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Why are we losing our minds over Stanley cups?

Dominique Olivier
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Why are we losing our minds over Stanley cups?

You’ve heard of an emotional support animal, sure. But why are people all around North America suddenly talking about an “emotional support water bottle”? Is the Stanley cup really the last word in personal hydration – or is this just a sippy cup for adults?

TikTokkers. Momfluencers. Gym bunnies. Corporate girlies. They all have one thing in common: their absolute devotion to the Stanley cup. Even if you’ve never seen a Stanley in person, you’ve no doubt seen at least one video about it online – whether it was an influencer raving over the new colour range that dropped at her local store, or a video of some dad making fun of his wife’s obsession with her oversized water bottle.

@hellokittyloverr26

New pink stanleys are out at @target 🩷🥰🫶🏼 #stanley #stanleycup #stanleytumbler #pinkstanley #pinkstanleytarget #pinkstanleytumbler #pink #pinklover #pinktok #pinkaesthetic #pinkgirl #girlythings #girlytok #girlygirl #girly #viral #viralvideo #viraltiktok #fypシ゚viral #fypシ #fyp #fy #foryoupage #foryou #foru

♬ original sound – valeravixen

I don’t use the word “obsession” here lightly either. Some members of the church of Stanley are so dedicated to these products that they are erecting “Stanley displays” in their kitchens to show off their collections. Right at the start of the year, a 23-year-old woman in the US was arrested for allegedly stealing 65 Stanley cups worth a total of about $2300. Following her arrest, the police issued a plea to the public: “While Stanley Quenchers are all the rage, we strongly advise against turning to crime to fulfil your hydration habits.”

So, why are we so thirsty for Stanley cups all of a sudden?

@lukecharleshammer

the Stanley cup craze is something else 😂 although i do love them 🤷🏼 we stan @stanleybrand in our house #marriedlife #stanleycup 🎥 inspo: @www.janky.com

♬ Blue Blood – Heinz Kiessling

A short trip down memory lane

It’s hard to keep a good brand down, and the clever folks at Stanley know this. Having celebrated its 110th anniversary in 2023, this old dog learned a new trick just in time to meet an upsurge in demand for health-focused products post-pandemic.

The brand’s founder, welder William Stanley Jr., was somewhat of a pioneer amongst blue collar workers when he invented his “Unbreakable Stanley Bottle” in 1913. Back then, most insulated bottles and flasks had a glass lining, meaning that one accidental knock on a factory floor, workroom or construction site would render a bottle obsolete. Stanley’s bottles featured a stainless steel lining, which not only made them tougher, but paved the way to more hygienic drink consumption.

Stanley remained popular with factory and construction workers, and eventually managed a seamless transition into the camping trend, which unlocked the leisure side of the market. But it’s the way that they captured the attention of social media influencers that will probably go down in history as a business masterclass.

Back with a bang

The sudden surge in the popularity of the Stanley cup can be attributed to the efforts of Ashlee LeSueur, Taylor Cannon, and Linley Hutchinson. This trio of close friends serve as the masterminds behind The Buy Guide, an e-commerce blog offering product recommendations for various aspects of the modern woman’s life.

The Stanley cup was among the initial recommendations on their site and gained traction within their modest following. However, in 2019, Stanley announced that they would discontinue the Quencher cup – the same product that The Buy Guide had been promoting. Since Stanley was inactive on social media at that stage, they were completely unaware of the renewed interest in the Quencher until the girls from The Buy Guide reached out to them, begging them to keep the product alive.

The turning point came when a new mom and influencer, who had previously purchased the cup through The Buy Guide, shared a photo on her Instagram story. She praised the cup for its utility in staying hydrated during childbirth and while caring for her baby.

This endorsement breathed new life into the Stanley Quencher and proved beneficial for the Stanley company at large. Recognising the untapped potential in Instagram marketing, Stanley collaborated with The Buy Guide in 2020. The strategic alliance aimed to leverage the product’s appeal among women in particular. As The Buy Guide team stated, “We knew if women could sell this cup to women, it would be a winner.”

Their intuition proved correct. Stanley redesigned their Quencher cup in a series of candy colours and successfully reached the female market, even dedicating a section on the front page of their website to the Stanley Quencher.

Now everybody wants a sip

Just like the latest skincare crazes that have every pre-teen buzzing, the Stanley cup has become the “must-have” item for everybody from moms to college students to young girls. TikTok is flooded with videos of 11-year-olds shedding happy tears on Christmas morning as they unwrap this prized possession. Having a Stanley instantly upgrades your cool factor – an unexpected outcome for what is basically a fancy water bottle.

All of this is great for Stanley, of course, and they’ve certainly leaned into their success. Their Quencher comes in 11 standard colours, with an array of occasional limited-edition releases that help to drive hype. Priced between $20 and $45 each (size dependent), they aren’t exactly cheap – but that hasn’t stopped fans from stocking up on multiple colours and sizes and even buying keychain-like accessories to glam up their bottles.

Of course the proof is in the profit, where the effect of Stanleymania is clear to see. Next time you wonder if influencer marketing is effective, remind yourself that Stanley’s annual sales reportedly jumped from $75 million to $750 million in 2023 alone.

How long can it stay hot?

One of the selling points of the Stanley Quencher is that it can keep beverages hot for 7 hours. How long will they be able to do the same for demand?

At present, about 110 000 people are signed up to Stanley’s restock notification list for out-of-stock products. As anybody with experience in the markets will tell you: it’s simply impossible for that demand to last. At some point, the bubble will burst, and the same stores that are seeing moshpits erupt around their new Stanley stock drops will be selling surplus stock out of bargain bins.

@iamrayysyymone

#greenscreenvideo #target #stanleycup #valentines #fyp

♬ original sound – Rayy Syymone

Perhaps it is a mark of the human condition, our herd mentality and our fear of missing out that drives us to hype products like the Stanley cup into these dizzying heights. Stanley isn’t a listed company (imagine what that chart would look like if it was!) but if it was, I reckon this would be the time when investment analysts would start looking at it with a sceptical eye. Will the comedown be a gradual taper as people lose interest and influencers move on to fresher pastures, or will it be a sudden drop on the heels of some scandal? Only time will tell.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Bites (Alphamin | BHP | Grindrod Shipping | Lewis | Novus | Sea Harvest – Brimstone)

The Finance Ghost
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Ghost Bites (Alphamin | BHP | Grindrod Shipping | Lewis | Novus | Sea Harvest – Brimstone)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Alphamin was negatively impacted by heavy rainfall (JSE: APH)

Sales volumes were far below production volumes, but it’s a temporary problem

Alphamin produces tin in the Democratic Republic of Congo. With the release of fourth quarter results, we now know that 2023 was a record year of tin production. Sadly, heavy rainfall towards the end of the caused a lot of problems for road haulage, so sales volumes fell far below production volumes in the final quarter (2,046 tonnes and 3,126 tonnes respectively).

The good news is that this is a temporary issue as the rainfall has subsided. Alphamin expects to catch up the sales shortfall in the first quarter of the new financial year.

The full year result was a 1% increase in contained tin produced and an 11% drop in contained tin sold. Average tin prices fell by 15%. Combined with the drop in sales, it’s therefore not surprising to see EBITDA falling by 39%. The company did as much as it could to mitigate the impact of falling prices and sales volumes, with all-in sustaining cost flat year-on-year.

To help investors understand the impact of the sales issue in the fourth quarter, Alphamin notes that this had a negative impact of $14 million on EBITDA. To give context to this, 2023 EBITDA was around $136 million.

Looking at the balance sheet, the company highlights a four-year extension to the off-take agreement with the Gerald Group, which includes a tin prepayment arrangement of up to $50 million. The interest rate is floating and works out to 10.3% currently. There is also a reduced marketing commission under this arrangement.

Thanks to Mpama South coming on stream in the first quarter of 2024, tin production guidance for 2024 is between 17,000 and 18,000 tonnes. That’s a big jump from 12,568 tonnes in 2023. The company estimates that the Mpama South capital expenditure cost will be 10% above budget due to weather and other logistical challenges.

Is BHP’s provision for Samarco high enough? (JSE: BHG)

Media speculation in Brazil suggests that it may not be

The Fundão tailings damn failed in November 2015. It was an absolute disaster. BHP holds a 50% stake in Samarco, the operator of the dam. The other 50% is held by Vale.

As you might expect, the period since the failure has been one of legal action and reparations, with the corporates having to play a delicate game of trying to do the right thing and not being on the receiving end of an outsized financial claim.

