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Weekly corporate finance activity by SA exchange-listed companies

Vanessa Aitken
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Weekly corporate finance activity by SA exchange-listed companies

The PBT special dividend of 75 cents per share (a total gross distribution of R156,9 million) has been approved and will be paid on 15 May.

Distell and Heineken have announced that all the scheme conditions have been completed and Distell will delist from the JSE on 28 April.

Kibo Energy issued a total of 794,893,911 new shares following a warrant conversion and convertible note conversion. 284,524,625 shares were issued for the warrants and 510,369,286 shares issued for the convertible loan note conversion.

The Jasco Electronics shareholders have approved the delisting resolution and the offer has become unconditional. The finalisation date announcement is expected to be released in early May.

The Kal Group (previously Kaap Agri) will repurchase and delist 247,843 shares following the release of the odd-lot offer results.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 17 to 21 April, a further 2,651,096 Prosus shares were repurchased for an aggregate €185,26 million and a further 566,392 Naspers shares for a total consideration of R1,9 billion.

Two companies issued profit warnings this week: Coronation Fund Managers and Renergen.

Three companies issued or withdrew cautionary notices: Trustco, Life Healthcare and Afristrat Investment.

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

Who did what this week across the African continent?

DealMakers
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Who did what this week across the African continent?

Smile Identity has acquired Inclusive Innovations, the parent company of a Ghanaian identity verification software developer, Appruve. Financial terms were not disclosed. The acquisition strengthens Smile Identity’s presence in Ghana and also aids it’s expansion into francophone Africa, focusing on Côte d’Ivoire and Senegal.

InfraCo Africa, part of the Private Infrastructure Development Group, has invested US$1,5 million in Uganda’s Afresco. The investment will support Afresco’s ‘Energy-as-a-Service’ offering to Commercial & Industrial clients in Uganda, Malawi and the DRC.

The UAE’s Ignite Power has acquired the solar solutions portfolio in Kenya of Mwezi Limited. The company did not disclose any financial terms. The acquisition will expand Ignite’s presence in the East Africa country.

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

www.dealmakersafrica.com

Competition law developments in Africa

Lesley Morphet
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Competition law developments in Africa

2022 was another busy year for competition regulators across Africa.

One aspect driving this activity arises from the introduction of the Africa Continental Free Trade Area (AfCFTA) Agreement. The AfCFTA has, as its primary objective, the creation of a single market for goods and services across the African continent. Before it can function, protocols need to be put in place, one of them being a Competition Policy Protocol, the provisions of which require the existence of a functional competition regime.

A draft Protocol has been developed in terms of Phase II of the AfCFTA Agreement, and was approved in October 2022. Pursuant to this, Rwanda has launched a project to align the national legal framework with the Competition Policy Protocol, and Ghana has delayed the submission of its Competition and Fair Trade Practices Bill to Parliament in order to ensure that the Bill is in alignment with the draft Protocol.

Many countries in Africa have existing competition legislation, and the diminishing number of countries without a competition law are taking steps to introduce such legislation. For example, Uganda, which for many years has been considering the introduction of a competition law, moved a step closer to this in 2022, with a bill having been submitted to Parliament for debate and consideration. Lesotho is considering the introduction of competition law. Burundi is also being assisted by the East African Community (EAC) to set up its competition authority.

Existing regulators are becoming more active. One of these is Mozambique, which in 2022 imposed its first administrative penalty for failure to notify a merger. The authority has identified market studies and restrictive practices investigations as key areas to be prioritised. It has also made provision for the electronic submission of merger notifications and complaints.

Nigeria is also making its mark in the field of competition and consumer law since its legislation came into force a few years ago. With respect to all aspects of competition law, Kenya has been very active for a number of years, particularly under the stewardship of Francis Kariuki, who was appointed Director General of the Competition Authority of Kenya in 2013. His term came to an end last month, and an acting Director General has been appointed. It will be interesting to see how the authority develops under new leadership. Egypt, too, is being proactive where mergers are concerned. Until now, it had a post-merger notification regime which had no powers to assess, approve or block a transaction, but they have now introduced legislation moving to a suspensory regime with penalties for gun-jumping.

Kenya, Nigeria and Egypt, along with South Africa and Mauritius, are proactively looking at digital markets and the implication for competition, an area which is seen by regulators globally as being of great importance. Following a workshop on “Digital Economy and Competition in the African Region”, hosted by the ECA in October 2021, an Africa Heads of Competition Dialogue was held in South Africa in February 2022, involving representatives from these countries. The Dialogue was convened to discuss the development of an African response to digital markets.

South Africa has taken the lead in development in this area, with the South African Competition Commission (SACC) having launched a market inquiry into online intermediation platforms in 2020. It released an interim report towards the end of 2022, and is due to release its final report in February 2023. From a competition law perspective, South Africa is still the most active jurisdiction across all areas, and from a merger perspective, the competition authorities are emphasising the importance of public interest considerations. In the past, their focus in this regard has been on employment aspects, but more recently, pursuant to an amendment to the law, this has expanded to include considerations of ownership, particularly by historically disadvantaged persons and workers. This focus on public interest also appears to be gaining traction in other jurisdictions on the continent.

Regional regulators are also active. The EAC recently passed an amendment bill aimed at granting the EAC competition authority the power to set the criteria for approving mergers or acquisitions.

The Common Market for Eastern and Southern Africa (COMESA) is a very active regional authority, both from a merger and a prohibited practice perspective, and it has also weighed in on the topic of digital markets. In March 2022, it issued a press release regarding Digital Finance Services, noting that they have been undertaking a number of activities aimed at promoting fair digital markets, and have prepared Guidelines for e-Commerce.

This active trend looks set to continue in 2023, and parties with activities in Africa should continue to ensure that they are compliant with the various existing and impending competition laws on the continent.

Morphet is a Partner | Fasken

This article first appeared in DealMakers AFRICA.

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

www.dealmakersafrica.com

Ghost Bites (Anglo American | Amplats | Astoria | British American Tobacco | Hammerson | Kumba Iron Ore | Prosus | Quilter | Sibanye-Stillwater | Steinhoff)

The Finance Ghost
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Ghost Bites (Anglo American | Amplats | Astoria | British American Tobacco | Hammerson | Kumba Iron Ore | Prosus | Quilter | Sibanye-Stillwater | Steinhoff)

Anglo’s production is boosted by Quellaveco (JSE: AGL)

This copper ramp-up was the major positive news in Q1

Anglo American is a huge beast, so a 9% increase in production that is mainly attributable to a single project tells you how big that project really is. Of the 178,100 tonnes of copper produced in this quarter, 59,500 tonnes was attributable to Quellaveco. There was no production from Quellaveco in the base period.

