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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

MultiChoice has entered into an agreement with Nasdaq-listed Comcast subsidiaries NBCUniversal and Sky to form a new partnership. The new Showmax Group will be 70% owned by MultiChoice and 30% by NBCUniversal and will build on Showmax’s success to date. The service will combine MultiChoice’s accelerating investment in local content with an extensive pipeline of international content licensed from NBCUniversal and Sky.

Sanlam’s private equity arm has, through its SPE Mid-Market Fund 1, acquired a controlling interest in SkipWaste, a leading provider of integrated waste management solutions. Financial details were undisclosed.

Nikkel Trading 392 has advised Brikor that it has entered into written agreements with major shareholders of the company to acquire 567,57 million shares (representing a 67.7% stake) at a price of R0.17 per share. The first tranche (34.1%) will be settled immediately while the second tranche representing 33.5% will be conditional on a number of suspensive conditions. On implementation, an offer to minorities will be triggered.

Investec Property Fund alerted shareholders to three corporate actions. It is proposing to internalise the asset management function for an aggregate purchase price of R975 million, settled from the sale of disposal properties. In addition, the property fund has acquired a further 19% interest in the Pan European Logistics Platform Hercules Hex Holdco for a gross consideration of €103,8 million representing an implied asset yield of 4.9% and gross asset value of c.€1,1 billion. The fund has established a 50/50 joint venture with the management team of the Irongate funds management business and buy out the Irongate Australia Fund Management Platform from Charter Hall. At the same time, it will acquire an 18.67% equity interest in the remaining Templewater Australia property fund which will be managed by the platform.

Two deals announced during 2022 have been terminated this week:

Altron has notified the market that its category 2 transaction relating to the disposal of its business interest in Altron Document Solutions and its associated subsidiary Genbiz Trading to Bi-Africa Investment Holdings for R538 million, has been terminated. The deal, announced in March 2022, will not proceed even though regulatory approvals were received. The reason given, is that the parties could not conclude a distribution agreement satisfactory to both parties.

In December 2022 Sebata entered into a sale of shares agreement with Hellochoice to dispose of its 55% controlling stake in Freshmark Systems for a disposal consideration of R24,75 million. The deal has been terminated as a result of obligations not being met by the purchaser as per suspensive conditions in the agreement.

Unlisted Companies

Lescault and Walderman, a US firm providing technology-driven accounting and finance services to small and medium businesses, has acquired a majority stake in local AWCape and a minority stake in Applico – both Sage business partners in their respective regions.

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

Of the 71,43 million rights offer shares available to shareholders of Accelerate Property Fund in terms of its capital raise of R50 million, shareholders took up 16,8 million shares with the remaining 54,62 million going to U Big Investments as per the underwriting agreement. The shares had a subscription price of R0.70 per share.

As part of its capital optimisation strategy, Investec Ltd this week acquired on the open market a further 1,513,703 Investec Plc shares at an average price of 533 pence per share (LSE and BATS Europe) and 680,307 Investec Plc shares at an average price of R116.96 per share (JSE).

Kaap Agri has announced it is to proceed with an odd-lot offer to shareholders holding 312,942 KAL shares, representing 0.42% of the total issued share capital of the company. The cost of the offer is expected to amount to c.R13,37 million (excluding transfer costs).

Santova has applied to the JSE for cancellation of 4,648,548 shares. The treasury shares were repurchased by the company at an average price of R7.75 per share. Following the cancellation effective February 27, 2023, the remaining share capital of the company is 133,555,821.

Buka Investments’ shares have been suspended following the cancellation of its acquisition of Caralli Leather Works and Socrati Footwear from B&B Media and Moltera Group announced in July 2022. As a cash shell, Buka Investments is required, within six months of classification, to enter into an agreement and acquire viable assets to satisfy the conditions for listing in terms of the JSE Listing requirements. Consequently, Buka’s listing was suspended with effect from February 24, 2023.

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

South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,645,462 shares at an aggregate cost of A$7,23 million.

Glencore this week repurchased 10,680,000 shares for a total consideration of £53,1 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.

Investec repurchased a further 415,726 Investec shares for a total consideration of R116 million. The shares were repurchased during the period 20 February to 24 February 2023.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 20 to 24 February 2023, a further 3,366,685 Prosus shares were repurchased for an aggregate €232,68 million and a further 374,723 Naspers shares for a total consideration of R1,22 billion.

Seven companies issued profit warnings this week: Royal Bafokeng Platinum, Libstar, Murray & Roberts, Hulamin, Putprop, Sanlam and Investec Property Fund.

Five companies issued or withdrew cautionary notices. The companies were:
Murray & Roberts, Acsion, Chrometco, Jasco Electronics and Brikor.

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

Not your average retail investment research

Barry Dumas
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Not your average retail investment research

BARRY DUMAS, TRIVE SOUTH AFRICA: We have all seen, used, or compiled those research reports: the ones no retail investor ever uses or understands. We use clever words to uplift our personas and try to stand out from the crowd to be noticed while missing the point of grabbing our target audience, the retail investor’s attention.

On the flip side, fast forward to the present day, a post-pandemic era where the retail investor is informed, taking market share, and phenomena like meme stocks and gamification are all the rage.

Phrases like “Do Your Own Research” keep the retail investor on the Ferris wheel and in an altered state where they think anyone can perform open heart surgery. “I can do it myself” are gamified buzzwords that lead to uneducated investment decisions, and delusions of grandeur, not by choice but by the illusion that anyone can do any professional occupation nowadays.

The investment landscape is changing fast, but things sometimes do not change for the better, and unfortunately, not all of us are investment professionals by trade. Most, if not all, retail investors have everyday jobs that take up all their time. These investors need more time, or sometimes the know-how, to do an investment opportunity’s actual fundamental, technical, or even quantitative analysis.

