My Disney position is going from bad to worse. For some reason, the management team is tone deaf to macroeconomic conditions and is prepared to make incredible losses in streaming.
As I shake my head in disbelief at the Disney share price drop, Toddler Ghost is asking me about the “tractor” scene in Cars. It’s an improvement on Cocomelon, I’ll tell you that much.
Cars came out in 2006 and is just as brilliant today as it was back then. After three movies, multiple spin-offs and endless merchandise, Disney made plenty of money from Lightning McQueen and deservedly so.
Of course, he’s watching it on Disney+ on our TV, so Disney is still using the movie to generate revenue, this time through the power of distribution. The trouble is that a generational hit like Cars is hard to come by. In the content game, the costs just keep on coming.
The content treadmill
If you can imagine setting a treadmill at your local gym to the steepest setting and putting it at 15km/h, then you’ve got the right idea of how it feels to be running a streaming business in this environment. Every single month, there’s someone else releasing new content and trying to steal your subscribers.
Netflix. Disney. Amazon. The list goes on and the budgets are huge.
The winner in all of this? Undoubtedly the consumer. We have more choice than ever before. We can have an entire bouquet of streaming platforms and still be spending far less than a full DSTV subscription. Of course, live sport remains a competitive edge for MultiChoice, as does the strong slate of regional content. Broadband affordability is another challenge for the streamers.
With Disney’s share price down over 40% this year, the blame can be laid squarely at the feet of the streaming business and management’s insistence on throwing the kitchen sink and all the fairy tale creatures at the problem.
They better be right
Management is promising that the streaming business will be profitable by 2024. If it isn’t, the market is going to punish Disney even further.
With Q4 and therefore full year 2022 results now in the wild, we know that Disney’s streaming operations (called Direct-to-Consumer) lost a spectacular $4 billion this year. That’s a whole lotta money.
This drove a 42% drop in operating income for the broader Media and Entertainment Distribution segment, which includes all the other media businesses in the group (and there are many). The Q4 result is even worse, with a 91% drop in operating income in that segment.
The parks did well – but shareholders didn’t benefit
The thesis in Disney was a recovery in the theme parks as Covid retreated into the shadows. When I invested, I knew management would invest some money in the streaming business. I just didn’t expect them to pull a Zuck on me and build their own version of the Metaverse.
The recovery in that segment came in with a vengeance. Operating income recovered sharply from just $471 million last year to $7.9 billion this year.
This was enough to achieve a 56% increase in group operating income, which would’ve been MUCH higher if any degree of sanity prevailed in the media business.
The Q4 growth (or lack thereof) is what has really spooked the market. Group operating income is flat year-on-year despite a 9% increase in revenue, so the margin is collapsing as losses mount in the media business.
Where to from here?
I’ve been wrong on Disney’s short-term capital allocation decisions. Much like at Meta, I’m hoping that they will start to tone it down now.
If the company is right and the streaming business turns profitable in FY24, then Disney remains interesting and I’ll consider adding to my position once I’ve had time to fully unpack these results.
If it doesn’t work out, the pain in the share price will get a lot worse until management abandons the investment in Direct-to-Consumer (a very unlikely outcome).
For now, I’m holding. I think we might see another drop after the next quarter, which could be a catalyst to add to the position.
Magic Markets Premium
We’ve covered Disney twice in Magic Markets Premium.
Our approach is always to present a bull case and a bear case, empowering our subscribers to trade and invest with more confidence. A market is all about people reaching different conclusions with the same information, which is why we give a balanced view.
In our most recent work on Disney (August 2022), we noted that management is accelerating the investment in streaming and that this looked bearish over the short-term. We were right (sadly). I opted not to add to my position, as I felt things could get worse before they get better.
Well, they got worse alright.
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Aspen closes a €1.26bn syndicated loan facility
The 2018 facility has been successfully refinanced
When dealing with international groups, the debt structures become extremely complicated.
Aspen’s 2018 facility was a multi-currency facility that included EUR, ZAR and AUD facilities with tenors of three to four years, with extension options available.
The facilities have now been consolidated into a single facility agreement. Through a syndication process, other banks took some of the debt and allowed the initial lenders to take money back off the table. This is how large banks earn delicious fees on debt structuring.
The lead arrangers were Citi, RMB, MUFG Bank (Europe) and Nedbank. There were eighteen lenders who committed to the facilities from various countries. These were banks with which Aspen already held relationships.
Yamana Gold’s board changed its recommendation
The $300 million break fee is now receivable (around 3.6% of Gold Fields’ market cap)
After months of Gold Fields working the market to try and drum up shareholder support for a transaction, this deal has fallen over in the space of a couple of days. Welcome to the joy and pain of M&A.
If you have been reading Ghost Bites this week, you’ll know that the Yamana Gold board told the market that the competing bid for the company is a superior offer to what Gold Fields had put forward. Despite this, the Yamana board hadn’t changed its recommendation to shareholders to vote in favour of the deal.
At 4pm on Tuesday afternoon, Gold Fields announced that Yamana’s board had changed its stance on the deal. Shareholders were now being told to rather vote against the Gold Fields transaction. At 5:50pm after the market closed, Gold Fields announced the termination of the deal with Yamana and the triggering of the $300 million break fee.
With Gold Fields’ market cap at R137 billion, that’s a rather juicy 3.6% of the market cap just in the break fee. We will find out on Wednesday morning whether the share price will shoot back up to pre-transaction levels.
I have a decent chunk of money in Gold Fields and I’m sincerely hoping that this will be the case.
Hammerson’s trading update looks promising
The primarily British property fund is enjoying strong tenant demand
Hammerson released a Q3 trading, operational and rent collection update. It was enough to send the share price more than 7% higher.
The company expects FY22 adjusted earnings to be at least £100 million. Thus far this year, gross rental income is up 11% in this inflationary environment.
There’s an improvement in footfall in UK and Ireland to 90% of 2019 levels. France is at 95%. Due to changed shopping habits (higher spend per visit) and the inflation we are seeing in the market, sales are above 2019 levels.
