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What is Du Pont of it all?

The Finance Ghost
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What is Du Pont of it all?

When analysing the financial performance of retailers, it helps to know how to work with Return on Equity and other key metrics. Chris Gilmour gets the calculator out.

The Food and Drug and General Retailers listed on the JSE often trade at highly rarefied Price/Earnings (P/E) ratios. In the normal course of events, considering the less than stellar earnings performance of most of them over the past five years, one would intuitively expect to see these ratings decline.

But they haven’t.

They have largely stayed intact and in certain instances (as with Clicks and DisChem) they are trading on P/E ratios close to 30 times. In an attempt to discover whether or not there is a rational investment basis for these rarefied ratings, I have used a modified Du Pont analysis, which ranks each share by its sustainable growth rate (SGR) and then compares that to its P/E.

This throws up some interesting results.

Get the textbook out

In the equation below, I refer to Return on Equity (RoE) and the Payout Ratio, which is the percentage of profits paid out as distributions to shareholders.

As a refresher, the SGR = RoE * (1-Payout Ratio). In other words, the SGR is the Return on Equity times the retention ratio.

Return on Equity can be further broken down using the Du Pont formula:

RoE = Net Profit Margin * Asset Turnover * Leverage

How does this work, you ask?

It can be rewritten as RoE = (Net Profit/Sales) * (Sales/Assets) * (Assets/Equity)

If you remember your school maths, Sales and Assets cancel out in the formula and you are left with Net Profit / Equity, which is RoE!

The point of Du Pont is that you can properly assess the components of RoE.

Applying this to JSE retailers

I have taken the four most expensive retail shares on the JSE in terms of P/E ratio and calculated a SGR for each one:

 Price (c)PE (x)RoE (x)Payout ratio (%)SGR (%)
Clicks3048629.5348.062.018.2
Dis-Chem309425.6132.7237.620.4
Shoprite2360222.3424.7757.210.6
Pick n Pay588219.6736.685.05.5

Clicks vs. Dis-Chem

The first thing to notice is that Clicks has by far the highest RoE of any of these retailers at 48%. The second really interesting point is the vast differences in the payout ratios from just under 38% in the case of Dis-Chem to 85% in Pick n Pay.

One can reasonably argue that Clicks is especially generous to its shareholders, with a relatively high dividend payout ratio, and that it is one of the main reasons why it enjoys such a high rating. But even with such a high payout ratio, it still manages to achieve a decent SGR of 18.2%. Clicks also has an ongoing share buyback programme that enhances shareholder wealth.

Dis-Chem, too, has a relatively high RoE and combined with a relatively low payout ratio, ends up with the highest SGR in this exercise.

Pick n Pay vs. Shoprite

Contrast this with Pick n Pay, which also has a high RoE of 36.6%. It pays out such high dividends that SGR is left at a very low 5.5%. That was fine in the days when the company was being streamlined but now it’s in an investment phase with much greater capital requirements. This company has a number of options available to it when trying to improve its SGR.

Two elements stand out immediately, the first of which being that it can attempt to greatly improve its operating profit margin and in so doing boost its RoE. The group has been struggling with an exceptionally low operating profit margin for many years and it’s not immediately obvious how it can improve this metric substantially in the short term. At 3.1%, Pick n Pay’s operating margin is roughly half of Shoprite’s operating margin of 6%.

By greatly increasing the penetration of clothing in its portfolio, it can significantly improve its operating margin, but this won’t happen overnight.

As Pick n Pay’s Boxer chain grows in comparison with the rest of the group, it is likely that the profit margin will also improve. Discounters, perhaps somewhat counter-intuitively, have a somewhat higher profit margin than traditional supermarkets.   

The easier, second option would be to reduce the dividend payout ratio and apply the proceeds to debt reduction. Of course, this is easier said than done in a situation where the controlling family naturally wants a high payout ratio.

Debt/equity in Pick n Pay is high at 108%. That’s fine when interest rates are low and stable but once in an upwards trajectory, as they are now, this could come back with a vengeance.

Shoprite’s SGR is surprisingly low, at only 10.6%. Of course, its RoE was the smallest of the four to begin with. This in itself is also surprising, considering that Shoprite has a particularly high operating profit margin of 6%. It’s difficult to see how Shoprite can squeeze a higher operating margin out of the business, especially against such a difficult trading environment. And the operating profit margin does appear to have hit a ceiling of around 6% for the past few years now.

Unlike Pick n Pay, Shoprite doesn’t have a higher margin clothing chain to fall back on. But it does have Usave, the main rival to Boxer in the discounter arena. That could conceivably help to sweeten the overall group margin a bit as the penetration of Usave relative to the rest of the group increases.

Shoprite has an entirely different balance sheet structure to Pick n Pay. With total borrowings of R4.5 billion, its debt/equity is just under 18% and it has lower gearing than Pick n Pay. If it geared up to the same level as Pick n Pay, its SGR would rise considerably as this would drive a higher RoE.

But Shoprite has a culture of installing CAs as CEOs of the company. Current CEO Pieter Engelbrecht is a CA as was his predecessor James Wellwood “Whitey” Basson. CAs tend to be conservative individuals and don’t go looking for risk if they don’t feel it is warranted.

The bottom line

The bottom line in this exercise is that Pick n Pay appears to be trading on a P/E ratio that is way out of line with what can reasonably be expected in terms of its sustainable growth rate. Shoprite is not an awful lot better, though at least it has the balance sheet capability to change quickly if it so desired.

Both of the pharmacy chains, while expensive on PE basis, at least have sustainable growth rates that approximate to that type of rating.

