Wednesday, November 13, 2024
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Who’s doing what in the African M&A space?

Marylou Greig
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Who’s doing what in the African M&A space?

DealMakers AFRICA

Askari Metals, an ASX-listed copper-gold exploration company, is to acquire a 90% stake in the advanced Uis Lithium-Tantalum-Tin Project in Namibia. The stake acquired from LexRox Exploration Services, expands the company’s exposure to the battery metals sector.

Arrow Minerals, an ASX-listed West African gold exploration company, has signed a binding agreement to acquire a 60.5% stake in the Simandou North Iron Project in Guinea, West Africa. The stake will be acquired in two stages from Amalgamated Minerals Pte.

Canadian junior gold exploration company Sylla Gold has entered into an arm’s length letter of intent to acquire an option to earn 100% of the Sananfara gold exploration permit located contiguously south of its Niaouleni Gold Project in Mali.

Access Holdings has acquired, via First Guarantee Pension (FGP) and First Ally Asset Management, the entire issued share capital of Sigma Pensions from Actis. Access intends to merge the operations of Sigma and FGP to create Nigeria’s fourth largest Pension Fund Administrator by assets under management.

The Central Bank of Nigeria has sold Polaris Bank to Strategic Capital Investment (SCIL). The transaction will see SCIL pay an upfront consideration of ₦50 billion and make a repayment of ₦1,3 trillion, the consideration for bonds injected.

Nigeria’s Titan Trust Bank has made an offer to minorities to acquire the remaining stake in Union Bank of Nigeria. The offer is priced at ₦7.00 per share, the price at which the block trade was executed when Titan acquired its majority stake. The remaining 6.59% is valued at ₦13,49 billion.

Mauritian firm Barak Asset Recovery is to acquire a 60% stake in Savannah Cement owned by Seruji. Savannah cement which is headquartered in Kenya exports regionally and is also active in the Democratic Republic of Congo and Mauritius.

Real estate co-ownership startup Seqoon has raised US$500,000 in a pre-seed round through Banque Misr’s pilot programme to support startups in Egypt. The funds will be used to grow its team to service its newly launched co-ownership destination in El Gouna.

Moove, a Nigeria-based fintech startup, has raised a £15 million (US$16,8 million) financing facility from Emso Asset Management. The funds will be used to expand its operations in the UK. The company will launch a 100% EV rent-to-buy strategy which will give access to new, zero-emissions vehicles for a fixed monthly charge.

Egypt-based solar energy company KarmSolar has secured EGP47 million (US$2,4 million) in funding from Qatar National Bank for the first financed solar Power Purchase Agreement battery storage system in the country. KarmSolar provides integrated energy solutions across the industrial, agricultural, commercial and tourism sectors, leading the growth of the private solar energy market in Egypt.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Momentum Metropolitan repurchased 44,798,859 shares for a total purchase consideration of R750 million, representing 3% of the Group’s share capital. The shares which were repurchased between August 10 and October 26, 2022, will be delisted and cancelled.

As part of its capital optimisation strategy, Investec ltd acquired on the open market 517,193 Investec plc shares at an average price of 410 pence per share (LSE and BATS Europe) and 379,603 Investec plc shares at an average price of R84.27 per share (JSE). Since October 3rd the company has purchased 37,22 million shares. The purchase programme will end on or before 17th November 2022.

Pick n Pay Stores is to take a secondary listing on the A2X Markets exchange with effect from November 1, 2022. The company’s primary listing will remain on the JSE and its issued share capital will be unaffected.

After months in discussion with its lenders on a debt restructure plan Tongaat Hulett has entered voluntary business rescue. Its Botswana, Mozambique and Zimbabwe sugar operations are funded independently from the company and as such are not financially distressed. Metis Strategic Advisors has been appointed as business rescue practitioners.

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

Glencore this week repurchased 19,700,000 shares for a total consideration of £97,39 million. The share repurchases form part of the second phase of the Company’s existing buy-back programme which is expected to be completed over the period from August 4, 2022, to February 14, 2023.

South32 has this week repurchased a further 5,322,381 shares at an aggregate cost of A$19,42 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period October 17 -21, a further 4,127,703 Prosus shares were repurchased for an aggregate €210,91 million and a further 831,983 Naspers shares for a total consideration of R1,8 billion.

British American Tobacco repurchased a further 689,584 shares this week for a total of £23,03 million. Following the purchase of these shares, the company holds 214,370,564 of its shares in Treasury.

The only company to issue a profit warning this week was Mix Telematics.

Cognition withdrew its cautionary notice.

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

How to own a great car, cheaply

The Finance Ghost
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How to own a great car, cheaply

If you follow me on Twitter, you already know that I’m a hopeless petrolhead. I’ve loved cars since I could walk and I’ve been watching Formula 1 since long before Netflix even existed.