Demand for prime space is still high, with group occupancy at 95%. The pipeline for Q4 is strong. More than half of leasing activity this year has been to non-fashion categories, although fashion remains core to Hammerson’s offering.
With rent collections at 93%, the company expects rates to improve further by the end of the full year.
In terms of property valuations, yields were stable this quarter. That’s a bit different to what we saw in the Capital & Counties update, for example.
As is the case with so many property funds, Hammerson is busy with disposals of non-core assets.
Murray & Roberts pops 17% on news of a sale of Clough
The proposed sale of Clough Limited solves a lot of problems
As we recently learnt, the major challenges in the business that have taken Murray & Roberts into a loss-making position are found in the Energy, Resources and Infrastructure platform. This platform comprises “substantially” the group’s interest in Clough Limited, the Australian business in the group.
Murray & Roberts has agreed to sell 100% of Clough to Webuild, a multinational Italian industrial group that is clearly very brave. The Italians have worked with Clough on many projects over the years.
This is a get-out-of-jail deal that pays a modest amount to Murray & Roberts for the business. The value placed on the business is around R4 billion but Murray & Roberts will only receive around R5.5 million in cash. The rest of the price is discharged through the cancellation of an outstanding intercompany loan account.
Webuild will extend an interim loan facility of A$30 million to Clough.
The net result is no residual exposure to Clough. Murray & Roberts’ only remaining exposure to Australia will be through RUC Cementation Mining.
This is a Category 1 transaction for Murray & Roberts and shareholders will therefore need to vote to approve the deal.
Murray & Roberts invested in Clough in 2003, so this has been a long-standing relationship. In 2013, Murray & Roberts bought out the remaining 38.4% interest in Clough at a valuation of A$1.13 billion (R12.7 billion at today’s exchange rate).
If anyone from Murray & Roberts needs to drown their sorrows at a bar, there are many other South African execs ready to share war stories of value destruction in Australia.
Redefine guides modest growth for FY23
The share price is down around 8.5% this year
I must apologise for missing Redefine’s results in Monday’s edition of Ghost Bites. I’m covering it here to make sure you’ve seen them. In other words, this news is outdated by one day.
Redefine is focused on the South African and Polish markets. The local assets are valued at R58.9 billion and the offshore assets are R30 billion, representing a third of total exposure.
Within the South African portfolio, 41% is in retail, 38% in office and 20% in industrial property. There’s 1% sitting in specialised properties. Office vacancies remain a significant worry, up from 12.9% in August 2021 to 14.4% in August 2022.
In support of the balance sheet and to reduce loan-to-value (LTV), Redefine has been selling off non-core properties. The LTV has improved from 42.4% to 40.2% year-on-year. With interest rates rising, this is critical. The average cost of rand-denominated funding has increased from 8.1% to 8.7%.
For the year ended August, group distributable income grew by 26.1%. On a per share basis though, it only increased by 1.4%. The dividend per share is 28.5% lower in this period.
Guidance for next year is distributable income per share of between 54.2 cents and 56.4 cents. This is modest growth of the FY22 number of 53.71 cents. A payout ratio of between 80% and 90% is expected.
Little Bites:
Director dealings:
A prescribed officer of Sibanye has entered into a derivative structure with a value of R49.5 million. It looks like a structure that protects against volatility in the position rather than taking a view on a specific direction.
A director of Impala Platinum has disposed of shares worth R30k.
Value Capital Partners has bought another R117k worth of ADvTECH shares (they have board representation at the company).
Renergen’s stock was halted from trading on the ASX based on a non-material capital raise that the company was contemplating. Renergen notes that it had already decided not to proceed with the raise by the time the trading halt was implemented, so the company applied to the ASX for the trading halt to be lifted and expects normal trading to resume on Wednesday.
Between 31 October and 4 November, Naspers repurchased nearly R1 billion worth of shares and Prosus repurchased €262 million in shares.
An employee at Harmony Gold’s Tshepong North mine tragically lost his life in a fall of ground incident. This is another reminder that mining is still a dangerous industry, despite all the precautions taken by mining companies.
Attacq is the latest company to implement a secondary listing on A2X. The primary listing on the JSE is unchanged.
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Gold Fields keeps a cool head
The board is listening to what the market has been been saying
If you look at the Gold Fields share price action this year, you’ll quickly see that the market didn’t love the proposed merger with Yamana Gold. The resultant drop in the Gold Fields share price had the effect of lessening the appeal of the Gold Fields offer to Yamana shareholders, as there is no cash underpin to the Gold Fields offer. This is an all-share offer based on a fixed exchange ratio.
This opened the door for a competing offer to arrive on the scene, a development which was covered earlier this week in Ghost Bites.
Gold Fields has the right to improve its offer to convince the Yamana board that Gold Fields should be called the superior offer. The local gold mining house has elected not to do so, demonstrating deal discipline that is always great to see in management teams.
Gold Fields believes that its offer is both strategically and financially superior to the competing offer. This is based on the long-term strategic fit of the assets, which shareholders of both companies would be exposed to in an all-share merger.
There’s an interesting twist in this tale that I didn’t pick up in the Yamana announcement earlier this week. Despite defining the competing offer as a superior offer, the Yamana board has not changed its recommendation to shareholders. I’m not sure if this is to avoid triggering the hefty break fee in this deal. Either way, the board is technically still recommending that shareholders vote in favour of the Gold Fields offer.
It all comes down to the shareholder vote scheduled on 22 November.
Invicta reports a solid jump in earnings
The market responded with a 9% rally
Invicta released a trading statement for the six months ended September. There were some major once-off earnings in the comparable period, so earnings per share (EPS) is expected to be much lower.
This is exactly why headline earnings per share (HEPS) exists as a measure. HEPS is designed to exclude once-offs in the numbers that distort year-on-year comparisons.
Investors should ignore the EPS number and instead concentrate on HEPS, which in this case is expected to increase by between 38% and 48% vs. the prior comparable period.