BHP’s provision for the failure was $3.7 billion as at 30 June 2023. If Brazilian media speculation is to be believed, it may not be enough.

The Brazilian media is reporting that the Federal Court of Brazil has quantified collective moral damages as $9.7 billion. The original claim was for $43 billion in reparation, compensation and collective moral damages. I’m certainly no expert in this stuff but if just the moral damages are $9.7 billion and BHP is on the hook for half of that, then the provision of $3.7 billion is inadequate.

BHP responded to the media speculation by releasing a SENS announcement noting that the company hasn’t been served with a decision by the court. We therefore don’t know if that amount is correct or not. It would also potentially be open to appeal.

Shipping rates increased at the end of 2023 for Grindrod Shipping (JSE: GSH)

We need to wait for more detailed disclosure to get a proper view on things

Grindrod Shipping is 82.23% held by Taylor Maritime. As Taylor is also listed and releases quarterly updates, Grindrod Shipping always alerts investors to any such updates.

One needs to be careful, as Taylor’s disclosure covers both the Taylor and Grindrod Shipping fleets. At best, we can use this disclosure a rough directional guide. According to Taylor, its net time charter equivalent (TCE) rate increased 15% over the three months ended December. We will need to wait for Grindrod Shipping to release its quarterly results so that a proper year-on-year comparison can be made. That’s the real story, as one would reasonably expect rates in the December quarter to be higher than the September quarter due to retail seasonality.

Separately, Grindrod Shipping also released an announcement dealing with ship sales and purchases. Unless you’re following the company in immense detail, the only relevance of this announcement is the insight that these companies are constantly right-sizing their fleets based on demand. They also do all kinds of interesting transactions, like charter deals rather than outright sales or purchases.

Lewis shareholders suffer an unpleasant UFO sighting (JSE: LEW)

Cash sales have been abducted and credit sales are keeping things going

Lewis is generally seen as a dependable group that manages to push forward in a tough environment, while using clever share buybacks to give shareholders a return that otherwise isn’t available in the furniture industry. This strategy won’t work forever, as conditions in this market need to improve at some point.

In a trading update for the nine months to December 2023, Lewis notes revenue growth of 8.7%. The star here was other revenue, which includes things like interest income and insurance revenue. Thanks to strong credit sales growth in the past two years, this source of income was up 15.2% for the nine months.

That’s just as well, because group merchandise sales were only up by 4.2%. The traditional business (Lewis, Beares and Best Home & Electric) grew 6.6% and UFO fell by 14.5%. The key difference is that UFO is a cash sales business, whereas the rest of the group is dependent on credit sales.

Comparable store sales were just 1.5% at group level over the nine months. For the traditional business, comparable stores sales came in at 3.2%.

As you perhaps already knew, furniture at this end of the market is only a profitable model because of the ability to sell on credit. This means that collection rates are critical to the business performance. The collection rate was 80.7% in this period, down from 82.0% in the comparable period. It also costs a lot of money to manage a debtor book, with those costs up by 59.8% for the nine months.

Lewis continues to find ways to compete in this market, with shareholders rewarded by a high dividend yield along with share price growth over time. The pressure on South African consumers only seems to be getting worse though, so watch that collection rate.

Novus declares a special dividend (JSE: NVS)

Remember this when looking at share price charts in future

When a company is in “value unlock” mode, there are often special dividends along the way. This is typically just a way to return cash to shareholders from sources other than profits. A special dividend is often the outcome of a sale of a division, for example, or some other major strategic change.

Novus has declared a special dividend of 50 cents per share. The source of cash is the sale of property and the reduction of working capital in the print division. On a share price of R4.75, that’s a meaty dividend.

The payment date is 19 February.

When you look at share price charts in future, remember that you need to add back the special dividend to see the true return to shareholders. This is also true for ordinary dividends if you want to consider a total return vs. a share price return. The difference with a special dividend is that it has the effect of causing a substantial drop in the share price because the company is deliberately making itself smaller. The impact on share price return vs. total return is thus more pronounced.

Sea Harvest and Brimstone release the circulars for the Terrasan deal (JSE: SHG | JSE: BRT)

And no, this isn’t a combined circular

You may recall that Sea Harvest recently released the most overcomplicated SENS announcement I’ve ever seen. For whatever reason, it detailed every restructuring step taking place at Terrasan as a pre-cursor to the Sea Harvest deal. The net result is that barely anyone in the market actually understood the transaction.

The circulars have now been released for the deal. There are two of them, as Brimstone as the controlling shareholder of Sea Harvest (with a 53.37% stake) needs to release its own circular to shareholders.

The simple version of this story is that Sea Harvest will acquire 100% of certain Terrasan subsidiaries that catch, process and sell pelagic fish, as well as 63.07% of Terrasan’s businesses that farm, process and sell abalone. The combined purchase price is R965 million. R365 million will be settled in cash and the rest through the issuance of Sea Harvest shares at R10 per share. The current Sea Harvest share price is just below R9.

There are also two deferred consideration payments based on financial targets for the year ended December 2023 and ending December 2024. The maximum possible payments are R98.5 million and R157.5 million.

The pelagic business that is the target of the acquisition is known as Saldanha. It operates on the West Coast of South Africa and employs over 600 people. Its 15-year fishing rights were recently renewed. Sea Harvest has just 0.6% of the anchovy quota and 2.7% of the pilchard quote, whereas Saldanha holds 11.51% and 5.05% respectively. This acquisition therefore give Sea Harvest much higher overall fishing rights.

The abalone business is called Aqunion and it has farms in Hermanus and Gansbaai. It employs 430 people. Sea Harvest is acquiring 63.07% of this business and the remaining 36.93% will be held by Agri-Vie.

Overall, these transactions help Sea Harvest improve its scale and diversification. Terrasan has held these investments for a long time and is looking for a liquidity event.

The pro-forma impact on Sea Harvest from this transaction is a 37% increase in diluted HEPS. That shouldn’t come as a surprise when big chunk of the deal is funded in cash – they are literally buying earnings. The net asset value per share is a useful metric here as well, with that due to decrease by 3%. Of course, the bigger focus will be on strategic benefits going forward.

Sea Harvest doesn’t seem to have used much in the way of corporate finance advice here, but the lawyers (in this case Webber Wentzel) did very nicely with a R8.8 million fee just on the legal advice and drafting. Total transaction costs of R15.6 million really aren’t bad for a deal this size.

From a Brimstone perspective, the important thing here is that the group will be losing control of Sea Harvest as part of this transaction. This is because Sea Harvest has to issue many new shares, so Brimstone will only have a 47.5% stake after the deal. The intrinsic net asset value (INAV) per Brimstone share doesn’t change as a result of this transaction. This is because Brimstone values the stake based on the listed share price and hasn’t taken into account a control premium. The counterargument is that even if a premium had been recognised, it would probably still be there as a 47.5% stake is as good as a 53% stake in practice, as shareholder meetings never have a 100% attendance rate.

And yes, in case you are wondering, shareholders of both Sea Harvest and Brimstone need to approve the deal for it to go through.

Little Bites:

  • Director dealings:
    • Executives at Spear REIT (JSE: SEA) are buying shares in the company, with the CEO buying shares worth R28.8k and the CFO buying shares worth R209k.
    • The CEO of Santova (JSE: SNV) now holds more than 5% in the company. I find it odd that the announcement says that this was due to an acquisition of shares, as I couldn’t see a director dealings announcement. I think it’s more likely that the wrong template was used for this announcement and that the 5% threshold has been reached due to share buybacks and there being fewer shares in issue.
  • The SARB approval for Frontier Transport’s (JSE: FTH) special dividend has been obtained. The payment date for the dividend of 137.38 cents per share is 12 February.

Ghost Bites (Dis-Chem | Harmony | Mr Price | PPC | Sasol)

The Finance Ghost
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Ghost Bites (Dis-Chem | Harmony | Mr Price | PPC | Sasol)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Dis-Chem buys the Midrand DC from directors (JSE: DCP)

This is part of the ongoing efforts to clean up related party arrangements

When entering the listed space, Dis-Chem carried certain elements of typical family businesses with it. One such element is that several properties were owned by the founding directors rather than the company, with leases in place to govern that relationship. This isn’t an ideal situation, especially for core properties.

Having been under pressure to sort this out, there have been a few transactions over the years to bring core properties into the group. The latest such example should also be the last one. In a deal to buy the Midrand distribution centre and head office for R478.6 million, Dis-Chem will now own all core distribution centres and its head office.