Aside from Quellaveco, there was good news at the steel and iron ore operations as well. These benefits were partially offset by lower copper grades in Chile, a drop in PGM production and the transition of De Beers’ Venetia mine from open pit to the new underground section.

2023 production and unit cost guidance has been reaffirmed across all business units.

In terms of realised prices, I’ve decided to include the entire table from the announcement to show you how significantly commodity prices have dropped off year-on-year when measured in US dollars:

Production fell at Anglo American Platinum in Q1 (JSE: AMS)

The decrease is in line with guidance, which has been reaffirmed for the full year

In its own-managed mines, Anglo American Platinum (or Amplats) anticipated a drop in production because of lower predicted grade at one of the mines and infrastructure closures at another. Refined PGM production was impacted by smelter availability, which in turn was impacted by Eskom load curtailment.

Due to lower refined production, PGM sales volumes decreased by 17%.

Despite this, there is no change to 2023 guidance across production and unit cost guidance.

Astoria holds its portfolio valuations steady in Q1 (JSE: ARA)

Detailed valuations of unlisted assets are only performed at the end of the interim and annual periods

Astoria holds a portfolio of listed and unlisted assets. The unlisted assets are valued by the directors based on maintainable earnings and reasonable valuation multiples. The listed assets need to be marked to market, which led to a write-down in value this quarter.

There’s not a whole lot that you can read into the quarterly results, particularly because the major driver has been market volatility and its impact on the listed portion of the portfolio. If you want to understand more about the group, you would be better served by watching the recording of the recent appearance on Unlock the Stock:

A smokin’ fine for British American Tobacco (JSE: BTI)

The US scored a payday here for BAT’s activity in North Korea over a decade

This isn’t a political platform and never will be. Still, I can’t help but stare in awe at a fine payable to the US authorities of a whopping $635 million (plus interest) by British American Tobacco for activities in North Korea from 2007 to 2017. Sanctions are clearly a profitable business model for the Americans.

British American Tobacco ceased all operations in North Korea in 2017, so this investigation related to the decade before that.

In its interim report, the company had raised a provision of roughly $540 million for this settlement. Perhaps the most incredible thing of all is that despite the obvious shortfall, full-year guidance for the company is unchanged.

Hammerson’s property values are going sideways (JSE: HMN)

Improvements in property income are being offset by adjustments to yields

Because of the way property is valued, it’s entirely possible for the rental income to improve and the value to stay flat or even move lower. It all comes down to the required rate of return for investors, which is higher as the cost of capital in a market increases. This is why a rising rate environment can hurt property values even when property is thought of as an inflation hedge.

In line with what I’ve seen from other European funds, Hammerson’s portfolio value went sideways this quarter despite improvements in rental income and footfall.

Importantly, balance sheet metrics have also improved. The company can’t do much about property values but it can certainly reduce debt. You may recall seeing headlines about anger at Hammerson for the lack of a dividend. Perhaps the improved property metrics will be supportive of a return to dividends sooner rather than later.

Kumba reports higher production and flat sales (JSE: KIO)

The base period was significantly impacted by rainfall

After some positive commentary on Transnet by Afrimat and Sasol, I’ve been waiting to see whether Kumba is also having a better experience. Although ore railed to port by Transnet increased by 3% year-on-year, it was still below Kumba’s expectations.

Looking at this quarter specifically, production increased by 14% because of difficulties in the base period including the weather. Sales volumes were flat year-on-year (hence inventory stockpiles increased). Compared to Q4 2022, which was a disaster with the Transnet strike, sales are up 38%.

Guidance for full year 2023 has been reaffirmed subject to Transnet performance.

Prosus has further reduced its Tencent stake (JSE: PRX)

The buybacks continue to be funded by the sale of Tencent shares

In my next life, I’m coming back as a Prosus executive. After putting in place a convoluted structure to try to reduce the inherent discount to the valuation in the holding structure with Naspers, the management team is now being paid eyewatering sums of money to sell Tencent shares on one side and repurchase Prosus and Naspers shares on the other. The worst part is that this is what should’ve happened in the first place, instead of the ridiculous cross-holding structure that we have today.

Sigh.

After a further sale of shares in Tencent, Prosus’ stake has now decreased to 25.99% in the company.

Quilter reflects improved investor sentiment in 2023 (JSE: QLT)

Flows in Q1 2023 are significantly higher than in Q4 2022

Quilter reported a modest 2% gain in assets under management and administration as at 31 March 2023 vs. 31 December 2022. That’s not earth shattering, but not bad for a three-month period either. The gain was mostly attributable to net inflows, which is the good news in this story.

Although net inflows were lower year-on-year, the comparable period was before the conflict in Ukraine really took off. If we look at Q4 2022 for comparative purposes instead, the momentum in flows is positive. This is especially true in the Affluent channel.

Quilter (and its shareholders) will hope that this momentum can be sustained throughout 2023.

This capital raise is at the Finnish line (JSE: SSW)

Sibanye’s lithium project in Finland is enjoying local government support

In its efforts to secure the outstanding equity funding for the Keliber Lithium project in Finland, Sibanye has announced that the Finish Minerals Group (the manager of the Finnish State’s mining industry shareholdings) will increase its holding in the Keliber project from 14% to 20%.

This will be effected through the rights issue by the project’s holding company, with the state obviously taking up an outsized proportion of rights in order to increase its stake. Of the total raise of €104 million, a substantial €53.9 million is coming from the Finnish State.

Sibanye will retain 79% in the project, with minority shareholdings holding the remaining 1%.

Laying of earthworks for the project commenced in March and the project is progressing well. The remaining capital for the project will be raised in the form of debt.

Steinhoff creditors say WHOA – mostly (JSE: SNH)

Major shareholders are trying to extract some value here

I really do love the fact that Steinhoff’s Dutch Law restructuring plan is called the WHOA Restructuring Plan. Whoa, indeed.

After the plan was published at the end of March, shareholders were allowed to make representations that were also shared with the court-appointed observers.

Unsurprisingly, the shareholders pushed for a material change to the terms. Equally unsurprisingly, the creditors said whoa. There will not be any material changes.

The important update is that contingent value rights (CVRs) to be issued to creditors and shareholders in the new “topco” will carry identical terms and conditions. Creditors will hold 80% and shareholders will hold 20%.