That is why having access to outstanding research resources is essential to help and assist retail investors on their journey while educating themselves.

Why is research so important?

Simply put, investment research is essential for retail investors because it helps them make informed investment decisions. Retail investors invest their own money, typically through a brokerage account, rather than investing on behalf of an institution or a company.

Without conducting research, retail investors may make investment decisions based on incomplete or inaccurate information, which can lead to poor investment outcomes. Access to a reliable research source can help retail investors evaluate potential investments and understand their risks and rewards.

Here are 5 reasons why research is important for retail investors:

  1. Understanding the company: Research can help retail investors better understand the company or industry they are considering investing in. This can include analysing financial statements, reviewing management team experience and evaluating the competitive landscape.
  2. Evaluating risk: Research can help retail investors identify the risks associated with an investment. This can include regulatory or legal risks, market risks and company-specific risks.
  3. Identifying potential opportunities: Research can help retail investors identify potential investment opportunities. This can include identifying companies that are undervalued by the market or that have strong growth potential.
  4. Avoiding investment pitfalls: Research can help retail investors avoid common investment pitfalls, such as investing in companies with poor financial performance or facing significant legal or regulatory challenges.
  5. Managing emotions: Research can help retail investors manage their emotions and avoid impulsive investment decisions. By conducting thorough research, investors can be more confident in their investment decisions and avoid reacting to short-term market fluctuations.

Investment research will always be topical; the way we present research has changed a lot since back in the day. It has become more simplified, visual, and to the point, which retail investors find informative in the fast-paced world. Unfortunately, the reality is that it is not that easy doing your own research; if it was, everyone could do it effectively and have the desired results.

Research is hard work – filtering through local SENS (or even US SEC) announcements and company financials and looking at the behavioural aspects is a challenging task to perform effectively daily.

For those retail investors who want to do their own research, education on the fundamental, technical and behavioural aspects will be critical to your success. Access to data and information is the commodity of choice; even then, you will only sometimes get it right. Not even the investment greats with all their resources get it right all the time, but the difference is that they get it right more often than those around them.

In closing…

In essence, research enables the retail investor to make informed decisions, which includes evaluating potential investment opportunities and the associated risks of that investment. Investment research is not for everyone, nor does the average retail investor have access to the resources professionals use to enable them to do the analysis effectively.

Education will be key for those taking on the task alone, but clever investors using credible research resources will give them a fighting chance against the market.

The question will remain: will the retail investors keep following the crowd and “do their own research”, or will the retail investors start doing their own research based on educated decisions?

To read more from Barry Dumas and the research team at Trive South Africa, visit the research blog here>>>

Ghost Bites (AECI | Aspen | Brikor | Capital & Counties | Cashbuild | Caxton & CTP | Cognition | Harmony | Investec Property Fund | MTN | Murray & Roberts | Stefanutti Stocks | Woolworths)

The Finance Ghost
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Ghost Bites (AECI | Aspen | Brikor | Capital & Counties | Cashbuild | Caxton & CTP | Cognition | Harmony | Investec Property Fund | MTN | Murray & Roberts | Stefanutti Stocks | Woolworths)

AECI battles with the German business (JSE: AFE)

An operating loss of R228 million at AECI Schirm Germany isn’t pretty

In the year ended December, AECI’s group revenue was up 37% and EBITDA was up 16%. Once depreciation and amortisation is included though, EBIT was flat. That’s not what you want to see in your operating margin.

It does at least mean that cash profits grew solidly, supporting an increase in the dividend of 15%. This is despite an increase in group debt, with gearing up from 24% to 45%.

There was also no shortage of reinvestment in the business, with 61% of total capital expenditure of R1.55 billion going into growth opportunities (vs. maintaining existing assets).

The flat EBIT result was thanks entirely to the German business, which suffered an operating loss of R228 million and an impairment of R445 million. Shareholders are demanding Achtung, Baby!

(And in case that reference went over your head, today is a good day to discover the band U2…)

Aspen gives shareholders a shot in the arm (JSE: APN)

A rally of over 13% would’ve put a smile on many faces on Wednesday

For the six months ended December, Aspen’s group revenue fell by 1%. Within that, Commercial Pharmaceuticals grew by 2% and Manufacturing revenue fell 10% due to the loss of COVID vaccine sales.

The manufacturing margins on the vaccine are higher than in Commercial Pharmaceuticals, so gross profit fell by 5% as margin deteriorated.

Normalised EBITDA fell by 11% and normalised HEPS was 17% lower, with foreign exchange losses adding to a painful set of numbers.

If you found yourself wondering why on earth this sent the share price higher, you aren’t alone. You needed to keep reading the announcement to get to the better news.

The outlook for the second half of the year is a lot better, with earnings expected to exceed not just this interim period but also the second half of the prior year. A very useful driver of earnings over the next couple of years will be capacity utilisation in the sterile manufacturing facilities, which comes with great operating leverage as overhead absorption per unit improves. Remember, under-utilisation is the death knell for any manufacturing business.

Has the market gotten carried away here? I don’t chase gains like these as a rule, especially when they are based on a lot of promises rather than money that has already been banked. Each to their own.

Brikor shareholders may get a liquidity event (JSE: BIK)

A mandatory offer at 17 cents per share looks likely

With the bid in the market at 12 cents per share and the offer at 17 cents per share, I suspect that Brikor shareholders will be quite happy to accept a mandatory offer at 17 cents per share. It’s probably the only way to sell at this price!

