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Ghost Bites (ArcelorMittal | British American Tobacco | Emira | Kaap Agri | Spur | Steinhoff)

The Finance Ghost
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Ghost Bites (ArcelorMittal | British American Tobacco | Emira | Kaap Agri | Spur | Steinhoff)

ArcelorMittal releases annual results

The share price barely budged, with the market knowing what was coming

In the year ended December 2022, ArcelorMittal dealt with a significant decrease in sales volumes, mitigated to some extent by a 6% increase in realised dollar steel prices for the full year. The second half of the year saw pressure on selling prices though.

Despite substantial process made in reducing expenses, EBITDA was still down 50% and headline earnings fell 62%. Net debt increased from R1.26 billion to R2.81 billion, so the balance sheet reflects the much tougher year that the company just survived.

Still, return on equity in 2022 was 25.2%. There’s nothing wrong with that. It just looks horrible year-on-year after the blowout result of 120.3% in 2021.

To give you an idea of how cyclical the company is, the share price is up 209% over 3 years but is down 60% over the past 12 months! Strong stomachs only need apply.

British American Tobacco is still a cash cow

100% operating cash conversion is the real story here, not the nauseating attempts at ESG

If you want to read the most irritating ESG commentary in the market (accompanied by a TRADEMARKED term for ESG, of all things), then British American Tobacco is for you. The best approach is to ignore the tobacco guilt section and just look at the numbers.

Much as the company would have you believe otherwise, it’s still all about selling cigarettes to people. For the year ended December, revenue was £27.6bn and just over 10% of that came from the New Categories: products that allow people to blow fruit-flavoured smoke all over the place.

They hope that New Categories will be profitable by 2024, one year ahead of plan. It hardly matters, as the segment is tiny in the group context. I think most shareholders just see it as a necessary tax on the rest of the business.

Reported operating margin was lower but the group attributes this to once-off issues, with adjusted operating margin up by 150 basis points. The most important news is 100% conversion of operating profits into cash, which enabled the company to return £6.9bn to shareholders in 2022.

This is a slow growth but defensive business, with adjusted diluted EPS up 5.8%. The dividend is up 6%.

Globally, tobacco industry volume is expected to be down 2% in 2023. Against this backdrop, it’s all about the cash, with a plan to generate £40 billion in free cash flow over the next five years.

Emira’s earnings are up

And there’s an interesting technical point about trading statements

For non-property companies, a trading statement needs to be released when the management team is reasonably sure that earnings will differ by 20% (up or down) vs. the prior period. For property companies, the trigger is a 15% difference in distribution per share, which is a different way of thinking.

Sending the share price over 4% higher in the process, Emira released a trading statement with an expectation of distribution per share increasing by between 15% and 17.5% for the six months ended December.

Kaap Agri is killing it

The company couldn’t resist taking advantage of the AGM

Usually, an AGM is dryer than a McDonald’s burger that was left in the sun. Some companies take advantage of the event by giving an update on trading conditions, which is exactly the approach Kaap Agri took. With numbers like these, I’m not surprised.

For the first three months of 2023, like-for-like revenue increased by 17.8%. This is the right metric to use, as overall revenue is vastly higher (73.8%) because of the acquisition of PEG Retail Holdings. Sales have also been significantly boosted by fuel price inflation, which takes group inflation to 26%. Without fuel, it’s only 12.5%.

Even excluding PEG, volumes were 6.3% higher across the rest of the business. That’s very strong. Fuel volumes excluding PEG fell by 3.2%, which the group notes is better than the rest of the industry.

With PEG out of the equation, retail-related revenue grew by 7.5% and agri-related revenue was up 7.2%. Like-for-like expenses only grew 2.5% which is an astonishing performance. Excluding load shedding costs, the expenses actually fell by 1.8%!

Recurring headline earnings per share grew by 19.8% for the quarter. To make this result even better, the working capital cycle improved during the quarter with more efficient inventory ratios and other improvements.

Unsurprisingly, return on capital improved during the quarter. This was a terrific result. And despite numerous challenges in the economy, the full-year result is expected to be at the upper range of medium-term targets.

Despite this, Kaap Agri’s share price suffers from the mid-cap curse of trading at a low multiple:

A whole lotta burgers

Spur’s trading update for the six months ended December is excellent

Based on recent updates from property funds, we knew that restuarants were performing well again. Spur directly benefits from this, with franchised restaurant sales up by a whopping 31.5% year-on-year. There’s still a COVID impact in the base of course.

To give more context to the performance, Spur points out that sales grew 21.1% in the second half of the year vs. the first half when COVID played a much lower role. That’s impressive.

Clearly, South Africans still need a cold beer and something to do with the kids. Restaurants aren’t usually thought of as being defensive, but that model makes sense to me.

Spur was the top performing format in the group, up 33.6%. RocoMamas only grew by 14.6% and I’m not surprised based on my last trip to the restaurant a few months ago, as the format has lost its value proposition that made it so successful initially.

Speciality Brands were most impacted by the pandemic, as they rely on sit-down sales that inevitably include alcohol. An example is The Hussar Grill. That segment grew sales by a juicy 62.3%!

The percentage change in HEPS is meaningless as there are huge tax distortions in the base. It’s more useful to just consider the diluted HEPS range for this period of 134.79 cents to 138.28 cents. If I go back to the six months ended December 2019, diluted HEPS was 124.9 cents.

This means that Spur is finally running ahead of pre-pandemic levels. It’s been a journey.