MultiChoice is ticking over
The company is priced for dividends, not growth – is the market getting it right?
The MultiChoice trading statement needs a careful read. There’s an important difference between core headline earnings per share (HEPS) and reported HEPS, primarily relating to commentary around foreign exchange losses that I found a bit confusing.
Let’s start with the simpler stuff.
For the six months to September 2022, MultiChoice achieved subscriber growth (a big deal for DSTV given the level of competition in the market) and reduced trading losses in Rest of Africa. A cost optimisation programme further contributed to profitability.
As a partial offset, the group spent R0.7bn in decoder subsidies ahead of the FIFA World Cup. If customers can’t afford decoders, they can’t become subscribers. This is another example of how difficult things have become for MultiChoice. You won’t read about Netflix subsidising people’s fibre bills. MultiChoice is competing in a market that has changed substantially and it’s only going to get tougher from here.
We now get to the measures of profitability. There are two of them that MultiChoice wants you to focus on. The first is organic trading profit (up between 2% and 7%) and the second is core HEPS (up between 1% and 5%). Core HEPS includes the impact of realised foreign exchange losses. It does not consider unrealised and/or non-recurring foreign exchange losses.
Once those forex movements come into play, the profitability changes dramatically. In fact, MultiChoice will slip into a headline loss for this interim period of between -50 and -64 cents per share.
The reasons? Unrealised losses on translating USD-denominated debt into ZAR and the impact of repatriating cash from Nigeria at the “parallel rate” – an unofficial market rate because getting dollars is hard in Nigeria. MultiChoice notes that these are temporary losses.
I understand the temporary difference in the context of the translation of debt, as the dollar is incredibly strong and is unlikely to stay there long term. One can never be sure, of course.
I don’t understand it in the context of repatriated cash. Once cash has been repatriated and exchanged into another currency, that rate is locked in and those losses are permanent. It’s possible that MultiChoice is recognising some kind of forex provision based on the expected rate for future repatriations. Even if that is the case, there’s no guarantee at all that the parallel rate will get closer to the official rate. It could just as easily move further away.
The temporary nature of these issues is debatable.
The share price is trading at similar levels to three years ago and has been trending sideways. In the meantime, investors have been collecting dividends.
Quantum Foods warns of a sharp drop in profits
Times are tough in the poultry business
Quantum Foods is a R1bn market cap company providing diversified animal feeds and poultry products to the South African and selected African markets. The company is best known for being the largest producer of eggs in South Africa.
Profitability has cracked for the year ended September 2022, with headline earnings per share (HEPS) falling by between 68% and 78% vs. the 52.2 cents reported in the comparable period.
We heard from Astral a couple of weeks ago that the short-term outlook for the poultry sector is bleak. The pressure has already hit Quantum’s business which is focused on a different part of the poultry value chain.
Raubex Group grows its earnings and dividend
Yes, construction groups CAN make money
For the six months ended August, Raubex put in a performance that looks excellent. Revenue was up by 23.2% and operating profit increased by 26.4%, so there was operating margin expansion to go along with the strong top-line result.
The story gets even better on the balance sheet, where cash generated from operations jumped by 145.7% to R589.3 million thanks to increased profits at Bauba and the Beitbridge Border Post project in Zimbabwe. Due to acquisitions of subsidiaries and general mine capex, there was a net outflow for the period.
This helped support an increase in the interim dividend of 12.8% to 53 cents per share.
Looking deeper, margins came under pressure in Materials Handling and Mining, with a substantial revenue increase not translating into an uplift in operating profits. Construction Materials went in the wrong direction on the margin line as well, dropping from 9.1% to 6.2%. In Roads and Earthworks as well as Infrastructure, margins were higher.
If there’s one metric that investors might want to keep an eye on, it’s the decrease in order book from R17.14 billion to R16.40 billion. Still, the commentary in the outlook section is very positive.
Little Bites:
Director dealings:
The CEO of Altron has bought shares in the company worth R715k
Des de Beer has bought even more shares in Lighthouse Properties, this time worth R3.2m
With an attractive dividend reinvestment price of R31 per share, I’m not surprised that 84.4% of Hyprop shareholders elected the dividend reinvestment alternative. Shareholders received a pro-rata application as demand exceeded supply of available shares under this alternative. This allowed Hyprop to retain around R500 million in equity.
Delta Property Fund released results for the six months period ended August 2022. Key metrics have all gone the wrong way, with vacancies up to 33.9% and rental income down 12.7%. The loan-to-value ratio has increased to 58.2% and the debt is more expensive, with an all-in cost of 8.1% vs. 7.4% in the comparable period. Delta transferred one property for R74 million in this period and has signed agreements for a further R232 million across nine properties. Those proceeds will be used to reduce debt. The NAV per share is R4.27 and the funds from operations came in at 9.2 cents. The share price is at R0.31.
After a long fight going back to 2020, Trustco’s JSE listing has finally been suspended. The company fought the regulator at the Financial Services Tribunal and in court, but to no avail. The company’s application to the High Court has now been dismissed with costs, which means that the JSE’s original decision to suspend the listing can be implemented. It all relates to an approach taken in the 2019 financial statements which the JSE doesn’t believe was in line with IFRS standards. Trustco had taken advice that the treatment met the standards. The judge recognised Trustco’s approach in engaging with experts but still ruled that the JSE’s regulatory framework ultimately governs listings on the exchange, thus the JSE’s view must stand. Trustco will need to restate its financial statements to the JSE’s satisfaction in order for the suspension to be lifted.
Fitch has reaffirmed Sirius’ BBB investment grade credit rating and stable outlook. This is based on the occupancy and collection rates in the portfolio and the in-house marketing capability that reduces reliance on brokers. A solid credit rating helps keep the cost of debt low but doesn’t give an indication of expected equity returns.
In further ratings news, Fitch has upgraded NEPI Rockcastle from BBB with a positive outlook to BBB+ with a stable outlook. This is based on operational metrics and the share price. As above, a credit rating upgrade doesn’t tell you anything about equity returns.