When Warren Ingram invited me back onto Honest Money to talk about the cost of car ownership, I couldn’t resist. I firmly believe that hard work needs to be rewarded, so you’ll never hear me talking about how it only makes sense to drive the cheapest car possible.

No, I have a V8 in the garage and I love it to bits.

Here’s the thing though: it’s possible to drive special cars and do so without breaking the bank. By focusing on cars that aren’t going to lose much value (and by being willing to drive something a bit older), you can create epic memories and lose less money along the way than someone buying a new (and boring) hatchback.

In yet another unorthodox appearance on this great podcast, I talked about the true cost of ownership and the danger of balloon payments on flashy new cars. We dealt with the usefulness of an access bond when buying cars. Most of all, I explained why an older Porsche 911 makes so much sense vs. a new hatchback.

Start your engines!

Another week, another central bank

The Finance Ghost
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Another week, another central bank

TreasuryONE’s Andre Botha gives us more context to this week’s market moves

With a largely bare data cupboard last week, we expected the rand to trade within tight bands. Although that was mostly the case, we saw the rand trading wildly within the R18.00/50 range. With the Fed and US data quiet last week, it was up to new sources for some market direction. One of the sources of market movement was the political situation in the UK.

In a sensational scene, Liz Truss resigned from her post as Prime Minister, just 44 days after she took office. Looking back at her term, it certainly looked like her position became untenable with several economic faux pas happening in such a short space of time. The pound has been trading wildly in the lead-up to the announcement and staged a strong fightback at the start of the week after the new Prime Minster, Rishi Sunak was appointed on Tuesday.

Pound moves during Truss’ term:

Another event that caused the market some strain was the Prime Minister election in China. The Chinese Communist Party elected Xi Jinping as its general secretary for a precedent-breaking third term. Even though the move was not unexpected, the fact that Prime Minister Jinping surrounded himself with supporters in his Politburo Standing Committee triggered a small reaction from the market, because the Committee is full of supporters of China’s Zero Covid policy, which could impede the country’s economic growth if the restrictions are maintained.

Taking a look at this week, we have another few days of minmal market-moving data or events out of the US, which could mean another week for the rand trading within the R18.00/50 range. We have heard murmurs in the market that the Fed could start looking at pivoting in the early part of next year. This has caused the US dollar to trade close to parity against the Euro and improve the market sentiment. This has caused the rand to move back into the R18.10s, firmly within the current range.

Rand remains range-bound:

On the Eurozone front, we have the European Central Bank interest rate decision coming out on Thursday. We expect the ECB to hike interest rates by 75 basis points, which could see the euro gain some traction while also helping the rand. The key, however, is the speech by ECB President Christine Lagarde and the way forward for the ECB. Based on the tone of her speech and press conference, we could see some volatility in the market.

The Medium-Term Budget Policy Statement on Wednesday had little effect on the markets. It’s likely that the rand will see more action based on the ECB decision.

Speak to TreasuryONE about market risk, managed treasury and other services. For a daily podcast on the markets, add Andre Botha to your playlist here.

Ghost Bites (Bytes | EOH | Famous Brands | Kore Potash | Renergen)

The Finance Ghost
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Ghost Bites (Bytes | EOH | Famous Brands | Kore Potash | Renergen)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

The market took a bite out of Bytes on Wednesday

A drop in the share price of over 10% greeted the latest results

Bytes is a leading software, security and cloud service specialist. The company was spun out of Altron, giving investors the opportunity to own a UK-focused tech company on the JSE.

Based on a skim of the results, it’s not obvious why the market didn’t like them. Revenue increased by 27.9% and gross profit was 23.8% higher (admittedly a deterioration in gross margin). Operating profit was 17.7% higher and headline earnings per share was up 17.4%.

The interim dividend per share is 20% higher at 2.4 pence.

As you keep reading, an issue emerges that might explain the market reaction. The cash conversion of profits has deteriorated dramatically, driven by delays in payments from customers. The group hasn’t written off any bad debts and is confident of being paid in full by debtors. Part of the reason is that gross billings to customers is vastly higher than the income retained by Bytes, so any delays in payment of the large amount can destroy the cash conversion ratio.

If you’ve been looking for a range trading stock for your watchlist, check this out:

EOH still needs a solution for the debt

Will Thursday’s results presentation give more details on the balance sheet plan?

If only the income statement ended at operating profit, EOH would be looking good.

In the year ended July 2022, operating profit jumped to R282 million from R147 million. After so many asset disposals, it’s better to look at continuing operations. For only those business units, operating profit increased from R55 million to R100 million.