There are various directors who have a financial interest in this deal i.e. not just the Saltzman family. This makes it a related party transaction. As it is only a small related party transaction (because Dis-Chem has a large market cap), the deal can go ahead provided an independent expert opines that the transaction is fair. BDO Corporate Finance has done just that.

Harmony has released excellent numbers (JSE: HAR)

Production was strong and costs came in well below guidance

The gold sector is on a charge at the moment, with Harmony Gold up more than 80% over the past 12 months. When things go well for mining houses, they go extremely well. The converse sadly applies as well.

For now at least, Harmony is having its day in the sun. Gold production for the six months to 31 December 2023 was between 820,000 and 835,000 ounces, an increase of between 12% and 14% year-on-year. Thanks to the economies of scale that come with this kind of performance, all-in sustaining costs (AISC) for the first half of the year will be between R830,000/kg and R855,000/kg, which is way below the previous guidance of R975,000/kg.

This excellent performance was driven by good news in both the South African and Papua New Guinea operations.

The management team is taking a cautious approach here, with full-year guidance unchanged at the upper end of 1,380,000 to 1,480,000 ounces. The all-in sustaining cost guidance is still R975,00/kg. Although this certainly looks conservative, it’s also true that a lot can change in mining – and quickly.

Mr Price gets the market even more excited about clothing (JSE: MRP)

Coming out the day after the TFG announcement, the rally in the sector continued

Mr Price has released a trading update for the 13 weeks ended 30 December. Retail sales grew by 9.9% and that was enough to get the market excited, even though the base period was really rough for Mr Price as they had been woefully underprepared for load shedding.

Comparable store sales were up 4.1% in this period. This means that new stores made a big difference to the total growth rate as well. Of course, recent acquisitions are part of that story. Things improved dramatically in December (comparable store sales growth of 8%), as October and November combined only saw comparable growth of 0.8%.

Group selling price inflation was 4.9%. Although unit sales increased 5.0%, my interpretation is that this includes new stores and acquisitions. With comparable store sales only up 4.1%, it sounds like comparable volumes are 0.8% lower. Happy to be corrected on this if I’ve gotten it wrong.

The apparel segment did the heavy lifting, with sales growth of 11.7%. Mr Price gained market share for five consecutive months in apparel, with Mr Price Kids as a real highlight. Home could only manage 0.9%, with Yuppiechef as the highlight with double digit sales growth. Telecoms was up 9% but is a really small part of the group.

Interestingly, online sales growth was very limited. Online sales only grew 2.9%, contributing 1.8% to retail sales.

The market would’ve liked the comment about how sales were achieved at a higher gross margin than last year. TFG also teased a good gross margin story in its update. Closing inventory was 1.9% lower than the corresponding period, so efficiencies in that space are clear to see.

In terms of the recent acquisitions, Power Fashion is performing ahead of the market with double-digit growth, achieving its highest market share on record in December. Studio 88 managed growth of high single digits against a strong base.

Looking ahead, shareholders will want to take note that the group’s shipping rates are contracted until June. If rates are still elevated by that stage due to Red Sea (or other) issues, then there will be an impact on supply chain costs.

PPC is cash positive after the disposal of Cimerwa (JSE: PPC)

The proceeds from this disposal have been banked

It’s incredible to think about how far PPC has come from a balance sheet perspective. After a great deal of effort, the company was put on a sustainable footing – something that is highly necessary when competing in a market as tough as cement in Southern Africa. We are light on infrastructure investment and heavy on cement imports.

It may therefore come as a surprise that PPC is focusing on the markets closer to home, choosing to exit the business in Rwanda. The sale proceeds of $42.5 million have now been banked, with PPC Group now in a cash positive position.

It’s interesting to note that the COMESA Competition Commission approval is not a condition precedent for the disposal. That approval is expected to be received within 120 days. I’m no expert in that space at all, but I suspect that things get a bit awkward rather quickly if the approval isn’t obtained as expected.

PPC is now fully focused on the Southern Africa market.

Sasol continues to be dragged down by chemicals (JSE: SOL)

The share price has halved over the past 12 months

Sasol shareholders are starting to look like they went a few rounds with Dricus. When a price halves over a year, it’s ugly. The Sasol share price detached from the oil price a while ago, which suggests that the chemicals side of the business is causing the pain.

Indeed, in the overview section of the latest quarterly update, Sasol notes that the first half of the financial year has been hit by an average sales basket price for chemicals that is 24% lower year-on-year. This is a result of customer destocking and lower energy prices. Although pricing was slightly better in Q2 than in Q1 of the current financial year, the reality is that profitability is under pressure.

On the energy side, production performance has improved year-on-year but the rand oil price has negatively impacted the business, as have inflationary pressures on costs.

The outlook isn’t much better, with global petrochemical markets remaining uncertain. South African customers are facing the challenges of Eskom and Transnet, so that isn’t doing Sasol any favours either.

The previous guidance for FY24 production and sales volumes has been affirmed for all segments except for one of the fuel operations.

Little Bites:

  • Director dealings:
    • The CFO of Afrimat (JSE: AFT) has sold shares worth R1.24 million.
    • Praesidium SA, the fund linked to a director of Huge Group (JSE: HUG), has bought shares worth R34.4k.
  • Astoria Investments (JSE: ARA) has renewed its cautionary announcement related to a potential acquisition.
  • Conduit Capital (JSE: CND) is still in the process of disposing of CRIH and CLL. The approval from the Prudential Authority is taking longer than expected to come through. There have been several extensions to the date required for the fulfilment of conditions. There is now yet another extension, this time to 29 February 2024.

Ghost Bites (Quilter | The Foschini Group)

The Finance Ghost
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Ghost Bites (Quilter | The Foschini Group)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Quilter’s strategy to attract client flows is working (JSE: QLT)

Distribution is so important in the asset and wealth management industry

Quilter has released a trading update for the fourth quarter of 2023. It’s got a lot of good news in it, like Assets under Management and Administration increasing by 5% between September and December. An increase in asset prices certainly helped, but so did core business net inflows of £175 million. This is below the £242 million achieved in the comparable period, but it’s still a solid outcome.

Through Quilter’s own channel, full year net inflows as a percentage of opening assets came in at 15% in the High Net Worth segment and 10% in the Affluent segment. On the Platform channel, independent financial advisor gross inflows were up 44% in the fourth quarter and 7% on a full year basis. This led to a net inflow situation in that part of the business, although High Net Worth clients were a considerable source of outflows based on portfolio repositioning.

Fourth quarter non-core net outflows of £119 million were consistent with levels seen in the third quarter.

Another important metric is productivity, with gross sales per Quilter Adviser (as they define the term) up 21% in the fourth quarter.

The Quilter share price is up 20% in the past 12 months.

The Foschini Group’s share price rally looks too optimistic based on results (JSE: TFG)

Was there a short squeeze in the morning? Or did the market get very excited about gross margin?

When The Foschini Group released released its third quarter trading update, the share price shot up around 8%. It then washed away over the course of the day, closing 3.3% higher. The results themselves weren’t fantastic, so it’s possible that some short positions were squeezed in the morning i.e. had to be closed out. Alternatively, the market got very excited about the comments on gross margin and glossed over the rest. I’m genuinely not sure though. Markets don’t always make sense.

For the quarter ended 30 December 2023 (well, the 13-week period to be exact), group turnover was up 4.5% year-on-year. Over the nine months year-to-date, group turnover was 9.0% higher. That’s a significant deceleration in the third quarter.

TFG Africa (which includes South Africa) was up 5.1% for the quarter, with a strong finish to the year of 11.8% growth in December. Like-for-like turnover growth was just 0.7% for the quarter and 6.1% for December. The market would’ve appreciated the comment that December was the highest full-price contribution thus far in this financial year, which means the best gross margin. Further down in the announcement, there’s another comment that talks to a recovery in gross margin.

The trend highlighted earlier in the week by Attacq about a relatively disappointing Black Friday was echoed by TFG Africa, noting that Stage 6 load shedding was implemented over that weekend. Load shedding was relatively better in December 2024 vs. December 2023, so a lot of trade seems to have shifted from November to December.

TFG Africa’s cash turnover grew 6.6% in the quarter and now comprises 75.8% of TFG Africa turnover. Credit turnover only grew by 0.7% in the quarter, with conservative average acceptance rates to reflect the macroeconomic pressures.

For all the investment made in the Homeware category by TFG Africa, it could only grow by 0.9%. The best result was in Clothing (up 6.4% for the quarter), which also happens to be the biggest part of the local business (75.4% of turnover).