In other words, once the creditors are settled and this exceptionally complicated scenario plays out, the current shareholders would hold 20% of whatever is left via an unlisted instrument. For retail shareholders who have a tiny stake in Steinhoff, holding such an insignificant amount in the unlisted space is literally worthless.

I maintain that the fundamental value of a listed Steinhoff share is close to zero.

Little Bites:

  • Director dealings:
    • A director and prescribed officer of Sabvest (JSE: SBP) collectively bought shares worth R765k.
  • Oasis Crescent Property Fund (JSE: OAS) has very little liquidity, so it only earns a mention in Little Bites on an otherwise busy day of news. With no leverage in order to be Shari’ah compliant, this property fund has a highly conservative business model. Despite the lack of debt, an improvement in conditions drove a 14.6% increase in distributable income in the year ended March 2023.
  • Eastern Platinum (JSE: EPS) has some unusual drama on its hands, having received unproven whistleblower allegations related to undisclosed related party transactions involving the sale of chrome at discounted prices. Two independent directors will oversee an investigation into this.
  • With approval from the SARB now obtained, PBT Group (JSE: PBG) will pay its special dividend on 15 May.

Ghost Bites (Capital Appreciation | Jubilee Metals | KAL Group | Purple Group | Sibanye-Stillwater | South32)

The Finance Ghost
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Ghost Bites (Capital Appreciation | Jubilee Metals | KAL Group | Purple Group | Sibanye-Stillwater | South32)

Capital Appreciation announces a R131 million deal (JSE: CTA)

The acquisition target is Dariel Solutions

Dariel Solutions is the holding company of Dariel Software, an IT software services provider that was founded in 2001. As is so often the case, it takes two decades to build a business to the point where it can be sold for this sort of number. The focus on the FinTech sector is what caught the attention of Capital Appreciation.

The structure looks decent for Capital Appreciation. The R131.2 million purchase price is split nicely across a cash payment (R46.9 million), equity allotment out of treasury shares (R38.4 million) and potential earn-out payment (up to R45.9 million). The earn-out has cash and equity elements to it. In summary: Capital Appreciation is making good use of its listed platform here.

It’s rather interesting to note that the profit warranty is based on EBITDA over a 24-month period. This takes some volatility out of it, with the warranty being R62.2 million in total EBITDA from 1 April 2023 to 31 March 2025. This represents a compound annual growth rate (CAGR) of 20%.

The net asset value of Dariel was R47.8 million as at the end of March 2023. That’s not the way tech companies are valued, so I would suggest looking at EBITDA of R23.8 million and profit after tax of R16.2 million in assessing the purchase price. The trailing Price/Earnings multiple is 8.1x if the full purchase price is applicable, which would be the case if the earn-out is met.

This is a sensible price for what seems to be a fast-growing, established company. The Capital Appreciation share price increased by 1.3% on the day. With a market cap of R2 billion, this is a small but not insignificant transaction for the company.

Jubilee Metals has a good story to tell (JSE: JBL)

Production guidance should please shareholders

With recent upward momentum in PGM prices, it’s a good time to be delivering on production expectations. Jubilee Metals is doing precisely that in the PGM side of the business, with full year guidance reaffirmed.

Of course, mining is never simple. Jubilee has the ability to focus on either copper or cobalt at the Sable Refinery. With cobalt prices having dropped by around 76% from the year’s high, it wasn’t terribly difficult to choose copper as the winner. Copper guidance for the full year is unchanged, though.

In chrome, full-year production is expected to be ahead of guidance. As an additional benefit, chrome prices have also been stronger during this quarter.

There’s been no shortage of volatility in this share price in recent years:

KAL Group mopped up over R10m worth of odd-lots (JSE: KAL)

In case the name isn’t familiar, this is the renamed Kaap Agri Limited

Odd-lot offers have been popular on the JSE lately. It’s a bit sad I think, as companies don’t like having a long tail of retail shareholders because of the administrative costs. Although odd-lots aren’t forced to sell, many don’t notice and end up selling their shares by default.

If you aren’t familiar with how this works, an odd-lot is a holding of fewer than 100 shares. The company can make an offer to all such shareholders, buying back their shares and hoping to save on administrative costs in the process.

In the latest example, KAL Group has repurchased 0.3% of its total issued share capital for nearly R10.1 million.

The company is set to release results on Star Wars day – May the 4th!

Purple Group turns red (JSE: PPE)

The share price continues its correction as macroeconomic conditions bite

Twitter can be a nasty place. If ever you needed an example of how quickly a mob can turn against something, look no further than the general narrative on Twitter around Purple Group.

Also, if you ever needed further proof that the price drives that narrative, check out the results of this survey at roughly the halfway mark:

Suddenly everyone is bearish on Purple Group. I was pointing out how overvalued the company was long before the investors starting heading for the exit over the past year. For context, just take a look at this share price chart:

Where is this headed? The trend definitely isn’t your friend here if you are long, with little to suggest that the near-term pressure on South African consumers (and thus investors) will ease. We can see it coming through in significantly lower client inflows and thus average revenue per user (ARPU), a key metric for any growth company.

Although active client numbers have increased sharply, profitability isn’t driven by active accounts. It is driven by activity on those accounts and the level of deposits, as EasyEquities does have various sources of revenue these days.

With a loss-making period being digested by the market, Purple Group CEO Charles Savage joined me to discuss a wide range of topics related to these results and the company’s growth prospects. I can’t write anything that does this discussion justice, so rather just listen to it:

Something positive at Sibanye-Stillwater (JSE: SSW)

Good news has been hard to come by recently at Sibanye

This is a highly operational update, but it is at least good news for a mining group that has mostly been reporting unhappy things in recent times. Sibanye’s Stillwater West mine can now report a recommissioned vertical shaft, which means the damage suffered during March 2023 has been repaired.

Production from the deeper levels of the mine (below 50 level) has resumed and should reach normalised levels by the end of this month. Suspension of production at deep levels for even just a few weeks had a negative impact on production numbers of approximately 30,000 2Eoz.

Mining is hard.

South32 revises production downwards in several areas (JSE: S32)

The share price didn’t have a good day

In case you’re wondering how important production guidance is for mining groups, I decided to CTRL-F “guidance” in the South32 update. It appears a whopping 51 times! There’s your reminder for the day that valuations are firmly forward-looking in nature.

There was some good news in this South32 update, like copper equivalent production up by 7% year-to-date and Australia Manganese achieving record production. Commodity pricing was also higher across the general portfolio.

