In the week of the one-year anniversary of Russia’s invasion of Ukraine, it is worth pondering the impact this event has had on the global economy and how it is likely to play out in the future. Chris Gilmour digs in.
Without wishing to labour the point, and without indulging in whataboutism, let me be clear that I view Russia’s invasion as being an act of naked aggression that goes entirely against all norms of a rules-based society. And if Russia succeeds in Ukraine, that won’t be the end of the story. Far from it. Moldova, Romania and Poland will be next, regardless of their EU/Nato membership.
To be sure, the Americans have no doubt gotten involved in similar atrocities over the years, such as their involvement in the Balkans, Iraq and Libya to name but a few, but the economic repercussions were relatively contained. This doesn’t make Russia’s involvement any more palatable, however, as two wrongs don’t make a right.
It has been said that when war comes, the first casualty is the truth. And that is very true, from a variety of perspectives. There can be little doubt that Vladimir Putin firmly believes his own rhetoric when he talks about re-incorporating Ukraine into the greater Russia, regardless of the fact that Ukraine has been a sovereign country ever since the fall of the USSR.
Already, this campaign has claimed many lives on both sides.
Russia does not disclose casualties but the Armed Forces of Ukraine estimate that approximately 135,000 Russian soldiers have been killed so far. Ordinarily, this would be regarded as a massive setback for any country, until one realises where those casualties are concentrated amongst the Russian forces. These are not primarily soldiers from Moscow or St Petersburg, but tend to be conscripts from faraway areas of the Russian Federation such as Chechnya for example. Recently, these forces have been augmented by The Wagner Group of mercenaries, which in turn have been recruiting troops from Russian prisons.
Russia, like China and Japan, is suffering from de-population. As a direct consequence of the Lewis Turning Point, there physically aren’t enough people in the country to keep the economy ticking over, nevermind losing them on the battlefield. The stories of Ukrainian children being abducted and taken back to Russia are not just urban legend. This is one of the few ways left for Russia to try to reverse its current de-population trend and only time will tell if it has succeeded.
The one factor that has astonished western military experts about this whole campaign is the relative ineffectiveness of the Russian armed forces. A year ago, most experts would have given Ukraine virtually no chance against the big bad Russian bear. But within days, it became glaringly obvious that the Russian military wasn’t even close to the might of the old Red Army that trundled into Hungary in 1956 and Czechoslovakia in 1968. This is a hollowed-out version that lacks basic logistics capabilities, that has yawning gaps in its non-commissioned officer ranks and where motivation levels among recruits is exceedingly low. Putting these and other factors together adds up to a dismal cocktail.
And yet, Putin keeps throwing ever more manpower against Ukraine. His empty threats regarding nuclear retaliation carry even less weight than they did when first he first uttered them a few months ago. The west realises that he’s just bluffing. But eventually there will come a point where Russia physically runs out of people in the necessary demographic to maintain its presence in Ukraine. That point is perhaps not too far off now.
If this hypothesis is correct, and Ukraine starts making noticeable incremental territorial gains during the spring and summer, we can reasonably expect desperate counter-measures from the Russians. These may include the use of chemical weapons and so-called “dirty bombs”- ordnance wrapped around small pieces of radioactive material.
There is no room for negotiation on either side. Ukraine is determined to have its territory back to pre-2014 levels and is not prepared to discuss the matter. It is particularly keen to have the Crimean Peninsula back. The Russians are equally determined not to give an inch. However, if enough pressure can be brought to bear on Russia in the form of economic sanctions coupled with crushing defeat on the battlefield, it will have no choice but to retreat.
Throughout its long history, Russia has gone to war with many nations, which is hardly surprising, considering its extensive land mass that borders many other countries. And its track record in these wars is not inspiring, other than in World War 2, when it came back after losing many millions on the battlefield to defeat Nazi Germany on the Eastern Front. Russia/the USSR has been beaten in many wars over the centuries. It is not and never has been invulnerable. For the sake of a long-lasting peace, it is important that Russia is soundly defeated in Ukraine.
This article reflects the views and opinions of its author, Chris Gilmour.
AngloGold tanks 7% on a rough day for mining (JSE: ANG)
I’m so glad that I cut my gold exposure a few weeks ago
I’ve given up on gold. After the rally at the start of the year, I decided to recycle my capital into more lucrative investments, like collecting leafblowers or vintage vacuum cleaners. I’m now convinced that almost anything is a better choice than gold miners.
With another horrible day on the market for these miners and a 7% drop at AngloGold after releasing results, nothing here is proving me wrong.
Despite gold production increasing by 11% in 2022 and all-in sustaining costs per ounce only increasing by 2%, adjusted EBITDA was lower. Why? Because the gold price just refuses to do well in a rising rates environment. It has failed as an inflation hedge and gold has limited utility outside of inflation hedging and jewellery.
The positive element to this story lies in free cash flow, which looks much better year-on-year.
I have no regrets in exiting this industry.
Bidcorp: food service is lucrative (JSE: BID)
The share price has gained another 2% after results were released
The food service industry is a beautiful thing. Restaurants, hotels and even hospitals aren’t going to send someone to the shops to go and buy supplies and ingredients. Instead, they let companies like Bidcorp do the hard work.
This puts Bidcorp at the perfect point in the value chain – literally the shovel in the restaurant gold rush. Restaurants come and go, but Bidcorp doesn’t. The same is true for Sysco ($SYY), the North American equivalent to Bidcorp. We’ve researched this company in Magic Markets Premium, a research platform that you can access at a really affordable rate.
Bidcorp is more than just a restaurant supplier. Only 42% of revenue is from hotels and restaurants, with a further 12% from fast food joints. Other major segments include butcheries, caterers, other wholesalers and healthcare providers.
Another important thing to know about Bidcorp is that the company offers genuinely global exposure to investors, with a small percentage of group revenue (5%) generated in South Africa. As rand hedges go, this is a goodie.
The market knows how good the business is, which is why it trades at such a high multiple that any slowdown in earnings growth gets punished with significant volatility:
Of course, the pandemic drove a massive drop in the share price. Hindsight is perfect, as this would’ve been a good choice to jump into. Recent momentum is sharply upwards and I always get nervous buying a chart like that. Huge climbs tend to correct themselves and consolidate.
Looking at the six months ended December, earnings look fantastic with revenue up 28.1% and HEPS up 45.5%. Cash generated from operations increased by 35.6%. This is why the market has gotten excited.
The “laggard” in this result was the Emerging Markets segment, which includes China that was heavily impacted by lockdowns in this period. Even in that segment, revenue grew 10.2% and trading profit was up 13%. The reopening in China has been part of the recent share price momentum, though it’s worth highlighting that China is also a relatively small contributor to group revenue.
The biggest part of the business actually sits in the UK (25%) and Australia (16%).
Though I would be wary of buying the recent jump, this is one of the ways on the JSE to truly give your money a passport.