TFG London was up against a tough base, with turnover falling 3.0% in GBP in the third quarter. TFG Australia was even worse, down 7.3% for the quarter in AUD. The weak rand worked wonders on both those results, reported as positive growth of 9.0% in TFG London and -0.8% in TFG Australia when expressed in rands.

Looking at online turnover, this grew by 29.2% for the quarter. TFG Africa’s online turnover was up 44.8%, now contributing 4.2% of TFG Africa turnover. The consolidation of the brands on the Bash platform seems to be working well. TFG London’s online turnover grew 8.4% in the quarter and contributed 44.5% of sales. TFG Australia’s online turnover fell 1.4%, contributing 6.2% to TFG Australia turnover.

Looking ahead to the fourth quarter, TFG expects turnover to be higher than a year ago because the base period had substantial load shedding. Of course, we don’t know yet what load shedding will be in the first few months of this year, but my view is you can expect our government to do everything possible to keep the lights on ahead of elections.

Little Bites:

  • Director dealings:
    • An executive director of Richemont (JSE: CFR) has sold shares worth around R6.8 million.
    • Sean Riskowitz has bought more shares in Finbond (JSE: FGL) through Protea Asset Management, this time to the value of R208k.
  • MC Mining (JSE: MCZ) updated the market on the takeover offer (or lack thereof) by the consortium that includes Senosi Group and Dendocept. A Bidder’s Statement (this is an official term) was expected to be lodged in the first week of January 2024. The consortium has been delayed for some reason and hasn’t given a revised timetable, but it has reconfirmed its intention to make a takeover offer. The independent board committee has reiterated its “take no action” recommendation at this stage. MC Mining is registered in Australia, which is why you’ll see some takeover law language that you may not otherwise recognise.
  • The financial director of Rebosis (JSE: REA | JSE: REB), Asathi Magwentshu, has resigned from the board. The company is still in business rescue, so her replacement will be walking into a tricky role!
  • Kibo Energy (JSE: KBO) has sold shares in Mast Energy Developments worth £120k. The proceeds will be used for ongoing working capital requirements and to reduce the balance on the bridge loan facility with RiverFort Global Opportunities to meet monthly payments and avoid equity dilution.

Ghost Wrap #60 (Motus | Attacq | Clicks | Woolworths)

The Finance Ghost
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Ghost Wrap #60 (Motus | Attacq | Clicks | Woolworths)

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.

In this episode of Ghost Wrap, I covered these important stories on the local market:

  • Motus is a great example of how cyclical the used car industry is, with the additional challenge of having costly debt.
  • Attacq’s turnover and footfall update for November and December hass some real nuggets for those interested in the retail sector.
  • Clicks achieved solid retail sales, but the wholesale side of the business had a wobbly.
  • Woolworths is struggling with consumer affordability, as sales volumes dropped and so did headline earnings from continuing operations. 

Ghost Bites (AVI | Bowler Metcalf | Cashbuild | Clicks | Jubilee Metals | Karooooo | Woolworths)

The Finance Ghost
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Ghost Bites (AVI | Bowler Metcalf | Cashbuild | Clicks | Jubilee Metals | Karooooo | Woolworths)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

AVI proves that we keep eating our stress away (JSE: AVI)

The biscuit and snacking business has improved its margins

When it comes to consumer goods, my theory is that the most defensive branded products are the ones that we turn to in a time of need. In other words: the naughty treats. When it’s time to throw calories at our problems, we want the branded stuff with a taste we trust. Private label will do for day-to-day things, but not for that skelm snack just before bed.

In AVI’s trading update for the six months to 31 December 2023, Snackworks reported revenue growth of 9.8%. That’s not the most impressive growth in the group, with that honour going to Entyce Beverages with growth of 16%. The difference is that Entyce couldn’t fully recover cost pressures through pricing, as consumers are price sensitive on drinks. Instead, that business managed to protect margins by increasing volumes and achieving manufacturing efficiencies. Snackworks, in contrast, was able to recover input cost pressures thanks to consumers being less price sensitive, improving margins in the process.

Within the group revenue growth performance of 7.1%, the important laggard was I&J. Fish sales volumes fell 17.1% due to poor catch rates, aggressive competition and inefficiencies at Cape Town’s port. The taxi strike also didn’t help. Combined with the costs of a new B-BBEE structure, I&J’s operating profit is “materially lower” year-on-year.

Thankfully, the rest of the group pulled through and delivered HEPS growth of between 16% and 18%. That’s a strong performance, which is why the share price was trading 6% higher in late afternoon trade.

Bowler Metcalf: hold on to your hats (JSE: BCF)

The packaging and plastics company has delivered a big jump in earnings

Bowler Metcalf has a black hat as its corporate logo and possibly the worst website on the JSE. The share price has been volatile and isn’t the most liquid thing around either, but there’s little doubt that the market will appreciate the latest trading statement.

Thanks to higher sales in the packaging segment and resultant benefits of economies of scale, HEPS for the six months to 31 December 2023 is expected to be between 68.8 cents and 73.3 cents. That’s an increase of between 42.1% and 61.9%!

There’s very little growth happening at Cashbuild (JSE: CSB)

But at least the second quarter was better than the first quarter

Cashbuild released an operational update dealing with the second quarter of the year, which ended on 24 December 2023. This also gives us sales data for the first half of the year.

The second quarter was certainly a lot better than the first quarter, coming in at 5% growth in revenue. Like-for-like revenue growth was 3% and new stores contributed 2%. When combined with the first quarter to give the half-year result, we find growth of just 2%.

Selling price inflation was 3.2% as at the end of December. Transaction volumes were down 1% in existing stores over the period.

P&L Hardware is still going backwards, with a drop in revenue of 5% in the second quarter.

A strong retail performance at Clicks (JSE: CLS)

A drop in wholesale turnover blunted the overall turnover growth – but still a good set of numbers

The health and beauty market in South Africa seems to never stop growing. Attacq gave us a pretty good clue in the update on Monday and Clicks confirmed it at a much more macro level on Tuesday by releasing a trading update for the 20 weeks to 14 January 2024.

Retail turnover is up 11.8%, with Clicks having achieved its highest ever daily sales on Friday 22 December. People were clearly getting those headache pills ready in anticipation of a big Christmas weekend! Selling price inflation was 7.5% and sales in comparable stores increased by 8.4%, so Clicks achieved volume growth.

Clicks achieved market share gains across all core product categories in the first quarter of the financial year, which is genuinely impressive.

Moving on from Clicks retail, recently acquired chain Sorbet grew franchise and corporate sales by 12.3%. Franchise sales aren’t reported as part of Clicks’ sales, but the company earns royalties etc. on them.

The wholesale business didn’t do so well, with UPD’s total managed turnover declining by 6.3%. Wholesale turnover was down 0.8% due to a systems transition at UPD’s main distribution centre. Many a consumer goods business has been impacted by changes in systems and Clicks is no exception. As systems stabilised, wholesale turnover improved significantly, coming in at 6.9% for the six weeks to 14 January. This was hopefully just a bump in the road. It’s also worth noting that UPD has been strategically letting go of lower margin clients.

Unsurprisingly, the market gave this announcement a positive reaction.

Record quarterly chrome production at Jubilee (JSE: JBL)

The group is on track to deliver production guidance for FY24

Jubilee Metals released a production update for the second quarter of the 2024 financial year. This quarter covers the three months to the end of December. The good news is that FY24 production guidance has been affirmed thanks to a strong quarter.

Chrome production increased by 13.2% quarter-on-quarter, setting a new quarterly record in the process. PGM production was maintained at very similar levels to the first quarter, with no third-party production in the period. Copper production at Roan fell vs. the first quarter but the upgrade project is going to drive a strong second half of the year. It’s a pity that a delay at the Roan project has been experienced based on difficulties in sourcing certain electrical components.

Karooooo is still growing, but at a slower rate (JSE: KRO)

A deceleration in growth isn’t what the market likes seeing

Karoooooo is the owner of Cartrack (and a couple of other businesses – but that’s the main one). Cartrack is all about signing up new subscribers and increasing the base of recurring revenue. Investors have high expectations for growth, with the share price having been largely range-bound since mid-2022 as the company tries to grow into its valuation.

The good news is that the business is still growing, with Cartrack subscribers up by 14% year-on-year in the third quarter. The bad news is that the rate of growth has slower, with fewer net new subscribers in this quarter than a year ago.

Total revenue is up 16% as reported or 14% on a constant currency basis. Subscription revenue increased by 17% as reported and 14% on a constant currency basis, so there’s your proof that most of the revenue is recurring in nature. Importantly, Cartrack is growing in every region in which it operates.