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 #1 (Purple | Northam | Sappi | Novus | AVI | Transaction Capital | MUR | EOH | Foschini | MultiChoice)

The Finance Ghost
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Ghost Wrap #1 (Purple | Northam | Sappi | Novus | AVI | Transaction Capital | MUR | EOH | Foschini | MultiChoice)

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

Ghost Wrap is your weekly summary of the most interesting and important stories on the JSE. This week, we cover:

  • Sappi vs. Novus at opposite ends of the value chain
  • AVI inching forward with margins under pressure
  • Transaction Capital under pressure in SA Taxi, with the market also focusing on WeBuyCars
  • Murray & Roberts selling the Aussie business and making some progress in infrastructure
  • EOH needing to raise R500 million through a rights offer
  • The Foschini Group being priced for perfection – a risk for any share price
  • MultiChoice’s subscriber growth
  • Purple Group’s latest HEPS guidance and the profitability of EasyEquities and GT247
  • Northam Platinum shooting an Impala and making a play for Royal Bafokeng Platinum

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:

Add it to your playlist on Spotify. It will be available on Apple soon!

Ghost Bites (EOH | Murray & Roberts | Richemont | The Foschini Group)

The Finance Ghost
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Ghost Bites (EOH | Murray & Roberts | Richemont | The Foschini Group)

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EO-eish: don’t say I didn’t warn you

For many months, I’ve been writing about an inevitable capital raise at EOH

So here we are: EOH is trading at R3.80 per share. I got out at breakeven (above R7 per share) some time ago. Just three months ago, there was still the chance to get out at over R5 per share when it was extremely obvious that an equity capital raise would be unavoidable.

All I can hope is that a few lessons have been learnt here by investors.

EOH tried its very best to deal with the enormous amount of debt on the balance sheet. Disposals of assets were achieved at modest multiples, so that didn’t do any favours for the investment story. There were also delays in closing certain disposals, which is a disaster when the balance sheet is a ticking timebomb.

We’ve now reached a point where the company needs a rights offer of R500 million in addition to a R100 million issue of shares to Lebashe Investment Group, EOH’s empowerment shareholder. With a market cap of just R680 million, the capital raise is almost equal to the current market cap.

Lebashe has saved the company before, putting in R750 million in 2018 in a “necessary capital injection for an unsettled EOH” – an interesting choice of words. The original deal allowed for a further issuance of shares to Lebashe provided the EOH share price reached R90. Needless to say, that share price is now an utter joke vs. current levels. The proposed new deal resets that strike price to approximately the current share price plus a 25% compound annual growth rate (CAGR). The maturity has also been extended by a further 5 years.

Nodus was appointed as independent expert in relation to the Lebashe deals (the specific issue and share amendment) and has opined that the transactions are fair.

Underneath all of this, there is a sustainable business that generated R282 million in operating profit for the year ended July. This is before interest costs, of course. If all goes well with the rights issue, those who follow their rights will have exposure to a much healthier balance sheet and a company that generates cash. Losses incurred up until now may never be recovered, sadly.

The proceeds from the capital raise will be used to repay R563 million of its bridge facility (of which R728 million is outstanding), with the remaining cash used to improve other elements of the balance sheet.

Although pricing for the rights issue hasn’t been finalised yet, the scenarios in the announcement assume a range of discounts from 20% to 40%.

Most importantly, there is no mention at this stage of an underwriter. There’s no guarantee here of the full R500 million being raised. Lebashe has agreed to follow its rights, so that’s something at least.

Murray & Roberts gets some momentum in renewables

The Power, Industrial and Water platform is making some progress

OptiPower (a division of Murray & Roberts), in consortium with Concor Construction, has been awarded contracts by EDF renewables with a combined value of R1.2 billion. This is a result of ongoing engagement by the Power, Industrial and Water platform with Independent Power Producers who were shortlisted for renewable energy projects in South Africa.

The engineering, procurement and construction contracts relate to the Koruson Main Transmission Substation and the San Kraal and Phezukomoya Wind Energy Facilities.

EDF Renewables currently operates four wind farms in South Africa.

This is useful momentum in a platform of Murray & Roberts that has been struggling to get traction thanks to ongoing delays in project approvals and a generally low level of investment in South African infrastructure.

Richemont makes investors richer

Performance for the six months to September looks excellent

Luxury goods are known for being almost immune to economic downturns. If you’ve got literally millions for jewellery, then chances are good that interest rates don’t bother you too much.

Sales in this period were up by 24% at actual exchange rates and 16% at constant rates. There were double-digit increases in all regions except Asia, which only grew by 3%. Retail sales are 67% of group sales and grew by 30% at actual rates and 21% at constant rates.

Operating profit from continuing operations was up 26%, with operating margin of 28.1%. It’s as though Richemont operates in a different world to everyone else. This is the joy of luxury goods.

If we look at operating segments, Jewellery Maisons grew sales by 24% at actual exchange rates and delivered a 37.1% operating margin. Specialist Watchmakers grew sales by 22% at actual exchange rates and achieved a 24.8% operating margin.

The focus on continuing operations is key here, with a 40% jump in profit to €2.1 billion. With discontinued operations included, the group result looks very different. The loss from discontinued operations is €2.9 billion, primarily due to a €2.7 billion write-down of YNAP net assets as part of the deal with FARFETCH to sell a controlling interest in YNAP to that company.

If you’re interested in learning more about that deal, we covered FARFETCH in Magic Markets Premium when news of the deal broke in September 2022.

The Foschini Group falls 7% despite solid results

The market saw something that it didn’t like – perhaps the inventory levels?

In the six months to September, The Foschini Group (TFG) reported revenue growth of 23% and headline earnings per share (HEPS) growth of 18.1%. Despite the jump in profits, the interim dividend of 170 cents per share is identical to last year.