Steinhoff tanks another 18%

I still don’t understand why anyone is buying it

Steinhoff’s plan was to sell a 6.5% stake in Pepkor in an accelerated bookbuild, which means institutional investors bid for shares at a discount to the prevailing share price. Without the discount, there’s no incentive for bidders.

Importantly, this doesn’t actually hurt other shareholders in Pepkor. The company isn’t issuing new shares at a discount. Pepkor has nothing to do with this actually, as Steinhoff sold shares that are already in issue.

The demand for Pepkor shares at a discount was so great that the size of the placing was increased to a stake of 7.2%, with Steinhoff raising R4.9 billion in the process. The shares were sold at a discount of 5.3% to Pepkor’s closing price the prior day.

So, why did the Steinhoff share price fall so hard? Perhaps because people have finally referred back to the deal on the table, in which shareholders will either have 20% of an unlisted company or 100% of sweet nothing.

In my view, at 36 cents per share, Steinhoff is still 36 cents too expensive.

Little Bites:

  • Director dealings:
    • An associate of a director of Salungano has acquired shares worth nearly R3m
    • A director of Trematon sold shares worth R450k
    • A director of Clicks has bought shares worth R98.5k
  • This is a little bite with a potentially big impact. Sam Sithole has been appointed as a non-executive director of Tiger Brands. If you aren’t familiar with the name, Sithole co-founded Value Capital Partners back in 2016 after a strong career at Deloitte and then Brait. Value Capital Partners currently holds 3.45% of Tiger’s shares and these director appointments are usually the precursor to the company increasing its stake.
  • There’s a switcheroo in the AEEI – Premier Fishing and Brands deal. The offeror is no longer AEEI, but is instead Sekunjalo Investment Holdings (a private company). This is to avoid the complications of a related party transaction under JSE rules. The Takeover Regulation Panel (TRP) will need to consent to this.

Who’s doing what this week in the South African M&A space?

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

Exchange-Listed Companies

Anglo American is to acquire a 9.9% stake in Canada Nickel Company which owns the Crawford nickel project in Ontario, Canada. The undisclosed investment is part of Anglo’s approach to expand its nickel offering with additional battery-grade nickel for use in electric vehicles. Anglo will apply its FutureSmart Mining™ technologies to ore samples with the aim of assessing opportunities to improve processing recoveries and reduce the project’s overall energy, emission and water footprint.

Old Mutual asset manager Futuregrowth has invested in prop-tech startup platform Flow Living. Futuregrowth was the lead investor in the US$4,5 million pre-series A funding round alongside Kalon Ventures, Vunani, Endeavour, CRE Venture Capital among others.

Sanlam announced two deals at the end of last week. Through its subsidiary Sanlam Life, Sanlam will acquire a 26% interest in Capital Legacy by disposing of Sanlam Trust to Capital Legacy for R390 million in exchange for shares in Capital Legacy. It will also subscribe for further shares in Capital Legacy for R720 million in cash. Sanlam already has exposure to Capital Legacy through its 25% shareholding in Africa Rainbow Capital Financial Services Investments which itself holds (a diluted) 25% stake in Capital Legacy. Sanlam also announced the decision to acquire the remaining 38% stake in BrightRock; it first invested in the life insurer in 2017.

Thungela has announced a deal to acquire an 85% interest in the Ensham thermal coal operation in Queensland, Australia. The deal, implemented through a new company Sungela Holdings, comprises an equity investment of A$267 million and a mezzanine loan of A$68 million to the co-investors representing R4 billion. The stake will be acquired from Idemitsu with LX International holding the remaining shares.

Speculation regarding the possible sale of its subsidiary, PPC Zimbabwe for c. US$200m has been dismissed by PPC saying that it regularly receives unsolicited approaches for various parts of its businesses. Any developments on these unsolicited approaches it said, would be shared with the market via official channels. Nevertheless, the market responded positively with the share price up 21% on the rumours.

The proposed delisting of Premier Fishing and Brands from the JSE by majority shareholder African Equity Empowerment Investments (AEEI) announced in December has hit a regulatory snag – the JSE has advised AEEI that the deal constitutes a related party transaction. That is because AEEI is buying up the remaining 6.14% from minorities at R1.60 per share. Rather than delay the transaction – the circular must be updated – AEEI is considering replacing itself with Sekunjalo Investment Holdings as the offeror. Sekunjalo is the holding company of AEEI.

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

Renergen has successfully placed 4,600,000 newly issued ordinary shares via an accelerated bookbuild process at R24.00 per share, representing a 6.5% discount to the pre-launch closing price of R25.68 on February 6, 2023. The funds will be used to support the capital expenditure required for the Phase 2 expansion. Phase 2 of the Virginia gas project will produce 34 000 GJ of liquefied natural gas and up to 5 t/d of helium.

Steinhoff International raised R4,9 billion, placing 265 million Pepkor shares in an accelerated bookbuild, representing c. 7.2% of the current issued shares of the company. The placing, at a price of R18.50, represents a 5.3% discount to the pre-launch Pepkor share price on 8 February 2023. The disposal of shares reduces Steinhoff’s stake to 43.8% and increases the free float of Pepkor shares from 49% to 56.2%.

Cashbuild has announced a proposed odd-lot offer to shareholders holding 40,493 shares representing 0.16% of the total issued share capital of the company. The shares will be repurchased at a 5% premium to the 30-day VWAP of a Cashbuild share at the close of business on March 17, 2023.