Castleview Property Fund has released results for the six months ended August 2022. This obscure fund only owns two shopping centres. The net asset value per share has increased by 34.26% to 610.13 cents. Despite a decent trading period, the company hasn’t declared a distribution. The company is busy with a reverse takeover, so there is far more to come from this listed structure as many more assets will be injected into it.
The clocks went back in Britain and in parts of Europe last weekend, signalling that the northern hemisphere is well and truly getting hunkered down for a few months of increasingly dark and cold weather. The cost of living is about to get worse, as Chris Gilmour explores.
This year will likely be especially grim for most Europeans and Brits, with the possibility of rotational power cuts due to inadequate supplies of cheap Russian gas. The cost of living crisis makes the headlines regularly in the mainstream media but most people are still blissfully unaware of what is about to hit them.
At a very high level, short-term interest rates in the US look like they will keep on rising until they hit 5% next year. Following the 75 basis points hike of November 2, the US Fed Funds rate is now at 4%. US Fed chairman Jerome Powell hinted that the next rise might only be 50 basis points.
Inflation isn’t disappearing yet
Inflation in virtually all parts of the world (apart from South Africa, ironically) seems to be getting worse and in a number of countries such as the UK, second-round effects appear to have taken hold, which makes the job of reducing inflation that much harder.
China isn’t helping either. At the recent Communist Party Congress in Beijing, nobody was left under any illusions that Xi Jinping is the supreme leader, desperately attempting to emulate the founder of the People’s Republic, Mao Zhe-Dong.
China watchers tried very hard to look for positives coming out of the congress but the bottom line is that Xi has cemented his grip on power in a way no other Chinese leader has done in over half-a-century and no dissent will be tolerated.
Many observers genuinely expected to see Covid-19 restrictions being relaxed but that didn’t happen.
Chinese vaccines manifestly don’t work against the coronavirus’s latest variant of Omicron and the Communist Party is not prepared to use western mRNA vaccines that would perhaps be much more effective. China seems destined to stumble along for many more months yet, going from lockdown to lockdown, ensuring that disrupted supply chains remain that way.
And in the meantime, Xi and his cohorts continue to crackdown on the Chinese tech sector to ensure that it never poses a threat to the CCP’s authority.
As China becomes less of a force on the globalization front and the US brings back a lot more of its own manufacturing capability, expect inflation to remain higher than it might otherwise have been.
What is happening in the gold market?
Meanwhile, something rather strange is happening in the physical gold market. Although gold ETFs long ago eclipsed the need to hold physical gold for most investors’ purposes, it is still held by central banks and by fabricators.
According to the World Gold Council (WGC), central banks bought a record 399 tonnes of the yellow metal in Q3 this year, even as demand for gold ETFs shrank.
The lower price caused by ETF offloading resulted in a huge increase in demand for gold, up 28% from a year earlier to 1,181 tonnes in Q3. That in itself is only of moderate interest; what is far more interesting is the fact that year-to-date purchases of gold by central banks was 673 tonnes, more than the total purchases in any full year since 1967.
Among large buyers mentioned by the WGC were the central banks of Turkey, Uzbekistan, Qatar and India, but a substantial amount of gold was also bought by central banks that did not publicly disclose their purchases. The WGC did not give any details on which countries these might be, but banks that do not regularly publish information about their gold stockpiles include those of China and Russia.
Russia and China have long mooted the idea of a gold-backed currency that would compete with the US dollar in terms of a reserve currency or monetary standard.
Winter is coming
Talking of Russia, the first snow fell in Moscow last week. It won’t be too long before the war in Ukraine takes on a very different, winter type of hue. The ground will become significantly harder but that’s not the big factor here. Russia will carry on using terror tactics to demoralise the country’s population, by successively degrading infrastructure. On the other hand, the Ukrainian army will be significantly better equipped than the Russian troops to withstand the tough Ukrainian winter, thanks to supplies from the US and other Nato countries.
In many ways, this winter is probably going to be Vladimir Putin’s last big gamble. He will throw everything he has at a scorched earth strategy of wearing down the Ukrainian resolve while at the same time hoping the resolve of the European Union nations will also crumble. Already that gambit is failing, with the recent revelation that natural gas prices have been tumbling as European gas storage plants become full.
All other things being equal, Europe should be in a far better position to withstand the loss of cheap Russian gas than was originally thought. However, any sustained cold snaps during winter could change that for the worse.
So as we start the final countdown to the end of 2022, we can look back on a year and think about what might have been…what should have been, without the totally unnecessary invasion of Ukraine. And we can start thinking about what 2023 may be like. As things currently stand, it doesn’t seem like it’s going to get much better any time soon, although both inflation and interest rates may well peak early next year.
Market speculators will doubtless grasp onto even the tiniest piece of perceived good news in order to send out buy signals. And there may well be opportunities both locally and in offshore markets in the wake of the selloff that occurred in the past few months.
But as always, stick with the motto of caveat emptor.
With all scheme conditions now met, Massmart and Walmart will proceed with implementation of the deal.
Although the champagne may have been poured by the deal advisors when the conditions precedent were met, the hard work for the operational teams will start now. Walmart needs to execute a successful turnaround of Massmart’s business and will be doing so away from the public markets.
Massmart shareholders will receive the scheme consideration on 21 November and the listing will be terminated on 22 November.
For a more detailed timetable, see the announcement below:
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All scheme conditions for Walmart’s buyout of Massmart have been met. The delisting is expected on 22 November. You can get all the details at this link>>>
Gold Fields is in a bidding war for Yamana Gold
The irony is that the share price rallied on news of the deal being at risk
If we base our analysis on the share price action above all else, then the market has never liked Gold Fields’ attempted merger with Yamana Gold. Gold Fields loves Yamana’s assets and believes that they represent an opportunity to acquire quality assets at a good price. Shareholders seem to be nervous of the deal, which has put the Gold Fields share price under a lot of pressure.