A lower payout ratio tells you that the balance sheet has come under some pressure. You have to go digging in the cash flow statement to find the problem and in doing so, you’ll also see why the share price dropped.

To help you learn where to find this stuff, I’ve highlighted it below:

When you see a swing like this, there are only three possible explanations: higher debtors, higher inventory or lower payables. In a retail business, it’s almost always inventory.

Aaaaaand…bingo:

The announcement doesn’t give many details on the inventory balance. Again, you need to get your inner sniffer dog out to find the details.

If you dig through the results presentation, you’ll find a slide that discloses 29.3% growth in inventory and 22.7% if you exclude the acquisition of Tapestry Brands. When you see huge balance sheet movements like this, always keep in mind whether there are acquisitions, as that can explain a large jump. In this case, the acquisition is only part of the reason.

Inventory days increased from 140 days to 154 days, as the group bought in inventory ahead of price increases and peak trading period. It’s also worth noting that merchandise inflation is 14%, so that sucks a lot of cash to keep the stores well stocked.

Here’s where I got these stats:

Did the market overreact? TFG has been priced for perfection for a long time now, so the smallest blemish in the results gets punished. Provided sales go as planned over the festive season, I suspect that the company will be ok.

For those who are feeling bullish on consumers in this environment, or those who enjoy trading ranges, the share price is at an interesting level:

Little Bites:

  • Director dealings:
    • A director of Gold Fields joined me in selling shares after the juicy jump in the past week. Unlike me, the director sold shares worth a whopping R3.9 million.
    • A director of Sappi has sold shares worth R962k – I would take careful note of this when read in the context of the company outlook that was covered in Ghost Bites earlier in the week.
    • A director of a subsidiary of Santova has sold shares in the company worth R923k.
    • The CEO of Altron has purchased shares worth nearly R46k.
    • As I expected to see as a Hyprop shareholder, many of the directors elected the dividend reinvestment alternative (just like I did).
    • A director of a subsidiary of African Rainbow Minerals has sold shares worth R2.75 million
  • There seems to be action brewing in the Grand Parade Investments shareholder register. Sun International now holds 10.56% in the company. Is this the start of a play by Sun International for Grand Parade? The assets certainly make a lot of sense together. In the meantime, GMB Liquidity (which has made a mandatory offer to shareholders) now holds 35.1404%.
  • The board of Kore Potash must be holding its breath to see what happens next with the Minister of Mines in the Republic of Congo. In early October, the company received a letter from the Minister “expressing his discontent” with the administration of the companies in the country and the lack of progress being made towards the financing of the Kola Project. The company has formally responded to the Minister with a view to continuing the historically “strong and constructive” relationship with Kore Potash. In Africa, being on the wrong side of the government is never a good thing. Sadly, it’s often not the fault of the company, with many African governments well known for shaking the tree to see how much money falls out in the right places.
  • Eastern Platinum has reported results for the third quarter of 2022. Revenue increased by 8.1% year-on-year in this quarter and from a year-to-date perspective, revenue is up 4.8%. Gross margins are higher and the group is making operating profits this year vs. operating losses in the comparable period. Due to a large foreign exchange loss, the group reported a net loss as it reports in dollars. The working capital picture isn’t great at all, with the company owed $16.4 million from a key customer. The group is busy raising capital to accelerate the restart of the Zandfontein underground operation.
  • ISA Holdings released results for the six months ended August. Turnover increased by 9% and HEPS was 40% higher at 6 cents, with a particularly strong contribution from the investment in cybersecurity and records management business DataProof. In something you really won’t see every day, the payout ratio is 100%. Yes, the interim dividend is equal to HEPS at 6 cents per share!
  • Unsurprisingly, the shareholders of Cognition Holdings voted almost unanimously in favour of the disposal of Private Property. I think that the company achieved a great price for this asset.

Multichoice Reviewed Interim Results Announcement

Sponsored Content
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Multichoice Reviewed Interim Results Announcement

Condensed consolidated Interim financial results for the year ended 30 September 2022

MultiChoice is a powerful business with incredible reach on the African continent. There are over 22 million households that enjoy a strong combination of live sport, regional content and international shows.

With growth in subscription revenue and some normalisation in advertising, revenue has grown considerably. There is pressure on earnings and cash flow though, as the company has invested heavily ahead of the 2022 FIFA World Cup. With the best broadcasting rights in 50 markets in Africa, that’s an investment that makes sense.

Refer to the results below for all the details:

multichoice-reviewed-interim-results-announcement

Ghost Bites (AVI | MultiChoice | Purple Group | Sappi | Transaction Capital)

The Finance Ghost
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Ghost Bites (AVI | MultiChoice | Purple Group | Sappi | Transaction Capital)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

AVI inches forwards despite tough conditions

After a rollercoaster year in the share price, performance is flat year-to-date

AVI released the chairman’s comment that was made at the AGM on Tuesday. It starts with the usual bad news (consumer pressure / load shedding / Transnet) and ends off with a positive, albeit modest story at operating profit level.

Revenue for the quarter ended September increased by 9.7% year-on-year, a strong result driven by price increases. Revenue growth was achieved in all categories except I&J which was impacted by poor catch rates and an unfavourable abalone sales mix. The group focused on protecting margins even where volumes were impacted, which is the mature (and painful) approach to take.

In the footwear and apparel business, the year-on-year numbers were flattered by the disruption from civil unrest in the base period.

Group gross profit margin fell slightly as not all cost pressures could be recovered. Operating expenses increased at a rate above inflation, mainly because of exposure to fuel prices among other costs. Consolidated operating profit increased by just 2.1%. If we exclude I&J, the branded consumer business grew operating profit by 9.5%.