Nikkel Trading has entered into agreements with major shareholders to buy 67.7% of the company. There are two tranches here, with the first one representing 34.1% of shares in issue. This does not trigger a mandatory offer, for which the threshold is 35% ownership.

The second tranche is for a further 33.6% in the company, which is subject to approval by regulators like the Competition Commission, JSE and TRP. If that gets approved and executed, it would trigger a mandatory offer to all other shareholders.

If I was a Brikor shareholder, I would consider this liquidity opportunity very carefully. Director Garnett Parkin didn’t waste any time, selling shares worth nearly R3 million.

Capital & Counties is still battling valuation pressures (JSE: CCO)

When rates are rising, property values tend to drop even if rentals increase

This is confusing, I know. The way a property is valued is based on a “cap rate” and the higher the rate, the lower the property value. Value and yield always have an inverse relationship.

Simply, investors demand a higher return from the properties when rates are higher. Even if rentals increase, the impact of higher yields is often severe enough to more than offset the benefit of net operating income from the properties.

At Capital & Counties for example, the valuation of Covent Garden is flat because yields widened by 19 basis points to 4.07%. Lillie Square’s valuation fell 6%. We won’t talk about the value of the investment in Shaftesbury, which is substantially lower.

Group net debt to assets is 28%, so the balance sheet is in decent shape.

Cashbuild releases its worst interim HEPS in years (JSE: CSB)

When will the pain end in this sector?

With a 32% drop in the share price over the past year, things really haven’t been enjoyable for Cashbuild. The riots hurt the business severely and consumer spending has shifted away from DIY and home improvement in the aftermath of the pandemic.

For the six months to December, revenue was down 4% and headline earnings fell by a rather hideous 39% to R156 million, comfortably the weakest result in recent years. The dividend has been slashed by 32%.

As we dig deeper, we find selling price inflation of 4.5%, which suggests that volumes were down approximately 8.5%. Gross profit margin also went the wrong way, dropping from 26.6% to 25.3%. With operating expenses up by 9%, profitability never stood a chance.

There’s no sign of improvement, either. In the first six weeks of the 2023 calendar year, revenue was down 8% year-on-year. Nobody is climbing off this pain train just yet.

Caxton and CTP reports a juicy jump in HEPS (JSE: CAT)

There’s impressive pricing power on show here

In the six months ended December, Caxton’s HEPS increased by between 32.3% and 39.8%. That’s a solid outcome under these circumstances, achieved through revenue growth of 25.8% as the company managed to recover raw material costs.

In the industrials game, pricing power is everything in an inflationary environment. If you can’t pass those costs on to customers, you die. Simple as that.

The group had also made the strategic decision to ramp up raw material stockholdings to avoid losing out on sales because of supply chain issues. As supply chains have eased, this creates the opportunity to reduce the overall stockholding and release working capital into cash.

I’m not surprised that the share price was 4.5% up on this news.

Cognition is profitable again (JSE: CGN)

Both EPS and HEPS are in the green

After the sale of Private Property and the rationalisation of costs, Cognition Holdings is profitable once more. For the six months ended December, HEPS is expected to be between 0.60 and 0.75 cents, a lovely turnaround from a loss of 0.70 cents in the comparable period.

Even Earnings Per Share (EPS), which is affected by asset impairments (unlike HEPS), is positive in this period.

The share price is up over 60% in the past year, a great example of a value unlock by a small, off-the-radar company.

Harmony: no dividend as the company invests in copper (JSE: HAR)

It seems that even Harmony Gold is scared of gold

I can’t blame Harmony Gold for wanting to diversify its exposure to the yellow stuff. After such a disappointing period for gold, the investment case took a knock.

In the six months to December, the year-on-year story looks good at least. Revenue was up by 6% and net profit jumped by 36%. There’s no dividend though, as the company has acquired Eva Copper in Australia as part of the diversification strategy referenced above. This also drove a substantial increase in net debt to EBITDA from 0.1x to 0.6x.

The charts over the past year in this sector don’t make for pleasant viewing:

Investec Property Fund has a lot to tell you (JSE: IPF)

There’s a ManCo internalisation and a couple of joint ventures

Allow me to begin by explaining why property fund asset management companies (or ManCos) were the biggest rip-off of ordinary shareholders that I’ve possibly ever seen on the JSE.

You see, instead of just paying salaries to property professionals, funds were put together by “asset managers” who then charge a fee based on the value of the properties, not a reasonable amount for the skills and time spent (like a normal management team).

With the greatest respect to property professionals, this isn’t “asset management” in the true sense. This isn’t a team of people putting together deals across various industries, building a portfolio of diversified assets and dealing with a huge variety of market dynamics. Property funds stick to properties, so there’s absolutely no reason why property professionals can’t just earn a salary and bonuses. Sorry, but it’s true. You don’t see the team at Bidvest or Barloworld trying to put together a ManCo.

Nevertheless, for years institutional investors were happy to let this happen. As people eventually realised how expensive this is for shareholders, funds were put under pressure to “internalise” the ManCo at great expense. Not only are management teams now being paid out a multiple of their earnings, but the base for that multiple is also inflated!

How do you rationally explain a scenario in which Investec (the ManCo) will get paid out a spectacular R975 million by Investec Property Fund to internalise the ManCo? The market cap of the fund is not even R7 billion, so this is around 14% of the fund’s market cap! The net management fee saving on an annual basis is R73.8 million, so they aren’t shy of putting a proper earnings multiple on it either.

Even worse, that management team will still need salaries going forward. It’s not like they work for free from here onwards.

Once ordinary shareholders have been fleeced of their capital, they can look forward to news like the acquisition of a 19% interest in the Pan European Logistics Platform for EUR96 million and a 50% joint venture agreement with Irongate Australia to acquire a stake in one of their property funds.