Choppies expects a major drop in earnings (JSE: CHP)
Volumes are down and competitors are squeezing Choppies on price
In grocery retail, inflation can either help you or kill you. It all depends on the ability to increase prices, which in turn depends on product quality and the resilience of the customer base.
A less differentiated retailer can get into trouble in these conditions, especially when focusing on lower income consumers who are exceptionally price sensitive.
Choppies has suffered a drop in volumes as a direct result of stiff competition in a tough environment. Pricing increases couldn’t mitigate this impact, which is further proof that Choppies has little ability to hang on to customers for any reason other than price competitiveness.
For the six months ended December, HEPS is expected to be between 29% and 39% lower. Chopped, indeed.
Coronation puts a number on the tax dispute (JSE: CML)
Destination: Constitutional Court
Coronation’s market cap is R10.8 billion. The tax dispute with SARS is estimated to be worth between R800 million and R900 million, based on a decade’s worth of profits being attacked.
That’s not terminal for the company by any means, but it is terminal for the interim dividend.
The fight isn’t over yet. Coronation is going to apply to the Constitutional Court for leave to appeal against the Supreme Court of Appeal judgment.
Although it’s been on a rollercoaster ride this year, the share price is marginally higher year-to-date. Longer term performance is ugly, with a 60% drop over five years.
Grindrod continues to grow strongly (JSE: GND)
Although HEPS is up substantially, the market perhaps wanted more
A share price is all about expectations. A share price movement is all about the difference between reality and those expectations. With a 2.5% drop in the price after releasing a trading statement, it seems that the market was hoping for a bit more from Grindrod.
For the year ended December, HEPS will be up between 37% and 43%. Detailed results are due on 2nd March.
After a sharp increase during 2022, the share price seems to have run out of gas:
Sasfin keeps disappointing (JSE: SFN)
In a year that was amazing for banks, Sasfin missed out
If you really don’t like money, you could consider being a long-term investor in Sasfin. Over three years, you would’ve made a whopping 4% in total (plus dividends). In the past year, when other banks have been flying, you would be flat.
In a trading statement for the six months ended December, HEPS is down between 16.8% and 24.7% vs. restated earnings. The restatement had a huge impact on prior period earnings, making them much higher than previously reported.
Not a single Sasfin share changed hands despite the update coming out at 4pm, so that probably tells you everything you need to know.
Standard Bank waves its flag once more (JSE: SBK)
As has been the trend in (most) local banks, earnings are up
In the year ended December, Standard Bank benefitted from the major trends that I’ve been highlighting as bullish for banks: inflation (hence larger balance sheets at corporates and even individuals) and significantly higher interest rates.
We aren’t at the point yet where interest rates are really hurting the credit loss ratio, so banks are performing beautifully (Sasfin excluded).
This trading statement doesn’t give us many details, but we know that HEPS for the year is up between 30% and 35%. Detailed results are due on 9th March.
Little Bites:
Director dealings:
A director of Old Mutual (JSE: OMU) bought shares worth nearly R15k.
Directors of ultra-obscure company Nictus (JSE: NCS) bought shares worth R1.75k.
Kibo Energy (JSE: KBO) sent out a notice for an Extraordinary General Meeting, as the company wants to give the directors the authority to issue a lot of new shares as part of the company’s growth strategy.
Jasco Electronics (JSE: JSC) released results for the six months ended December. It was a very unhappy period in which revenue fell by 14% and the group swung from a profit of R4.7 million to a loss of R23.8 million. The situation is tense, as the company has breached its loan covenants with the Bank of China. CIH is looking to take the group private, so Jasco is likely to leave our market anyway.
Hammerson Plc (JSE: HMN) has had to restate its 2021 financial results based on an accounting interpretation of forgiveness of rental payments during Covid. The property fund’s earnings for FY21 have been restated from £80.9 million to £65.5 million. The change in policy will have a positive impact on FY22 earnings, so watch out for a significant positive year-on-year swing from this change.
The Competition and Markets Authority (CMO) in the UK has approved the merger of Capital & Counties Properties (JSE: CCO) and Shaftesbury without conditions.
As part of an incredibly complicated sequence of events, Safari Investments (JSE: SAR) shareholders will be asked to vote on the company repurchasing a large number of shares for a total price of R311 million. With a market cap of only R1.8 billion, this is big.
Famous Brands (JSE: FBR) has concluded its transaction to buy property from the group founders for R181 million.
Homechoice (JSE: HIL) is highly illiquid, so I’ve included the trading statement under Little Bites as you would have to make many little bites to build up any kind of position. For the year ended December 2022, HEPS grew by between 30% and 50%. The bid-offer spread is wider than the average highway, so good luck with trading this one.
If you happen to be a Trustco (JSE: TTO) shareholder and would like all the details on the accounting restatements that were necessary after the company lost its dispute with the JSE, then refer to the trading statement that was issued on Wednesday. The net asset value (NAV) per share is much higher in the latest numbers, with the share trading at a large discount to NAV anyway.
Sasol delivered a mixed set of results for the first six months of the 2023 financial year, supported by oil and refining tailwinds offset by lower volumes and higher feedstock costs.
No loss of life since October 2021
~550MW renewable energy power purchase agreements conclude in South Africa
R18 billion spend with black-owned suppliers
Invested R780 million in socio-economic and skills development
Venture Capital Fund launched supporting low carbon strategy
Earnings before interest and tax (EBIT) of R24,2 billion
Core headline earnings per share up 9% to R24,55
Interim dividend of R7,00 per share declared
The impact from the global weaker economic growth, disrupted supply chains, depressed chemical prices and the resultant higher input costs impacted the Chemicals business negatively. Performance of our South African value chain was muted given the scheduled total East factory shutdown at Secunda and operational variability experienced, mainly due to lower productivity and coal quality in our Mining operations, contributing to lower volumes for the six months. The safety of our people and stability of our operations is a key priority. The company will continue to focus efforts on improving business performance to maximise profitability for the full year.
“We navigated several challenges during the period, including safety and operational stoppages at our Mining operations, power supply interruptions which also impacted our suppliers and customers, weaker global economic growth, disrupted supply chains and higher feedstock and energy costs. The last two factors had a particularly severe impact on the profitability of the Chemicals Eurasia and Chemicals America segments,”
said Fleetwood Grobler, President and Chief Executive Officer, Sasol Limited.
Earnings before interest and tax (EBIT) of R24,2 billion remained in line with the prior period, mainly due to a strong pricing environment which was offset by lower volumes and increasing input cost pressures, with declining demand for chemicals globally. Earnings benefitted from gains of R5,1 billion on the valuation of financial instruments and derivative contracts offset by remeasurement items of R6,4 billion.
Remeasurement items include impairments of our Secunda liquid fuels refinery cash generating unit (CGU) (R8,1 billion), South African Wax CGU (R0,9 billion) and China Essential Care Chemicals CGU (R0,9 billion) and a reversal of impairment of our Tetramerization CGU (R3,6 billion) in the United States of America, as well as a profit on partial disposal of an interest in the Area A5-A offshore exploration license in Mozambique (R266 million) and the realisation of foreign currency translation reserves following the liquidation of subsidiaries (R251 million).