The share price closed 2.5% higher on a day where the ALSI closed 1.5% higher.

MultiChoice reports results ahead of the FIFA World Cup

Sport is big business and the group has invested heavily ahead of the soccer

In the six months ended September, MultiChoice reported growth in the user base of 5%. There are now 13 million households in Rest of Africa and 9.1 million households in South Africa that have DSTV. Both segments are still growing, although the average revenue per user (ARPU) is much higher in South Africa (R290) than in Rest of Africa (R183).

Subscription revenues were up 8% year-on-year, with Rest of Africa growing far more quickly with 27% growth. Advertising revenue only increased by 5%, which isn’t bad in this consumer environment. As we can see from tech company results in the US, there has been a normalisation of advertising spend as sport has returned. Advertising contributes around 7% of MultiChoice’s revenues.

Irdeto reported a 13% decline in revenue, which was more than offset by 19% growth in insurance premiums and other revenue.

Earnings and cash flow were impacted by the investment ahead of the FIFA World Cup. With significant anticipated subscriber growth, the group isn’t taking any chances with global chip shortages. The investment in decoder subsidies reduced trading profit by R0.7 billion and free cash flow by R0.8 billion, particularly in Rest of Africa. The opportunity is clear though: SuperSport is the only place to watch every match of the FIFA World Cup in an African time zone across 50 markets.

With a reduction in losses in Rest of Africa, group trading profit increased 2%. The impact on margin of the decoder investment is expected to unwind in the second half of the year, delivering even more positive operating leverage.

Consolidated free cash flow fell by 44% because of the investment in decoders. The balance sheet is still strong, boasting R7.5 billion in net assets including R7 billion in cash.

A key competitive advantage for MultiChoice vs. the likes of Netflix is the investment in local content. 48% of general entertainment spend was on local content, something that international streamers really struggle to compete with.

A challenge faced by the company lies in repatriation of cash from African countries and especially Nigeria. This is something that investors keep a close eye on.

Purple Group is still profitable in a tough market

The share price has lost 40% this year as markets cooled down

For the year ended August, Purple Group expects to report a drop in earnings per share of between 10% and 20%. This includes substantial fair value adjustments. Most investors look at headline earnings per share (HEPS) to ignore these adjustments, in which case the drop is between 67% and 77%.

This is a year-on-year movement and markets were absurd during the pandemic, so I’m not surprised to see a drop. The announcement came out after market close, so the share price hasn’t had an opportunity to react to this news. Selling pressure is likely on Friday.

If we look at EasyEquities specifically, the group’s operating profit before tax of between R29.8 million and R33.0 million demonstrates that a sustainable business has been built. This is a drop of between 31.3% and 38.0%, which is as expected in this market. Client numbers increased but so did expenses, up by 56.5% in the development of future revenue opportunities.

EasyEquities is still a startup at heart and needs to invest in the future. Leaving aside my appreciation for what they’ve done for South African investors, I think being profitable in this environment is an achievement of note.

The fair value gain relates to the shareholding in the RISE business. EasyEquities previously held a 50% stake and then acquired the remaining 50%, leading to a revaluation of the original stake to a value in line with the price paid for the rest. This led to a positive fair value adjustment of R48.9 million. The company paid for the stake by issuing shares at R2.50, which looks like a good deal based on the current traded price.

In the prior period, there was a fair value adjustment of R50 million related to EasyCrypto. This means the fair value adjustments are consistent year-on-year.

Looking at other business units, GT247.com achieved an incredible turnaround. After a loss of R8.7 million in the prior period, profits are now between R13.4 million and R14.8 million. This is a huge swing achieved through a revenue recovery to historic levels.

Emperor Asset Management went the other way, with a loss of between R5.6 million and R6.2 million vs. a profit of R0.9 million in the prior period. The loss includes an impairment adjustment of R3.8 million.

The head office and investments segment recorded a significantly lower loss of between R3.4 million and R3.8 million, an improvement of 54% to 59%. This includes the investment in Real People Investment Holdings.

My view hasn’t changed. Purple Group has a great business and a very overvalued share price. I’ve been consistent in that view throughout the pandemic and the chart this year supports it. At the right price, I can’t wait to invest in Purple and get exposure to the global expansion of EasyEquities.

Sappi reports another record quarter

Take note: the company has given a sobering market outlook

In a cyclical industry, you have to be very careful in extrapolating earnings. A great quarter can become a distant memory if things turn quickly enough.

In the quarter ended September, Sappi reported a 35% jump in sales and 121% increase in EBITDA excluding special items. HEPS was 311% higher, although “special items” means that reported profit was 26% lower.

Importantly, net debt is down 40% year-on-year and the net asset value is up by 19%.

Excluding special items, this was a record quarter for EBITDA, driven primarily by improved profitability for the pulp segment and a strong performance in North America that offset the cost challenges in Europe.

Graphic paper sales saw order activity slow down towards the end of the quarter, with Sappi noting that this is an industry in terminal decline. At the end of the quarter, Sappi agreed to sell three European mills to Aurelius Investment Lux One, reducing exposure to this market. Proceeds will be used to reduce debt.

To give you an idea of how cyclical this industry is, net cash generated for the year of $506 million is vastly higher than just $29 million last year. This is how the business managed to reduce debt to such a large extent.

The strong balance sheet will be needed, as the outlook section notes that macroeconomic uncertainty has increased considerably in recent weeks. Order activity in dissolving pulp and graphic paper has declined, with destocking across the vale chain. On the plus side, demand for packaging and speciality papers is more resilient in a downturn.