I just find it hard to focus on the “good” strategic news after seeing that incredible amount put forward for the ManCo.

In a separate trading update, the fund reported a decline in distributable income per share of between 2% and 3%. This was blamed on interest rate movements in Europe. Reversions (the percentage change in a renewed lease rental vs. the previous rental) are negative in South Africa and positive in Europe, showing how different the conditions in each region can be.

MTN’s HEPS is higher, but wait for the cash flow (JSE: MTN)

The issue for telecoms companies doesn’t lie in profitability

In a trading statement for the year ended December, MTN banked growth in HEPS of between 12% and 22%. The forex losses are huge, as the company needs to upstream cash from a country like Nigeria at pretty much whatever exchange rate it can get.

For reference, the HEPS range is R11.05 to R12.04 per share. The forex impact was -R1.81 per share, so this is material in the group context.

Full results are due on 13 March. When they are out, the first thing I’ll be looking at is the commentary around the costs of load shedding and the investment required in batteries and other backup solutions.

The share price barely moved after this trading statement came out, so I think the broader market is also waiting to see what the balance sheet looks like.

Murray & Roberts makes a small recovery (JSE: MUR)

I still don’t think the risks are being fully priced in

After releasing interim results for the six months ended December, Murray & Roberts closed 4.65% higher. This is despite being (1) loss-making and (2) in a net debt position of R2 billion with a market cap of R950 million. You need to be brave to be having a punt here.

The good news is that at least earnings before interest and taxes (EBIT) was positive this period, coming in at R80 million. This suggests that the core business is capable of making a profit, so the losses are due to the balance sheet.

This balance sheet isn’t going to be fixed overnight, with the company already warning that there will probably not be a full year dividend. More worryingly, the comment in the result about “options to de-lever the balance sheet to create a sustainable structure” gives a pretty strong clue that a painful rights offer could be coming down the line.

The only thing you can be guaranteed of with Murray & Roberts is that the share price will be volatile going forward.

Stefanutti Stocks buys more time (JSE: SSK)

Lenders have agreed to extend the capital repayments profile

When Stefanutti Stocks last updated the market on the restructuring plan in November 2022, the group was negotiating with the lenders to extend the capital repayment profile out to February 2024.

This has now been achieved, so the group has another 12 months to manage this loan.

Woolworths puts in a premium performance (JSE: WHL)

It’s not often that the dividend nearly doubles!

With an “under new management” sign firmly on the door, Woolworths is showing the market what the benefits are of focusing on the core business.

These numbers look quite incredible, really. In the 26 weeks to 25 December, turnover was up 15%, HEPS jumped 75.1% and the interim dividend per share nearly doubled (+96.9%) as management confidence in the operations increased.

Free cash flow per share was up 29.3%, a strong result but well off the profitability growth as some of the cash got sucked into the business.

To be fair of course, the comparable period included lockdowns in Australia. Woolworths gives us a very useful data point for the last six weeks of this period as a more sustainable view on the business, with revenue up by a still-impressive 8.8%.

With David Jones on its way out the door, management can give full focus to the local operations and Country Road in Australia. With load shedding having a huge impact of R15 million per month (not least of all because the average Woolworths Food is colder than Sutherland in winter), management will need to find a longer-term energy solution. The cold chain is everything at Woolworths, so this is a key business risk.

The share price actually fell by 3.2% on Wednesday after results were released, perhaps as the market digested the load shedding impact. The share price has been on a charge of note, so some consolidation is to be expected.

Little Bites:

  • Director dealings:
    • A prescribed officer of Gold Fields (JSE: GFI) has sold performance shares worth R11.3 million. There’s no indication that this was only the tax amount. Having recently given up on gold in my portfolio, I don’t blame this individual.
    • RBFT Investments, an associate of a director of Salungano (JSE: SLG), has been buying shares in the open market at R1.40 per share. The latest purchases come to R4.7 million and there’s still plenty of ammo left to buy shares of those who want to sell.
    • Peter Mountford (CEO of Super Group) sold enough of his share awards to cover the tax on them and chose to keep the rest. Although these are performance awards, choosing to keep 57% of them sends a message (JSE: SPG).
    • The company secretary of Tiger Brands (JSE: TBS) has sold shares worth R1.05m that were acquired under an incentive programme. It looks like this was the full value of the award, not just the tax.
    • An associate of a director of Fairvest (JSE: FTA) has acquired shares worth R980k.
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth around R55k.
    • The company secretary of Trematon (JSE: TMT) has sold shares worth R35.5k.
  • Sanlam (JSE: SLM) and Alexander Forbes Group (JSE: AFH) have closed the deal in which Sanlam acquired Alexforbes’ individual client administration business. The effective date of the transaction is 1 March 2023. Sanlam’s Glacier business will take full responsibility for this newly acquired operation.
  • Premier Fishing and Brands (JSE: PFB) has concluded the transaction to meaningfully increase its stake in Talhado Fishing Enterprises from 50.3% to 80.65%.
  • I was slightly surprised to learn that Sygnia’s (JSE: SYG) offices in Green Point are owned by a family trust of founder Magda Wierzycka. For someone who has always beaten the drum about governance, that’s an unusual situation for a listed company. Still, this is why related party rules exist on the JSE, so an independent expert will need to opine on whether the lease terms are fair. I’m just not sure that the optics are great, especially after the company had moved towards having professional independent management and has now reverted to the old founder-led situation after David Hufton left the group.
  • I’m keeping an eye on Clicks (JSE: CLS), a company whose share price has always been propped up by foreign investors. With greylisting and a souring of relations with the US, I’ve been wondering if US investors might start selling. Sure enough, JPMorgan Chase & Co has sold down its stake and now holds 7.98% in the company. The Clicks price is holding up for now.
  • In a very strange situation, an update that supposedly related to Renergen (JSE: REN) was released on SENS. It caused a stir, as it was all about the late announcement of a share consolidation. The JSE seems to have made a mistake here, as Renergen and its Designated Advisor had no knowledge of this announcement and it clearly related to a completely different and suspended company called Resource Generation Limited (JSE: RSG). Renergen can’t get rid of it on its SENS feed, so an announcement was released asking shareholders to disregard the incorrect release. I’ve never seen this before!
  • The CFO of Advanced Health Limited (JSE: AVL) has resigned and been replaced on an acting basis by an internal candidate.