Sadly, there’s more to an income statement than the operating profit line. Underneath that joyous level, we find the ugliness of the interest expense. This resulted in a headline loss per share of 72 cents, an improvement of 26.5% vs. the loss of 98 cents in the prior year.

Although EOH managed to repay R733 million in debt during this financial year, gross debt was still R1.3 billion as at 31 July 2022. That operating profit seems less enticing now, doesn’t it?

Subsequent to year end, the sales of the Network Solutions business and Hymax SA were concluded, leading to a further R104 million of debt being repaid. There’s still a long way to go.

Even the detailed financial report doesn’t disclose details of the plan to fix the balance sheet. The company talks about “right-sizing the capital structure” and notes that it is a “business imperative” particularly as interest rates are rising. The company expects to finalise the capital structure by early 2023.

Interestingly, the auditors are comfortable with a going concern assumption for EOH. This was achieved through the renegotiation of the senior bridge facility repayment date, which was expected from 1 April 2023 to 31 December 2023.

So what will the plan be for the balance sheet? In my opinion, the likeliest outcomes here are a rights offer and/or a strategic equity investor. Such an investor might be introduced as an underwriter to a heavily discounted rights offer, for example. Either way, I can’t see how the group will manage without a significant equity injection.

Trading at R4.40 per share, I remain grateful that I got out at breakeven above R7 some time ago.

Famous Brands exceeds pre-Covid revenue

Burgers are back, baby

In the six months ended August 2022, Famous Brands managed to beat the revenue achieved in the comparable period in 2019 (with Gourmet Burger King excluded from both periods, as that business is now a distant and very bad memory for the group).

This gives some context to year-on-year growth numbers of 19% for revenue and 121% for headline earnings per share. Unsurprisingly, the recovery in Signature Brands (the full service restaurants) was even more significant than in Leading Brands (the take-away joints).

I have bad news for your calorific habits, as menu prices increased substantially in the first half of 2022 and more increases are expected for the remainder of the year because of inflation.

Speaking of calories, I had a good laugh at this comment:

“While healthy eating continues to gain prominence, it is no longer driven by COVID-19, and consumers also seek indulgence and comfort in their food choices.”

With incredibly strong cash flow generation (cash generated from operations was 7% higher than EBITDA), shareholders don’t need to head for the ice cream queue to feel better about these results. Net debt to EBITDA is down to 1.98x from 4.4x a year ago, a far more palatable level.

A disappointment in the result was the performance of the Retail division (e.g. Steers sauce in the supermarkets). Sales grew by 15% to R121 million, yet an operating loss of R1.9 million was incurred due to product write-offs. The profit in the comparable period was only R0.3 million. If you think the food production industry is easy, you are horribly mistaken.

Going forward, the question is around how Famous Brands will grow. We’ve seen how well offshore acquisitions went, so hopefully there won’t be many (or any) of those. Existing brands like Debonairs can expand internationally, with the pizza chain opening its first restaurants in Oman and Saudi Arabia.

I continue to scratch my head over the lack of a successful Mexican chain in South Africa. For whatever reason, nobody has cracked the Taco Bell or Chipotle code in South Africa. Perhaps I’m alone in my enjoyment of quesadillas.

In the meantime, shareholders can enjoy an interim dividend of 130 cents per share.

A quarterly review of Kore Potash

Here’s a recap for those who haven’t been following this company

Kore Potash owns a 97% stake in the Kola Potash Project and Dougou Extension Potash Project in the Republic of Congo. Rather than being a spud available from your local Portuguese fruit and veg store owner, potash is potassium in water-soluble form that is used primarily in fertilizers.

The company is in exploration phase, so there are no mining production or construction activities currently underway.

Here’s the highlights reel:

  • The Engineering, Procurement and Construction (EPC) proposal to construct Kola was provided by SEPCO Electric Power Construction Corporation, the engineering partner of the Summit Consortium
  • The consortium now needs to provide a financing proposal based on the EPC terms
  • The Minister of Mines of the Republic of Congo decided to remind us of the risks of operating in Africa, by “expressing discontent” with progress and giving the company 30 days to respond

With $6.2 million in cash at the end of September, at least the company can afford good lawyers. I’m just not sure lawyers make much difference in the Republic of Congo.

In reality, the sooner the financing proposal can be obtained, the better. With the EPC proposal still being negotiated, there’s a difficult path still to walk.

Renergen and the inconsistent heating

Although this may sound like a Roald Dahl story, it meant a delay for investors

To Renergen’s credit, the company likes to keep the market appraised of its situation in great detail.

We don’t just know that the commissioning of the plant has been delayed. No, we know that this is because of inconsistent heating from the conduction oil system which was incorrectly installed, an issue that Renergen discovered while testing the helium train.

While fixing the issue, Renergen used the opportunity to connect recently drilled wells, so this takes the plant closer to full design specification.