Further good news is that North American demand is robust and Sappi is investing $418 million at Somerset Mill to respond to this demand, with an expected completion date in 2025. Capital expenditure for FY23 is estimated to be $430 million, of which $70 million relates to next year’s spend on Somerset.

Despite rising input costs that are a concern for production efficiencies, Sappi expects EBITDA for Q1’23 to be ahead of Q1’22.

A dividend of 267.28155 cents per share will be paid in January.

Transaction Capital is growing in the high teens

It’s tricky to know which earnings measure to focus on

Having studied accounting, I can tell you with certainty that most of it is ignored by the market. People look at key metrics and ignore the noise, as many accounting standards have become so complicated that they just aren’t useful.

One of the big wins on the JSE is that companies need to report headline earnings per share (HEPS), a standardised metric designed to improve comparability. It works well.

In Transaction Capital’s trading statement for the year ended September, my favourite local company reported HEPS growth of 49% to 54% from all operations and 51% to 55% from continuing operations. To show you how distorted numbers can become, basic earnings per share (EPS) is down 34% to 30%.

To help make sense of it all, the company suggests using core EPS from continuing operations to assess performance. This metric excludes adjustments on put and call option structures, once-off transaction costs and other non-core items.

With an increase of 15% to 19%, this means that the group is growing in the high teens.

I look forward to the release of full results on 15 November so that I can see how things are going at SA Taxi in particular.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R2.4m worth of Lighthouse Properties shares
    • A prescribed officer of Impala Platinum has disposed of shares worth nearly R996k
    • Associates of Piet Viljoen and Jan van Niekerk have acquired Astoria shares worth R1m and R66k respectively
    • The family trust of the CEO of Altron has bought more shares in the company, this time worth over R50k
    • An associate of directors of Octodec has acquired shares worth R1.06m
    • An associate of Jacob Wiese has bought shares in Shoprite worth R695k
  • Sephaku Holdings released a trading statement for the six months ended September 2022. The group expects headline earnings per share to jump by between 58% and 66%, coming in at between 11.11 cents and 11.67 cents. There’s a slight timing complication in the group results as one of the subsidiaries as a different year-end to the holding company.
  • There’s yet more drama in the Northam Platinum / Royal Bafokeng Platinum story. Back in April, the CEO and COO of Royal Bafokeng retired and the company concluded new fixed term contracts with those executives. This led to accelerated vesting of shares, a move which Northam complained about to the TRP as a frustrating action under the Companies Act. After the TRP dismissed Northam’s claim, a subsequent appeal to the Takeover Special Committee (TSC) was successful. The TSC found that the share issuance contravened the Companies Act and that Royal Bafokeng must correct this contravention. Royal Bafokeng believes that the ruling is “legally and factually flawed” and will be consulting with advisors re: next steps. Interestingly, the TSC further ordered the TRP to investigate Northam’s full complaint in its entirety as expeditiously as possible.
  • In further platinum news, Eastern Platinum announced a pipeline finance agreement with Investec. The credit facility was reduced from R150 million to R110 million and will be used for working capital purposes and the restart of the Zandfontein underground section of the Crocodile River Mine. This renewable 12-month revolving commodity finance facility is secured by PGM production from the tailing storage facility at the mine. A hedging structure on the underlying minerals means that the commodity pricing is guaranteed.
  • Montauk Renewables released quarterly results for the period ended September. Net income increase from $8.9 million to $11 million. If you are keen to see what US reporting looks like (as the company has a secondary listing on the JSE and reports under US rules), you’ll find it at this link.
  • If you are a shareholder in BHP, you may be interested in the presentation and the speech from the AGM that you’ll find at this link.
  • Advanced Health Limited reminded the market that a strategic review of the business is still ongoing. Approaches from several parties re: a potential acquisition of Presmed Australia have been received. The board is evaluating the proposals with its advisors.
  • I quite enjoyed the outcome of the Quilter vote on the resolution authorising political donations or expenditure. The company says that the resolution is to avoid inadvertent breaches of the law, as it doesn’t actually make donations. Still, shareholders on the South African register only gave it 63.77% vs. 99.94% support on the UK register. We are well aware in SA of what “political donations” actually means.
  • Libstar has announced that the acquisition of Cape Foods has become unconditional.

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

Resource counters were in the spotlight this week making the headlines on two occasions

Northam Platinum announced on Wednesday, exactly one year to the day after the announcement of the initial acquisition of a 32.8% stake in Royal Bafokeng Platinum (RBPlat), that it would bid for control of RBPlat in a voluntary offer worth R31,7 billion. The offer of R172.70 per RBPlat share is on the same terms as its acquisition made in November last year, less the dividend paid out by RBPlats. The offer (cash and shares) is significantly higher than that of Impala Platinum of R150 per share (R90 per share plus 0.3 shares in Impala). The minimum cash consideration offered by Northam is R54.40 assuming full acceptance of the offer, however, if acceptance rates are low, then the full amount will be paid in cash. Northam currently owns 34.52% of RBPlats (37.8% if call options granted are exercised) with Impala having secured 40.71%. The Public Investment Corporation stake of 9.42% makes it an important cog in this bidding war. As a category one transaction in terms of the JSE Listing Requirements, Northam plans to issue a circular by December 7 with shareholder approval required in due course.

Gold Fields has terminated its proposed acquisition of Yamana Gold following the recommendation by the Yamana Board to its own shareholders to accept the recently announced competing bid from Pan American Silver and Agnico Eagle Mines. One can’t help feeling that Gold Fields has dodged a bullet – for months Gold Fields has been trying, with limited success, to persuade its shareholders that it was not overpaying for the Canadian assets. Had shareholders not voted in favour of the $6,7bn deal later this month, Gold Fields would have had to pay Yamana a break fee of $300 million – the turn of events will see Gold Fields and its shareholders benefitting from Yamana’s termination fee.