Industrials REIT has issued 2,343,679 shares in terms of its scrip dividend election, representing 0.78% of the current issued share capital of the company. Following the allocation, the issued share capital of the company will be 298,775,175 of which 1,914,727 will be treasury shares.

Copper 360, the red metal producer is to list on the AltX board of the JSE later this month.

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:

Santova announced the repurchase of 4,109,908 shares during the period November 1, 2022 and February 2, 2023. The shares, which will be held as treasury shares, were repurchased for a total transaction value of R31,93 million.

Datatec repurchased 3,000,000 shares on the open market at a price of R33.50 per share for a total transaction value of R100,5 million. The shares will be held as treasury shares to be used in settlement of share-based remuneration awards.

Glencore this week repurchased 22,500,000 shares for a total consideration of £123,48 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed this month.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 30 January to 3 February 2023, a further 3,966,195 Prosus shares were repurchased for an aggregate €292,8 million and a further 683,846 Naspers shares for a total consideration of R2,29 billion.

One company issued a profit warning this week: Sasol.

Three companies issued or withdrew cautionary notices. The companies were: Pembury Lifestyle, Tongaat Hulett and Coronation Fund Managers.

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

Thorts: ESG reporting begins with honest and verifiable statements

Paula-Ann Novotny, Jaqui Pinto and Chandni Gopal
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Thorts: ESG reporting begins with honest and verifiable statements

An increased focus on ESG reporting has heightened the risk that stakeholders may take a number of decisive actions against a company for making false or misleading claims, including litigation and shareholder derivative actions.

Today, in assessing the likely resilience and sustainability of their investments, investors employ an integrated framework based on environmental, social and governance (ESG) principles. Companies are now expected to consider and reflect ESG risks, impacts and opportunities in their strategies, product portfolios, operational value chains, decisionmaking structures, and stakeholder engagement platforms.

As stakeholders and shareholders pay more interest to these nonfinancial parameters of a company’s performance, there is an increased demand for companies to disclose data that is transparent, verifiable, credible, and accurate.

Reporting requirements are evolving

Various organisations, regulatory and industry bodies, and even States have developed frameworks to guide ESG disclosure and reporting which, although all seeking to achieve similar goals, have nuanced approaches, recommendations and focus areas. One of the biggest challenges faced by corporates is understanding which frameworks (global, regional, or sector-specific) to report against and how to meet those requirements in alignment with other stakeholder expectations and requirements.

A global effort towards convergence and harmonisation of these guidelines is under way. The latest effort is the ISSB’s Exposure Drafts of two new disclosure standards aimed at establishing a global baseline guideline for sustainability and climate-related disclosures. Reporting in line with these frameworks is currently voluntary for South African organisations, but we anticipate a mandatory disclosure regime(s) in the near future (as is already happening in the UK and EU).

For South Africa, the JSE has issued voluntary sustainability and climate change disclosure guidance documents, which align with global standards but are framed by a domestic context.

In deciding what information to disclose (as guided by the principle of “materiality”), corporates must identify the purpose and users of their reports. For example, integrated reporting targets stakeholders seeking to assess enterprise value (e.g. investors, lenders and creditors), so disclosure includes a sub-set of sustainability issues that enable users to understand the financial implications of sustainability-related risks and opportunities on enterprise value over time. The various disclosure frameworks which have been published recommend different approaches to materiality (single materiality vs double materiality), depending on the report’s purpose and users.

Stakeholders can deploy various weapons

Companies have various stakeholders, such as employees, the communities in which they operate, funders, trade unions, non-governmental organisations, and shareholders. This piece focuses on shareholders, although other agendas and concerns must also be considered and balanced.

Shareholder activism involves shareholders deploying certain mechanisms to effect change within a company. This has been effectively used to pursue ESG agendas.

South Africa has an enabling framework for shareholder activism, including the Companies Act, the Takeover Regulations, and the Financial Markets Act. Guidelines and requirements issued by regulators such as the JSE and the Takeover Regulation Panel also provide shareholders with certain protections, as well as the King Code.

• Shareholder activism can take the form of attending, taking part in, calling (in certain circumstances) and voting at meetings. Companies can prepare themselves by considering who the shareholders are, what information they are using, and what their main concerns are. It is always best to be proactive and to engage with shareholders at the appropriate levels and through appropriate channels to pre-empt any issues, and to cater for them.
• Shareholders have the right to access certain company information. The Protection of Access to Information Act allows shareholders (and other parties, including broader stakeholders) to request and access additional information. For example, they may ask to see verifiable evidence that lies behind a company’s claims of its ESG achievements.
• Appraisal rights, which are governed by Section 164 of the Companies Act. This provides the shareholder, in certain circumstances (predominantly involving corporate actions) the right to demand that the company buy back all shares held by that shareholder for a fair market value.
• Dissenting shareholders have various protections in legislation. For example, in terms of the Companies Act, an affected transaction is subject to court review if more than 15 percent of the shareholders vote against it and, within five business days after the vote, any person who voted against it requires the company to seek court approval.

Apart from legislative tools, shareholders can also effectively use social media to obtain support and change ideas, as well as influence a company’s strategy.

South Africa’s legislative provisions uphold disclosure

While South Africa has no specific legislation targeting ESG-related claims, there are “hard” and “soft” law requirements that potential litigants may utilise to hold companies accountable for inaccurate or misleading disclosures and statements.