“I am excited about the progress we have made towards achieving our 30% greenhouse gas emission reduction target. We have concluded power purchase agreements (PPAs) for the purchase of a significant quantity of renewable energy in South Africa totalling approximately 550 MW. In Mozambique, our gas drilling campaign is progressing ahead of plan, providing us with increased feedstock flexibility up to 2030. Our Sasol ecoFT business is also making good progress, and we have entered into several studies to determine the feasibility of producing sustainable aviation fuel (SAF) from green hydrogen and sustainable carbon sources,” concluded Grobler.
Note: this article was sponsored and written by Sasol
Adcock Ingram has delivered a masterclass here, with great earnings and dividend growth off relatively modest top-line growth.
It’s funny how just one product can cause major swings, with Panado demand normalising and volumes down by 5.4% in the Consumer business as a result. Thanks to average selling price increases of 9.8% though, turnover was higher and trading profit grew by 7.1% as costs were well managed.
In the OTC business, turnover was up 15.3% with volume growth in brands like Allergex. Although gross margin was under pressure from production costs and the weaker currency, trading profit still increased by 8.5%.
The largest segment is Prescription, which increased turnover by 9.4%. Combined with a higher gross margin, the net impact was a substantial 37.4% jump in trading profit.
The disappointing segment was Hospital, which saw turnover decline by 2.2%. Still, with gross margin going in the right direction, trading profit improved by 10%.
As you can see, the trading profit performance was impressive across the board and Adcock Ingram really did a great job here in tricky conditions. With the Single Exit Price increase of just 3.28% this year, cost control will be critical in this industry. The company has warned that gross margin compression is almost unavoidable.
The interim dividend is 20% higher at 125 cents per share and the share price was trading at just under R53.00 in afternoon trade.
Assemble, Avengers! (JSE: AEG)
A 13.4% rally was the reward for punters
I’m old enough to remember when Aveng was trading at one cent per share. Literally. In the heat of the pandemic when the Fed was making it really easy for everyone by letting money fall out of the sky into the economy, the Aveng fans called themselves the Avengers.
It’s worth remembering where Aveng came from:
Buy and hold, they said. It will be fun, they said.
You can’t see it on the chart, but the share price is down 28% over the past year. This is despite Tuesday’s rally. In case you’re wondering what happened to the “one cent” share price, there was a huge share consolidation during the pandemic.
Moving on to results for the six months to December, someone really needs to help Aveng with what “flat” means. When earnings drop from R53 million to R48 million (-9.5%) that’s not “flat”:
Corporate nonsense aside, the business is clearly more profitable and has cash in the bank. The metric they don’t include in the summary is “normalised earnings” which dropped from R82 million to R44 million. So…is it more profitable?
I think the market focused on the debt. R125 million was repaid in the period. There’s another R353 million of “legacy debt” that will be dealt with by the proceeds of the Trident Steel disposal. The trade finance facility will also be settled.
The focus going forward is on McConnell Dowell in Australia and Moolmans in South Africa.
BHP on the wrong end of iron ore and copper prices (JSE: BHG)
Attributable operating profit is down 32%
Managing a mining giant isn’t easy. There isn’t much you can do about commodity prices, so you have to focus on controlling production, expenses and capital allocation.
Despite commodity prices moving against BHP in the six months ended December and revenue dropping by 16%, the company still achieved an EBITDA margin of 54%. Margins were under pressure though, as EBITDA was down 28% year-on-year.
After $3 billion found its way into capital expenditure, there was $3.5 billion in free cash flow for shareholders to enjoy.
Net debt is at $6.9 billion, which is towards the bottom of the target range of $5 billion to $15 billion. An interim dividend of $0.90 per share has been declared, equivalent to a 69% payout ratio.
BHP tells a cautionary tale for the second half of the year, noting a volatile operating environment and a global slowdown in the wake of anti-inflationary policies (i.e. higher interest rates). Much of the commodity demand depends on China.
KAP Industrial Holdings reports a drop in HEPS (JSE: KAP)
Safripol and Restonic had a particularly tough time
KAP Industrial Holdings is a well-diversified business. The downside is that one of the businesses is usually having a tough time, so the company trades in a frustrating price range that now sees it near the 52-week low of R3.68. The price closed at R3.75 after releasing results, down 3.85% on the day.
Revenue increased by 12% in the six months to December. This doesn’t help when operating profit falls by 8%, driven by a 26% decline in Safripol based on lower volumes and pressure in Restonic as well. If you read further down the report, you’ll realise that profitability took a knock across almost the entire business, with revenue up and operating profit either flat or slightly down in several divisions.
With finance costs up sharply, the impact was amplified at HEPS level, down 17% year-on-year.
The cash story is the worst one of all, with cash flow from operations down by 96% due to a R2.2 billion temporary absorption of working capital. Investors will be hoping that “temporary” is the operative word there.
The company describes the near-term outlook as “challenging and uncertain” – but they are confident in the group. Still, there’s no obvious reason why the group’s operating environment should materially improve in the second half of the year, as the macroeconomic pressures aren’t disappearing.
Kumba reports a 46% drop in HEPS (JSE: KIO)
This is despite average realised FOB export prices 13% above the benchmark
Demand for Kumba’s high-grade iron ore helped the company achieve an average price of $113 per wet metric tonne, which is 13% above benchmark prices. With production lower across the group and export sales down by 9%, that wasn’t enough to save this result.
Unit costs increased sharply, driven by inflation and lower production. EBITDA margin fell from 63% to 50%, a situation that would’ve been worse without Kumba’s cost saving efforts.
Free cash flow was 66% lower at R10.4 billion. Total dividends for the year fell by 61% to R40.
With a closing price of R540, this puts Kumba on a trailing dividend yield of roughly 7.4%.
Motus earnings are up, but watch the balance sheet (JSE: MTH)
There’s a lot more debt in the system now
In the six months ended December, Motus achieved revenue growth of 14% and EBITDA growth of 25%. Although operating profit was 22% higher, attributable profit only increased by 9%.
The difference lies in the interest costs (which more than doubled), with Motus having taken on far more debt as part of making strategic acquisitions. Net debt to equity has increased from 30% to 75% and net debt to EBITDA is up from 0.9x to 1.6x. More debt was also required for higher levels of working capital. Of the bank funding (rather than floorplan funding), only 9% is at fixed rates and the rest is floating.
Whilst growth in HEPS of 13% is nothing to get upset about, metrics like free cash flow (down from R2.9 billion to just R425 million) spooked investors. The dividend was up only 9% and investors don’t want to see a dividend growing at a slower percentage than revenue, as it means that the top-line story isn’t being enjoyed by shareholders.
In terms of market share, Motus holds 20.5% share of the retail new car market in South Africa, which contributes 65% to revenue and 78% to operating profit. The company doesn’t disclose the share in the UK and Australia but notes that it maintained market share in those countries.