Murray & Roberts (M&R) has signed an agreement with Webuild, an Italian construction a civil engineering group, to dispose of its interests in Australian company Clough, which has for some time experienced acute working capital pressures. Although the business is valued c.A$350 million, the cancellation of an outstanding intercompany loan account will see M&R receiving just A$500,00 in cash.

GMB Liquidity has made a mandatory offer to minority shareholders of Grand Parade Investments (GPL) at an offer price of R3.33 per share – in line with the current market price. The recent on-market acquisition of GPL shares by GMB increased its stake to 35.14%, over the 35% threshold requiring GMB to make mandatory offer. It is however, not GMB’s intention to apply for the delisting of the company from the JSE.

African Equity Empowerment Investments has entered into a small, related party transaction with majority shareholder (66%) Sekunjalo Investments to dispose of 1,188,916 ordinary shares in Sygnia.

Unlisted Companies

In a statement released this week, the Competition Commission has prohibited the proposed deal by Amsterdam-based AkzoNobel to acquire Kansai Plascon Africa and Kansai Plascon East Africa saying it would substantially lessen competition in the manufacturing and supply coatings market.

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

MC Mining has concluded its fully underwritten renounceable rights offer. The company raised A$40 million with the sub-underwriters taking up the shortfall of 200,026,719 shares.

Buffalo Coal has announced a rights offering. If all rights are exercised, an additional 421,352,596 shares will be issued. The company intends to use the net proceeds to settle its debt with Investec.

Hyprop Investments will issue 16,127,649 new shares in terms of its scrip distribution alternative resulting in a capitalisation of distributable retained profits of R500 million.

New listings on A2X continues to gain ground with Attacq joining its growing list of companies taking secondary listings on its platform. Attacq shares will commence trading on November 16, 2022.

The trading of Trustco shares has been suspended on the JSE following the ruling by the High Court which dismissed the company’s application with costs. The ruling reinstates the JSE’s decision in November 2020 to suspend the company’s shares for failing to comply with the Listing Requirements in relation to its Annual Financial Statements.

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:

Capital & Counties Properties has repurchased 783,854 shares for a total consideration of £857,933 in accordance with the authority granted by shareholders at its annual general meeting in June 2022.

Glencore this week repurchased 17,840,000 shares for a total consideration of £93,71 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 4,016,123 shares at an aggregate cost of A$14,98 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period October 31 to November 4, a further 5,549,485 Prosus shares were repurchased for an aggregate €261,79 million and a further 507,887 Naspers shares for a total consideration of R997,91 million.

British American Tobacco repurchased a further 555,949 shares this week for a total of £18,67 million. Following the purchase of these shares, the company holds 216,027,057 of its shares in Treasury.

Three companies issued profit warnings this week: Quantum Foods, Invicta and Novus.

Six companies issued or withdrew cautionary notices. The companies were:
Alviva, Murray & Roberts, Ellies, Pembury Lifestyle, Grand Parade Investments and Premier Fishing & Brands.

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

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

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

DealMakers AFRICA

X-ERA, a UAE-based logistics services provider, has completed its acquisition of SPEED, announced in July, for an undisclosed sum. Egypt-based SPEED is a B2B marketplace platform connecting FMCG suppliers with small to medium-sized merchants and retailers.

IXAfrica Data Centre, a developer and operator of hyperscale-ready data centres in East Africa, has received US$50 million in investment from Helios Investment Partners to accelerate the development of IXAfrica’s Nairobi Campus.

Egyptian foodtech startup Brotinni, a dark butcher solutions startup, has raised US$600,000 in a seed funding round led by Innlife Investments. The platform offers to-order hand-cut, farm-sourced and vacuumed-sealed fresh meat and poultry as well as frozen and ready-to-cook products. Funds will be used to scale operations and invest in marketing.

In its fourth funding round, Morocco-based fintech startup WafR, has raised US$120,000 from First Circle Capital. The startup aims to digitize cashback and in-store rewards allowing retailers and FMCG brands to boost their customer loyalty.

Sendy, a Nairobi-based on demand logistics platform, has secured undisclosed funding from MOL PLUS Co, the corporate venture capital arm of Mitsui O.S.K Lines. Sendy connects consumer goods manufacturers and e-commerce companies with customers. The funds will be used to scale services in Kenya, Uganda, Nigeria and Côte d’Ivoire with the aim of improving logistic supply chain inefficiencies across the continent.

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

Thorts: The business case for producing biofuel from sugar cane in SA

Aimee te Riele
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Thorts: The business case for producing biofuel from sugar cane in SA

Not too long ago, South Africa’s sugar industry was counted amongst the top cost competitive producers of high quality sugar in the world.

While the outputs from the industry were small compared to those of leading global sugar producers like Brazil and India, the job creation and contribution of sugar producers to the SA economy was significant. In fact, the South African sugar industry creates one of the highest number of job opportunities per R1m in capital investment.

In recent years, however, annual sugar production has declined rapidly. Today, around 25% less sugar is being produced in South Africa than was the case 20 years ago. Unsurprisingly, a major consequence of this production decline has been a reduction in employment opportunities. Of equal concern is the fact that, despite lower production figures, flagging demand for sugar, driven by, amongst others, the Health Promotion Levy (HPL) on sweetened beverages, and a highly competitive import environment, there is still a large annual excess of sugar cane that is either rolled forward to the next sugar season or destroyed. Adding to the problem is the country’s limited milling capacity, which is dominated by a few large players, resulting in profitability challenges for smaller scale farmers where input costs are already high. While there have been efforts by government to address the situation, such as the development of the Master Sugar Plan, there has also been a fair amount of shortsightedness, as evidenced by the HPL, which cost the industry well over a billion rand in the 2018/19 sugar season. It is becoming clear that restoring the relevance and importance of sugar cane growth and processing to South Africa’s economy is going to require lateral thinking and an innovative approach.