“Hard” laws primarily include statutes such as the Consumer Protection Act, Companies Act and Financial Markets Act, all of which contain provisions relating to disclosures and statements. Various environmental, health and safety regulations similarly impose reporting requirements.
“Soft” laws comprise common law requirements such as those in delict where, for example, a financial statement could lead to an investor suffering financial loss, giving rise to an actionable claim.

Claims relating to ESG disclosures may be ventilated in numerous forums. Apart from the court system, there are also statutory ombudsmen and regulators, and various forms of alternative dispute resolution. Dispute resolution proceedings, particularly litigation and arbitration, are generally considered to be an expensive endeavour, which tends to deter potential claimants. In recent years, however, the advent of third-party litigation funding, especially for matters of public interest and climate change (in)action, has ameliorated the “expense” barrier to entry, making litigation much more accessible to ordinary consumers and affected communities.

In an effort to safely navigate the minefield of litigation risk presented by ESG-related disclosures, companies should remember that “the best defence is the truth”. If a company can support concrete statements with evidence of sustainability efforts and firm data, it is more likely to be able to neutralise and defend potential ESG claims.

Paula-Ann Novotny and Jaqui Pinto are Senior Associates, and Chandni Gopal a Partner | Webber Wentzel

This article first appeared in DealMakers, SA’s quarterly M&A publication.
DealMakers is SA’s M&A publication.

www.dealmakerssouthafrica.com

Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

The Finance Ghost
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Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

Anglo American invests in Canada

The mining giant is acquiring a 9.9% stake in Canada Nickel Company

In addition to this minority stake in the company, Anglo American will have the exclusive right to buy up to 10% of the recoveries of nickel concentrate, iron and chromium in the magnetite concentrates, as well as any corresponding carbon credits from the Crawford project.

Concentrate indeed – that’s what you have to do when reading these mining announcements.

Put simply, this is part of Anglo’s strategy to expand its nickel offering in preparation for electric vehicle demand. I’m sure it also helps that Canada has electricity.

Farewell, Coronation dividend

An 11% drop in the share price accompanied the bad news from SARS

The only reason to invest in Coronation is for the dividend. When that’s gone, shareholders run for the hills. We have perfect evidence of this after the latest news regarding tax litigation in the group’s international operations.

This has been going on since 2021, when the Western Cape Tax Court ruled in favour of Coronation Investment Management. SARS went to the Supreme Court of Appeal in November 2022 and judgement was handed down yesterday, upholding SARS’ appeal and ordering Coronation to pay additional taxes together with interest and costs. Thankfully for shareholders, the claim for costs was dismissed.

This will have a “material impact on earnings and cash flows” although the company needs to quantify the claim first. For this reason, no interim dividend is expected.

Coronation is also considering an appeal to the Constitutional Court.

Lesaka jumps 13% after beating revenue guidance

The company is still loss-making, but to a far lesser extent than before

In the second quarter of the 2023 financial year, Lesaka (previously Net1) exceeded revenue guidance by 4%. The actual growth is a pointless measure, as the acquisition of Connect Group has vastly increased the size of the group.

The operating loss of $2.2 million is a 74% improvement from a loss of $9.4 million in the comparable period. The net loss has improved from $12.4 million to $6.6 million.

Perhaps the biggest milestone of all is positive net cash of $3.4 million vs. an outflow of $13.8 million in the comparative period. The return of the Consumer business to profitability was a major driver of this result.

Guidance for the full year has been reaffirmed, which the market seemed to like. Still, the group isn’t profitable yet and took on a lot of debt for the Connect Group acquisition, so there’s a lot of work still to be done.

Orion signs a definitive agreement with the IDC

The R250 million facility will help fund early works at Prieska

Orion’s funding package with the IDC has been in the works for a while, made possible by the initial $87 million funding package from Triple Flag. The IDC facility has been structured as a senior secured convertible loan facility worth R250 million.

The IDC loan can be converted into shares in the Prieska copper-zinc project based on a pre-money valuation of the project of R1.2 billion.

The company now has funding for demonstration trial mining and dewatering, critical to the early works bankable feasibility study which the company hopes to complete by mid-2023.

This is a mezzanine facility into a risky project, so seeing an interest rate of Prime + 3.5% isn’t surprising. This money doesn’t come for free even if Orion opted not to use it, with the IDC earning a raising fee of 1.25% and a commitment fee of 0.75%. It’s common to see these fees in funding packages.

Pick n Pay – for load shedding, that is

The share price was the most discounted item on the shelf today, down 8.5%

Pick n Pay released a trading update for the 43 weeks ended 25 December 2022. That’s a rather odd period to be reporting on, capturing effectively the 10 months preceding Christmas.

In grocery stores with an all-important cold chain, there’s absolutely no choice but to pay for energy backup solutions when Eskom does what it does best. The company notes “some impact on turnover” which makes sense based on my visit to a depressed, rather dark mall on Wednesday afternoon. The far bigger impact is on operating costs, with generators costing a fortune to run.

Pick n Pay is still tracking miles behind Shoprite, with sales growth in South Africa of 9% and an increase of only 4.8% in like-for-like sales. Rest of Africa was up 17% or 9% on a constant currency basis.

There’s a deceleration here in the South African business, with sales for the 17 weeks to 25 December posting like-for-like growth of just 2%. The shocker is Boxer, which managed just 0.2% like-for-like growth in that period vs. Pick n Pay at 2.8%. The company blames base effects, with like-for-like for Boxer returning to 9.7% in January.