Cash generated from operations is an important measure for the group and it increased by 55%.

The sooner the pain in Carzuka ends, the better. The failed attempt at entering the used car market lost R28 million this quarter. It lost R15 million in the comparable quarter. They are winding it down, which is why cost of sales was larger than revenue. Stock needs to be cleared.

Karooooo Logistics is telling a far better story, with adjusted EBITDA jumping from R2.6 million to R7.9 million. It’s still small (and particularly tiny vs. adjusted EBITDA of R447 million at Cartrack), but isn’t a drag on group earnings.

Woolworths is treading water (JSE: WHL)

The recovery has suffered a significant wobbly

After a few periods in which the apparel side of the business at Woolworths was starting to tell a better story than Woolworths Food, the organic yoghurts fought back and delivered the best numbers in the group. Sadly, this is less to do with brilliance at Woolworths Food and more to do with a poor result in Fashion Beauty and Home.

The group numbers need to exclude David Jones to be comparable, as that disaster is finally out of the group in this period but was still there in the base. With that adjustment in place, sales increased by 5.4% as reported or 4.4% in constant currency terms for the 26 weeks to 24 December 2023. Woolworths is quick to point out that the base period was strong and that makes the comparison tougher, but the reality is that this wasn’t a good performance.

If there is a silver lining, it’s that sales growth accelerated to 7.2% in the last six weeks of the period. Those Woolworths mince pies are working hard here.

Speaking of the Christmas goodies, Woolworths Food grew turnover by 8.4% overall and 7.2% on a comparable store basis. Underlying product inflation was 9.1%, which means volumes growth was negative i.e. consumers pulled back. This is despite price increases at Woolworths being below headline food inflation, which remains one of my key concerns about the group. The pricing power enjoyed a few years ago doesn’t seem to be present anymore.

I have an overall fear that the South African upper middle class is simply becoming too poor for the Woolworths Food model to show strong growth. Just look around you at the relative explosion of Chinese cars on the road vs. the German models that were everywhere 10 or 15 years ago. The overall level of wealth is dropping.

At least we are still happy to spend over Dezemba, with sales in Woolworths Food up 8.6% in the last six weeks of the period at a time when inflation was up 7.9%. This means positive volume growth!

Space grew 3.3% over the period, so Woolworths is still investing. Online sales were up 46.6%, contributing 5.1% of South African sales.

Moving on to Fashion Beauty and Home, sales for the 26-week period were hit by poor availability of stock. The summer range was delayed at the ports. Turnover grew by a paltry 2.2% and comparable store sales were up just 1.5%. That’s a pretty horrible outcome when price movement was 11.4%, as it means that volumes were sharply negative. The last six weeks of the period weren’t much better, up 3.8%. Trading space was up 0.3% and online sales grew 26.9%, contributing 5.4% of South African sales.

This means that we are nearly at the point where online sales penetration in Woolworths Food will exceed penetration in Fashion Beauty and Home. I firmly believe that Checkers can be thanked for that, with other retailers benefitting from market acceptance.

Woolworths Financial Services grew the book by 4.9%. The annualised impairment rate increased from 5.5% to 6.3%, reflecting the strain on consumers. Importantly, it’s lower than at the end of the previous year.

Moving across the pond, Country Road Group saw sales fall by 5.0% overall and 9.5% in comparable stores. The company had a very strong base to contend with, as Australians in particular emerged from post-Covid lockdowns to dodge spiders and snakes on their way to the shops. Sales growth in the last six weeks moved slightly positive, up 1.3%.

Despite the performance in Australia, trading space increased by 6.6% in this period. Woolworths is clearly looking through the cycle here and investing. It’s also worth noting that online sales increased marginally to 26.8% of total sales, so that gives you an idea of how underdeveloped online shopping still is in South Africa.

With all said and done, HEPS from continuing operations will be down by between 5% and 10%. Including David Jones in the base leads to a HEPS drop of 25% to 35%, but that’s not a fair comparison.

Little Bites:

  • Director dealings:
    • The CEO of RH Bophelo (JSE: RHB) bought shares worth R790k.
    • Acting through Protea Asset Management, Finbond (JSE: FGL) director Sean Riskowitz has bought shares worth R68k.
  • Reinet (JSE: RNI) confirmed that its net asset value (NAV) per share increased by 2.1% between September 2023 and December 2023. The company has achieved a compound annual growth rate (including dividends) of 8.5% since March 2009, measured in euros.
  • Coronation Fund Managers (JSE: CML) announced its total assets under management as at 31 December 2023. The number came in at R629 billion. They never bother to include the comparative number, forcing me to go digging for old SENS announcements. The number as at 31 December 2022 was R602 billion. This means they grew assets under management by 4.5% in the past 12 months.
  • The CEO of Eastern Platinum (JSE: EPS) wrote a letter to shareholders in which he reminded them of the significant expected change in production mix from 2023 to 2026. Chrome production made up most of the mix in 2023, yet PGMs will be 80% of 2024 revenue and the split will then move to 65% – 35% in favour of PGMs in 2025 – 2026. Although PGM prices are under a lot of pressure currently, the hope is obviously that they improve significantly by the time Eastern Platinum is producing a material amount of PGMs. It also helps matters that the whistleblower allegations of related party transactions were found to be unsubstantiated. For the work required to get the PGM operations going, the company has funding from the rights offer completed in May 2023 and an Investec pipeline finance facility.
  • Orion Minerals (JSE: ORN) has acquired important surface rights at its New Okiep Mining Project, clearing the way for more drilling. The company says that this clears up any conflicting land use interests, which previously prevented Orion from accessing the surface area to conduct validation work.
  • In its share buyback programme that started in November 2023, AB InBev (JSE: ANH) has repurchased 0.51% of total shares outstanding. This is an investment of $647 million in its own shares.
  • Since the general authority was given in July 2023, Santova (JSE: SNV) has repurchased 3.1% of its shares for R30.8 million. The average price paid was around R7.50 per share, which is slightly below the current market price.

UFC: The business of bliksem

Dominique Olivier
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UFC: The business of bliksem

They say there’s no better prize than winning in the name of your country. While that’s certainly a sweet sentiment, I’m willing to bet that Dricus du Plessis is equally happy about the reported $1 million that he just won in his fight against Sean Strickland.

The majority of us probably had no exposure to the UFC before we sat on our couches at 05:00 on Sunday morning, bleary-eyed but totally ready to watch two half-clad men beat each other up in the name of national pride. For the sake of transparency, I’ll make no secret of the fact that I knew nothing about the UFC (or MMA as a whole, for that matter) until the swelling chorus of support around Dricus “Stillknocks” du Plessis and his quest for the world championship caught my attention.

With the fight won (well done Dricus!) and my curiosity piqued, I set out on a little Sunday-afternoon research expedition, which then turned into a full-on dive down the rabbit hole that is competitive fighting.

Here’s what I learned:

There’s a market for combat

For as long as human beings have existed, we’ve wanted to fight each other. And practically for as long as we’ve wanted to fight each other, we’ve also enjoyed watching other people fight. Thus, we not only invented things like boxing, wrestling, karate and jiu-jitsu for self defence, but also, to some degree, for showmanship.

In the early 1990s, a man named Art Davie decided that he wanted to monetise this showmanship in a new way. Now, charging an audience a fee to watch a fight was not a new idea by a long shot. But usually when people fought in the ring, fight organisers would do their best to make sure that the opponents were evenly matched in terms of their size and skill. Art Davie reckoned the only way to inject some real excitement into competitive fighting was to turn that tradition on its head.

Art was fascinated by the “Gracies in Action” videos that he had seen. This was a video-series, produced by the Gracie family of Brazil, which featured Gracie jiu-jitsu students defeating martial artists of various disciplines such as karate, kung fu, and kickboxing in unarmed, full-contact matches. With this seed planted in his brain, Art approached director and producer John Milius and jiu-jitsu master Rorian Gracie with the idea to host an eight-man single-elimination tournament called “War of the Worlds”. The competition would showcase martial artists from diverse disciplines engaging in unrestricted combat, with the goal of determining the superior martial art.

In other words: a classically trained boxer could take on a karate master in the ring, with no weight classes separating them. Obviously, there was massive entertainment potential here. Davie spearheaded the business plan, and a group of 28 investors chipped in the startup cash for WOW Promotions, all geared up to turn the tournament into a television sensation under John Milius’ direction. Fast forward to 1993, and WOW Promotions was on the hunt for a TV partner, which they found in Semaphore Entertainment Group (SEG).