One alternative that appears to have the potential to achieve the desired outcomes of industry recovery and sustainability, and meaningful job creation and protection, lies in the still largely unexplored area of biofuels production.

While there has been some preliminary research done into the viability of biofuel production from sugar cane by the Cane Growers Association and other industry players, there still appears to be a lack of industry partnership aimed at laying the groundwork for a South African biofuel made from sugar cane.

This is somewhat puzzling, given the positive economic impacts – over and above the aforementioned industry revitalisation and job creation – that a thriving and growing biofuel sector would undoubtedly deliver. As has been the case with the country’s burgeoning renewable energy sector, biofuels present the potential to unlock massive cost-efficiencies (particularly in a high oil-price environment), unlock opportunities for meaningful publicprivate partnerships, create more employment opportunities, and deliver numerous secondary industries, all of which would contribute greatly to long-term economic growth.

In addition to all of these positive spin-offs, a growing biofuel industry is also likely to deliver tax revenues similar to those that the sugar industry currently does, so the transition should not have any negative implications for the national fiscus. In fact, given the likelihood of a continued decline in demand for sugar in the coming years, an investment today into building a thriving ‘biofuels from sugar cane’ industry in this country will likely deliver far more appealing long-term returns in the form of tax revenues and sustainable economic contributions.

Of course, achieving a viable ‘biofuels from sugar cane’ industry is not without its challenges. For one, the current mills would need to add on facilities to enable biofuel production, or new dedicated biofuel processing plants would need to be built. However, the potential returns of a high-functioning biofuels industry would be well worth the investment required to set it up. The European Union is suggesting that 2% of sustainable aviation fuel should be available at EU airports by 2025. This is to increase to 37% in 2040. Furthermore, South Africa is in a position to benefit from industry profitability with little to no competition from imported sustainable fuels, as the environmental benefit of using sustainable fuels is eroded by the transportation of it.

Biofuels may also be used for road transport by blending them with petrol and diesel. However, this will require willingness from government to implement compelling biofuel subsidies and incentives. The USA offers a good example of how such incentives, coupled with a commitment by government to leveraging biofuels as an alternative to transportation fuels produced from fossil fuels, can drive incremental growth in biofuel usage and demand. Given South Africa’s commitment to reducing fossil fuel-based energy as part of its just transition, a similar approach can and should be adopted in this country. And the result could well be a significant turnaround in the fortunes of existing cane growers, a return to sugar cane farming by those who have sought alternatives in recent years, and a significant injection of employment opportunities, given the highly labour-intensive nature of sugar cane growing and processing.

Possibly most significantly though, a strong biofuels sector, and the associated supply chains and secondary industries, would almost certainly present an appealing proposition for local and international investors. And given the dire need for such investment inflows into South Africa in order to kick-start its economic recovery, that single benefit in itself makes for a very compelling ‘biofuels from sugar cane’ business case.

Aimee te Riele is an Associate, Corporate Finance | Nedbank CIB

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

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

Ghost Bites (Grand Parade | Lesaka | Northam Platinum | Novus | TWK)

The Finance Ghost
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Ghost Bites (Grand Parade | Lesaka | Northam Platinum | Novus | TWK)

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Grand Parade Investments gets a mandatory offer

Don’t get too excited – the price is in line with the current traded price

A mandatory offer is triggered when a shareholder moves above the 35% threshold. In such a case, an offer must be made to all other shareholders and the offeror needs to be in a financial position to make such an offer.

GMB Liquidity Corporation has moved to a 35.14% stake in Grand Parade Investments and has thus triggered a mandatory offer at a price of R3.33 per share. The rule is that a mandatory offer must be made at the higher price paid for a share in the six months before the commencement of the offer period.

The offeror doesn’t intend to apply for a delisting of the company.

Grand Parade had previously alerted the market to the potential sale of shares in the company or its underlying assets as part of a value unlock strategy. The announcement makes it clear that the GMB offer is independent of that process.

In fact, GMB is building up its stake because of that process and what it believes can be achieved. Weirdly, the cautionary announcements by Grand Parade (which supposedly have nothing to do with GMB) have now been withdrawn. It may be the case that whoever was negotiating with Grand Parade has now walked away because of GMB.

In case you’re wondering who GMB is, the sole director is Gregory Bortz who has also invested in horse racing in the Western Cape. He is the chairperson of Kenilworth Racing.

His latest horse to back is clearly Grand Parade. With an offer price in line with the current market price, the only acceptances will likely come from holders of large blocks of shares who are looking for a liquidity event that is otherwise difficult to achieve on the market in an illiquid stock.

Lesaka Technologies reports results at the upper end of guidance

The Connect acquisition is outperforming expectations but there’s plenty of debt

Lesaka Technologies (which used to be called Net1) has released results for the first quarter of 2023. The year-on-year numbers are pretty meaningless as this result includes the Connect acquisition and the base period doesn’t.

Despite revenue of R2.1 billion and adjusted EBITDA of R111 million, the group is still making an operating loss of R80 million.

Through cost optimisation initiatives and modest revenue growth, the Consumer segment reported a smaller adjusted loss of R24 million vs. a loss of R137 million in the comparable quarter. The group hopes to achieve break-even in the Consumer business in the next quarter.

The problem is the level of debt, with a net interest charge of R62 million in this quarter because of the borrowings to fund the Connect acquisition. The group has cash on the balance sheet of around R540 million of which $9.2 million is held in dollars.