Whichever way you cut it, volumes have dropped severely. Internal selling price inflation for the 17-week period was 10%, below CPI Food of 12.2%. This means volume declines of roughly 8%, which is extraordinary.

Not only is the sales performance poor, but the incremental increase in diesel costs year-on-year was R346 million to run generators. The current run rate is R60 million per month, which is a massive problem. Investment is being made in more efficient power solutions, which impacts the rate of growth in the store footprint. Basically, corporates now need to do what government is supposed to be doing, which will negatively impact economic growth.

Pick n Pay Clothing is a very good little business, with sales up 11% for the 10-month period and 6.2% for the 17-week period, running ahead of key competitors like Mr Price and Ackermans. The standalone clothing stores grew 11.4% in the 17-week period, with the clothing lines within supermarkets suffering from system upgrades.

Clothing isn’t enough, sadly. Previous guidance for earnings was that they would be flat for the full year. Based on these numbers and the management commentary, it’s almost certain that full year earnings will be down year-on-year.

Pick n Pay was managing to hang on to Shoprite in the good times. Now that things are tough, the gap between the two is being opened at a frightening rate.

And in this chart, I demonstrate that “defensive” is the joke of the day when looking at grocery retailers:

Sappi: another way to get a klap on the market

With a drop of 10%, there really are some bruises after this day on the JSE

For the quarter ended December, sales ere down 2% but profit was up by 54%. Net debt reduced by 35%. Headline earnings per share increased by 55% and the company declared a dividend again.

So why on earth did the share price tank after Sappi released its best ever first quarter result?

If you skip right down to the bottom of the announcement, you’ll see a comment that they “anticipate a return to a normalised level of earnings in FY2023” – a stark reminder that share prices are forward looking.

The market assesses cadence (results vs. the immediately preceding quarter) rather than just year-on-year numbers, looking for signs of a slowdown in the conditions that have been so beneficial to Sappi. With customer inventory levels now much higher, there’s a destocking cycle that is hitting sales volumes.

That slowdown is clearly visible and Sappi is as cyclical as a company gets, so share price volatility is par for the course.

The good news is that the balance sheet is vastly stronger than it was a year ago, with net debt of $1.24 billion vs. $1.92 billion a year ago.

Steinhoff is shedding assets faster than Eskom sheds electricity

The latest sale is a portion of the stake in Pepkor

The Steinhoff garage sale continues. After recently reducing its stake in Pepco in Europe, the company is now selling a 6.5% stake in Pepkor. This would take its ownership from 51% to 44.5%. Needless to say, the proceeds will be used to reduce debt.

Investec and Morgan Stanley will be getting their cellphones (and Bloomberg terminals) out to find buyers. Keep an eye on the Pepkor share price on Thursday!

WBHO expects a significant jump in earnings

The share price closed 3.5% higher in response

With operating profit from continuing operations expected to be up by at least 10% thanks to a revenue increase of 12%, WBHO shareholders have something to smile about regarding the six months to December 2022. The Building and Civil Engineering segment worked all the magic, with operating profit up 50% vs. a decline of 8% in the Roads and Earthworks segment. The Construction Materials and Property Developments segment expects an increase of 8% in operating profit.

Looking abroad, the UK business was flat on the revenue line and down 35% at operating profit level. WBHO is in the middle of a complicated exit from Australia, with further costs of A$5.5 million recognised in this period.

In Africa, a notable update is that income from associates and joint ventures should be up 160% thanks to the completion of the refinancing of the Gigawatt Power Station in Mozambique.

The financial position has been strong over the six months, perhaps the most important measure in the construction industry.

It also helps that the continuing operations order book is at R26.5 billion vs. R22.2 billion at the end of June 2022 and R17 billion at the end of December 2021.

A tighter range for HEPS will be given once available, with the company flagging a 20% increase in earnings from continuing operations.

Little Bites:

  • We only had Big Bites today!

Ince Individual DealMaker of the Year 2022

Marylou Greig
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Ince Individual DealMaker of the Year 2022

This is the 15th year in which such an award is to be made. Candidates are nominated by their peers in the M&A industry. From these nominations a shortlist of four candidates has been chosen by the Independent Selection Panel. They are (in alphabetical order):

Charles Young (Bowmans)

Partner and Head of Mining at Bowmans, Charles has led many high-profile and intricate transactions in the African resource sector. He led the team on behalf of NYSE-listed Ardagh Group on its entry into the African glass-packaging market with its acquisition of Consol, in a deal valued at $614m (R10bn). In another complex cross-border deal, Charles led the team representing Yamana Gold on its proposed acquisition by Gold Fields in a transaction valued at $6,7bn (R103,85bn). He advised Harmony Gold Mining on its acquisition of AngloGold Ashanti’s remaining operations in South Africa for $300m (R2,96bn), Orion Mine Finance on a complex $200m gold streaming arrangement and a $100m platinum streaming arrangement with Platreef Mine, a subsidiary of Ivanhoe Mines.

Christo Els (Webber Wentzel)

Christo has over 25 years of experience in the areas of corporate law and M&A, making the shortlist of candidates for DealMaker of the Year five times, and taking the title in 2011. He led teams in three transformational transactions during 2022, two of which have been shortlisted for the Brunswick Deal of the Year – the take private by the Manta Bidco consortium of Mediclinic International, and the Sanlam/Allianz joint venture of their insurance assets in Africa. In addition, Christo worked with Walmart on the acquisition of the remaining shares in Massmart. He also provided strategic advice on a number of matters, including Gold Fields’ proposed acquisition of Yamana Gold, and the disposal and repurchase programme implemented by Naspers and Prosus.