The priority is to achieve steady state production, with LNG first and liquid helium thereafter. It sounds as though this issue was a three-week delay. The company points out that this plant will run for at least 20 years, so a delay of this nature to prioritise the safety of the plant is a sensible approach.

Little bites:

  • Director dealings:
    • Value Capital Partners acquired another R2.2 million worth of ADvTECH shares. This comes through as director dealings with the group has representation on the board.
    • The CFO of Momentum Metropolitan has bought shares worth R504k.
  • Nu-World Holdings released results for the twelve months to August. These are numbers that the company will hope to forget, as South African revenue fell by 14.2% in an environment of weak consumer discretionary spending. Offshore revenue was up by 14.2%, primarily due to a stronger dollar. Overall, revenue fell by 8.8% and HEPS was 39.9% lower at 394.1 cents. This puts Nu-World on a Price/Earnings multiple of 6x. A final dividend of 149.8 cents has been declared. This relatively illiquid stock has experienced a share price decline of nearly 24% this year.
  • MiX Telematics has released a trading statement for the six months to September 2022. Based on reported earnings, the company has slipped into a headline loss per share position of -0.5 cents (vs. headline earnings per share of 13 cents in the comparable period). The primary driver is a non-cash deferred tax charge of R60 million, with non-recurring acquisition costs of R12.8 million also not helping. Without those charges, the business is still profitable and intends to declare a dividend for the second quarter.
  • Zeder’s special dividend of 10 cents per share has received SARB approval and will be paid on 14 November with a last day to trade of 8 November.
  • The merger of Capital & Counties Properties and Shaftesbury was approved by shareholders in July. Regulatory approvals are still outstanding and the merger is expected to take place in the first quarter of 2023. The companies plan to pay dividends as usual in the fourth quarter of 2022 and will make separate announcements in this regard.
  • In case you’re a small business owner struggling to stay on top of financial reporting obligations, you should feel better knowing that Efora Energy (currently suspended from trading) is still busy finalising its 2021 results.
  • Speaking of new directors, Huge Group has announced a director appointment after unexpected recent resignations of a few directors. Conway Williams has joined the board.

Ghost Bites (The Foschini Group | Jubilee Metals | Oasis Crescent Property Fund)

The Finance Ghost
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Ghost Bites (The Foschini Group | Jubilee Metals | Oasis Crescent Property Fund)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

The Foschini Group shows that shopper behaviour is normalising

After a volatile year for the share price, the year-to-date performance is -4.95%

TFG (no relation to your favourite ghost) released a Q2 trading update and a trading statement for the six months ended September 2022. The announcements are always incredibly detailed, so we can dig in here.

Let’s kick off with the earnings guidance, as headline earnings per share (HEPS) for the six months to September is expected to increase by between 8% and 28%. That’s a wide range. With a whopping 31% increase in group revenue this quarter, one would hope that the HEPS growth is towards the upper end of that range (recognising that this was a quarterly revenue growth number, not an interim number).

Before you get too excited about the 31% growth, I must caution that there’s a lot of noise in that number.

It’s helpful to know that TFG Africa (which includes South Africa) contributed 67.2% of turnover. TFG Australia contributed 19.6% and TFG London contributed the remaining 13.2%.

Looking at TFG Africa, turnover was up 22.5% overall and 6.4% on a like-for-like basis, so you can see the impact of acquisitions in these numbers. Tapestry Home Brands was acquired with effect from 1 August. If the recent comments on my Twitter page by upset Coricraft customers are anything to go by, the company needs to do serious damage control with customers. TFG may have an interesting time there.

TFG London grew turnover by 4.4% in local currency and achieved margin expansion. TFG Australia skyrocketed 104.5% in local currency, as the comparable quarter was plagued by Covid restrictions on trading.

In a particularly interesting metric, group online turnover contracted by 6.9% as consumers returned to stores. The contribution to group turnover was 8.1% in this quarter (vs. 11.4% in the comparable quarter). The impact was even more severe in TFG London (down 16.2%) and TFG Australia (down 25.9%) as shopping habits normalised. This is bullish for retail property funds.

A key feature of the strategy is the localisation of the supply chain, which the group calls its “quick response” capability. This supported growth in TFG Africa this quarter. In case you’re wondering how the local business makes its money, 72% of turnover in this quarter was in Clothing categories, 11.9% in Homeware and 8.9% in Cellphones.

It’s also worth noting that cash turnover contributes 71.4% to total TFG Africa retail turnover. Cash turnover grew by 24.3% this quarter and credit turnover by 18.3%, with a decline in average acceptance rates as the group used more stringent acceptance criteria.