Weather and other temporary impacts affected production in several operations this quarter, with guidance revised lower for the full year as a result. Surprisingly, unit cost guidance is largely unchanged despite the production pressures. Capital expenditure guidance is unchanged.

The group is in a strong balance sheet position and regular followers of SENS will know that South32 has been busy with an extensive share buyback programme in addition to the payment of cash dividends to shareholders. There’s a question mark around the wisdom of this in a rising interest rate environment, with finance cost guidance for the year revised sharply upwards from $150 million to $190 million.

The growth strategy is focused on so-called transition metals like copper and battery-grade manganese.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R12.4 million worth of shares in Lighthouse Properties (JSE: LTE).
    • A director of Old Mutual (JSE: OMU) has bought shares worth over R1.1 million in the company.
  • Altron (JSE: AEL) is selling its ATM hardware and support business to American group NCR Corporation. The parties have agreed to extend the fulfillment date for outstanding conditions by one month to 31 May 2023. This is required for competition approval in Namibia and some tax admin with SARS.
  • As I suspected, life after REIT may not be so bad for Fortress (JSE: FFA). GCR has improved the company’s credit rating outlook from Evolving to Positive and affirmed its existing credit ratings.
  • Brimstone (JSE: BRT) is proposing the specific repurchase of forfeitable shares that may vest in February 2024. The price would be based on the 30-day VWAP at the time of vesting, with no premium or discount. As I see it, this is a liquidity event for the executives and managers who receive share-based awards, as there is a lack of liquidity in the Brimstone price. They are essentially turning an equity-settled scheme into a cash-settled scheme.

Ghost Stories #12: A Market Thriller with a Future in Manila (with Charles Savage)

The Finance Ghost
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Ghost Stories #12: A Market Thriller with a Future in Manila (with Charles Savage)

With the release of interim results for the six months ended February 2023, Purple Group is reflecting the broader economic and social issues that are plaguing South Africa. With huge pressure on consumer budgets, there simply isn’t enough left over for investment.

Purple Group and its EasyEquities business are cyclical and we are now at a painful point in the cycle. To unpack what that looks like and what the future of Purple Group holds, CEO Charles Savage joined me on Ghost Stories.

We discussed topics including:

  • Trends in retail flows of users on the platform, including commentary on the different distribution partners (Capitec, Discovery, Telkom, Satrix and Bidvest).
  • Bear case arguments like the potential deterioration of unit economics as the user base grows, or the decision to invest in the Philippines at a time when South African conditions are tough and demand focus.
  • The mix of activity-based and annuity revenue in the EasyEquities business, with insight into the RISE business and the impact of its consolidation on the numbers.
  • The pending launch of a fixed income product to help investors earn a yield on cash that is in their brokerage accounts, with some commentary around other product launches into the large user base.
  • The performance of EasyProperties and EasyCrypto in this environment.
  • The R150 million capital raise referenced in the results and how Charles is thinking about the sources and uses of this cash.

I hope that you enjoy this show and that it helps you in your assessment of the Purple Group share price. Please do your own research and remember that an appearance on Ghost Stories doesn’t mean that I endorse the company that the executive in question is representing.

Note: although EasyEquities is an important partner to Ghost Mail, my commentary on the Purple Group share price and business model has always been and will always be independent.

Who’s who in the bling industry?

Trive South Africa
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Who’s who in the bling industry?

Opulence, grandeur, sparkle and the who’s who are all terms associated with luxury and abundance, but it does not get more luxurious than these French conglomerates, LVMH, Hermès, Kering, and Financière Richemont S.A., commonly referred to as Richemont, the Switzerland-based luxury goods holding company founded by the famous South African businessman, Johann Rupert.

Comparing Share Price Performance Across French Luxury Brands 

Concerning the price chart below, it is clear that Hermès International SCA (EPA: RMS), commonly known as Hermès, has delivered superior returns to its shareholders, boasting a stellar 280% cumulative return (green line) over the most recent five-year period. Hermès has significantly outperformed its competitors and the Vanguard Consumer Discretionary ETF (yellow line) on a five-year historical performance basis.

LVMH Moët Hennessy Louis Vuitton (EPA: MC), commonly called LVMH, has performed remarkably well over the last five years, returning nearly 220% to its shareholders (blue line). Despite falling short of Hermès’ five-year performance, LVMH shareholders will be pleased to see such impressive share price growth, significantly outperforming the overall investment return of stocks in the consumer discretionary sector, as measured by the Vanguard Consumer Discretionary ETF.

With Hermès (EPA: RMS) and LVMH (EPA: MC) seemingly racing ahead, returning superior percentage growth in their respective share prices, it is important to note that Kering (EPA: KER) has underperformed the Vanguard Consumer Discretionary ETF, returning a measly 32% (orange line) over the most recent five-year period.

China’s Reopening Bodes Well for Luxury Goods 

French stocks have soared to record highs as investors pile into luxury goods groups with expectations of a sustained rebound in Chinese demand for these brands. The CAC40, a stock market index that represents the 40 largest publicly traded companies in France, has risen more than 14% over the last one-year period and by more than 30% since a low at the end of September of 2022. Concerning the price chart below, over the most recent one-year period, the CAC40 index (green line) has comfortably outperformed the SXXP (blue line) as well as the S&P 500 index (orange line), returning double-digit growth over the last twelve months.

The SXXP, or the STOXX Europe 600 index, is a broad-based stock market index representing 600 large, mid-sized, and small-cap companies across 18 European nations. This broad-based European index has returned just under 2% over the most recent one-year period. Still, it fares relatively well against the performance of the S&P 500 index (orange line), which has seen negative growth over the most recent twelve months.

The superior relative performance of the CAC40 index can be primarily accredited to macroeconomic trends boding well for luxury goods amidst China’s efficient removal of zero-Covid restrictions, which has accounted for most of the luxury goods sector’s recent success. According to market analysts at Morgan Stanley, Chinese demand for luxury products is among the world’s highest, with China recently emerging as the most important market for European luxury names. Consequently, the country’s economic reopening following extended lockdown periods bodes well for the luxury goods market, especially seeing that prices for luxury goods can reportedly be up to 30% lower in Europe than in China.

While China’s reopening paves the path for surging demand for luxury goods, it is also important to note that demand for luxury products is relatively inelastic, meaning that consumers are less sensitive to changes in price. In other words, the demand for a luxury product remains relatively stable, given a series of price changes. For this reason, luxury products are widely viewed as a hedge against inflation despite generally performing poorly in past recessions. Overall, French stocks have enjoyed a stellar rebound against China’s economic reopening and increased demand for luxury goods.