Growing organically is the “cheap” but difficult way to do it. Motus uses acquisitions to grow faster, with two deals in this period. One was for Motor Parts Direct in the UK, a substantial deal for Motus. The other was a bolt-on acquisition of three Mercedes Benz passenger dealerships and one commercial vehicle dealership.
With the share price down 3%, the market must have a concern or two about this balance sheet. I know that I do.
NEPI Rockcastle: record operating income (JSE: NRP)
Management is bullish about the momentum continuing
Despite the challenging economic background and the obvious problems in Eastern Europe related to Ukraine, NEPI Rockcastle enjoyed resilient consumers in Central and Eastern Europe (CEE) who spent more per visit to the malls. With record net operating income in the year ended December 2022, the management team expects growth to continue.
The company highlights that regional malls play a huge role in CEE, which is different to the high street culture in Western Europe. That sounds rather similar to South Africa!
With a loan-to-value ratio of 35.7%, the NEPI Rockcastle balance sheet is in very good shape.
Distributable earnings per share for the year was 52.15 euro cents, which was 51.5% higher than in 2021. An adjustment is needed for a once-off item, which would see a recurring view on earnings reflecting 20% growth. That’s still impressive.
Sasol was a mixed bag in this interim period (JSE: SOL)
Local supply chain challenges dampened the earnings party
Here’s a little reminder of how crazy things got in the pandemic for Sasol vs. where they are now:
This chart hides the recent momentum, which has been poor to say the least. Sasol has lost 15.7% in the past six months as local operational issues have plagued the company.
We now have results for the six months ended December, a period during which oil prices helped but chemical prices didn’t. Pressure on input costs hit the chemicals side of the business and lower coal quality in the mining business contributed to lower volumes.
This resulted in a flat EBIT performance of R24.2 billion. There were valuation gains on financial instruments of R5.1 billion, more than offset by impairments with Secunda liquid fuels refinery as the main culprit (R8.1 billion).
You have to read really carefully when lookin at Sasol’s numbers, with the hedging at the corporate centre making a huge difference:
The mixed result means that earnings per share was down 3.1% year-on-year, but headline earnings per share (which excludes impairments) more than doubled to R30.90. The group reported core HEPS growth of 9%, coming in at R24.55.
The interim dividend is R7.00 per share, so you don’t get a particularly exciting payout ratio here. Sasol is a hungry animal in terms of capital expenditure and you can see this impact on the cash that eventually finds its way to shareholders. If you read the detailed results, you’ll see that Sasol might end up spending more than guidance on capex this year due to inflationary pressures.
The market was clearly expecting more here, with Sasol down nearly 4% by lunchtime.
Open market bids for Salungano (JSE: SLG)
RBFT Investments wants to increase its stake
RBFT Investments holds an 18.1% stake in Salungano Group and wants to make that bigger. The intent is to eventually acquire all the shares and delist the company. For now, the company wants to acquire up to 60 million shares at R1.40 per share and will be doing so on the open market.
This is an exempt partial offer, not a general offer. If you hold Salungano shares and want the price, you just need to offer the shares on the screen accordingly.
Sibanye wants New Century Resources (JSE: SSW)
Sibanye already holds 19.9% and has made an offer for the rest
Sibanye-Stillwater (which everyone just calls Sibanye) already owns 19.9% in New Century Resources, making it the largest shareholder in the company. New Century is an Australian base metal producer and a top-15 global zinc producer, operating a tailings operation in Queensland.
Sibanye wants to own all of it, which is in line with the company’s “circular economy” strategy that includes a goal to be a global leader in tailings retreatment and recycling.
If all New Century Resources shareholders accept the offer, then Sibanye will need to cough up US$83 million for the deal.
The offer price is A$1.10 per share, a whopping 42% higher than the prior day’s closing price.
Sibanye also released a trading statement and production update for the year ended December, reflecting a drop in HEPS of between 46% and 51%. This reflects the gold sector labour issues in South Africa and the severe weather event at Stillwater. The gold strike had a massive impact, with production down by 50% in that part of the business.
The share price fell 5.5% on the day to close at R39.24. For reference, the 52-week low is R39.24.
Super Group keeps doing well (JSE: SPG)
Another 2% gain takes the year-to-date performance to nearly 23%
For the six months ended December, Super Group’s revenue increased by 34.6% and EBITDA was up 24.2%. This means that margins came under pressure, but it also means that earnings grew considerably.
As we head further down the income statement, it gets exciting again with HEPS up by 30.1%.
The company certainly took advantage of favourable conditions, ranging from strong supply chain demand in South Africa in the transport business and higher revenues per load in Europe through to an increase in new car sales thanks to improved vehicle availability in South Africa and the UK. From an accounting perspective, LeasePlan in Australia was consolidated for the full six months.
Management sounds bullish after this result!
Texton: the market price doesn’t lie (JSE: TEX)
The fund trades at less than a third of NAV
After the initial news broke of the interim dividend becoming only a distant memory, Texton has now released detailed numbers.
The fund is following a rather unusual strategy, with a direct property portfolio valued at R2.2 billion and indirect investments valued at R538.5 million. Essentially, capital has been recycled from the direct portfolio into the indirect portfolio, which is how Texton has gained exposure to the US market.
Although distributable earnings grew by 5.24%, HEPS fell by 28.9% and there is no dividend per share for this period vs. 10 cents in the comparable period. The net asset value (NAV) per share increased by 2.7% to 609.51 cents. The share price trading at just R2 tells the story, less than a third of the NAV per share.
I guess this is what happens when you take shareholder capital and invest it in funds like the Blackstone Real Estate Income Trust instead. I still don’t see a single logical reason why Texton is pursuing this strategy instead of returning capital to shareholders.
The loan to value ratio is at least healthy, coming in at 26.9%.
Tiger Brands is roaring, for now at least (JSE: TBS)
For how much longer can consumers keep this up?
For the four months to January, Tiger Brands managed to increase revenue by a whopping 17%. Here’s the real kicker though: 18% is due to price increases and volumes fell by 1%.
The volume performance obviously varies significantly at category level. Snacks & Treats did well for example, whereas the Baby division reported lower volumes and a drop in market share.
Load shedding cost pressures are still coming for consumers, with costs of R27 million for generators in this period. Tiger Brands hasn’t “yet” recovered this in price, which suggests that food inflation isn’t going anywhere. Each day of stage 6 load shedding costs Tiger Brands R1.5 million in incremental costs.
To prepare for stages 6 – 8 (something most of us are living in denial of), Tiger Brands needs to invest a further R120 million in additional generating capacity. To make it worse, the bulk of this investment would be on diesel and water storage capacity to mitigate the impact of load shedding on the municipal water supply.
The inflation outlook is low double digits in the second half of the financial year. Of course, this depends on Eskom not getting even worse.