Johan Holtzhausen (PSG Capital)

During 2022 Johan, who has been at the forefront of South African dealmaking for the past 24 years, led his team in the PSG Group restructuring which involved the unbundling to shareholders of its six JSE-listed companies, two of which were dual-listed (R19,4bn), a scheme of arrangement for the repurchase of PSG shares, representing the unlisted portfolio, (R3,15bn) and the concurrent delisting of the group. His notable transactions from the past few years include the 2019 Brunswick Deal of the Year awarded to PepsiCo for the acquisition of Pioneer Foods (R23,6bn) and PSG Group’s unbundling of its 28.11% stake in Capitec (R28,9bn). This is the second year that Johan, who is the Managing Director of PSG Capital, has been shortlisted for the Ince Individual DealMaker of the Year.

Michael Dempster (Standard Bank)

In 2022 Michael, a corporate finance executive at Standard Bank, advised on two high profile and public M&A transactions in the local market – Walmart on its acquisition of the remaining stake in Massmart (R6,4bn), and Allianz on its joint venture with Sanlam, advising on the amalgamation of their respective African assets in a deal valued in excess of R33bn. The combined operations of Sanlam and Allianz will create the premier pan-African, non-banking financial services entity. Michael also advised the African Finance Corporation on its $100m (R1,7bn) equity investment from the Public Investment Corporation, which is a catalyst for private sector-led infrastructure investment across Africa.

The winner will be announced at the ANSARADA DealMakers Annual Awards on 21 February, 2023 at the Sandton Convention Centre.

www.dealmakerssouthafrica.com

Ghost Bites (Bowler Metcalf | PPC | Renergen | Sasol)

The Finance Ghost
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Ghost Bites (Bowler Metcalf | PPC | Renergen | Sasol)

Bowled over by load shedding

“Plastic converting is energy hungry” – Bowler Metcalf CEO

Some industrial companies are managing to deal with load shedding successfully. Others are not, with the difference often coming down to the engineering realities sitting behind the process.

Despite a 13% increase in revenue for the six months ended December 2022, Bowler Metcalf experienced a 25% decline in profit from operations. The biggest culprit was a 25% jump in raw materials and operating costs, with a 13% increase in staff costs not helping either.

The management team is outspoken about load shedding, which is causing absolute havoc for many South African businesses. They do not expect the full year result to be an improvement, although operating costs are expected to have a less severe impact over the full year.

The share price is down 13.3% over the past year, trading at R9.31. Substantial share repurchases were executed during the period at an average price of R10.01.

PPC jumps 20% on deal speculation

This is a perfect example of “buy the rumour” in action

Media speculation in the morning sent the PPC share price running, as reports came out on PPC apparently considering a sale of its business in Zimbabwe. The market reaction to this news tells you what people think of the Zimbabwe investment.

After the share price shot up 20%, the company formally responded to the market speculation via a SENS announcement in the afternoon. The share price didn’t move much in response to the announcement, which was a loosely worded piece that reminded the market that PPC regularly receives unsolicited approaches for various parts of the business, including PPC Zimbabwe.

This didn’t exactly squash the rumour, did it?

Renergen taps the local market for capital

The company raised over R110 million in an accelerated bookbuild

First thing in the morning, Renergen announced an intention to place 4.6 million shares, which represents around 3.2% of existing share capital. This capital will be used to support the investment required for phase 2 of the Virginia Gas Project.

In an accelerated bookbuild, the bookrunner (in this case Standard Bank) contacts institutional investors to get them to support the capital raise. The general public doesn’t get the opportunity to invest.

The capital raise was successful, raising over R110 million at a price of R24 per share, a 6.5% discount to the pre-launch price. The discount is important to entice institutions to invest.

For retail investors, this means dilution at a discount.

Sasol takes a 7% hit to the share price

The market clearly didn’t like the trading statement

For the six months to December, Sasol is expected to report core HEPS growth of between 2% and 12%. That doesn’t exactly sound terrible, yet it is clearly well below what the market wanted to see.

Despite the stronger oil price and weaker rand, Sasol’s results are uninspiring because of operational challenges in the mining business and the impact of inflationary pressures on the business and the global economy. Adjusted EBITDA is expected to be flat year-on-year, so the business is going sideways operationally.

Net impairment losses were R6.4 billion in this period, with the largest write-down being R8.1 billion in the Secunda liquid fuels refinery based on macroeconomic price assumptions and input price pressures. Aside from a couple of other much smaller impairments, there’s a reversal of R3.6 billion against Lake Charles.

Little Bites:

  • Director dealings:
    • A director of Thungela has sold shares worth R5.3 million – that’s a rather large disposal, fresh off the back of the announcement of an acquisition in Australia.
  • Following the resignation of Gavin Hudson, Tongaat Hulett has announced the internal appointment of Dan Marokane as CEO of the group.
  • Outsurance Group announced the retirement of the CEO of the Australian business, Youi Holdings. Hugo Schreuder has been with Outsurance and was the founding CEO of Youi when it was launched in 2008. A continuity plan is underway.
  • Suspended company Pembury Lifestyle Group seems to be making progress on the schools that it is trying to rezone and register as part of a strategy to get the business back on track. There’s a long way to go though, not least of all with the 2019 audit having not yet commenced. That’s not a typo.