Jubilee Metals signs off on a busy year

The year ended June 2022 was full of operational achievements

With the release of its audited annual results and AGM notice, Jubilee reminded the market of significant progress made in the financial year:

  • Target production achieved across PGM, chrome and copper
  • Inyoni expansion in South Africa was completed in March 2022, increasing production capacity by 85%
  • Roan copper concentrator completed in Zambia, with ramp-up commencing in July and nameplate throughput rates achieved in September
  • Based on the investment programme, the tangible net asset value per share increased by 40%

Looking at financial performance, revenue increased by 5.4% and EBITDA was 25% lower in a year that was disrupted by the extensive capital programme. Cash from operating activities increased by 11% despite the drop in EBITDA.

The balance sheet looks good, with a positive net cash position.

The share price is down more than 29% this year, a victim of widespread pain in the commodity sector.

Oasis Crescent Property Fund grows distributable income

Even without the use of debt, this fund has beaten inflation over the years

The Oasis Crescent Property Fund is unique on the local market. It provides investors with a Shari’ah compliant property fund, which means no use of leverage whatsoever. As most readers will be aware, property funds and debt go hand-in-hand. In this environment of rising rates, not having debt isn’t necessarily a bad thing.

Despite the lack of leverage, the unitholder return of 10.3% per annum compares favourably to inflation.

Although total income decreased by 2.4% in the six months to September 2022, distributable income increased by 13.9%. The net asset value per unit dropped by 2.5% to R22.93 per unit (vs. a traded price of R19.51).

Due to negative fair value movements, headline earnings per unit was negative.

A distribution of 47.11 cents per unit has been declared for the interim period. Your eyes aren’t deceiving you: this fund trades on a much lower yield than most property funds in the market.

Little bites:

  • Director dealings:
    • The group managing director of Distell has sold shares worth nearly R6.8m
    • Des De Beer is still buying shares in Lighthouse Properties, this time worth nearly R1.7m
    • The CFO of Bidvest has sold shares worth R3.4m
    • An associate of the CEO of Momentum Metropolitan has acquired shares worth R0.9m
  • There are significant movements on the Grand Parade Investments shareholder register, with GMB Liquidity now holding 27.88% in the company. Entities called Arakot and Midnight Storm were the sellers. This is all very mysterious. Based on Twitter commentary from credible sources, it appears as though GT Ferreira and Hassen Adams have disposed of shares.
  • Hyprop has announced the reinvestment price for the dividend of 293.64090 cents per share. Investors can elect to reinvest the dividend in Hyprop shares at a price that represents a discount of 10.4% to the 7-day VWAP. The share price will keep moving of course, so the point here is that the reinvestment option is attractive if you want to increase your Hyprop exposure (like I do). The default alternative is to receive the cash, so you have to specifically notify your broker if you want to receive the shares.
  • Zeder’s special dividend of 10 cents per share is being delayed as approval from the SARB hasn’t been obtained yet. An updated timetable will be announced on SENS in due course.
  • A positive impact of the Chinese stock meltdown is that Naspers and Prosus can continue their respective share buyback programmes with a lower share price. Between 17 October and 21 October, Naspers and Prosus repurchased shares worth R1.79bn and $207m respectively. The next tranche should be at a much lower average price.
  • If you are a Stefanutti Stocks shareholder, you should refer to the circular dealing with the disposal of the business in Mozambique.

Massmart shareholders say yes to Walmart

Sponsored Content
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Massmart shareholders say yes to Walmart

Shareholders are advised that at the General Meeting held on Friday, 21 October 2022, convened to consider and approve the Scheme Resolution and the Delisting Resolution, all of the resolutions tabled were approved by the requisite majority of Massmart Shareholders present or represented by proxy and entitled to vote thereon.

In case you missed the big news on Friday, Massmart shareholders approved the resolutions related to the buyout by Walmart of the retailer. It’s rare to see an approval rating this high, with 99.98% of the vote being cast in favour of the scheme.

Although other conditions still need to be met, this is a huge step forward for Walmart in its plan to improve Massmart’s operations away from the public eye.

You’ll find the detailed announcement below:

results-of-the-general-meeting-of-massmaryt-shareholders

Ghost Bites (Altron | Dis-Chem | Fortress | Gemfields | Massmart | South32)

The Finance Ghost
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Ghost Bites (Altron | Dis-Chem | Fortress | Gemfields | Massmart | South32)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

In case you missed the big news on Friday, Massmart’s shareholders voted almost unanimously in favour of the scheme of arrangement for the Walmart buyout. You can get the full details at this link>>>

Altron reports a sharp recovery in profitability

Despite these numbers, the share price closed over 2% lower

For the six months ended August, revenue increased by 15% and operating profit jumped by 57% as operating leverage had the desired effect. When revenue increases faster than expenses, the impact on operating profit is amplified. This also works in the opposite direction with disastrous results.