Hermès International S.A. (EPA: RMS)

Hermès, the world-renowned French brand specialising in crafting luxury items, has seen its share price surge more than 30% this year, giving it a market value of more than €200 billion. The maker of Birkin bags has demonstrated immense resilience to challenging market conditions by utilising its strong brand appeal while predominantly catering to affluent consumers, paving the path to its recent success in navigating turbulent demand trends.

Fundamental Analysis:

On Friday, 14 April, the French luxury design house, Hermès released revenue figures for the first quarter of 2023, starting the year positively by posting a 23% year-over-year growth in consolidated revenue, which came in at €3.38 billion for the quarter, as all geographical areas recorded robust growth. Surging demand for the company’s must-have handbags has incentivised Hermès to strengthen its production capacities by opening a string of artisan factories to ramp up production. Moreover, the French luxury conglomerate recently announced plans to reopen its iconic flagship store in the centre of Beijing, given the brand’s dominant presence in China amidst the country’s decision to dismantle its zero-Covid restrictions. Despite macroeconomic uncertainties, Hermès maintains its ambitious stance on solid revenue growth as the group confidently moves through the 2023 financial year.

Looking at Hermès’ 2022 annual financial statements, the luxury design house posted stellar results amidst a turbulent macroeconomic environment which saw interest rates rise persistently in a heated battle against inflation, cutting into consumers’ disposable income and thus cementing the ideology that luxury items are a hedge against inflation. Revenue came in at €11.60 billion for 2022, representing a 29% year-over-year increase from the 2021 figure of €8.98 billion. Basic earnings per share (EPS) increased by 38% from €23.37 in 2021 to €32.20 per share for the 2022 financial year, while operating cash flows surged by 34% over the same period.

Technical Analysis:

Looking at the 1W price chart on Hermès, it is clear that the first half of 2022 proved exceptionally troublesome for the French luxury design house, with the share price crashing nearly 42% over a mere seven months to find support at the €970.30 level (red line) midway through June of last year. From that point onward, the price action on Hermès has experienced a persistent uptrend, finding higher highs and higher lows.

Should the recent positive market sentiment around luxury goods persist, bullish investors could further see the share price increase and continue its recent rally. If the current bullish rally loses steam amidst a change in market sentiment, the bears could see the price action on Hermès retrace and decline toward €1,673.20 (black dotted line), which could be the first support level for the bears. Suppose the share price reverts and falls toward the significant support level at €1,673.20. In that case, the possibility exists for either a retracement toward higher levels or, if the support level does not hold, the price action can decline to lower support levels.

LVMH Moët Hennessy Louis Vuitton (EPA: MC) 

LVMH, the French multinational luxury goods conglomerate, has seen its share price soar close to 28% year-to-date as macroeconomic trends favour the luxury goods sector, paving the path for Bernard Arnault, CEO of LVMH, to become the world’s richest man as of 1 April 2023. 

Fundamental Analysis: 

An excellent start to the year is the current theme for LVMH, with the European luxury goods behemoth reporting first-quarter revenue of €21 billion, a significant 17% year-over-year increase compared to the same period in 2022. As of 19 April 2023, LVMH is the twelfth-largest company in the world, with a market capitalisation of $483.67 billion, but the recent share price rally lifted the French luxury giant’s market capitalisation to $486 billion on 13 April, briefly ranking it as the world’s tenth-biggest company. Should the recent positive market sentiment around luxury goods persist, potentially leading LVMH to reach a market capitalisation of $500 billion, it would become the first European company to achieve that milestone.

Looking at LVMH’s 2022 annual financial statements, the luxury giant reported an impressive 23% year-over-year increase in revenue from €64.2 billion in 2021 to €79.2 billion in 2022. Moreover, the group’s basic earnings per share (EPS) figure reached €28.05 in 2022, representing a 17% increase from the prior year’s figure of €23.90 per share. 

Technical Analysis:

Looking at the 1W price chart on LVMH, the luxury giant has seen its share price rise to record levels, experiencing a trend similar to that of Hermès. LVMH saw its share price decline to test the significant support level at €543.80 (red line) in mid-June of 2022, and it has since rallied amidst bullish sentiment around luxuries, much like Hermès. If current market sentiment turns negative, the bears could see the price action retrace and decline toward lower levels, as indicated on the price action chart. However, LVMH is enjoying strong growth momentum amidst robust demand from local customers and international travellers, which may lead to higher levels.

Kering (EPA: KER)

Kering, the owner of world-renowned brands, namely Balenciaga, Bottega Veneta, Gucci, Alexander McQueen, and Yves Saint Laurent, has not enjoyed the same share price rally as Hermès and LVMH as of late, despite boasting relatively robust results for the 2022 financial year.

Fundamental Analysis:

Kering, in its 2022 annual financial statements, reported a 15% increase in revenue from €17.65 billion in 2021 to €20.35 billion in 2022 while enjoying a healthy 13% increase in basic earnings per share (EPS). Despite robust revenue and earnings growth, the famous luxury brand owner saw its free cash flow from operations decline by approximately 19% from €3.95 billion in 2021 to €3.21 billion in 2022, while net debt surged more than 1200% to €2.31 billion in 2022.

Looking at Kering’s revenue breakdown by segment, Yves Saint Laurent returned a 31% year-over-year increase in revenue from €2.52 billion in 2021 to €3.30 billion in 2022, while Bottega Veneta and Gucci returned 16% and 8% year-over-year increases in revenue, respectively.

Technical Analysis:

Despite experiencing a slight rally in the early weeks of January 2023, Kering’s share price has been consolidating sideways between €527.20 and €600.70 (black dotted lines) for the greater part of the 2023 financial year as market participants await a potential breakout in either direction.

For the bull case, a buying opportunity could exist if the price action pushes above €600.70, which could be the first resistance point in the price for the bulls. If the share price breaches this resistance level, it could reach higher resistance levels at €639.00 or €674.10 (black dotted lines), a share level towards the primary price resistance at €718.80 (green line). 

The bears could see the price action continue its long-term downtrend toward the support level of €527.20, which could be the first support level for the bears. Should the price action on Kering trend lower and the €527.20 support level fails to hold, the share price may decline to lower support levels at €480.40 (black dotted line) or €442.05 (red line). 

Compagnie Financière Richemont S.A. (JSE: CFR) 

The South African-founded luxury goods company Compagnie Financière Richemont S.A., more commonly known as Richemont, is making headlines, gaining significant attention and interest from market participants.