Ghost Bites (Blue Label Telecoms | Cashbuild | Orion Minerals | Sibanye | Southern Palladium | Santova)

The Finance Ghost
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Ghost Bites (Blue Label Telecoms | Cashbuild | Orion Minerals | Sibanye | Southern Palladium | Santova)

An auditor change at Blue Label Telecoms

The importance of Cell C is clear

Normally, news of an auditor rotation is about as exciting as the after-lunch session of parliament. When it comes to Blue Label Telecoms though, I thought this one was worth mentioning.

SNG Grant Thornton has been appointed as auditor, a name that you don’t see too often in JSE companies. PWC has rotated off this audit.

So, why is this interesting? Well, SNG Grant Thornton happens to be the auditor of Cell C, so the idea here is to save costs on the group audit, as Cell C is such a major component of the audit. Having the same auditor throughout the structure helps with audit fees.

Cell C is a big part of the Blue Label investment thesis, with the share price down 27.5% over the past six months. It has climbed 7% in the past 30 days though, so momentum is encouraging.

Cashbuild wants to mop up retail shareholders

The costs of maintaining a wide shareholder register are significant

An odd-lot offer isn’t an attempt to get rid of the strangest shareholders on the register. Instead, it’s a tool that lets a company mop up the register to decrease the costs of being listed.

An odd-lot offer impacts anyone holding fewer than 100 shares. Cashbuild’s share price of R190 makes this a significant holding of R19,000 – a number that will catch many retail shareholders in its net.

There are 2,477 shareholders that fall into this category, representing 57.59% of the total ordinary shareholders in the company but representing only 0.16% of total issued shares.

The price is a 5% premium to the 30-day volume weighted average price based on close of business on 17 March. This will make it tricky for those looking for an arbitrage (building up a position of fewer than 100 shares and getting out for a profit).

Critically, if you do not specifically make an election with your shares, you will be deemed to sell them under the odd-lot offer!

The approval of the odd-lot offer and a specific repurchase of R194 million from Patrick Goldrick will be the subject of a general meeting on 6 March.

Mining Indaba presentations

A couple of junior miners have made their presentations available

Having sat in ridiculous traffic in the Cape Town CBD earlier today, I can confirm that the Mining Indaba has attracted a lot of people. Even CNN’s Richard Quest is in town, doing what most tourists do: landing in Johannesburg and heading to Cape Town as quickly as humanly possible.

For investors in this sector, newsflow from the Indaba is critical. Some of the mining companies on the JSE will release their presentations this week, so budding geologists and mining investors will have lots of new material to dig into.

To get you going, Orion Minerals made its presentation available here and Southern Palladium has released its presentation at this link.

Sibanye has received environmental permits for Keliber lithium

The project in Finland is moving forward solidly

Sibanye-Stillwater’s environmental permit for the Keliber lithium project’s Rapasaari mine and Päiväneva concentrator has been received. I’m glad I don’t have to pronounce these names, particularly the second one that sounds like a type of pastry.

The permit came with 144 conditions and the company has made a submission to court for clarification or changes to six of those conditions.

Along with the approval for the Keliber lithium refinery in Kokkola, this permit means that Sibanye is still on schedule for the project. The construction phase for the refinery is expected to start within weeks.

It’s been a tough 12 months for the company, having dealt with major operational challenges in its gold and PGM businesses:

Santova’s buyback is progressing well

Nearly R32 million has been deployed into share repurchases

In the US, share repurchases are practically a national sport. Companies use them as an alternative to cash dividends, thereby crowing about “years of uninterrupted cash dividend growth” – yes, because share repurchases are simply increased or decreased in response to performance!

In South Africa, our listed companies are better than that. They generally use share repurchase programmes in the right manner: deploying capital into buybacks when they believe that their shares are undervalued.

Between 1 November 2022 and 2 February 2023, Santova invested R31.9 million in its own shares at an average price of R7.77 per share. The current share price is R8.10, so those shareholders who stuck around will be happy with that.

This repurchase represents 3% of the company’s issued share capital. The remaining authority for buybacks is for 16.3% of total issued shares.

Particularly in smaller companies on the JSE, seeing management teams with capital allocation discipline is encouraging.

Little Bites:

  • Director dealings:
    • A director of Stefanutti Stocks has bought shares worth R38.75k
    • A director of EOH has bought nil paid letters worth R11.6k (these give the right to participate in the rights offer and those who don’t want to invest further capital can sell their nil paid letters)
  • The institutional investor activity in Spar continues, with Old Mutual buying more shares in the retailer.
  • Those closely following York Timber will be pleased to know that the new CFO (Schalk Barnard) will start in his new role on 1 May 2023.
  • The CEO of African Dawn Capital (David Danker) has resigned, with the current executive chairman James Slabbert serving as interim CEO.
  • If you are a shareholder in Sable Exploration and Mining, be aware that the circular related to the mandatory offer by PBNJ Trading and Consulting has been released.

Ghost Stories #5: The Importance of China (Siyabulela Nomoyi, Portfolio Manager at Satrix)

The Finance Ghost
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Ghost Stories #5: The Importance of China (Siyabulela Nomoyi, Portfolio Manager at Satrix)

In this episode of Ghost Stories, Siyabulela Nomoyi (Quantitative Portfolio Manager at Satrix) joined me to talk about the importance of China not just to our market, but to global markets in general.