Gold Fields seems to be right about the appeal of the Yamana assets, as there’s now a bidding war on the table.
Yamana announced a joint offer from Pan American and Agnico. The board has designated it as a superior proposal. The offer is part-cash, part-shares in both companies and values a Yamana share at around $5.06 per share.
Gold Fields now holds a matching right, which means the company can choose to increase its offer and convince Yamana’s board that it is back to being the best offer. The Gold Fields offer is an all-share merger in which 0.6 Gold Fields shares would be issued for each Yamana share. At current pricing, that’s around $5.13 per Yamana share.
The offer prices aren’t terribly different and will change daily based on the behaviour in each offeror’s share price. I suspect that the Yamana board likes the cash underpin to the Pan American and Agnico joint offer and has given this significant weight in its assessment of which offer is superior.
At this stage, Gold Fields has given its opinion that the complementary nature of the assets would create a merged group that is more valuable to the Yamana shareholders than the competing offer. The Yamana board clearly feels otherwise.
Yamana shareholders are due to meet on 21 November to consider the Gold Fields offer. Of course, the board believing that the Gold Fields offer is inferior doesn’t mean that the shareholders will take that view as well.
A rally of over 11% in the Gold Fields share price tells you that the market would be quite happy to see the Yamana deal fall over. This calls into question whether Gold Fields has much of a mandate from shareholders to increase the offer and match the competing bid.
The greatest irony of all is that the Gold Fields rally in response to the deal being at risk has actually made the Gold Fields offer more attractive to Yamana shareholders! All-share mergers are complicated beasts.
To add to the noise, there is a termination fee of $300 million payable to Gold Fields in certain situations. There are many pages of legal documents that would govern whether a termination fee applies in this case, including non-solicitation provisions. If this offer genuinely came out of the blue, then I doubt it would be payable.
This is a developing story.
MC Mining has raised A$40 million through a rights issue
The underwriters are getting a significant allocation
A successful rights issue takes the company a step closer to financing the flagship Makhado project. This would position MC Mining as the only large scale producer of Hard Coking Coal in the South African market.
Of the 200 million shares issued under the rights issue, applications were received for 107.6 million. The underwriters (Senosi Group Investment Holdings and Dendocept and its associates) picked up the rest. This is a perfect example of the importance of having anchor shareholders.
The share price has almost tripled this year, though the chart is even more volatile than the Proteas in a World Cup:
MTN grows revenue and margins
The African subsidiaries are pulling the margin higher
With 285 million customers in 19 markets, MTN has incredible reach. This goes far beyond selling people the ability to make a phone call, with a major focus on digital services that are enabled by smartphones.
After covering the results from the African subsidiaries in Ghost Bites, we now take a look at the group results for the nine months ended September.
Group revenue increased by 14.3% and with voice revenue only up by 2.7%, it’s obvious why the group has turned its focus to other sources of revenue. Data revenue increased by 33.2% and fintech revenue was 12.9% higher.
Thanks to the African subsidiaries, group EBITDA margin was 30 basis points higher at 45.3%. South Africa actually fell by 210 basis points from 41.6% to 39.5%. To give that more context, MTN Nigeria’s margin increased from 52.6% to 53.6%.
There are headwinds of course, like sim registration rules in certain markets, general macroeconomic pressures on consumers and the introduction of taxes on electronic transactions in places like Ghana.
The market tends to put a much lower value on the African subsidiaries vs. MTN South Africa, as the risks are higher and it becomes difficult to upstream the cash to the holding company because of the limited availability of dollars. No cash was upstreamed from Nigeria during the third quarter. A payment post period-end took the year-to-date total from Nigeria to R6 billion.
A feature of the MTN story at the moment is high capex, as the network infrastructure is rolled out in key markets. Capex for the past nine months was a meaty R23.8 billion.
The balance sheet is always a focus area for investors. Group leverage of 0.5x and holding company leverage of 0.8x are well within targets.
As a reminder, MTN was recently in talks with Telkom about a potential acquisition. Discussions were terminated as the parties couldn’t reach an agreement.
The group’s medium-term guidance is unchanged, so the investment thesis is well intact. The share price is down 23% this year and I believe there is value to be found at this level.
Little Bites
Director dealings:
The CEO of Altron has bought shares in the company worth R547k
A prescribed officer of ADvTECH has sold shares in the company worth R900k
An associate of a director of Huge Group has entered into a very small CFD trade on the company’s shares
The CEO of Fortress REIT has acquired Fortress A shares worth R204k and Fortress B shares worth R86.4k
It may just be a timing thing in terms of announcements, but it looks like three Santova directors exercised share options worth over R1.3 million and didn’t sell any shares to cover the tax.
Exemplar REIT has a portfolio of 23 retail properties and has released interim results for the six months ended August. The fund is focused on rural and township retail. The interim dividend per share has increased by 51.5% and the net asset value per share is up by 15.92% year-on-year. The stock is extremely illiquid.
African Equity Empowerment Investments (AEEI) has entered into a small related party transaction with Sekunjalo Investment Holdings to sell shares in Sygnia to Sekunjalo. The price is 90% of the 30-day VWAP leading up to 30 September, with an adjustment mechanism in case the price moves by more than 10%. The stake is 1.188 million shares and Sygnia’s average weekly volume over the past three months is around 111k shares. To try and sell a stake of that size on the market would put pressure on the price, hence the discount to VWAP. Merchantec has been appointed as independent expert and will need to provide a fairness opinion here. The purpose of the transaction is to provide liquidity to AEEI.
Buffalo Coal has announced a rights offering at a price of 13.396 ZAR cents per share. Even if the full amount is raised, the company won’t have sufficient working capital for its obligations over the next twelve months. The proceeds will be used to settle indebtedness to Investec. The offering circular is denoted in Canadian Dollars because of the listing in Canada. The offer plans to raise C$4.16 million and the company will still have a working capital deficiency of C$38.4 million.