Managing your downside risk with medical buildings – Brought to you by Orbvest

Sponsored Content
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Managing your downside risk with medical buildings – Brought to you by Orbvest

Traditionally, risk-averse investors tended to keep their money in cash, but in many countries the real after-tax return on cash is below the inflation rate, which means those cash holdings are actually losing value.

For example, in South Africa, where the November 2022 inflation rate was 7.6%, at mid-December interest rates on six-month fixed deposits with the major banks ranged from 8% to 8.25%. That means, assuming an investor is in the top tax bracket of 45%, they are effectively earning about 4.5%.

“It was clear to us that there was a growing need for a lower-risk investment that still delivers regular income and preserves capital value,” says OrbVest CEO Martin Freeman. “The additional competitive advantage that OrbVest can offer is diversification into the world reserve currency, the US Dollar, through our investment in medical office buildings in the US, which offsets single-country risk.”

OrbVest has re-packaged its offering of medical office buildings in the US to respond to investors’ desire to spread their risks during a period of heightened geopolitical upheaval and uncertainty.

In 2021, OrbVest launched its first diversified portfolio, OrbVest Diversified Holdings 1 (ODH 1)

This was comprised of at least eight buildings that investors could put their money into to spread their risk beyond a single building. Since then, OrbVest has launched four more ODH offerings. It also offered another diversified portfolio, Triple Net One, which was also envisaged to be a portfolio of eight SNL (Single Net Lease) healthcare buildings, but one where the tenants have signed “triple net” leases, making tenants responsible for all the maintenance costs.

In response to market demand, towards the end of 2022, OrbVest decided to offer investors in those six products a single, consolidated product, simply called ODH. The rationale behind consolidation is to make these investments more robust, in a market which has become riskier because of higher inflation and interest rates. It will also save about $400,000 of costs over a five-year term, since each one of the ODHs and Triple Net One are separate listed entities.

Shareholders voted overwhelmingly in favour of the proposal to consolidate.

“For investors, it means their risk is now spread across over 100 medical tenants and 26 different buildings in 9 states across the US,” Freeman says. “In the event that the US does go into recession in 2023, even though the medical profession is relatively resilient, it is likely to experience some stress. But with diversification across such a broad portfolio, investors in medical office properties will see little impact if a few tenants are unable to meet their obligations.”

The new ODH has a five-year structure, which will start at the end of 2023.

OrbVest will accept investments until the end of December 2023, until ODH closes. Every time a new investor comes in, it triggers a new issue of shares, which makes those investors eligible for distributions immediately. Previously, investors into a single building have had to wait until the transaction has closed before their money starts to work for them which had an impact on the returns in the first year (although they were offered the opportunity to put the money in an interest-bearing note which mitigated this impact to a large extent).

Since the inception of ODH 1, investors have received over 7% annualised returns, and is anticipated to continue to pay 7% for the full investment period. All returns are distributed as Dividends and not as interest so are more tax efficient. Each of the underlying investment properties should be sold after the 5-year investment period and any capital growth is shared with investors on a profit waterfall, pushing the anticipated return per annum into double figures and the targeted figure is to exceed 10% IRR (internal rate of return). This return in dollars compares favorably to the rates currently being offered by South African banks to investors willing to tie their cash up for five years, which are between 9.9% and 11.25%, according to rateweb.co.za. Those returns translate into 5.5% and 6.25% respectively, for those in the top tax bracket. Also the anticipated depreciation of the Rand over the US Dollar over time should be considered.

OrbVest’s fees on the ODH portfolio are only 30 basis points (0.3%), but OrbVest also earn fees on the underlying investments which are weighted in favour of performance, with a 7% hurdle. All fees and charges are explained in the documentation, as required by the financial regulators in South Africa and the US.

For more information view this short video below or contact OrbVest on www.orbvest.com or email support@orbvest.com

Disclaimer
OrbVest SA (Pty) Ltd is an authorised Financial Services Provider. The content and information herein contained and being distributed by OrbVest is for information purposes only and should not be construed, under any circumstances, by implication or otherwise, as advice of any kind or nature, or as an offer to sell or a solicitation to buy or sell or to invest in any securities. Past performance does not guarantee future performance.
Returns are taxable and will be taxed as dividends from a foreign source, ordinary income or capital gains, depending on your tax residency. OrbVest is not a tax and/or legal advisor. Owing to the complex tax reporting requirements associated with private equity and private real estate investments, investors should consult with their financial or tax advisor or attorney before investing.
For members investing via www.orbvest.com the particulars of the investment are outlined in the property supplement, a private placement memorandum or subscription agreement, which should be read in their entirety by the proposed investor prior to investing and having obtained independent advice.

Ghost Bites (Altron | Equites | Kaap Agri | NEPI Rockcastle | Oceana Group | Sibanye-Stillwater | WBHO)

The Finance Ghost
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Ghost Bites (Altron | Equites | Kaap Agri | NEPI Rockcastle | Oceana Group | Sibanye-Stillwater | WBHO)

The sale of Altron Document Solutions has fallen over (JSE: AEL)

The buyer couldn’t agree on the way forward with Xerox

In what must be an immensely frustrating situation for all concerned, Altron’s disposal of Altron Document Solutions to Bi-Africa Investment Holdings has been cancelled.