For the six months to March, Tiger Brands expects solid operating income growth. I’m once again surprised by the company’s ability to keep growing earnings in this inflationary environment.
At what point will consumers simply break? Or will the pain keep going elsewhere, like into discretionary retailers?
Transpaco reports a major jump in HEPS (JSE: TPC)
The dividend isn’t far behind, up more than 41%
Transpaco isn’t the most liquid stock around, so the share price chart includes those typical horizontal periods where not much happens in the share price:
Still, the 32% gain over the past year has been backed up by earnings. For the six months to December, HEPS increased by 45% to 316.7 cents and the dividend increased by over 41% to 85 cents per share. This was achieved off revenue growth of 19.8%, so this is a perfect example of operating leverage (a percentage change in revenue leading to a higher percentage change in profits because of fixed costs in the structure).
Operating margin expanded from 9.0% to 10.0%. Those aren’t the biggest margins around, but at least they are heading in the right direction.
To add to the happy news, the gearing position (level of debt) improved.
Little Bites:
Director dealings:
Two directors of Spar (JSE: SPP) sold shares worth a total of R1.27m that vested under a conditional share plan, but the announcement doesn’t specify whether this was just the portion to cover taxes.
An associate of a director of Newpark REIT (JSE: NRL) has acquired shares worth R21k.
An associate of a director of Tradehold (JSE: TDH) has acquired shares worth R13k.
Steinhoff (JSE: SNH) has agreed to settle litigation in Europe for EUR202 million. The share price dropped another 3% to 31 cents, which means it is now only 31 cents too expensive.
Shareholders of Premier Fishing and Brands (JSE:PFB) have approved the acquisition of an additional equity stake in Talhado Fishing Enterprises.
The publication of the Rebosis Property Fund (JSE: REB) business plan has been postponed for the fifth time. It is now expected by 3rd March.
Before I delve into production numbers at Anglo American Platinum (Amplats), I have to point out the relationship between the PGM prices and the USD/ZAR cross. The dollar basket price per PGM ounce fell by 8% and the rand basket price increased by 2%. Our currency depreciation obviously lends a helping hand to the Amplats business.
Despite this, production issues and lower volumes meant a 24% decrease in revenue. Those fixed costs sadly don’t disappear just because production is lower, so adjusted EBITDA fell by 32% and EBITDA margin decreased from 65% to 57%.
Headline earnings per share fell by 38% and net cash fell by 43%. With that combination, it’s perhaps not surprising that the dividend fell by 62%.
The share price only fell by 2% as these results were well telegraphed to the market ahead of time.
CA Sales Holdings jumped 7.5%
This FMCG group released exciting numbers
In a trading statement covering the year ended December 2022, CA Sales Holdings indicated that HEPS would be up between 29% and 34%. That’s a juicy growth rate by any standards, with an expected HEPS range of 76.89 cents to 79.87 cents.
After the share price closed 7.5% higher at R7.05, this is still only a Price/Earnings multiple of around 9x at the midpoint of guidance.
City Lodge is profitable again
But HEPS looks a little light vs. the share price
In case you’ve been living under a rock, the tourists are back and the good times are flowing. City Lodge is thrilled to see the end of COVID, with numbers that are back in the green.
If we exclude the once-off settlement for business interruption insurance, then City Lodge achieved HEPS for the interim period of between 12.6 cents and 14.5 cents. That’s a vast improvement from the loss-making comparable period that was ruined by the pandemic.
Still, with a share price of R4.81, that doesn’t seem like a particularly great outcome. Even if we double this period, a simplification of note when you consider an ongoing month-on-month recovery (mitigated to some extent by recognising that the summer holidays must be the best time for this business), then it’s on an annualised Price/Earnings multiple of 17.8x.
Hmmm….that’s rather a lot, isn’t it?
The share price closed 2.8% lower after this announcement.
A positive Mpact
A 6.5% rally rewarded shareholders on Monday
For the year ended December, revenue from continuing operations was up 7%. The underlying operations did even better than this, as the base period included the major distribution agreement that Mpact terminated. Without that impact, revenue would’ve been up by 15% and volumes by 6%, so the benefit of higher pricing is clearly visible.
The volume growth was all in the Paper business, as the Plastics business saw flat volumes year-on-year across most of that division.
The joys of operating leverage are being felt here, with earnings before interest and tax (EBIT) up by 23% year-on-year. The “I” in “EBIT” is a bit painful though, with net finance costs of R180 million in 2022 vs. R140 million the year prior, driven by increased average net debt and higher interest rates.
Due to capital expenditure and increased working capital, net debt increased from R1.756 billion to R2.327 billion.
Looking ahead, Mpact will be investing R1.2 billion in its Mkhondo Paper Mill in response to growth in demand from the South African export fruit sector. Mpact hasn’t been shy to invest in its operations in general, including in major solar projects.
In case you’re wondering about discontinued operations, the Versapak business is held for sale. The company reported 20% growth in revenue and a strong improvement in profitability from net earnings of R2 million to R65 million. This is encouraging for potential offers that Mpact might receive.
I would really love to tell you what the HEPS increase will be. Sadly, the formatting of the SENS announcement was a complete disaster, so I’ll just include it here for you to decide for yourself:
Either way, earnings are up strongly and the market liked that, even if nobody was quite sure how to read this.
Murray & Roberts says bye-bye to Bombela
Strong shareholder support was achieved
This is a short update for Murray & Roberts, but one that is too important to be buried in the Little Bites. The company desperately needs to make progress on fixing its balance sheet, with the disposal of Bombela Concession Company firmly part of that strategy.
At the general meeting of shareholders to vote on the deal, it received overwhelming support, with 99.988% of votes cast in favour of the transaction.
Clearly, this deal is moving forward.
No dividend at Texton
There’s an abundance of caution here
If you invest in a property fund, it’s usually because you want to earn a dividend. Sorry for you if Texton was your fund of choice, because the old dividend of 10 cents per share is but a distant memory. For the six months to December, there is no interim dividend at all.
This is despite an increase in distributable earnings of 5.2%.
The board wants to “conserve cash” and “manage its balance sheet liquidity through the current interest rate environment” – so time will tell how this plays out.
WBHO updates its earnings guidance
There is a strong year-on-year improvement in profitability
Construction group WBHO has finished its work on the accounting impact of the Australian tax position on the 2021 numbers.
Based on this calculation, HEPS from continuing operations is expected to be between 800 cents and 828 cents for 2022 vs. 591 cents in the comparable period, an increase of between 35% and 40%.
Little Bites:
Director dealings:
A director of a subsidiary of Tharisa has sold shares worth R221.5k
A prescribed officer of Barloworld has bought shares worth R142k.
An associate of a director of Huge Group has bought shares worth R58.2k.
If you are an Alviva shareholder, keep an eye on your trading account on 6th March. That’s when the cash from the implementation of the Alviva delisting should be yours for the taking.
Spear REIT repurchased 2.83% of shares in issue between July 2022 and February 2023, at an average price of R7.62 per share. The current share price is R7.13, so ongoing buybacks will hopefully continue to bring the average repurchase price down.