Old Mutual has announced that the retail offer application window for the Bula Tsela B-BBEE transaction closed on 24 October. Shares are expected to be issued to successful applications on or around 25 November. The retail shares will be issued at a subscription price of R10.22 per share.
Impala Platinum has acquired another 0.05% in Royal Bafokeng Platinum, taking the total stake to 40.71%. The approval from the Competition Tribunal is still outstanding.
AngloGold Ashanti has announced that the acquisition of Coeur Sterling has satisfied all the conditions precedent and has now closed. This was a cash deal of $150 million that strengthens AngloGold’s plans in the Beatty district in Nevada, USA.
In case you’ve forgotten about it, Alviva has renewed its cautionary announcement relating to ongoing discussions regarding the expression of interest received by an investment consortium. Shareholders have to be patient for more details here.
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AngloGold reports better numbers
Production has increased significantly thanks to Obuasi
AngloGold has had anything but a glittering year, with the share price down nearly 27%.
The good news is that production is up by 20% in the latest quarter, with Obuasi continuing its ramp-up. Total cash costs were up 4% to $966/oz. All-in sustaining costs (AISC) improved by 6% to $1,284/oz.
Adjusted EBITDA increased by 5% to $472 million. Free cash flow is much better, coming in at $169 million vs. $17 million in the comparable quarter last year.
With improvements in production and costs, AngloGold is reporting much better numbers than we saw earlier this year. This is critical when the gold price is going nowhere slowly, which has been a feature of this macroeconomic environment with rising rates.
The adjusted net debt to EBITDA ratio is 0.41x.
AngloGold has reiterated guidance for annual production of between 2.55Moz and 2.80Moz. The majority of production growth is expected to come from Obuasi. Group guidance for cash costs and AISC has also been maintained.
Datatec reports a mixed bag of results in tricky conditions
The special dividend from the sale of Analysys Mason is coming later this year
Datatec has released results for the six months to August.
Including the Analysys Mason business (which has been disposed of), revenue increased by 8.7% and headline earnings per share (HEPS) fell by 25.4%, in both cases measured in dollars.
The sale was finalised in September and unlocked significant value for the group. A special dividend of £135 million is being paid to shareholders in December as a result of this sale.
Looking at the remaining operations, Westcon International grew revenue by 16.1% in dollars and 22.9% in constant currency. EBITDA was up 66.1% or 84.3% on an adjusted basis. Strong results are being driven by demand for network infrastructure, remote access solutions and cyber security.
Logicalis has now been split into two reporting segments: Logicalis International and Logicalis Latin America. The former grew revenue by 5.6% but experienced a drop in EBITDA of 35.6% (or 9.2% on an adjusted basis). The latter saw revenue drop by 21.3% and EBITDA deteriorate to a $1 million loss vs. $18.1 million profit in the comparable period. On an adjusted basis, it was still profitable.
In terms of group outlook, demand continues be strong and there are signs of improvement in global supply chains.
Gold Fields reports a “stable” quarter
All eyes are on two chinchillas (no, really)
For the quarter ended September, Gold Fields’ attributable gold equivalent production fell by 1% year-on-year and 4% quarter-on-quarter. Costs are up: all-in cost increased by 1% year-on-year and all-in sustaining costs increased 4% year-on-year to $1,061/oz. You can immediately see how much lower that is than AngloGold ($1,284/oz as reported further up).
With net debt to EBITDA of 0.4x, the balance sheet is still in a strong financial position.
The Salares Norte project is being impact by the relocation of endangered chinchillas. Yes, you read that correctly. The relocation of these animals has been put on hold, with the team monitoring the two surviving animals that had been relocated. These must be the most valuable little animals in the world, with first production expected to be up to three months delayed.
The circular for the proposed Yamana Gold transaction was distributed on 24 October and the general meeting is expected to be held on 22 November.
Although mining cost inflation has been higher than expected, cost guidance has been unchanged because of the offsetting effect of weaker exchange rates. Production guidance is also on track.
Battered Murray & Roberts gives a business update
With a share price drop of nearly 70% this year, investors are hurting
In case you ever thought that construction is a buy-and-hold industry, here’s a five-year chart of Murray & Roberts:
If someone showed you that chart and didn’t give you any further details, you might be tempted to buy at these levels. To help you decide whether there’s an opportunity here, Murray & Roberts released the business update that was presented at the AGM.
Before we delve into the business platforms, it’s worth noting that the potential disposal of the 50% stake in the Bombela Concession Company is progressing well. The group hopes to realise the present value of the next three year’s dividends through this disposal. The proceeds would be used to reduce debt in South Africa.
Murray & Roberts is structured through three platforms and each one is covered separately.
Mining
A strong price outlook for most major commodities is expected to drive growth in mining investment. This is especially true for commodities required for decarbonisation.
The order book (R22.2 billion) and near-term pipeline (R9.8 billion) is strong and all projects are progressing according to expectations.
Energy, Resources & Infrastructure
This is where things start to get very ugly, with supply chain disruptions causing delays in project milestone payments. This platform is struggling with “acute pressure” on working capital, which isn’t cute at all.
The really bad news is that cost overruns at Traveler in the US and Waitsia in Australia are so severe that profits recognised in previous financial years have to be reversed. This is going to drive a drop in earnings of more than 100% in the six months ended December 2022. In other words, the impact takes the entire group into a loss-making position.
The announcement goes on to talk about “ongoing and urgent cash flow needs” in this platform. The group doesn’t expect to raise new capital, so it’s not clear how that will be addressed.
Power, Industrial & Water
The biggest challenge in this platform is that South Africa’s infrastructure spend is poor. We’ve seen the impact this has had on Eskom and the next issue down the line is water.
The order book is tiny in this platform (just R0.3 billion) and near orders are R1.9 billion. At such a small size, the platform isn’t profitable.
Overall
Other than the indication that near-term earnings will be negative, the group isn’t ready to give more detailed guidance on earnings for the six months to December 2022. A trading statement will be released in due course.