Although several conditions precedent were fulfilled, the buyers and Xerox just couldn’t find common ground on a distribution agreement for the South African market. This was core to the transaction, so the entire thing is now over.

Altron still wants to sell this business, though I do wonder whether this update might scare off potential buyers. It all depends on what part of the distribution agreement was problematic. These conversations happened entirely behind closed doors, so we have no further details.

Equites updates the market on key focus areas (JSE: EQU)

This is a useful update on strategic drivers in the business

I must say, I quite like the way in which Equites Property Fund gives its pre-close update. The company has six strategic “focus points” and reports on each one.

Something I found interesting is that the asset disposal programme (basically just a way of recycling capital) is experiencing strong demand for the assets both in the UK and South Africa. The loan-to-value ratio is expected to increased to between 35% and 40% in the short-term, before returning to the medium-term range of 30% to 35%.

I also noted that the Shoprite relationship is expected to yield internal rates of return of between 13% and 14%. Put differently, you’re looking at a spread of between 300 basis points and 400 basis points over South African government bonds.

If you want to read the full update, you’ll find it here.

Kaap Agri to mop up the odd-lots (JSE: KAL)

An odd-lot offer is designed to save administrative costs

From time to time, listed companies decide to execute an odd-lot offer to buy the shares held by shareholders who each hold fewer than 100 shares. This isn’t great for retail investor liquidity of course, but does save administrative costs.

For example, Kaap Agri has 14,777 shareholders who hold fewer than 100 shares each, representing a total of 0.42% of shares in issue. Repurchasing the shares will result in a cash outflow for the company of R13.37 million for the shares and R716k in transaction costs, which I’m sure was compared to the costs of having those shareholders.

Here’s the thing though: shareholders aren’t forced to sell. With an offer price equal to the volume weighted average price, there also isn’t a huge incentive to let the shares go, even if there are some tax benefits available in this process.

Note that if you hold fewer than 100 shares and you DO NOT want to sell them, then you have to make that election by Friday, 21st April. The default election is to sell your shares so if you don’t specify otherwise, they will be sold.

NEPI shareholders: make your choice (JSE: NRP)

There’s a scrip dividend on the table at a premium to the cash dividend

When a company wants to retain cash, it can try and use a scrip dividend to persuade shareholders to accept new shares in lieu of a dividend. Sometimes, the values of the options are the same, which is the case when the company isn’t pushing the scrip option too hard.

In other cases, the scrip dividend is at a premium to the cash dividend i.e. shareholders are financially better off by choosing the scrip dividend, unless they believe that the shares are going to drop in value soon and they would rather have the cash.

At NEPI Rockcastle, the default option for this distribution is unusual. Unless they say otherwise, shareholders will receive a capital repayment on the shares. If they choose differently, they receive a scrip dividend or a cash distribution.

If you are a shareholder, you need to read this circular.

Oceana Group has been a great catch this year (JSE: OCE)

Strong pricing and demand have led to solid results

The fishing business isn’t easy, that much I can tell you. If you can imagine all the volatility of global markets and the ocean (literally) in one package, you’re on the money here.

Speaking of money, here’s the five-year chart for Oceana Group:

As you can see, recent momentum has been exceptional. Since July 2022, the share price has rallied approximately 55%!

After substantial supply chain disruptions in 2021 and the civil unrest, the company needed to replenish its inventory. Thanks to successfully doing exactly that, canned fish sales volumes were up by 33% in the four months ended January 2023 vs. the prior period. As great as the volumes story is, the selling prices didn’t increase by enough to offset cost pressures. Margins have suffered as a result.

In other local product updates, South African fishmeal and fish oil sales volumes were 23% higher.

In the US, fishmeal volumes were up 43% and fish oil volumes almost tripled! On that side of the very large pond, selling prices were at least higher. Along with the weakening of the rand, this means that Oceana’s best growth numbers were also achieved in the strongest currency.

Finally, horse mackerel and hake sales volumes increased by 43%. High fuel costs have once again been highlighted by the company as a concern.

The good news is that load shedding isn’t much of a worry, as vessel operations rely entirely on self-generated power. The canning and fish meal businesses have coal boilers as the primary source of power.

Despite the potential for volatility in this business, the group is confident enough to put out a trading statement for the six months ending March. HEPS will be at least 20% higher than the comparable year, which is the minimum required to trigger a trading statement. I suspect that they are being conservative here, so this might remain an interesting (but risky) punt for the next few months.

And in strategic news, the disposal of Commercial Cold Storage Limited has achieved regulatory approvals in South Africa. Approval in Namibia is outstanding, with the deadline kicked out to 30 April.

Sibanye-Stillwater signs off on a year to forget (JSE: SSW)

Between floods and labour strikes, 2022 was ugly for Sibanye

With a share price that is down 46% in the past year, there aren’t many positives to take from the 2022 financial year for Sibanye-Stillwater. The first half of the year was hammered by production problems and the second half saw profitability come under pressure despite improved production numbers.

For the year ended December, headline earnings was R18.4 billion, approximately half of the R36.9 billion achieved in the prior year. This was strongly weighted towards the first six months of 2022 (R11.9 billion) vs. the latter half of the year (R6.5 billion).

This drop in earnings was driven by a 20% drop in revenue in 2022, which led to a 40% decrease in adjusted EBITDA. With the operating leverage that is a feature of mining businesses, you can’t afford major drops in revenue. The gold business was the biggest offender here thanks to labour unrest, with negative EBITDA of R3.5 billion vs. positive R5.1 billion in the prior period. The floods in the US didn’t help either, with EBITDA in the US PGM operations down 47%.