Reading through anecdotes of how that first WOW event came together really gives you a taste of how unrestricted the 1990s were. For starters, the event was marketed to both investors and potential audiences as “a real-life version of Street Fighter or Mortal Kombat”. And then there’s the creation of the signature Octagon, which came about because organisers Davie and Gracie were unhappy with the idea of a traditional roped ring.

Claiming that a roped ring would give fighters too many opportunities to “escape” their opponents, they instead suggested such alternatives as 1) a moat full of alligators, 2) a razor-wire barrier, 3) a line of men in togas or 4) an electric fence. While all of these sound like they have spectacular viewing potential, it is perhaps best for all fighters involved that set designer Jason Cusson came up with the much tamer chain-link Octagon, which is the shape still associated with the sport today.

The moer the merrier

This inaugural WOW match – which was retrospectively dubbed UFC 1 – was met with massive amounts of enthusiasm and almost equal amounts of criticism. In 1996, US Senator John McCain was appalled when he saw a tape of an earlier UFC fight. He thought it was abhorrent and decided to lead a campaign to ban the UFC and what he called “human cockfighting.”

McCain went all out, sending letters to the governors of all 50 U.S. states, urging them to hop on the ban(d)wagon. 36 states heard the call and enacted laws banning the “no-holds-barred” action, with New York dropping the ban hammer right before UFC 12, forcing the UFC to pack its bags and relocate to Dothan, Alabama. But still the show went on, airing on DirecTV PPV, even though it was playing to a more intimate crowd compared to the cable pay-per-view giants of the time.

While UFC 1 was promoted under the tagline “There are no rules”, a slew of injuries led to the introduction of new rules after practically every UFC event. In the face of constant criticism, the UFC decided to play nice and teamed up with state athletic commissions, making a few tweaks to its rulebook to keep things classy while holding onto the essence of striking and grappling.

By UFC 12, weight classes were in and fish-hooking (the practice of sticking fingers in an opponent’s mouth or nostrils and pulling outwards) was out. Fast forward to UFC 14, and gloves became a must-have, while kicking someone’s head when they’re down became a must-not. After UFC 15, some limits were put on hair pulling, as well as on strikes to the back of the neck and head, headbutting, small-joint manipulations, and groin strikes.

For the UFC and their TV partner SEG, it was a long and arduous battle to transform from a spectacle to a full-fledged sport, all without losing the interest of a rabid fanbase that wanted nothing more than the no-holds-barred violence they had been promised. After doing the hard yards to get sanctioning, SEG found themselves teetering on the edge of financial ruin.

Then, in 2000, the dynamic trio of Station Casinos bigwigs Frank and Lorenzo Fertitta, along with their business partner Dana White, swooped in with a proposition to buy the UFC. Fast forward a month to January 2001, and voila! The Fertittas sealed the deal, purchasing the UFC for a cool $2 million and giving birth to Zuffa, LLC, the proud parent company overseeing the UFC.

Nowhere to go but up

Fast forward past many, many milestones – including a merger with World Extreme Cagefighting in 2010, a seven-year broadcast deal signed with Fox Sports in 2011, the signing of Ronda Rousey (the first female UFC champion) in 2012, the 2016 sale to WME-IMG for $4.025 billion and the subsequent 2021 buyout of Zuffa by Endeavour – and it looks as though the history of the UFC is as nailbiting as the final round in a championship fight.

On September 12, 2023, Endeavor and WWE decided to join forces. They fused into a brand-new, stock-market-hyped company under the symbol “TKO,” with Endeavor’s CEO, Ari Emanuel, calling the shots. WWE’s shareholders snagged a 49% slice of the action, and Vince McMahon was named executive chairman. The UFC was valued at a whopping $12.1 billion at the time of the merger.

Not bad for a business that was built on bloodlust and tamed by sanctions, wouldn’t you say?

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Bites (Afrimat | Attacq | Brimstone – Sea Harvest | Datatec | Pan African Resources | Reinet | South32)

The Finance Ghost
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Ghost Bites (Afrimat | Attacq | Brimstone – Sea Harvest | Datatec | Pan African Resources | Reinet | South32)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Afrimat is much closer to concluding the Lafarge acquisition (JSE: AFT)

These deals take a long time to finalise due to regulatory approvals

Back in June 2023, Afrimat announced that it was acquiring 100% of Lafarge South Africa from Holcim Group. This is a landmark transaction for Afrimat and important in the South African industry context, so various regulatory approvals needed to be obtained as part of finalising the transaction.

A few of these can now be ticked off the list, including the SARB, the Competition Authorities in Botswana and Eswatini and the Minister of Mineral Resources and Energy of South Africa in terms of section 11 of the Mineral and Petroleum Resources Development Act.

If you read that carefully, you would’ve noticed that the South African Competition Commission isn’t on the list of approvals. At this stage, the Commission has referred the transaction to the Competition Tribunal (which rules on larger mergers) and has recommended a conditional approval.

Importantly, the Tribunal doesn’t always follow the recommendation of the Commission. Also, we don’t know yet what the conditions of the approval will be and we’ve seen some pretty wild stuff from this regulator before.

This is the last remaining condition precedent for the deal, so Afrimat will be hoping for a timeous and successful outcome.

Attacq enjoyed strong festive trading (JSE: ATT)

Some of the underlying trends are particularly interesting

Attacq refers to its shopping malls as “retail-experience hubs” – a rather creative name that nobody else really uses. The name isn’t nearly as important as the performance, which in this case looks pretty strong. The company has released turnover and footcount numbers for November and December 2023 vs. the prior year i.e. covering Black Friday and Christmas trading.

At total portfolio level, November was up 6.4% year-on-year and December was up 10%. This means that in relative terms, Black Friday was less exciting this year than Christmas season trading. They make the point that December 2023 vs. November 2023 was a 40.3% increase in turnover, which is much higher than 35.6% last year. This suggests a return to December rather than November shopping.

Importantly, Mall of Africa was the standout performer in December with growth of 12.7% in turnover. In November, turnover was only up 5.2%. Perhaps the trend here is less about overall relative spend for Black Friday vs. Christmas and more about the online penetration of Black Friday vs. Christmas. My sense is that a lot of people look for online bargains for Black Friday, whereas December shopping is all about walking through the malls to buy for loved ones.

At category level, the top performances in December were apparel (up 19.4%) and health and beauty (up 15.4%). Restaurants managed 8.1% and take-out grew 7.4%, so that’s not great news for the likes of Famous Brands. It’s also interesting to note a significant drop in cinema attendance due to lack of movie releases. Perhaps most interestingly, the announcement notes that Game’s four stores in the portfolio grew by 14% year-on-year in December!

Brimstone saves us from the Sea Harvest announcement (JSE: BRT | JSE: SHG)

The Sea Harvest announcement is absolute overkill

Sea Harvest is going to acquire certain subsidiaries from Terrasan. Normally, a public announcement gives the basics of the deal and leaves the mechanics to happen behind closed doors. For some reason, this announcement gives all of the pre-deal restructuring steps in Terrasan in nauseating detail. I was very grateful that Brimstone released a much simpler announcement later in the day.

The impact on Brimstone of this transaction is significant, as it will no longer hold more than 50% in Sea Harvest once the Terrasan transactions are complete. This is because Sea Harvest will issue shares as part of the purchase price.

Long story short (literally, if you saw the Sea Harvest and Brimstone announcements next to each other), Sea Harvest will acquire 100% of the shares and claims in WP Fishing and Saldanha Sales and Marketing (catching, processing and sale of pelagic fish), as well as 63.7% of Aqunion (a vertically integrated abalone business).

The purchase price is around R965 million, of which roughly R365 million will be settled in cash and the rest in Sea Harvest shares. The eventual price may change based on the usual adjustments in these types of deals. There are also potential earnout payments based on 2023 and 2024 performance.

The full financial details will be available in the circular to be released to shareholders, as this is a Category 1 transaction for both Sea Harvest and Brimstone.

Datatec makes a small acquisition (JSE: DTC)

This represents a further push into cloud security services

Datatec announced that its subsidiary Westcon-Comstor has acquired Rebura, a London-based Amazon Web Services (AWS) consulting partner. The cloud industry has many companies that do this kind of thing, often specialising in either AWS or Azure (Microsoft) services – and occasionally both. The announcement makes it sound like Rebura is particularly strong in cloud security.

This is a voluntary announcement, so there’s no information on the price paid for the deal. We also don’t know how big Rebura is, so all we can really take from this is the strategic thinking at Datatec rather than the ability to assess the financial impact of the deal.