At net profit level, Altron is profitable again. Headline earnings per share (HEPS) came in at 34 cents and the interim dividend per share has more than doubled to 16 cents.

The numbers look even better in continuing operations, with revenue up 21% and HEPS rocketing to 41 cents. This tells you that discontinued operations are loss-making overall, with a substantial operating loss in Rest of Africa.

Looking deeper, you may be interested to learn that Netstar’s revenue is up 8.7% year-on-year. Profitability has gone the wrong way because of sales mix and higher GSM costs to counter the impacts of loadshedding. Karooooo’s international expansion makes sense when you see numbers like these. In case you have no idea what I’m talking about, Karooooo is the owner of rival group Cartrack.

For those interested in the group, the announcement goes into plenty of detail on underlying segments.

Overall, Altron expects a “solid second half performance” and notes that some parts of the group will face tricky conditions. Most of the businesses are heading in the right direction and the balance sheet will be further strengthened. Net debt : EBITDA has been brought down to 0.35x which is relatively low already.

Dis-Chem achieves another strong result

The group keeps winning market share

Even without reading the trading statement, a 5.8% rally in the share price tells you what you need to know.

Yet, because Dis-Chem trades at a multiple that gives value investors a stomach ache that even the dispensary can’t help with, the year-to-date share price performance is -4.5%. So much growth is already priced in.

Without any adjustments, the anticipated HEPS growth for the six months to August 2021 is between 43.1% and 45.4%. With a once-off gain excluded from the wholesale segment, the growth is between 30.4% and 32.6%. This is a better view of sustainable growth and is still a huge number!

This result was driven by market share gains and an increase in income margin across core categories. Growing revenue and margin simultaneously is the Holy Grail for any retailer.

The group notes a focus on return on invested capital (ROIC), an important metric that combines the income statement and the balance sheet. This is a fancy way of saying that the group is keeping a close eye on the cash, with an improved net working capital position.

Detailed results will be released on 2 November.

The year-to-date performance vs. Clicks is deserving of a chart:

Could Fortress avoid losing REIT status?

A group of shareholders has demanded that a general meeting be called

If you’ve followed this story in any detail this year, you’ll know that Fortress has a problematic dual-share structure that is forcing the company to fall foul of REIT requirements regarding distributions. In what would be the first example of such an issue on the JSE, Fortress is set to lose its REIT status. This is uncharted territory.

At the eleventh hour, a group of institutional shareholders controlling 59% of FFA share voting rights and 16% of FFB share voting rights has demanded that a general meeting be called. They are proposing an amendment to the company’s Memorandum of Incorporation (MOI) that would allow for a split dividend over the next two financial years (80:20 in favour of the FFA shares).

This has set hares running, as Fortress needs to get a circular out to shareholders as quickly as possible. Even then, the current distribution deadline will be missed and Fortress needs dispensation from the JSE to meet the distribution requirement by January 2023.

This story isn’t over yet. If the required shareholder approval (75%) is achieved, then Fortress may yet hang on to REIT status. With holders of 59% proposing this structure, there’s a good chance here of success.

Watch this space!

Gemfields resumes operations in Mozambique

The share price closed 5.8% higher, recouping some of the recent losses

Last week, Gemfields delivered the news that the market didn’t want to hear: disruptions to the ruby mining operations in Mozambique because of the insurgency in the wider area. As a reminder, Gemfields holds 75% in Montepuez Ruby Mining Limitada.

Influential local ownership of the other 25% can only help in this situation. The Mozambique police force responded quickly and the military arrived later that day. They will maintain a presence for the foreseeable future.

These are hardly the kind of working conditions that Silicon Valley types are accustomed to. Mining in Africa is no joke whatsoever.

Under armed guard, key operational personnel have returned to the mine and basic operations have resumed. The company notes that employee safety is the highest priority and the evacuation last week supports that notion.

Despite Monday’s rally of 5.8%, the share price is still down 7.6% over the past week.

South32’s quarterly report is promising

Production is higher across all commodities other than coal

In the three months to September, South32 achieved solid production numbers in aluminium, copper and other base metals, including a strong start to the year in manganese which is tracking ahead of production guidance.

Production guidance has been revised lower at Illawarra Metallurgical Coal, attributed to asset-specific issues that have negatively impacted the mine. The group has decided not to proceed with an investment in this asset, allocating the capital elsewhere in the operations including development options in North America.

The sale of four non-core royalties for up to $200 million was achieved in this quarter.

South32 has a strong balance sheet that can support the strategy of focusing on metals that are critical to a low-carbon future.

This is a massive operation and the quarterly updates go into great detail. If you’re a shareholder, it’s worth reading the full announcement.