Despite all of this, there’s still a final dividend of R1.22 per share.

WBHO is firmly back in the green (JSE: WBO)

Despite a return to profitability, there’s still no dividend

In the six months ended December 2022, WBHO delivered on the strong order book that was in place at the start of the period. Revenue from continuing operations increased by 15% and earnings from continuing operations was up by 39%.

Even if we look at total operations, the group is profitable again. HEPS came in at 630 cents vs. a headline loss per share of 1,613 cents in the comparable period.

No interim dividend has been declared.

Going forward, a 19% increase in the order book should help with profitability in coming periods. Once the exit from Australia is completed and the associated cash drag is over, there might even be a dividend again!

Little Bites:

  • Director dealings:
    • Aside from a small purchase of shares by an associate of the CEO of Spear REIT (JSE: SEA), there was a much meatier purchase by an associate of a non-executive director to the value of R1m.
    • A non-executive director of Anglo American (JSE: AGL) has bought shares worth £19.8k.
    • A non-executive director of Finbond Group (JSE: FGL) has bought shares worth R100k.
  • DRA Global (JSE: DRA) has very little liquidity, so I’m including a brief reference to results. In the 2022 financial year, revenue fell by 24.6% and underlying EBIT was just A$7 million vs. A$56.4 million in the prior year. There was no dividend.
  • The only certainty in a business rescue process seems to be that the publication of the business rescue plan will be delayed. At Tongaat Hulett (JSE: TON), this has now been pushed out to 31 March.
  • OUTsurance Holdings (JSE: OUT) has appointed Nathaniel Simpson as the new CEO of Youi Holdings, the Australian business within the group. He replaces Huge Schreuder as CEO, the founder of Youi when it launched as a greenfield project in 2008.
  • With the Tradehold (JSE: TDH) strategy now firmly based on the Collins Group, there have been wholesale changes at both executive and non-executive levels to the board.
  • Trustco (JSE: TTO) has released a messy set of numbers for the year ended August that were impacted by the long and painful fight with the JSE over the accounting policies. Although the net asset value increased by 362%, the headline loss per share was 159% worse than the prior period.
  • Obscure and highly illiquid company Putprop (JSE: PPR) released a trading statement noting that HEPS for the six months to December would be down by between 31% and 51%.

Unlock the Stock: Afrimat and Capital Appreciation

The Finance Ghost
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Unlock the Stock: Afrimat and Capital Appreciation

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In this fourteenth edition of Unlock the Stock, Afrimat and Capital Appreciation both returned to update us on their businesses. This gives you a wonderful opportunity to learn about two companies with completely different industry exposures, both available for investment on the local market.

Use the link below to enjoy this great event, co-hosted by yours truly, Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions:

Ghost Bites (Accelerate Property Fund | Choppies | Clientele | Hulamin | Liberty Two Degrees | Murray & Roberts)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | Choppies | Clientele | Hulamin | Liberty Two Degrees | Murray & Roberts)

Accelerate Property Fund raised R50 million (JSE: APF)

The underwriter had to take the lion’s share

When a property fund is trading at a huge discount to net asset value per share, you would expect shareholders to jump at a rights offer. After all, it’s the opportunity to buy more shares at a vast discount, especially when the rights offer is priced below the market price.

Not so at Accelerate Property Fund, where the fully underwritten rights offer for R50 million saw the underwriter take up over R38 million worth of shares.

With a share price that has fallen over 86% in the past five years, there isn’t exactly an orderly queue in the market for these particular shares.

Choppy profits at this retailer (JSE: CHP)

Choppies is suffering from margin pressures

Revenue growth of 9%. That sounds lovely, doesn’t it? Sadly, a lot happens between revenue and money landing in the pockets of shareholders.

In the six months ended December, Choppies clearly struggled with margins. Gross margin fell from 21.3% to 21.0% as supply chain costs couldn’t be recovered from customers. It may not sound like a lot, but a 30 basis points deterioration in a retailer is a big deal.

The margin pressure at operating profit level was a lot worse, exacerbated by the opening of new stores that take a while to ramp up to full profitability. Operating profit fell by 22.1% as operating margin contracted from 5.6% to 4.0%.

Remember, by the time we get to operating profit, we haven’t even dealt with interest costs yet. In a higher rate environment, those also went in the wrong direction despite a decrease in net debt over the period.

With all said and done, headline earnings per share fell by 35% and there is no interim dividend.

So much for that revenue growth, huh?

Clientele offers a juicy yield AND growth (JSE: CLI)

Brand ambassador Desmond Dube is clearly doing his job here

Clientele is one of those companies that never comes up as a stock pick. Closing at R10.37 on Monday, the trailing dividend yield is 11.57%. That puts most property companies to shame, plus you must remember that you pay the full income tax rate on a REIT dividend, whereas a Clientele dividend is subject to dividends withholding tax (which is much lower, or zero if you hold the shares through a company).

Now, this isn’t to say that Clientele has been a fantastic investment. The share price hasn’t gotten back to pre-pandemic levels, as evidenced by this chart:

Still, with that dividend yield, you would expect the company to be ex-growth. Instead, we find a business that just grew its HEPS by 14% in the six months ended December. This bodes very well for the next dividend!

Despite Desmond Dube’s best efforts on daytime television, the company is dealing with higher than expected policyholder withdrawals as its customers face economic pressures.

I’m also not sure what the investment funds were invested in, as they somehow achieved an annualised investment return for the period of 12%. Every other insurance company has been complaining about investment returns in 2022.