In this podcast, we discussed:

  • Why China is such an important partner to South Africa, specifically regarding commodity prices.
  • The sheer scale of China as a consumer market and the impact this has not just on US-based companies, but on a locally listed company like Richemont.
  • The obvious link to the JSE that everyone talks about: Naspers/Prosus and the investment in Tencent.
  • The risks in Chinese stocks over the past year or so, with Alibaba as the perfect example.
  • Historical valuation multiples in Chinese stocks and how the current levels compare to those lows.
  • How the relationship between sentiment and reality can drive substantial changes in valuation, particularly in geographies like China.
  • Our political allegiance in BRICS and the related strategic partnerships.
  • The importance of the property sector in China and related support measures.
  • The comeback in Chinese valuations as the economy has reopened.
  • Interesting ways to play the look-through to China, with Nike as an example of a company with significant indirect exposure to the country.
  • The importance of diversification in managing volatility.
  • Demographic changes in China in terms of the working population and how this drives investment in different sectors, like healthcare.
  • China’s approach to interest rates, which has been different to other emerging markets that tried to hike ahead of the Fed.
  • The use of ETFs, like the Satrix MSCI China ETF which tracks the MSCI China Index that captures large and mid-cap Chinese equities, or the Satrix MSCI Emerging Markets ETF that has China as the largest country in its holdings. Bond exposure through an ETF is possible as well. Don’t forget the Satrix RESI ETF, which gives exposure to the resources sector.

You can find out more information about these ETFs on the Satrix website.

Listen to the podcast using the podcast player below:

Follow Siya on Twitter here

Disclaimer

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance.

Don’t get ahead of yourself

The Finance Ghost
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Don’t get ahead of yourself

Chris Gilmour cautions against getting swept away by the equity market euphoria we saw in January.

The US Federal Reserve (the Fed) reduced its interest rate hikes from 75 basis points to 25 basis points last week. As, incidentally, did the SA Reserve Bank.

Does this mean that it’s A-for-Away into a new round of unfettered equity market euphoria? Hardly.

The world is in a very different place to where it was even a year or so ago. The global dynamics have changed almost beyond recognition. We’re likely going to have to contend with lower growth, higher inflation, higher interest rates and much greater overall volatility in markets for the foreseeable future. So while conventional wisdom dictates that we should reasonably look forward to inflation and interest rates falling as we approach the end of 2023, that doesn’t necessarily translate into good news for equity markets.  

The reasons for this apparent pessimism are many and varied but mainly revolve around deglobalization, depopulation and the rise of noisy autocratic states in many parts of the world. So for example, the war in Ukraine is likely to drag on well into 2023 and probably into 2024 and maybe even longer. The Russians are showing no signs of giving up, even though their economy is taking massive strain under the impact of international sanctions.

Geopolitical turmoil

A big spring offensive by the Russians is widely expected, with the Russians throwing everything they possibly can at the Ukrainians. This is why the Ukrainians are so keen to be ready for just such an attack. All through Russia’s military history, their campaigns have started off slowly and badly and have improved as the various wars have progressed. Russian commanders are obviously hoping that a similar pattern will emerge this time around, however, it is generally agreed by most military experts that the current Russian military is in much poorer shape than anyone could possibly have imagined at the outbreak of this conflict.

The NATO allies are upping the ante by supplying over 300 tanks, including the US Abrams and German Leopard to the front line. Faced with an increasingly difficult environment in which to sell its energy, Russia will be forced to cut back on production, all the way back to the well-heads in Siberia, which will tend to increase the price of that energy.

Agricultural products coming out of Russia and Ukraine will continue to be limited for as long as the war rages. So wheat and corn prices will remain high, as will fertilizer prices. While the FAO world food price index appears to have stabilized at higher levels, it is not showing any real signs of coming off. If the fighting in Ukraine intensifies, which it seems likely to do, that doesn’t bode well for agricultural product exports from either Ukraine or Russia.

The Americans are intent on bringing back large chunks of their manufacturing that hitherto was outsourced to China and other far east Asian countries. At least in the first instance, this process will be inflationary, until America gets economies of scale that work in its favour.

The UK is reprising its long-forgotten role as the “sick man of Europe”, following the Brexit disaster. Inflation remains stubbornly high, well above 10% year-on-year, and the IMF now forecasts that its economy will contract by 0.6% this year. Britain will likely be a drag on the rest of Europe as it muddles its way out of the mess created for itself by leaving the EU. It still has another two years before the next general election in December 2024, during which time it has to somehow bring inflation back to more manageable levels. According to the Office for Budget Responsibility, it can be done, but the political cost will likely be high.

German manufacturing has managed to secure some temporary relief from higher gas prices, due to a very benign winter. However, next winter is anyone’s guess and there will be zero cheap Russian gas available by then. So once again, an inflationary spiral is about to hit one of the largest economies on earth.

And China?

China remains the big unknown factor in the whole global GDP equation for next year and beyond. But it can no longer export its way out of trouble into a world that is increasingly wary of its supply chain fragilities.

As an increasing number of countries move back to manufacture onshore, Chinese companies are progressively losing out. China’s GDP growth rate of 3% for 2022 was the worst in 50 years, though admittedly that was due in large measure to the stubborn Zero-Covid policy that has finally been abolished.

However, Beijing’s options for stimulating its economy are limited.

Lest we forget our own problems…

South African load shedding is now adding to inflation thanks to the much greater frequency of power cuts. Supermarkets are having to cut back on supplies in order to minimize wastage due to food rotting in fridges that are turned off for hours on end. And the cost of using diesel to keep generators going is becoming prohibitive.

Costs can no longer be absorbed by retailers and producers and are being passed onto consumers via higher prices.

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