Sibanye gets another smack from the market
A 10.4% drop on Thursday took the year-to-date pain to over 20%
In a quarterly update to September, Sibanye-Stillwater frightened the market. There have been many pressures in the business, reminding us that mining is a tough game.
The biggest issue is in the gold business, where all-in sustaining cost is $2,207/oz (way up from a year ago). This puts the gold operations in a loss-making position. At a time when profits are under pressure in the South African PGM operations as well (thanks to load shedding), this isn’t a great story.
One needs to recognise that these aren’t the usual results, as Sibanye had to build up to normalised gold production after the recent industrial action. When production is much lower, the cost per ounce obviously goes through the roof because of fixed costs.
The US PGM operations are also well down vs. last year, with the impact of the floods still being felt.
One of the few highlights in the recent newsflow is the conclusion of a five-year wage agreement with the representative unions at the Marikana and Rustenburg operations. The PGM operations managed to get this right without labour disruptions, in stark contrast to the disaster in the gold operations.
Although Sibanye is pushing forward with strategies in battery metals, the market is clearly worried about the current operational pressures. With such a significant drop in the price and with the gold results arguably expected to normalise, one wonders if this is oversold.
Truworths grew strongly, but flags a challenging outlook
I hope you took some profits after that incredible rally in August
Most South African retailers are candidates for swing trades rather than buy-and-hold strategies. This is because they are cyclical stocks that have good periods and bad periods, with the long-term outlook impacted by challenges in South Africa like slow growth and load shedding.
As an aside, I think some of the best strategies you could’ve implemented this year would’ve been to buy strong support levels and take profit at resistance levels. It’s one of the only ways for individual investors to make money in a bear market without taking significant risk on leveraged positions that you can be closed out of. Easier said than done, obviously.
A feature of this bear market has been face-ripping rallies at any hint of good news. This is a feature of a bear market. As the exuberance calms down, the share price tends to fall away and close the gap, really hurting those who bought into the excitement.
The share price has come back down to earth after the excitement in August. The question is whether the business has done the same.
In a trading update, Truworths highlights comparable group retail sales growth of 13.1% for the first 17 weeks of the new financial year (4 July to 30 October). A 53rd trading week in 2022 means that comparing the first 17 weeks of the financial years gives a funny answer, as they don’t cover the same number of paydays. This is why Truworths releases a comparable number that matches the calendar periods rather than the exact trading weeks. Retail reporting is complicated.
Account sales are growing faster than cash sales (19.2% vs. 7.1%), which is perhaps cause for concern in this consumer environment. Account sales are now 52% of group revenue.
In Truworths Africa (mostly the SA business), retail sales were up 14.2%. If you exclude stores affected by civil unrest, the growth is 10.7%. This is the most useful number to remember. It’s interesting to note the ongoing growth in online sales, up 33% and contributing 3.3% to total retail sales.
Account sales contributed 70% of Truworths Africa’s sales. Key metrics in the credit book (active account holders able to purchase, and overdue balances as a percentage of gross receivables) were unchanged vs. the comparable period.
Merchandise inflation was 12% in Truworths Africa vs. deflation (not a typo) of 3.4% in the comparable period.
In the UK, the Office business grew sales by 10.2% in local currency. Online sales contribution fell from 45% to 41%, in line with the trend we’ve seen at other retailers as shopping habits normalise.
Looking at trading space, Truworths Africa increased by 0.7% in this period and expects to increase by 2% for the full year. Office is rationalising, with space down 3.4% in this period and an expected decrease of 8% for the full year.
The group has noted a challenging outlook, with low economic growth and ongoing load shedding in South Africa.
Little Bites
Director dealings:
The CFO of Famous Brands loves doing leveraged trades. The latest example is a long CFD position on the company’s shares with a value of just under R190k.
A prescribed officer of ADvTECH has sold shares worth R450k.
Value Capital Partners is taking a different view on ADvTECH, with a major acquisition of shares worth over R67 million (as a reminder, VCP has board representation, hence it comes through as dealings with an associate of directors)
The company secretary of Aspen has sold shares worth almost R458k
Glencore’s penalty from the UK Serious Fraud Office investigation has been finalised. The company will pay nearly £281 million. Together with the settlements in the US and Brazil, the payments are not materially different from the $1.5 billion provision recorded in the 2021 financial results.
There’s a changing of the guard at Curro, with Andries Greyling retiring as CEO with effect from 1 January 2023. He has served in various executive roles over the past 15 years, including as CFO, COO and CEO. The current CFO, Cobus Loubser, has been appointed as interim CEO. For some reason, the company also feels compelled to have a deputy CEO at this point in time, with Mari Lategan (the executive for corporate services and the group company secretary) appointed to that role.
In an exceptionally odd development, the JSE declined to give a dispensation for the chairman of MiX Telematics to enter into a share trade plan on the US market. In such a plan, shares are sold in a structured way to avoid crashing the share price. The process is managed by a broker and the chairman would’ve had no say on the timing. As this could lead to sales during a closed period, the JSE would’ve needed to grant a dispensation for this to go ahead. With 90% of volume on the NYSE rather than the JSE, it’s quite incredible that the JSE declined the request, leading to the chairman resigning from the board so that the plan can go ahead without breaching JSE rules, as he wants to sell down his stake in order to diversify his wealth. This is a perfectly reasonable thing to do and it’s beyond me how the JSE reconciles this approach with an overall strategy of attracting more international listings.
enX Group released results for the year ended August. The share price jumped 13.6% in a nod of appreciation, as HEPS from continuing operations increased from 90 cents to 160 cents (a 78% jump). This was achieved through a 21% increase in revenue from continuing operations. The balance sheet is a lot stronger, with net debt to equity improving from 50% to 31%.
Grindrod Limited has concluded the disposal of Grindrod Bank to African Bank. The effective date was 1 November. This is a major step for both groups, with a particular shout out to African Bank for what has been achieved since the tough years of curatorship.