The City of Johannesburg Valuation Appeal Board has upheld the municipal valuation proposed by the city for Sandton City, so the rates bill for Liberty Two Degrees is higher than they would like. With a provision needing to be recognised for arrear rates and interest, the impact on the year ended December 2022 is 2 cents per share. On a closing share price of R4.45, that’s not a huge impact on the yield.
Jasco Electronics Holdings increased 9% despite reporting a headline loss from continuing operations of between -6.3 cents and -6.5 cents. For those looking for silver linings, at least the order book is a lot healthier.
In the latest episode of Ghost Stories, Renergen CEO Stefano Marani took a break from a busy capital raising schedule to have an in-depth conversation with The Finance Ghost. After the first half of the show focused on the background to the project and the importance of helium to the global economy, the second half looked at the capital raising strategy.
Topics covered in the show include:
Stefano’s background in investment banking in the pre-GFC days, with the events of 2008/2009 leading to a career shift and the eventual investment in what would become Renergen.
The future-proof nature of helium, including several examples of industrial and technological applications for which there is no known substitute.
The importance of government support over the lifetime of this project.
South Africa’s geographical and geopolitical positioning, both of which are helpful to Renergen.
The logistical challenges around transportation of liquid helium.
Renergen’s plan to self-power its operations, making it grid agnostic in a country that we know doesn’t have enough electricity.
The Cryo-Vacc and the helium tokens – what happened to these headline grabbers?
The group structure and the way this drives the capital raising strategy with asset-specific funding partners.
An overview of Phase 1 vs. Phase 2 of the project.
The use of accelerated bookbuilds and why they are a necessity in South Africa vs. rights offers.
The capital raising strategy going forward, including the pursuit of a full listing on a US exchange rather than an OTC listing.
The likelihood of achieving meaningful liquidity in the US vs. what a company like Karooooo has experienced on the Nasdaq.
And on a fun note – the positive social impact of Renergen’s sponsorship of local rally racing.
Helium is the second most abundant element in the universe, but on earth it is relatively rare. It’s a colourless, odourless, tasteless, non-toxic gas that is lighter than air. Helium is found in natural gas deposits, and it is produced by radioactive decay. For many years, helium was used primarily for balloons and other recreational purposes. However, in recent years, its importance in modern technology has grown significantly.
The primary use of helium today is in cryogenics, or “extremely cold temperatures”. It is the only element that remains liquid at near absolute zero temperatures, making it an essential coolant for many scientific and industrial applications, but also the only propellant for rockets making it integral to space exploration and launching satellites. It has the same purpose in a rocket as the gas in your deodorant can: to push the important contents out at high speed. Back on earth though, it is used in magnetic resonance imaging (MRI) scanners, superconducting magnets, and particle accelerators.
Being inert, it has many industrial uses such as in welding, manufacture of semiconductors, manufacture of fibre optic cables, in laboratory equipment and many more. The world became acutely aware of the global semiconductor shortage after COVID, and this gave rise to increasing geopolitical tension over Taiwan’s sheer dominance in their manufacture. What few realise is that one of the primary reasons for the shortage of semiconductors was the critical short supply of helium over the period, which is now creating a significant opportunity for helium producers given the US’s approval of the recent stimulus package to construct semiconductor factories in the US, thus creating significantly more demand for this gas.
As technology advances, the uses of helium will only continue to increase. Its unique properties make it an essential part of modern life, and its importance will only grow in the years to come.
New technologies such as quantum computing and fusion (endless clean energy) are only possible with vast quantities of helium, in much the same way that most modern nuclear reactors have a helium cycle to transfer the heat from the reactor to the steam boiler to eliminate the risk of contamination in the event of a malfunction.
Most of the elements on the period table have a substitute of one kind or another, and in this regard helium is truly unique. It exhibits properties not shared with other gases, and as a result if the world were to run out of helium, most of our modern technology we enjoy would disappear along with it. This presents an interesting challenge however, as its most famous property is that it is lighter than air. If you release it, such as letting a balloon fly away for example, the helium escapes earth’s gravity and leaves the planet. This is not true of any other commodity we use. With sufficient money and resources, everything can be recycled, but not helium making it the world’s truly only diminishing resource.
Many ask if it can be made in a laboratory, and the short answer is yes. The full answer is that man-made helium costs around US$14 million per kilogram and is missing a neutron; in over 70 years the planet has only stockpiled 26 kilograms of this stuff. It’s called Helium-3, an exceedingly rare isotope of helium that when it comes near a radioactive source changes to normal helium and alerts you to the presence of the radioactivity. Clearly, guessing its purpose isn’t very difficult. It has been discovered on the surface of the moon in parts per million, and the Chinese government has now begun making plans to mine it on the moon and bring it back to earth.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
Zeda’s first update as a listed company was excellent.
Emira Property Fund showcases a year-on-year recovery in its portfolio.
Attacq is selling 30% of Waterfall City to the GEPF as a great price for listed shareholders.
Italtile and Cashbuild are struggling with consumer confidence and affordability for home improvement projects.
Pan African Resources, AngloGold, Gold Fields and DRDGOLD gave a flurry of gold mining updates that didn’t tell a great story for the sector.
Absa is a red bank with green numbers that look highly impressive.
Discovery didn’t impress anyone with its attempt at adjusted earnings – interest rates are too important to just ignore.
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.
Very few people use “Absa” and “high performance” in the same sentence, yet the post-Barclays reality for the bank has been something to behold. Released from the shackles, the bank may be red but the results have been green.
For the year ended December 2022, headline earnings per share (HEPS) is expected to increase by between 10% and 15%. There are major macroeconomic headaches in Ghana, without which normalised HEPS would’ve been up by more than 20%. This gives a good indication of how the rest of the group is performing, as the exposure to sovereign bonds in Ghana is an isolated (and annoying) issue.
Revenue increased by mid-teens in 2022, with non-interest revenue (NIR) growth as a major contributor. This is always terrific news for a bank, as it drives Return on Equity (ROE). When ROE is higher, the bank trades at a better Price/Book multiple. In other words, shareholders make money.
Pre-provision profit growth is expected in the mid-20s (which is brilliant) and the cost-to-income ratio is dropping to the low 50s. The bank is becoming more efficient relative to its revenue.
Critically, the credit loss ratio is expected to be similar to the interim level of 91 basis points, excluding charges related to the Ghana sovereign bonds.
ROE is expected to be slightly below 17% including Ghana, or 18% without it. Either way, that’s well in excess of the cost of equity, so Absa is doing all the right things for shareholders. With the dividend payout ratio going up as well, this is an excellent performance even with the pain in Ghana.
Aveng drops after a trading statement
Normalised earnings have decreased sharply
For the six months ended December, Aveng managed to increase group revenue by 16%. McConnell Dowell in Australia was a helpful contributor here with revenue growth of 22%. In South Africa, Moolmans is experiencing a drop in revenue based on project timing vs. the prior period. Revenue at Trident Steel (the business being sold) is up 58%.