Looking deeper, the long-term insurance segment remains the largest contributor, with net profit of R180.8 million and growth of 16% in that number. The short-term insurance business (Clientele Legal) recorded a 26% drop in net profit to R45.1 million.

Despite these numbers, the share price fell 0.3%. Volumes are thin here, despite the market cap of nearly R3.5 billion.

This is an interesting, off-the-radar company.

Hulamin: all about the “metal price lag” (JSE: HLM)

The concept of “normalised earnings” gets taken to the next level here

For the year ended December, Hulamin’s earnings as reported will drop by between 49% and 41%. If you apply normalisation adjustments to that HEPS number, then it looks very different.

The major adjustments are both related to the base year (2021) rather than the 2022 earnings. Hulamin talks about the Metal Price Lag (and even gives it capital letters), which is the timing difference between the purchase and sale of metal. I think most companies call this Normal Business.

If you are willing to work with Metal Price Lag, then you’ll be pleased to note that normalised HEPS has increased by between 20% and 38%.

The share price was trading around 3.5% lower in afternoon trade. This is called Share Price Lag.

Liberty Two Degrees is robust but perhaps expensive (JSE: L2D)

Operating costs are under serious pressure and the trailing yield isn’t juicy enough for me

Liberty Two Degrees makes for fascinating reading, as the property fund owns some of the most iconic properties in South Africa, including Sandton City and Melrose Arch. This is a mix of really desirable retail and office space, although the portfolio also includes a few other malls that aren’t nearly as prestigious.

Importantly, consumers have returned to malls and key retail metrics are running ahead of pre-pandemic levels. Turnover is up 21.9% vs. 2019 and footcount is up 9.9% vs. that year in the retail portfolio. Despite this, rental reversions were -9.7% for retail space, so tenants are still negotiating hard with landlords.

The situation in the office portfolio is still horrible, with negative reversions of -25.5% vs. -24.8% last year. Office occupancy has dropped year-on-year from 86.2% to 80% because the fund sold the fully let Standard Bank building. This “reveals” the occupancy in the rest of the portfolio. Leaving aside that building, like-for-like office occupancy has improved at least, though one would certainly hope so based on the negative reversions!

The trouble lies in operating costs, which have come under substantial inflationary pressure. We can see this in Net Property Income, which is still much lower than in 2019 despite the improvement in rental turnover and footfall. Here’s the real story vs. pre-pandemic numbers:

You also need to keep a close eye on interest costs, with a higher interest rate environment adding to the pressures. Net interest expense is 12.13% higher year-on-year, an unpleasant outcome when Net Property Income was only up 7.3%.

The good news is that the Loan to Value ratio is modest at 24.4%, so the fund isn’t carrying too much debt. This has helped support a 100% distribution pay-out for the year of 36.47 cents per share, which is 6.95% higher than in 2021. Under the circumstances, that’s a decent outcome.

The share price is trading at R4.30 which implies a trailing yield of 8.5%. Is that enough in this environment, particularly with load shedding pressures on operating costs? I don’t think so.

As this share price tells us, we are still a long way off pre-pandemic levels:

Murray & Roberts is losing money (JSE: MUR)

Is a rights offer coming at some point?

Murray & Roberts released an updated trading statement that treats the Australian business as a discontinued operation in this period and the prior period. This allows the market to isolate the rest of the business and see how that is performing.

The answer is: not well.

From both continuing and discontinued operations, the company is expected to report a headline loss in the six months to December of between -323 cents and -321 cents. From continuing operations only (i.e. ignoring the Blunder Down Under), the headline loss is -33 cents to -28 cents.

When a company says that it will “evaluate options to de-lever the balance sheet to achieve a long term capital structure”, it’s time to accept that the risk of a rights offer is very high. Have a look at the EOH share price to get a sense of what that looks like for shareholders.

Little Bites:

  • Director dealings:
  • If you’re a Kibo Energy (JSE: KBO) shareholder or perhaps an energy junkie, you’ll be interested to know that Kibo subsidiary, Mast Energy Developments, exceeded expectations in 2022 at the Pyebridge synchronous gas-powered flexible generation facility. I’m not going to pretend to understand this stuff, so read the full details here if this interests you.
  • Acsion Limited (JSE: ACS) has renewed the cautionary announcement related to a potential cash offer and delisting of the company.
  • Chrometco (JSE: CMO) has renewed the cautionary announcement relating to a material subsidiary of the company. The company is suspended from trading on the JSE.

Ghost Stories #7: Growth, Value and Markets (Nico Katzke, Head: Portfolio Solutions at Satrix)

The Finance Ghost
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Ghost Stories #7: Growth, Value and Markets (Nico Katzke, Head: Portfolio Solutions at Satrix)

In this episode of Ghost Stories, Nico Katzke (Head of Portfolio Solutions at Satrix) joined me to unpack a wide variety of investment topics.

There is something in here for literally everyone, with numerous insights available to you in this detailed discussion.

We covered topics like:

  • A brief overview of why 2022 was so hard for investors.
  • The difference between growth and value investing, explained in a way you likely haven’t heard before.
  • The VIX and the DXY and why these market metrics are useful in practice.
  • The disappointment of gold over this period.
  • Equity investing in the context of higher rates in the market, both over the short- and long-term.
  • Being careful of the growth component that is found in most leading indices.
  • The relative outlook for value vs. growth.
  • Artificial Intelligence as a theme and the potential disruption of Google.
  • Achieving real diversification through suitable portfolio allocation.
  • The importance of consistently investing over a long period of time.
  • The misconception of active vs. passive investing and how passive should rather be thought of as “rules-based” investing.

Listen to the discussion using this podcast player:

Disclaimer
Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance.

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