The Switzerland-based luxury goods holding company saw its share price surge as its 10-for-1 share consolidation kicked in on Wednesday, 19 April 2023, as the company moved forward with the secondary listing of its A shares on the JSE. With Richemont recently receiving the go-ahead to terminate its South African Depository Receipt programme, the company now has listed shares in South Africa that will trade in tandem with those in Europe.

Find out more about Trive South Africa by visiting the website here

Sources: Bloomberg, Hermès, LVMH, Kering, Richemont, Financial Times, Moneyweb, Cape Talk, The Fashion Law, The Guardian, Luxury Tribune, Reuters, Trive SA, Koyfin, Trading View

Ghost Wrap #21 (Clicks | Nu-World | Purple Group | Cashbuild | Oceana | Raubex | Mining Production (BHP + Glencore + Merafe + Sasol + Royal Bafokeng) | Standard Bank)

The Finance Ghost
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Ghost Wrap #21 (Clicks | Nu-World | Purple Group | Cashbuild | Oceana | Raubex | Mining Production (BHP + Glencore + Merafe + Sasol + Royal Bafokeng) | Standard Bank)

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

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

  • Clicks is still growing but nowhere near quickly enough to justify the valuation, which explains the mediocre investment performance over five years.
  • Nu-World really needs Eskom to switch the lights on and leave them on so that more people are encouraged to buy televisions!
  • Purple Group started the week with great news (the partnership in the Philippines) and ended it with news of a loss-making period.
  • Spare a thought for Cashbuild – I genuinely don’t know what they can do at this point to stop the bleeding.
  • Oceana is unpredictable to forecast but delivered the goods in this period, with HEPS more than doubling.
  • Raubex released strong results, with major contributions from unusual places like Australia (where South Africans normally get hurt) and Zimbabwe.
  • There was a flurry of mining production updates, including BHP Group, Glencore, Merafe, Sasol and Royal Bafokeng Platinum.
  • Standard Bank is still growing earnings strongly, notwithstanding the positive skew from the timing of the Liberty deal.

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

Listen to the podcast below:

Ghost Bites (BHP | Cashbuild | Choppies | Coronation | Glencore | Merafe | Oceana | Purple | Royal Bafokeng | Sasol | Standard Bank)

The Finance Ghost
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Ghost Bites (BHP | Cashbuild | Choppies | Coronation | Glencore | Merafe | Oceana | Purple | Royal Bafokeng | Sasol | Standard Bank)

BHP Group still has a positive outlook on demand (JSE: BHG)

China and India are key offsetting slowing demand in developed markets

With the benefit of another quarter behind the company, BHP Group has made it through nine months of this financial year. Production guidance for the financial year is unchanged, with the usual story of good news and bad news as you dig deeper into the individual operations.

Having a diversified group really pays off in mining. For example, one of the copper assets has performed below expectations but strong performance elsewhere has allowed the group to keep full year copper production guidance unchanged.

Full year unit cost guidance is also unchanged, although a couple of major operations (Escondida copper and Western Australia Iron Ore) are expected to be at the top of their respective ranges.

With the group focusing on the metals of tomorrow, investment is skewed towards copper and nickel opportunities.

Importantly, the group notes that engagements with customers in China and India have reaffirmed the positive outlook for commodity demand.

Cashbuild revenue is still falling (JSE: CSB)

It’s hard to build a bull case in this environment

How many people do you know who are busy with major renovations or building projects? Yup, same here. Practically nobody.

Interest rates are high. Consumer confidence is horribly low. Those who have spare money for projects are buying solar panels and inverters, not adding another room to the house that will be dark for half the day anyway.

This is coming through in the numbers for a company like Cashbuild, where revenue for the third quarter fell by 9% year-on-year. For the nine month period, revenue is down 6%. If we adjust for looted stores, then the decrease is actually 9% over that period.

Transaction volumes fell by 13% in existing stores. Selling price inflation was 6% at the end of March.

Although P&L Hardware is only 8% of group sales, the obvious joke about P&L in an accounting sense (Profit & Loss) is too good to pass up. With more L than P, sales fell by 15% in Q3. Ouch.

I’m not sure what Cashbuild can do to stem the bleeding. It’s a really tough situation to be in.

Choppies gives more details on its planned deal (JSE: CHP)

The Kamoso Group is in the cross hairs

Choppies is in negotiations to acquire a controlling stake in the Kamoso Group, an FMCG business based in Botswana. A quick look online suggests that Kamoso operates a variety of brands through 79 retail locations. There are 1,500 employees. This is by no means a small company.

Choppies was originally negotiating to acquire a 100% stake, but that’s been reduced to a 76% stake now. In the meantime, conditional approval has been received from the Botswana Competition and Consumer Authority.

Coronation: no jewels in this crown right now (JSE: CML)

The tax problem has taken the group into a loss-making position

Coronation’s share price has lost over 30% of its value in the past year. The irony is hard to ignore here, as this is an asset management business after all.

The thing to understand is that these businesses rise and fall with the broader markets. They grow assets under management (AUM) in the good times and earn performance fees on top. In the bad times, the performance fees evaporate and AUM drops. Punters use these stocks for a leveraged view on the broader equity market.

Historically, investors also bought Coronation for the high dividend yield. This makes it even more painful that the interim dividend is gone because of the group’s tax disaster.

In a trading statement for the six months to March, the full impact of that problem has been laid bare. HEPS is expected to drop by between 101% and 111%, which means that the group is officially loss-making. This isn’t an extinction event by any means, but it sure hurts.

Coronation has applied to the Constitutional Court for leave to appeal the Supreme Court of Appeal’s judgement in favour of SARS. If that application is successful, the matter is likely to be heard in the 2024 financial year.

In good news, AUM as at 31 March 2023 was R623 billion. Coronation is too cool to bother giving us comparatives in the SENS announcement, so I have to go digging every time. As at the end of December 2022, AUM was R602 billion. The recent uptick in equity markets has helped here.

Glencore reaffirms full year production guidance (JSE: GLN)

First quarter production was in line with expectations

Production updates for mining houses are highly important. They can’t control the prices of commodities, but they can control their production performance.

Another important point is that production being “in line with expectations” doesn’t mean that it increased. It just means that where decreases were anticipated, these came to pass. This explains why production numbers for many of the commodities have fallen at Glencore, like copper down 5% and zinc down 15%.

The main thing for investors is that production guidance for the full year has been reaffirmed. If you want to see just how detailed these reports get, you’ll find it at this link.

Merafe increases production year-on-year (JSE: MRF)

Prepare yourself for a short and sweet update

When Merafe announces production numbers, there’s no fluff. They don’t wax lyrical about load shedding and all the other joys of life in South Africa.