The price (whatever it may be) will be settled in cash.

Pan African Resources improved production at the right time (JSE: PAN)

The metrics look good for the six months to December 2023

The gold price has been doing some delightful things recently, with Pan African Resources noting a 13.7% year-on-year increase in the dollar gold price for the six months to December 2023. At exactly the right time, the group managed to increase gold production by 6.7%.

To add to the happy news, production costs are below guidance. All-in sustaining cost was $1,300/oz, which is below the FY24 guidance of $1,350/oz. Improved production leads to lower costs per ounce, but decent cost control was also required to achieve this number.

At this stage, guidance has been maintained for FY24. The company does acknowledge that it may be revised in due course based on the strong performance in the first half of the financial year. Importantly, annual output is going to increase substantially in FY25 following commissioning of the MTR project.

These projects don’t come cheap, with investment of $23.2 million on the MTR project driving an increase in group net senior debt from $18.9 million to $60.0 million. The group has also been investing heavily in solar PV energy solutions for obvious reasons.

Reinet Fund’s NAV moved higher at the end of 2023 (JSE: RNI)

The release of the fund NAV is always the precursor to the group NAV

Reinet Fund is where Reinet’s investments in Pension Fund Corporation, British American Tobacco and other investments can be found. This is why it represents the biggest part of Reinet’s balance sheet.

The net asset value (NAV) of the group differs from the fund as the group has various assets and liabilities that sit above the fund. Still, the direction of travel of Reinet Fund’s NAV gives a very good idea of where the group NAV is going.

From 30 September 2023 to 31 December 2023, Reinet Fund’s NAV increased by 2.1%. This is measured in euros.

South32 had a mixed quarter – not unusual for a group this size (JSE: S32)

Some of the production issues have affected guidance for FY24

South32 has released a production update for the first half of the financial year. As is always the case in mining groups of this size, there are strong areas (like record half year aluminium production) and weaker areas (a reduction in copper equivalent production guidance). Zinc and nickel also deserve a mention, each up 20% in the second quarter.

This gives you an idea of the diversification in the group and the breadth of production performance:

The group has been extremely focused on cost control and it shows, with several commodities enjoyed updated guidance that reflects operating unit costs either in line with or below original guidance. Of course, there are exceptions where costs have jumped due to production challenges.

Generally, the prices achieved for commodities in the six months to December 2023 were down year-on-year as demand moderated.

South32 invested $188 million of growth capital expenditure in the first half of the year to make progress on the Taylor zinc-lead-silver and Clark battery-grade manganese deposits. There are also various other exploration initiatives underway across the world.

Little Bites:

  • Director dealings:
    • An independent non-executive director of Sibanye-Stillwater (JSE: SSW) has sold shares worth $12.8k. The sale is denominated in dollars because the sale was actually of American Depository Receipts (or ADRs), which reference the local shares. For the purposes of director dealings, it’s like any other share disposal.
  • With the mandatory offer to shareholders of Brikor (JSE: BIK) having been concluded, Nikkel Trading has increased its stake from 68.01% to 84.20% in the company. With such a small float (the percentage held by public shareholders), there probably won’t be any liquidity in this stock.
  • The shareholders of Mantengu Mining (JSE: MTU) gave resounding support to the resolutions required for the specific issue of shares and warrants to GEM Global Yield as part of a R500 million facility to be made available to Mantengu.

Ghost Bites (Ascendis | Fortress | Novus)

The Finance Ghost
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Ghost Bites (Ascendis | Fortress | Novus)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

The Ascendis story takes another turn (JSE: ASC)

The latest SENS announcement raises more questions than answers

It seems as though Ascendis is now taking a piecemeal approach with its communications around the various allegations being thrown at the company on social media – and specifically Twitter/X, which is where all the action is when it comes to markets.

The first announcement this week was an acknowledgement that the circular is missing information and the meeting needs to be postponed. There’s no excuse for not disclosing this stuff properly, particularly in such a highly regulated environment. All this has done is put more steam behind the allegations.

The second announcement is a lot weirder, with the independent board stating that the presentation doing the rounds on social media isn’t a company document, has never been presented to the board and hasn’t been sanctioned by the board either. To add to the fun, the announcement also claims that the presentation has numerous factual inaccuracies.

Now, this is where things get really tricky for me.

Carl Neethling is the CEO of Ascendis, but has also spearheaded the proposed take-private. This puts him in a very tricky position, as he would presumably need to demonstrate that the best possible future for the company is one in which he takes it private with a consortium. For this to be true, there must (1) be no better alternative to going private and (2) the consortium must be the best bidder in town.

A lot of the social media stuff focuses on how the consortium is getting the shares for a bargain, profiting for themselves in the process. Look, I don’t know where some people have been all these years, but that’s how capitalism works. No take-private in history would’ve been completed unless the buyer thinks the price is appealing! Similarly, the sellers must be willing to accept the price, which they would only do in the absence of something better. I must also point out that nobody on social media is highlighting that this is an offer, not a scheme of arrangement. This means that shareholders can elect to retain their shares, provided they are willing to hold unlisted shares.

There are many other relevant questions that will likely add to the regulatory precedent in our market. For example, should the independent expert consider the offer based on the company’s existing reasonable prospects, or the value that the buyers will bring to the deal? In my view, it can only be the former. Ideas are easy and execution is hard.

When it comes to the presentation that is now the subject of a SENS announcement, I must point out that the independent board usually wouldn’t be privy to the documents that the consortium is using to raise funds. Unless I’m terribly mistaken, it has nothing to do with them whatsoever. The waters are muddied here because of Neethling’s position as CEO, which takes us back to the crux of the issue in my opinion: what was for the board and what was for the consortium? Most importantly, how has the conflict of interest been managed?

This story is going to be in the headlines for several months and is going to be absolutely fascinating in terms of how regulations are applied. Stay tuned!

Fortress gets strong approval for the plan to solve the share structure (JSE: FFA | JSE: FFB)

The dual share class structure of Fortress will soon be a thing of the past

If you’ve been following the Fortress story in recent times, you’ll know that the company holds the dubious honour of being the first Real Estate Investment Trust (REIT) to have lost that status on the JSE due to non-compliance with dividend distribution rules. This was caused by the dual-share class structure that effectively left the group hamstrung because the rules for distributions had never contemplated a downturn like we saw in the pandemic.

After attempts to find a solution with shareholders backfired, the company eventually threw in the REIT towel. It was a bit like the Y2K scare going into the year 2000. Nobody was quite sure what would blow up, and then nothing blew up.

Still, Fortress needed to sort it out and the recently proposed scheme has found support among shareholders. It cleverly uses NEPI Rockcastle shares to pay off the Fortress B shareholders, leaving only the Fortress A shares in issue (and a smaller stake in NEPI Rockcastle).

At the meeting to approve the scheme, it was given a resounding approval by both classes of shareholders.

Novus has been busy with share buybacks (JSE: NVS)

And there are many more to come

Since August 2023, Novus has managed to repurchases shares representing around 3% of total issued share capital. This comes to a total investment in its own shares of R45.5 million.

Importantly, the average price paid for share was R4.36 and the current share price is R4.51.

Under the general authority given at the last AGM, Novus can still repurchase another 16.99% of the shares that were in issue on the date of the authority. Of course, this doesn’t mean that the company will make those repurchases. The board must always consider the solvency and liquidity of the company when executing share buybacks, so it is common on the JSE to see buyback authorities from shareholders not being fully utilised.

Little Bites:

  • Director dealings:
    • Invicta Holdings (JSE: IVT) CEO Steven Joffe has turned the wick up on his purchases of shares alongside Dr. Christo Wiese. The two have each bought another R3.68 million worth of shares in the company.
    • A prescribed officer of Spear REIT (JSE: SEA) has sold shares worth R420k.
    • At a time when Kibo Energy (JSE: KBO) is already a source of major jitters for shareholders, the COO has sold shares in the company for R100k. That doesn’t send a great signal when the company is trading at one cent a share – literally the lowest price possible.
  • The group financial director of Sebata Holdings (JSE: SEB) has resigned with immediate effect. The current CEO will take over that role as well.
  • The mandatory offer period has closed for Brikor (JSE: BIK), with the offer having been triggered by Nickel Trading moving through the statutory threshold of 35%. Nikkel holds much more than that in practice, as they triggered the offer through a deal that got them to over 68% of the shares in issue! The TRP has issued a compliance certificate for the mandatory offer.