Northam finally swoops in with a higher offer

An offer has been made to acquire the remaining shares in Royal Bafokeng Platinum

Just one day after the M&A drama in the gold sector was put behind us, the PGM sector burst into life.

After a protracted process at the Competition Tribunal in an effort to block Impala Platinum from taking control of Royal Bafokeng Platinum, Northam Platinum has finally made an offer to all remaining shareholders.

A considerably higher offer than Impala’s offer, I might add.

Those who have followed the Royal Bafokeng story will know that Northam recently acquired a 34.52% stake in the company from Royal Bafokeng Holdings (and a few other shareholders) at a price of R180.50 per share. There’s also an option structure that gives Northam the opportunity to acquire more shares that would take the stake to 37.80%.

Under the original deal, Royal Bafokeng Holdings acquired an 8.67% stake in Northam as payment for the shares. This aligned the parties going forward.

Northam has now made an offer to all other shareholders for R172.70 per share. This is the price paid to Royal Bafokeng Holdings, less dividends paid by Royal Bafokeng Platinum since that date.

The Impala Platinum offer is R90 per share plus 0.3 shares in Impala. Based on the current Impala share price, that’s an offer of around R150.40 per share. As you can see, the Northam offer is a lot higher than that – almost 15% higher in fact!

The minimum cash component of the Northam offer is R54.40, with the rest settled in Northam shares. If acceptance rates for the offer are low, then the full amount will be paid in cash.

In a clever bit of corporate finance, Northam points out that if Impala Platinum doesn’t accept the offer, then the cash consideration will be at least R152.42 for other shareholders and the remainder will be settled in shares. This would take the cash component above what Impala Platinum is offering in total.

If Impala does want to step away from the asset and make a profit on its stake by accepting the Northam offer, it would end up being a relatively small cash component with a huge chunk of Northam shares to settle the purchase price. This would leave Impala as a significant shareholder in a company where I don’t think the two CEOs are golf buddies.

Time for a bidding war?

As is the norm in these situations, the Northam share price fell sharply (-6%) and Royal Bafokeng Platinum rallied more than 10% to R167.

If previous deals are anything to go by, the likeliest winner in this process is Northam’s corporate advisor. The advisory fees are usually quite extraordinary.

Novus nosedives 12.7% on release of a trading statement

The group has been squeezed by pulp and paper shortages

Let’s just get the ugliness of the Novus numbers out of the way: headline earnings per share (HEPS) is expected to drop by between 82.4% and 97.4% in the six months ended September. That’s a rather spectacular collapse in profitability. On the plus side, as least there are still profits.

Global pulp and paper shortages with high price increases and logistical challenges have had a massive negative impact on the Novus business. Despite making the decision to increase the stockholding to mitigate some of the risks, it just wasn’t enough of a buffer against market conditions.

To add to the pain, there were once-off costs in this period like the transaction costs for the acquisition of a 75% stake in Pearson South Africa.

Detailed results will be released on 18 November for your reading pleasure. Or pain.

TWK delivers solid results

I’m looking forward to unlocking this stock

TWK Investments is listed on the Cape Town Stock Exchange, so if you only follow JSE news then you wouldn’t have seen these numbers.

For the year ended August 2022, revenue was up by 17.8% and EBITDA jumped by more than 27.5%. As always, when the growth rate in EBITDA is higher than in revenue, you know there’s been margin expansion.

It gets better the further down you go, with HEPS up by 45% to 863 cents. The net asset value per share is up nearly 13.4% to R52.55.

The largest segment is Retail and Mechanisation, in which revenue increased by 27.8% thanks to high fertiliser prices that more than offset sales volume pressure. EBITDA margin increased nicely from 3.83% to 4.54%.

The next largest is Timber, which achieved revenue growth of nearly 16.7%. EBITDA margin increased from 14.67% to 14.93%, so you can see how wildly the operating margins can vary in each segment. This is the benefit of having a diversified portfolio, as some business models simply carry structurally higher margins than others.

If you’re reading this before 12pm on Thursday 10 November, you still have time to register for the Unlock the Stock presentation at this link. The TWK management team will be taking your questions. If you miss it, look out for the recording in Ghost Mail.

Little Bites:

  • Director dealings:
    • Another day, another major purchase of Lighthouse Properties shares by Des de Beer – this time for a whopping R31.4 million!
    • A director of a major subsidiary of African Rainbow Minerals has sold shares in the company worth nearly R2.3 million.
    • A director of a major subsidiary of Santova has sold shares worth R610k.
    • The CFO of Spear REIT has bought shares in the fund worth R77k.
  • Europa Metals released further drilling results from the Toral asset in Spain. The company is very excited about the 5.25m@23.24% ZnEq(PbAg) that it found. No, that doesn’t mean anything to me either. The bit I did understand was the CEO’s comments that this is the “highest grade intersection that the company has drilled to date at Toral” – clearly good news.
  • Universal Partners released financial statements for the quarter ended September. This Mauritian-listed company holds an interesting portfolio of businesses in Europe and the UK. The dental business in the UK is being sold and competition approval is outstanding. The rest of the portfolio ranges from debt collection through to water efficient toilets (no, really). The net asset value per share is just under R30 at current exchange rates and the share price is R20.99.
  • Having lost more than half its value this year, Ellies has renewed the cautionary announcement that was issued in September. The company is in negotiations to pursue acquisitions in sectors like solar, uninterrupted power supply and renewable energy. This is key to the corporate plan to diversify.
  • As expected, Renergen’s trading halt on the ASX has been lifted.
  • The Rebosis business rescue plan is expected to be released on 1 December after creditors approved another extension.
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