The pipeline (measured by “work in hand”) has increased by 64% since 30 June 2022.
Despite the efforts of the Australian business, group operating earnings are expected to be lower by 13% to 17%. Without any normalisation adjustments, headline earnings per share (HEPS) is expected to increase dramatically from 14 cents to between 59 cents and 64 cents. The problem is that once normalisation adjustments are included, the earnings aren’t nearly as rosy.
Normalised earnings are expected to be 44% to 52% lower in this period.
Detailed results are due on 21 February, so investors won’t have to wait long to get the details.
Barloworld: heavy on the narrative
Light on the numbers
Hot on the heels of Zeda’s excellent update the previous day, Barloworld has updated the market on trading conditions for the four months ended January 2023. Remember, Zeda (the mobility business – car rental etc.) was unbundled by Barloworld at the end of 2022.
In Barloworld’s update, there’s a LOT of commentary and not much in the way of numbers, so we need to read carefully and figure out what the most important points are.
In the Equipment southern Africa business (and yes, they use a small “s”), demand from the mining sector has driven solid revenue numbers in both machine sales and aftersales parts. They make more profit on the latter, so a shift in mix towards machine sales has resulted in a slightly lower operating margin. With a strong order book for the rest of the year, there has been investment in working capital. You can expect to see that impact on the balance sheet.
Notably, things are looking up in the DRC, where the Bartrac joint venture is posting profits and is expected to continue to do so.
In Equipment Eurasia, Mongolia is doing well and Russia is performing ahead of expectations. The Russian results are obviously down from the prior period (which happened to be a record), but Barloworld is trying to find a way to operate responsibly. Remember, with our political affiliation to BRICS, this isn’t the situation that faced US companies who were forced to pull out of Russia almost overnight. In Mongolia, the business was positively impacted by the opening of borders in China, allowing products and commodities to flow freely.
Overall, Mongolia is expected to be up year-on-year on all metrics and Russia is less of a drag than expected.
The Ingrain business (which you may recall was acquired from Tongaat Hulett) achieved “strong” revenue growth and “EBITDA at similar levels” to the prior period, which means margins contracted. Here’s a fun excerpt telling us that things are so bad in South Africa that we don’t even bother with the alcohol and coffee anymore, we just head straight for the chocolates drawer:
Barloworld is very good at balance sheet management. For me, they were the stand-out performer in the pandemic in terms of managing a crisis and coming out even stronger. I’m not surprised that the group is happy with the state of the balance sheet.
Look out for a pre-close update closer to the end of March.
Blue Label Telecoms is still hard to understand
Even accountants struggle with this one
Blue Label Telecoms is one of the trickiest companies on the JSE to get your head around. They are masters of doing highly complicated deals that usually end up disappointing shareholders. A share price that is down 58% over five years is proof of that.
In complexity though, one finds opportunity. Over three years, the share price has more than doubled. This is a highly volatile stock, which is why traders like it. There isn’t much excitement for traders in focusing on a company that trades in a tight range and goes up 7% every year.
The latest update is perfectly on brand for Blue Label Telecoms, because hardly anyone understands it. The share price dropped 5% in frustration, with group earnings down spectacularly. Even core headline earnings per share was down between 92% and 96%.
There were huge losses recognised on the Cell C investment, including the impact of the restructuring of the business. If we casually ignore that, then HEPS would be up 14%.
Blue Label is trading at the same levels as during the aftermath Global Financial Crisis. For those of you who are too young to remember, that was in 2008/2009. Whilst I can understand why traders try hard to get on the right side of these spectacular upswings, this management team’s track record with capital allocation is truly horrible. I wouldn’t have a long-term investment here.
Dis-Chem reports uninspiring retail sales numbers
On a like-for-like basis, consumer pressures are showing
With a drop in the share price of around 2.3% after releasing this announcement, the market has spoken. Dis-Chem trades on a high earnings multiple and that makes it vulnerable to any slowdown in performance.
For approximately the 5 months to the end of January, the group achieved revenue growth excluding COVID-related products (like vaccines) of 8.7%. That sounds ok, but like-for-like revenue growth in the retail side of the business was only 4.4% and that isn’t ok. An important difference between those numbers is the acquisition of Baby Boom, which was rebranded to Dis-Chem Baby City.
The company highlights vitamin C and zinc sales in the base period as a factor in the slower retail sales growth. They wouldn’t strip those out as being purely COVID-related, as as these products were accelerated by COVID but not entirely reliant on it. This is part of why growth is lower. Still, it seems incredible that those two products can have such an impact at group level.
Dis-Chem doesn’t suffer as much from load shedding as retailers with cold chains, but the diesel expense was still 54% higher at R36 million over this period.
The wholesale business is doing well, with external customer revenue up by 18.7% and overall wholesale revenue up by 8.6%. The Local Choice (TLC) franchise stores achieved revenue growth of 21% and there are now 165 of these stores.
Discovery pretends that interest rates don’t exist
“Normalised” earnings look great, at least
If you bought shares in Discovery in October 2015 and ignored your broking account for 7.5 years, what would your gain on your Discovery shares be?
Zilch. Nada. Nothing.
The dividends don’t cut it, I’m afraid. After Discovery won huge market share and became a household name in South Africa, the returns stagnated and things got a lot harder. Check out this share price chart:
If this investment was on Vitality, it would be Blue Status. There wouldn’t even be a discounted smoothie.
With headline earnings for the six months ended December expected to decline by between 7% and 12%, it doesn’t seem to be improving. There’s always something causing an issue. But on a “normalised” basis, the growth is magically between 27% and 32%.
POW! Straight to Diamond Status you go, thanks to a few adjustments. The market is smarter than that, with a small positive share price move based on this announcement.
The normalisation is driven by adjustments for the effects of interest rate changes. These apparently have no impact on the operations, yet they can swing a drop in headline earnings into an increase of potentially over 30%.
No impact indeed. I think we can all agree that interest rates can’t just be ignored.
Looking through the noise, what do investors need to know?
There isn’t a huge amount of detail in this trading statement, but we do know that Discovery Bank is performing in line with the plan. The group aims to bomb 10% of normalised operating profit on new initiatives, with the numbers running close to this level. As for whether investors will ever see a return on Discovery Bank, the jury is still out.
The other important news (and a contributor to negative earnings in this period) is that the lifting of zero-COVID lockdowns in China has led to waves of infections. Ping An Health Insurance has taken a conservative approach to provisions here, although claims have been limited thus far. The investment returns in China also took a knock in this period, though lifting of lockdowns should help with that as Chinese equity markets have rallied considerably.
Steinhoff: ugly, but fair
Sadly, life just isn’t fair
The agreement that Steinhoff is trying to implement with its creditors is a hideous outcome for shareholders. It remains beyond me why anyone is buying shares in Steinhoff at the moment. Nevertheless, it is still trading at 35 cents per share.