No, they just give the number. In this case, attributable ferrochrome production was 3% higher year-on-year for the quarter ended March.

We should all regret buying tech stocks in 2020 instead of Merafe. Over three years, the share price is up nearly 260%. Sigh.

Things at Oceana are looking swell (JSE: OCE)

Bad jokes aside – good luck ever forecasting this one with accuracy

Oceana is as unpredictable as the ocean itself. The variables in this business are incredible, ranging from the catch at sea through to international pricing for a variety of seafood products. The swings are breathtaking, with HEPS for the six months to March up by between 127% and 147%.

This performance is thanks to higher inventory levels, favourable international pricing for a variety of seafood products and strong volumes in canned fish. Increased cost pressures were felt as well, but the benefits clearly far outweighed the troubles here.

It wasn’t long ago that most of the fishing businesses on the JSE were reporting really tough results. I’m genuinely not sure how anyone forecasts the performance of this business with any accuracy.

Purple Group turns red in tough conditions (JSE: PPE)

When bad valuations happen to good people…

I warned over and over again that Purple’s valuation during the pandemic simply wasn’t sustainable. This was no reflection at all on the quality of EasyEquities and the huge strides made during the pandemic. It was simply an example of emotions in the market and how investors tend to fall in love with a story rather than its numbers.

When trade opens on Monday morning, Purple is likely to take a huge knock. You had to be pretty blind to external conditions not to expect ugly numbers here. With consumers and equity markets under pressure, the lack of EasyEquities screenshots on Twitter was perhaps the best indication that investors are licking their wounds.

The challenge in the business is that they need people to be trading in order to be generating an income. This is different to an asset management business that earns fees from assets under management every year, regardless of whether there is churn in the portfolio.

For the six months to February, Purple Group will report a headline loss per share of between -0.82 cents and -0.91 cents. That’s a big swing from HEPS of 1.63 cents in the comparable period.

The group highlights the right things in the announcement, ranging from the number of partners through to customer growth and the general love of the platform. I couldn’t agree more with the product market fit here and how successful it has been.

The trouble is that although R2.9 billion in deposits flowed into investments on the platform, traded value fell to historic lows. When the going got tough, inexperienced investors turned their backs on the markets. To be fair, those investors are also trying to afford their bond repayments and alternative energy solutions thanks to Eskom.

This has been a perfect storm for South African consumers and I’m not surprised one bit to see the drop in Purple’s earnings. This doesn’t change the long-term story either, as the strategy to grow into South East Asia is being implemented and there are good reasons to believe that it could be interesting. Another key part of the model is the low cost to serve clients, along with strategic initiatives to build institutional flows that are less volatile than retail flows.

Purple is down 56% over the past 12 months. The price is up 265% over 3 years. When it comes to popular small caps, volatility is the only certainty.

Royal Bafokeng is struggling with Styldrift (JSE: RBP)

Despite this, full year guidance is unchanged

For the quarter ended March, Royal Bafokeng’s performance doesn’t tell an encouraging story. Goodness knows that the distraction of the Northam Platinum – Impala Platinum battle over the company wouldn’t have helped.

A strong operational performance at BRPM has been unable to offset the problems at Styldrift. A decrease in tonnes hoisted and milled led to a 1.5% decrease in 4E metals in concentrate.

When production falls in an inflationary environment, then it’s basically a guarantee that cash cost per ounce will increase. In this case, it’s a significant jump of 22.1% in cash operating cost per 4E ounce.

The group’s balance sheet is in good shape and full year guidance has been reaffirmed based on operational improvement strategies that have been implemented.

Sasol’s update for the first nine months of the year (JSE: SOL)

Guidance is mostly unchanged, other than Natref which is revised downwards

Fresh from the news of a major refinancing of its dollar debt with several banks, Sasol has released a production update covering the latest quarter and thus the first nine months of the year.

The Energy business is still enjoying relatively high oil prices and a positive refining margin environment. In the Mining operations, there are improvements in the coal delivered to Secunda operations and the coal stockpile remains above target. Export sales were significantly lower though, thanks to Transnet issues and the diversion of export coal to Secunda. Speaking of Secunda, production volumes were 5% higher in Q3 vs. Q2 of this year, as equipment availability improved. The Natref news isn’t positive, with operational challenges that have led to a reduction in full year guidance.

The Chemicals business is suffering from prices, unit margins and demand that are all below historical levels. Volumes were in line with Q2, with year-to-date performance 6% lower year-on-year. External revenue is down 9% for the nine month period.

Transnet is also a problem in the Chemicals Africa segment, but Sasol does make the point that supply chain challenges have improved in the latest quarter. This echoes a recent comment made by Afrimat.

Standard Bank is smashing it (JSE: SBK)

This environment continues to work well for the banks

Standard Bank releases a quarterly update because the company needs to provide information to Industrial and Commercial Bank of China (ICBC). This is helpful because it gives us a more frequent health check on the local banking industry than we get from Standard Bank’s peers.

There are some big swings thanks to changes in IFRS rules (what else is new?), so adjusting for those swings is important when looking at comparable performance. On that basis, attributable earnings are up by a whopping 28% year-on-year. The weak rand helps here, but there’s a great underlying story that includes an “ongoing recovery” in Liberty Holdings. I also must note that the 100% stake in Liberty only reflected from February 2022, so the first quarter view is flattering because Liberty wasn’t fully in the base. Standard Bank doesn’t give us the growth excluding Liberty, unfortunately.

In addition to the traditional banking business doing well in this environment thanks to higher interest rates and balance sheet growth in inflationary conditions, it’s worth highlighting that trading revenue was ahead of the comparative period and ahead of expectations.

As expected, the credit loss ratio was closer to the upper end of the through-the-cycle target range of 70 to 100 basis points. The attributable earnings number is net of impairments though, so there has been major growth for shareholders despite these pressures.

Liberty timing distortions aside, things are looking good. The share price hardly moved on Friday though, suggesting that the market has already priced in substantial growth. Either that, or economic worries are just too severe at the moment for investors to get excited about local banks.