Five non-executive directors have resigned from the board of Tongaat Hulett, with the rationale being that the business rescue practitioners are now administering the company. In such a situation, the directors felt that their role is limited. Their risk isn’t limited, so I’m not surprised to see this.
Libstar held an investor day and made the presentations available online. If you’re interested, you’ll find them here.
Hammerson has announced that it is exercising the early redemption option in respect of bonds due in 2023 with cash that it has on the balance sheet. The principal amount of the bonds outstanding is €235.5 million.
The Singapore sovereign wealth fund now holds a stake in Shoprite of over 5%.
The ARC Fund has sold down some of the stake in Afrimat, now holding 4.718% in the company.
Mediterrania Capital Partners, a private equity firm focused on growth investments in SMEs and mid-cap companies in Africa, has exited its investment in private educational group Groupe Scolaire René Descartes (GSRD). The exit of the Tunisian company was executed through an MBO led by GSRD’s management.
Gold producer Caledonia Mining Corporation Plc, focused on mining in Zimbabwe, has further expanded its footprint in the country with the acquisition of Motapa Mining from UK company Bulawayo Mining. Motapa holds a mining lease over exploration property in southern Zimbabwe adjacent to the Bilboes gold project – Bilboes was acquired in July 2022. Caledonia Mining’s primary asset is the Blanket Mine in Zimbabwe.
Pasofino Gold, a Canadian-based mineral exploration company listed on the TSX-V, has advised Hummingbird Resources (HB) that it will exercise its option to acquire HB’s 51% stake in the Dugbe gold project in Liberia. Pasofino will issue shares to HB in settlement, resulting in HB owning 51% of the outstanding shares of Pasofino on completion of the consolidation.
CardinalStone Capital Advisers, a West African private equity fund manager, has invested US$6 million in AfyA Care, a healthcare group providing integrated healthcare services. The investment formed part of AfyA’s series A capital raise.
valU, the Egypt-based buy-now-pay-later lifestyle-enabling fintech platform, has made an investment into Hoods with the aim of capitalising on Hoods’ unique platform – a live entertainment commerce platform in the Middle East.
Morocco-based Spotter, a fintech startup enabling businesses to assess the creditworthiness of customers, has raised an undisclosed sum from UM6P Ventures.
Eden Care, a Rwanda-based digital insurer, has raised an undisclosed sum in a pre-seed funding round from DOB Equity, Seedstars International, Norrsken Foundation and Bathurst Capital.
Fintech platform Money Fellows has raised US$31 million in a Series B round. CommerzVentures, Middle East Venture Partners and Arzan Venture Capital led the investment in the Egypt-based startup. Funds will be used to accelerate growth, expand product offerings and scale its expansion across Africa and Asia.
SmallSmall, a Nigerian proptech, has raised US$3 million ($2 million in equity and $1 million in debt) in seed funding. The startup has three product lines – buy, rent and stay. Investors in the round included Oyster VC, Asymmetry Ventures, Vivaz and Niche Capital with participation from several angel investors. Funds will be used to scale within Nigeria.
The Bank of Africa in Morocco has secured a financial package of €13 million from the European Bank for Reconstruction and Development to support Morocco’s green transition.
MTN Nigeria has secured €100 million in financing from the European Investment Bank. The financing will be used to accelerate its network expansion programme.
Tradehold has declared a special dividend of R4.34 per share. The funds are part of the cash consideration of £102,5 million received from the sale of its shareholding in Moorgarth earlier this year.
Labat Africa has advised it has issued a further 22,606,003 new shares for cash. The shares were issued under the company’s General Authority approved by shareholders in May. The company has issued 39,281,862 new shares under this authority representing a cumulative 23.13% of Labat’s issued share capital.
Super Group has proposed an odd-lot offer to shareholders holding a total of 49,014 Super Group shares, representing 0.014143% of the total issued share capital of the company. The offer will be priced at a 10% premium to the 10-day VWAP of the ordinary share at the close of business on Friday, 2 December 2022.
A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:
Glencore this week repurchased 19,080,000 shares for a total consideration of £96,93 million. The share repurchases form part of the second phase of the Company’s existing buy-back programme which is expected to be completed over the period from August 4, 2022, to February 14, 2023.
South32 has this week repurchased a further 2,470,909 shares at an aggregate cost of A$9,19 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period October 24-28, a further 5,601,358 Prosus shares were repurchased for an aggregate €237,02 million and a further 1,019,972 Naspers shares for a total consideration of R1,84 billion.
British American Tobacco repurchased a further 1,100,544 shares this week for a total of £37,01 million. Following the purchase of these shares, the company holds 215,471,108 of its shares in Treasury.
Only one company issued a profit warning this week: AH-Vest.
Five companies issued or withdrew cautionary notices. The companies were: Trustco, Afristrat Investment, Grand Parade Investments, Finbond Group and Luxe.
Yet another quiet week on SA’s exchanges – one would be forgiven for thinking the migration of Corporate SA to the coast was already underway:
RMB Corvest, Rand Merchant Bank’s (RMB Holdings) private equity arm, has invested an undisclosed sum in Sedgeley Energy, a solar photovoltaic solutions provider based in Namibia. The deal provides Sedgeley Energy with liquidity required to support its long-term growth plans.
Shoprite has invested an undisclosed sum in local SA tech startup Omnisient. The investment was made in an undisclosed expansion round with participation from Buffet Investments, KLT, One5 and ENL. Omnisient enables businesses to use consumption data to create new revenue streams.
The sale by Tradehold of its rental enterprise to Dulu Holdings, announced to shareholders in September this year, has been terminated following the non-fulfilment of various conditions precedent.
Unlisted Companies
Sika South Africa, a manufacturer and distributor of a range of construction chemicals, has acquired a majority stake in Italian manufacturer Index Construction Systems and Products. The deal expands Sika’s bitumen product range and boosts its position not only in Italy but also in Europe.
The Industrial Development Corporation has increased its shareholding in Mozal Aluminium from 24% to a 32.45% equity stake.
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