Little Bites:

  • If you are a Gold Fields shareholder, then make yourself a strong coffee. There’s a 158-page circular for your attention. The proposed merger with Yamana Gold is a landmark deal and there’s a lot in the circular for you to absorb. Gold Fields believes this deal makes sense because of the increasing maturity of existing productive assets and a decline in the quality of new gold discoveries. If this persists, global gold production is expected to contract by 35% between 2022 and 2030. You’ll find the circular at this link>>>
  • RECM & Calibre released a trading statement noting that the net asset value (NAV) per share will increase by between 22.4% and 25.7% to between 1,740 and 1,788 cents. The share price jumped by nearly 15% to R14.40 in response to this update.
  • Spear REIT has agreed to dispose of 15 on Orange for R246 million. The buyer is not The Capital Apartments and Hotels Group, despite that group having a call option to purchase the property. The option hasn’t been exercised and the option will be cancelled upon implementation of this deal. The purchase price is 7% lower than the call option price and the buyer is Zimbali Coastal Resort, owned by Resrev Malta Limited. This transaction is Spear’s final step to get out of the hospitality sector, which is part of why it is an attractive deal despite the lower price. The proceeds will be used to reduce debt and the loan-to-value (LTV) after this transaction will be 38%. The disposal yield is 8.13% and the value of the net assets at 28 February was R265 million, in line with the strike price of the option that was held by The Capital Apartments and Hotels Group. Although recycling capital at a value below the balance sheet carrying amount is usually frowned upon, there’s a solid strategic rationale here.
  • There’s bad news for Trellidor, hopefully bringing to a close a period in the group’s history that won’t be remembered fondly. Trellidor had fully provided for the R32.1 million labour dispute based on the Labour Appeal Court’s judgement. The company needs to reinstate 42 employees of the 132 dismissed in 2013 and must make limited back-pay payments to these employees. After applying to the Constitutional Court for leave to appeal the Labour Appeal Court decision, Trellidor has been notified that the leave to appeal was refused. The company will now engage with the labour union regarding implementation of the judgement. The share price is down more than 37% this year.
  • Tharisa has announced a loss of life incident involving a mechanic who had been with the group for eleven years. It’s always awful to read these stories. Mining companies do their very best when it comes to safety, yet it remains a job with real risks.
  • Transcend Residential Property Fund announced the results of the general offer by Emira. The offer was accepted by holders of 22.98% of Transcend shares in issue. This takes Emira’s stake to 68.11%.

Will rate hikes work for inflation?

The Finance Ghost
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Will rate hikes work for inflation?

Because if they won’t, then the actions of the Fed are going to cause untold misery around the world. Chris Gilmour takes a closer look at an alternative thesis.

Conventional wisdom at the US Federal Reserve (the Fed) and a few other central banks globally is that the main culprit behind stubbornly high inflation is excessive demand. That being the case, the remedy appears simple: just keep on increasing interest rates until the excess demand gets choked off and everything reverts to normal.

But what if they’re wrong? What if this inflation is NOT necessarily caused by excess demand, but by other factors? Would this mean that we’re going down the wrong path?

Is there another cause?

No less a figure than the Fed’s 2IC, Lael Brainard, has suggested recently that US inflation may be caused not only by the usual suspects (high food and fuel prices) but also by overly-aggressive expansion of profit margins by retailers and other consumer-facing industries, such as auto dealers. She had to steer a cautious path when making these comments, so as not to appear overly anti big business, but the message was clear.  Addressing a meeting of the National Association for Business Economics in Chicago, Brainard asserted that “there is ample room for margin recompression to help reduce goods inflation” in the retail economy. In other words, she is asking business to reduce margins to help reduce inflation.

“Retail margins have increased 20% since the onset of the pandemic, roughly double the 9% increase in average hourly earnings by employees in that sector,” she said. “In the auto sector, where the real inventory-to-sales ratio is 20% below its pre-pandemic level, the retail margin for motor vehicles sold at dealerships has increased by more than 180% since February 2020, 10 times the rise in average hourly earnings within that sector.”

So what? What does it matter what is causing the inflation? Surely what matters is how we get rid of it?

No.

The Fed wasted precious time in 2021 debating whether or not inflation caused by a massive expansion of the money supply was going to be more than just temporarily inflationary. In so doing, it let inflation build up a head of steam that only got greater, thanks to higher food prices and then the coup de grace, the war in Ukraine.

But we have to be careful and not fall into the trap of thinking that there is necessarily a quick, easy and indeed an elegant solution to the inflationary spiral in which we find ourselves. And we need to avoid making knee-jerk reactions to try to combat this inflation.

Where did this inflation come from?