Little Bites:

  • Wesizwe Platinum (JSE: WEZ) is running behind schedule on the hot commissioning of the BPM Processing Plant. It was meant to take place at the end of March, but several challenges (no further details given) mean that commissioning is only likely by the end of May. Production will commence as soon as possible thereafter.
  • PBT Group (JSE: PBG) is still awaiting SARB approval for the special distribution that has been declared after the sale of a non-core asset. When that approval is obtained, the final dates for payment will be announced.
  • I would always advocate for caution when investing in Trustco (JSE: TTO). There are formal cautionary announcements out there at the moment, so at least we all agree that caution is needed. The management agreement renewal and a potential resources transaction are both in progress, with further announcements expected at some point.
  • Buffalo Coal Corp (JSE: BUC) is about to disappear – the shares will be delisted on the JSE on 28th April as part of a take-private transaction.

Ghost Bites (Clicks | Nampak | Nedbank | Nu-World | Steinhoff)

The Finance Ghost
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Ghost Bites (Clicks | Nampak | Nedbank | Nu-World | Steinhoff)

Clicks continues winning market share (JSE: CLS)

But the earnings growth continues to look too low for the current valuation

Clicks remains an anomaly in the market. Not only does the share price trade at a huge multiple, but there’s a heavy tilt towards foreign ownership in the shareholder base. One would assume that the South African risk premium should hurt the share price here, yet the share price is only down 17% in the past year. That doesn’t seem like enough of a correction when viewed against earnings growth and the state of affairs in this country.

For the six months ended February, group turnover increased by 6.8% if we exclude vaccinations in the current and prior period. Another adjustment is made for insurance proceeds in the comparable period, without which adjusted HEPS is up 10.2%. To be honest, I’m comfortable with both of those adjustments.

The dividend is only up by 2.8% though, which is still higher than unadjusted HEPS which increased by just 0.9%. If you were hoping that the Clicks dividend would help your investments keep pace with inflation, you can officially feel disappointed.

In terms of underlying performance, Clicks surpassed 10 million Clicks ClubCard loyalty members and reported market share gains in all product categories. The wholesale picture is less favourable, with UPD continuing to face pressures on pricing. Operating costs are growing at a rate well above inflation at the moment, thanks to the likes of fuel and security costs.

In acquisition news, you may recall the November 2022 announcement of the R105 million acquisition of Sorbet Holdings. The group is also acquiring 24-hour pharmacy M-Kem, giving you the opportunity to wait in a long and frustrating queue at any time of day now.

Despite the tough consumer environment, Clicks is investing heavily in growth. 50 new stores and 40 pharmacies are planned to be opened this financial year, with record capital investment of R958 million planned. R477 million is earmarked for new stores and refurbishments, while R481 million will be invested in supply chain, technology and infrastructure.

The full year outlook is growth in adjusted diluted HEPS of between 8% and 13%. On an unadjusted basis, diluted HEPS is expected to differ by -2% and 3% year-on-year.

Disappointingly, there is no mention that I could find in the earnings of the recent Constitutional Court judgement against Clicks. The future of Clicks’ ownership of a manufacturing pharmacy division is in doubt, along with any potential penalties for breaching legislation.

Nampak brings in a war time CEO (JSE: NPK)

Erik Smuts has resigned from the CEO role

There are peace time and war time CEOs in this world. Based on the narrative on Twitter, the new interim CEO of Nampak is firmly the latter. Phil Roux has loads of experience in the FMCG industry and in corporate turnarounds as well, a skill that Nampak needs more than ever before.

He will replace Erik Smuts in the top job after Smuts “opted to step down” – with immediate effect. Read into that what you will. The official line is that the restructuring process means that the CEO’s role has changed materially.

After 25 years of service to Nampak, Smuts will hopefully make a better decision than ruining his life by going to run Eskom. That is a path that I suspect won’t be repeated.

Nedbank wants to take out the odd-lots (JSE: NED)

Get ready for another arbitrage opportunity in June

Odd-lot offers have been popular recently on the JSE. Companies use them to remove the administrative burden associated with having a long tail of shareholders with small stakes. I hope that by now, companies are doing the maths properly around what it will actually cost. Inevitably, there’s an arbitrage opportunity that attracts many new shareholders who buy fewer than 100 shares.

Nedbank is likely to be another example, with the odd-lot offer price set to be a 5% premium to the 10-day volume-weighted average price (VWAP) calculated as at 19 June 2023. If shareholders keep a close eye on the pricing, they might be able to generate a modest profit.

At the current price, 99 shares would cost R20.4k and so a 5% profit would be just over R1k. If it works out that way, it’s a useful boost to anyone’s bank account.

Nu-World releases detailed interim results (JSE: NWL)

HEPS has halved and now investors can understand why

It starts right at the top of Nu-World’s income statement, with revenue down by 15.7% for the six months ended February 2023.

South Africa was worse than the international business, with sales down by 26.3%. One of the hardest-hit categories is new TVs, which the company blames on load shedding. That seems sensible to me – nobody wants a decorative TV. That’s not a great read-through for MultiChoice, either.

Offshore, revenue was up 31.5%. This was thanks to new markets being opened up, although profitability suffered due to trading conditions.

I suppose the good news is that inventory fell by 43.5%, so it seems as though a lot of inventory was cleared out and not necessarily replenished. That’s good for working capital.

Pepco is the irrelevant gem inside Steinhoff (JSE: SNH)

These results are a wonderful example of putting perfume on a pig

I see that Steinhoff is now changing hands at around 21 cents per share. So, only 21 cents to go until it reaches fair value.

It’s such a pity that the holding company is essentially worthless, because an underlying business like Pepco is doing good things in Europe. The company has released its second quarter trading update and growth at Pepco’s European business is sky high, up 30.7% in constant currency. The Poundland business in the UK is moving at a far more sedentary pace, up 6.7% in constant currency.

On a combined basis, Q2 revenue growth is 19.7% in constant currency. Importantly, the rollout of stores is a huge part of the story. To get a sense of how existing stores have been performing, we need to look at “like-for-like” growth. On that metric, group revenue is up 8.5% for the quarter.

This means that things have slowed down a bit, with the growth for H1 (the six-month period of Q1 + Q2) coming in at 22.8% including new stores and 11.1% on a like-for-like basis.

Against a backdrop of inflationary pressures on consumers, the company is pushing forward with a growth strategy focused on new stores. For the first time, new store growth in Western Europe exceeded Central Europe.

At some point, when Steinhoff is owned by its creditors, I’m sure they will be happy with Pepco.

Little Bites:

  • Director dealings:
    • As a reminder of how much richer Des de Beer is than basically all of us, he received almost R95 million worth of shares in Lighthouse Properties (JSE: LTE) just as a scrip dividend.
  • An independent expert has determined that the terms of Exemplar REITail’s (JSE: EXP) small related party transaction with McCormick Property Development Company are fair to shareholders.
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