Although there really isn’t much left for shareholders in this structure, the reality is that the situation is “fair” to shareholders in the financial sense. EY was engaged to provide a fairness opinion and has made various assumptions in the process, mainly around the lack of meaningful restructuring alternatives for Steinhoff.
On that basis, the proposed restructuring has been found to be fair. If you’re curious, you can read the opinion here.
Little Bites:
Director dealings:
The directors of Jubilee Metals certainly bought the dip this week. The CEO put R535k behind the company, the independent chairperson bought R646k worth of shares and the ex-chairperson was good for R408k. With the share price under serious pressure in recent days, the market liked this.
Jonathan Ackerman has taken early retirement as an executive director of Pick n Pay, marking another step that the family has taken away from the retailer. Having said that, he will stay on the board in a non-executive role.
In a trading statement released on Wednesday, African Rainbow Minerals highlighted that headline earnings should be between 34% and 44% higher, with the manganese and coal operations as the major drivers here.
There were several asset impairments that led to a much lower increase in earnings per share (between 8% and 16%). This is a good example of one of the major differences between HEPS and EPS, as impairments are excluded from the former.
Not much fire at Brimstone
HEPS is down between 72% and 82%
Brimstone is an investment holding company, so I would’ve thought that net asset value per share would be a useful measure of performance. Nevertheless, the Brimstone trading statement focuses on earnings per share and reflects a drop in HEPS of between 72% and 82%. That’s not pretty.
There are several reasons for this, ranging from lower profitability at Sea Harvest through to higher finance costs. Detailed results are due on 7 March.
The Equites – Shoprite relationship continues
Good business is about partnerships, like this one
When it comes to being a strong tenant, it’s hard to fault Shoprite. The group is growing beautifully and has immense financial muscle. Equites Property Fund specialises in logistics properties and has a funding profile that suits this strategy, where Shoprite investors are looking for a different risk-return opportunity vs. a property fund.
The Equites-Shoprite relationship is interesting, as the parties seem to be able to do a variety of different types of deals. In the latest example, Equites is going to acquire an existing logistics campus from Shoprite for R560 million. There’s another R78.2 million changing hands for undeveloped land and costs already incurred by Shoprite as part of the development plan.
Over and above the R78.2 million, Equites expects to invest R344 million in extending the facilities.
These are long-term plays, with a 20-year lease with Shoprite and three additional 10-year lease renewal periods. The initial rental yield is 7.75% and the rental will escalate at 5% per annum. The initial yield is where I feel a little uneasy, as that seems to be on the low side in this environment.
Equites’ loan-to-value ratio will increase by 230 basis points due to this deal, which will be funded through a combination of undrawn debt facilities and capital recycled from property disposals.
Grindrod Shipping: which way will it go?
Supply – demand dynamics have swung sharply
In Textainer’s recent quarterly update, we saw a drop in fleet utilisation rates. 2022 was a record year for the container company and so the year-on-year story needs to be interpreted in that context. Still, demand for containers has cooled off.
With a quarterly update from Grindrod Shipping now available to us as well, we can see the same trend coming through. Revenue in the 4th quarter was only $81.4 million vs. $460.5 million for the full year, so that’s a big slowdown in the final quarter.
Gross profit is even worse, coming in at $23 million for the quarter. Over the preceding three quarters, total gross profit of $143.8 million had been generated. You don’t need to get the calculator out to figure that negative momentum out for yourself.
The company actually reported a loss in the fourth quarter of $4.6 million. Adjusted net income was $10.6 million though, with various non-recurring charges taken out. I would still be careful of putting too much importance on the adjusted number.
Instead, I would focus on this paragraph from the announcement:
When a cyclical business starts talking about reducing debt, having more flexible liquidity and optimising operations, you know that the good times are coming to an end.
So, would you go long or short this share price chart?
South32 looks forward to better margins
The first half of the year wasn’t a happy time
South32 has a very interesting commodity mix, which includes aluminium, copper, nickel, zinc-lead-silver, manganese ore and metallurgical coal. There are over 25 exploration prospects, so the group has plenty of options out there. The projects are also found in several continents, so South32 is a diversified resources play.
Metallurgical coal contributed 30% of EBITDA in the first half of the year. The next largest contributors were manganese ore (17%) and nickel and copper, both 13%. Margins have come under pressure across the various commodities, as shown by this excellent slide from the investor presentation:
The group highlights the reopening of China as underpinning a commodity price rebound to start the second half of the year. Operating margins are highly sensitive to the commodity prices of course, with South32 doing everything possible to manage what it can control (e.g. operating costs).
Full year guidance is unchanged and the company is still aiming to deliver production growth of 6% for the full year. This will help drive lower unit costs, which should improve margins.
For the first half of the year though, the margin pressure is biting. Revenue is down 8% and the ordinary dividend is down by a whopping 44% as HEPS has decreased by the same percentage.
Despite this, the share price is up 16% in the past year. Like Glencore, it’s been a solid performer through the pandemic.
Zeda is off to a cracking start as a listed company
Performance in the quarter ended December was strong
There are two really important things that you want to see as an investor: an increase in revenue and an expansion (or at least maintenance) of the EBITDA margin.
Zeda has achieved both these things in its inaugural quarter as a listed company, having been unbundled by Barloworld back in November. Revenue is up 24% and EBITDA is up 23%, so that’s really strong growth with EBITDA margin protected at around 38%, a juicy number in an of itself.
Zeda is primarily a car rental and fleet business and the holiday season is obviously critical for that model. Interestingly, this result was achieved despite an average utilisation rate for the quarter of only 70%. This was negatively impacted by the delivery of vehicles that Zeda had ordered ages ago, which is further evidence that supply chains have loosened up (refer to the Grindrod Shipping update).
An important element of the strategy is the mix between discretionary business (like travel) and contracted services (like insurance and monthly subscriptions), with the latter contributing 55% of revenue.
The optionality in this business lies in the opportunity to improve the utilisation rate, as revenue of the car rental business is ahead of pre-pandemic levels despite billed days only running at 68% of 2019 levels. They are targeting utilisation of 73% to 75% for the full year, which would deliver solid results.
The leasing business is a great revenue underpin for this group and is stable, with focus on the corporate business and value-added products.
On the used car side, both retail and wholesale sales recorded growth and margins were stable despite the supply of vehicles improving. Surprisingly, demand was strong in an environment of higher interest rates, inflation, fuel hikes and load shedding.
I haven’t included this under director dealings because I didn’t want to confuse you. Back in 2021, a director of Harmony Gold (at the time) casually sold R5.9 million worth of shares and didn’t get permission because of an “administrative oversight” – I have no idea what penalties or similar would be applicable in this case, but I hope something applies. If it doesn’t, then what is the point of even having these rules?
AECI has appointed Holger Riemensperger as the group CEO. As you probably guessed from his name, Riemensperger is an international appointment who comes to the group with extensive experience across many regions.
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