Let’s go back to first principles and discover the roots of this great inflation. Until the start of the Covid pandemic, inflation was extremely benign and wasn’t an issue for any country. But in an attempt to combat the worst effects of the pandemic, most governments around the world (both in developed and emerging economies) borrowed to the hilt and expanded their balance sheets significantly. The end result of such an exercise was always going to be inflationary. It manifested itself in the US and the developed world in huge pent-up demand that exploded into an orgy of spending as lockdown restrictions were relaxed.

Fed chair Powell was correct in assuming that this would only be temporary, referring to it as “transitory”.

However, certain other factors – notably those relating to supply-chain disruptions – occurred during lockdown. The manufacture of semiconductors (silicon chips) virtually ceased as car production ground to a halt. This was reflected in a massive deficit of new auto availability as the lockdown restrictions were eased, resulting in the prices of both new and used cars rising almost exponentially.

But once again, looking at it rationally, Powell could be forgiven for thinking that this was another transitory inflationary effect. At the same time, food prices (which had been rising before the pandemic struck) rose very rapidly. This was due to a variety of reasons, mainly climate-related. Only in the last few months have food prices started softening, and they are now similar to where they were two years ago.

Source: UNFAO

The oil price exhibited some bizarre behaviour at the onset of the pandemic, going to less than zero on a forward basis for a brief period in time. But then, gradually, it started increasing and when the war broke out in Ukraine, it spiked, along with gas prices, which had been increasing rapidly before then. Since then, of course, it has settled back to roughly where it was before the conflict.

So many of the factors that are associated with causing the great inflation appear to be subsiding, fuel and food being most notable. But that’s only really the case for US consumers, shielded as they are from currency fluctuations, as both food and fuel are denominated in US dollars. Most other countries with few if any exceptions, have seen their currencies depreciate significantly in the face of a resurgent dollar, helped by the Fed increasing US interest rates.

Where will inflation settle?

Inflation is probably going to settle at a higher average level than where it was prior to the coronavirus pandemic. The main reason for this lies in the change in globalisation dynamics (the effective end of globalisation as we have got used to it) and structural changes to supply chain dynamics. The US is bringing back a lot of its manufacturing onshore, after many decades of outsourcing it to far east Asia and specifically to China. For the first few years, this will be structurally inflationary, as the country gears up to get the economies of scale required to produce what is currently being produced offshore. After that, the inflationary forces will subside. But this could take five to ten years to achieve.  

So, back to Lael Brainard. If she is correct, then increasing US interest rates much beyond where they currently are will likely achieve very little of a positive nature but will cause untold misery around the world. Many emerging economies were already facing a debt crisis long before the dollar’s upwards surge. Sustained strength in the greenback could well be the straw that breaks the camel’s back.

Global impact

And even in countries such as SA, which has most of its debt denominated in local currency rather than USD, there is a perceived need to keep on hiking rates in tandem with rate hikes in America, to ensure that SA bonds remain attractive to foreigners. Inflation in SA is certainly not caused by excessive demand and yet the SA Reserve Bank feels the need to keep on hiking rates regardless.  

In the UK, inflation appears to be out of control, with second-round effects such as high wage demands accompanied by strikes becoming all too common. September inflation printed at 10.1%, up from 9.9% in August. The Bank of England is predicting it will peak at around 18% during the next year.

The usual suspects (high fuel and food prices) appear to be the main reasons for the rapid rise in inflation in Britain, but the collapsing pound is an even bigger factor. To put this in perspective, the price of a barrel of Brent crude oil was $97 just before the Russians invaded Ukraine but the £/$ rate was at 1.36 at that time. Today the oil price in USD is marginally lower but the £/$ rate is 1.13. This means that a barrel of oil in pound terms is now 18% higher than it was at the start of the war in Ukraine. Goods on the supermarket shelves are rising in price on an almost weekly basis, virtually regardless of where one shops. While the USD remains strong, thanks to rising US interest rates, the pound is likely to continue weakening, unless and until the Bank of England steps in and hikes rates meaningfully. Getting British inflation under control would be a difficult task at the best of times, but when also facing a political crisis, it becomes even more unmanageable. Jerome Powell and his members of the FOMC need to sit down and think very carefully about the consequences of their actions.

If they keep on hiking rates, hoping to get rid of inflation quickly and effectively, we may all suffer long-lasting economic damage.

For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.

Unlock the Stock: Calgro M3 | Pan African Resources

The Finance Ghost
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Unlock the Stock: Calgro M3 | Pan African Resources

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

Unlock the Stock is proudly brought to you by Kuda, a specialist insurance and forex services provider. The South African team from Lumi Global looks after the webinar technology for us.

In the latest edition of Unlock the Stock, we welcomed construction group Calgro M3 and mining house Pan African Resources to the platform. Both of these companies are currently generating a lot of interest among investors for different reasons.

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

You’ll find all the other Unlock the Stock events at this link>>>

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