Ghost Bites (BHP | Kore Potash | Motus | Richemont)

The Finance Ghost
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Ghost Bites (BHP | Kore Potash | Motus | Richemont)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

BHP takes a knock in metallurgical coal (JSE: BHG)

Production of other commodities is in line with guidance at the halfway mark of the year

If you know anything about mining, you’ll know that it is fraught with production risks and things that can go wrong. Production updates are big news, as the mining house can control production but cannot control commodity prices. In many cases, management is measured based on production rather than anything else.

BHP is halfway through its financial year and is showing a strong first half in copper, iron ore and energy coal. It hasn’t been a good half for metallurgical coal due to a combination of planned maintenance and low starting inventory values. Full year guidance for BMA (the metallurgical coal) asset has been decreased, which means expected unit costs of production also go up. To achieve an appealing cost per unit, production needs to be running at high levels. This is true for any commodity.

Another headache for BHP is a sharp fall in nickel prices, leading to tricky production decisions. They refer to the problem as being a number of structural changes in the nickel industry and a cyclical low in realised pricing. Average realised prices for nickel are down 24% year-on-year for the first six months of the year.

Comparing the BHP share price to other mining giants like Glencore and Anglo American reveals that even when buying the large “diversified” groups, you still need to understand the underlying exposures:

Kore Potash: still awaiting PowerChina’s EPC proposal (JSE: KP2)

In the meantime, the CEO and CFO have both left the company

Doing business in a place like Republic of Congo is no joke. Not only does it take forever to get a proposal to build a mining operation because of all the complexities involved, but there are also notoriously difficult government departments to manage.

You can imagine how delicate the position is when the SENS announcement talks about having a “moral guarantee” from the government to keep supporting the project despite milestones not having been met, as well as the importance of a ceremony that was held at the site and attended by dignitaries.

Moving on from politics, Kore Potash has had its own management challenges. The CEO resigned in October 2023 and the acting CFO in December 2023. The current chairman has assumed the role of CEO and a “non-board CFO” has been appointed as well. The company is trying to save on costs and is avoiding making commitments to new people until the financing proposal for the project has been received from the Summit Consortium.

That funding proposal isn’t going to happen until the Engineering, Procurement and Construction (EPC) proposal is received from PowerChina. These contracts are exceptionally complicated and need to manage the risks for both parties. When you read of major construction companies losing a fortune or even going bankrupt, it’s usually because a specific contract went really badly. This is why PowerChina is investing heavily in getting the contract proposal right, including having boots on the ground for months now to properly assess everything from the design of the facility itself through to service corridors

PowerChina has confirmed that it has received all required information and that internal reports are being finalised. It’s do-or-die for Kore Potash, as I can’t see the project or the company surviving if this contract isn’t finalised and the financing proposal isn’t obtained shortly thereafter.

Motus confirms a substantial drop in HEPS (JSE: MTH)

The market seemed to fully expect this, with the share price in the green for the day

The car business is cyclical. Sales are impacted by all kinds of factors, ranging from interest rates through to inflation. The aftermath of the pandemic was a great time to sell cars because of supply shortages, forcing consumers to really pay up for new vehicles. Of course, distortions like that eventually experience a correction.

This correction has come to Motus, with the market seemingly expecting it based on the share price actually closing higher for the day despite HEPS for the six months to December 2023 falling by between 20% and 30%.

Interesting strategic nuggets include the company acknowledging oversupply of vehicles from the manufacturers, leading to discounts on new vehicles and a negative impact on margins. This is a complete turnaround from the post-pandemic supply shortages.

Despite this, the announcement notes double-digit revenue growth and stable operating profit for the six months to December 2023, so that doesn’t really make sense in the context of the commentary on pricing. The drop in earnings is mostly being attributed to higher financing costs because of working capital tied up on showroom floors and vehicles in the car rental business. Acquisitions made by Motus have also driven debt higher.

They are looking to reduce the rental fleet and unlock working capital savings. This should come through in the second half of the financial year as this is a seasonal business.

Unexpected riches at Richemont (JSE: CFR)

The market got this one totally wrong based on other luxury brands

Richemont is a gigantic company. To see a group this size put a 10% gain on the share price in one day is extraordinary. The sales update completely blew the market away, along with anyone who might have had a short position. Such a position would’ve been pretty logical based on what we’ve seen from other luxury brands like Burberry.

Of course, if the markets were easy, you wouldn’t even be bothering to read this.

For the three months ended December 2023, Richemont managed to grow sales by 8% at constant exchange rates and 4% at reported rates (being euros). The important news is that the company achieved growth across almost all regions, including the Americas where luxury has had a wobbly.

Asia Pacific grew 13% in constant currency. China, Hong Kong and Macau were good for a combined 25% growth. Europe fell by 3% with an overall reduction in tourist spending. The Americas grew by 8%, with Richemont believing that part of this is domestic purchasing by Americans rather than spending abroad (with Europe suffering as a result). It was Japan that really shone though, growing 18% in this quarter despite a whopping 43% growth in the prior year. Middle East & Africa grew 10%, with the UAE and Saudi Arabia as strong contributors.

I’m not surprised that online retail was down 5% in constant currency. It’s a very small component of the group, thankfully. I suspect it will stay that way as I don’t understand why people would buy a timepiece that costs the same as a family car (and sometimes a family home) online! The retail channel grew 11% and the wholesale and royalty channel was up 4%.

As a final comment on online, YOOX NET-A-PORTER (recognised as a discontinued operation) saw sales drop by 11% on a constant currency basis. Richemont notes a “continuing challenging environment” for pure online businesses in this space.

Looking at product categories, the Jewellery Maisons did particularly well with an increase of 12%. Specialist Watchmakers managed 3% and the Other segment dropped 1%. The Jewellery Maisons business contributes over 70% of sales revenue, so the segment that needed to perform is the one that did perform.

If we consider the nine months to December 2023 as a year-to-date view, sales increased 11% at constant rates and by 5% at actual rates.

All eyes will be on LVMH later this month. Where Richemont is genuine luxury (with a number of watchmaking brands that I can’t even pronounce), LVMH is exposed to mass affluent businesses like Sephora cosmetics stores and Hennessy Cognac. I could be way off the mark here, but I don’t think this positive surprise from Richemont is a guarantee that LVMH is going to deliver good numbers.

Little Bites:

  • Director dealings:
    • The company secretary of Trematon Capital Investments (JSE: TMT) sold shares worth R277k.
    • The matchy-matchy buying at Invicta (JSE: IVT) continues, with the CEO Steven Joffe and Dr. Christo Wiese each buying shares worth R202k in the company.
    • The chairman has bought shares in Life Healthcare (JSE: LHC) worth R185k.
    • An executive director of Santova (JSE: SNV) has bought shares worth R56.5k.
    • An associate of the CEO of Mantengu Mining (JSE: MTU) has bought shares worth R35k.
  • There’s a new executive management structure at PPC (JSE: PPC), including two major hires of internationally experienced executives. Although much progress has been made in turning the group around, it shows how much still needs to be done that there’s space for a Chief Strategy Officer and Chief Revenue Officer.
  • Sappi (JSE: SAP) is making some changes to its balance sheet by issuing a notice of early redemption for 5.25% convertible bonds issued by Sappi Southern Africa. Holders of bonds who do not want them to be redeemed would need to convert them into equity instead. The value of the bonds outstanding is well in excess of R1.1 billion.
  • If Kibo Energy (JSE: KBO) had a dollar for every time that the company releases a SENS announcement, by now the share price would be higher than one cent a share. The latest announcement relates to an extraordinary general meeting to amend rights related to shares. If you’re a shareholder in this thing, go check it out.
  • Steve Phiri served as CEO of Merafe (JSE: MRF) and then as a non-executive director some years ago. He has also been the CEO of Royal Bafokeng Platinum. Phiri has now joined the board of Merafe once more as a non-executive director.
  • In the unlikely event that you are a shareholder in Cafca Limited (JSE: CAC), one of the most illiquid stocks on the JSE, you may be interested in their financial results. The short-form announcement gives no details at all, which might explain why nobody ever trades in this thing.
  • Dan Marokane is stepping down from his role as interim CEO of Tongaat Hulett (JSE: TON) to take the reins at Eskom, perhaps the hardest job in the country. He will work with the team until the end of February to assist with the handover to current CFO Rob Aitken who will move into the CEO role.
  • Chrometco (JSE: CMO) has renewed the cautionary announcement linked to “circumstances relating to a material subsidary of the company” – it’s suspended from trading anyway, with caution or otherwise.
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