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Ghost Bites (Clicks | Coronation | Gemfields | Santova | Sasol)

The Finance Ghost
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Ghost Bites (Clicks | Coronation | Gemfields | Santova | Sasol)

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Clicks rallies 5% based on annual results

With a dividend up 30% and return on equity of 48%, it’s another big result for Clicks

Well, the results are in. Making people wait in incredibly long queues is clearly good business, with a ticketing system that forces them to browse the shelves while waiting.

There’s a base effect in this Clicks result that saw retail turnover increase by 11.7% in the year ended August. The comparable period included Covid and the riots in KZN, so that is obviously flattering for the year-on-year growth rate. Another important point is that Covid vaccines contributed a 3.5% uplift in retail sales.

Retail margin fell by 30 basis points because of the dilutionary impact of the vaccines.

In case you’re wondering if vanity is still a thing, the beauty category recovered strongly. There are no Zoom beauty filters available when walking around the office instead of attending online calls!

The blemish in this result was in the UPD business, where distribution turnover declined by 2.6% because of the base effect of strong demand for medicines during the severe waves of Covid. Margin expanded by 50 basis points in this business. Inventory levels were higher due to lower than expected demand in the hospital channels, so that had a negative impact on cash from operations.

Adjusted total income grew by 9.8%, with total income margin up by 90 basis points to 27.7%. Clicks is still achieving incredible margins.

HEPS from continuing operations increased by 30.1% to 1,033 cents and a final dividend of 457 cents has been declared. The total dividend for the year is 637 cents, up 30% in line with HEPS.

Clicks does make an effort to adjust for the impact of civil unrest. With that out of the picture, the group believes that diluted HEPS would’ve been up 11.9%.

There’s no stopping this group, with the long-term target increased from 900 to 1,200 stores. There will be between 40 and 50 new stores and pharmacies opened each year. Along with refurbishments of stores, this is the main driver of record planned capital expenditure of R936 million for the new financial year.

The share price rallied more than 5% on the day. It is down 8.5% this year and still trades at a huge valuation multiple of over 28x earnings.

Coronation’s AUM drops further and earnings are down

Investment management firms are high beta stocks, as earnings are impacted by market values

As an asset management firm, Coronation’s earnings are tied to the movements in the broader market. The other variable is net flows from investors, which is an important measure of success (or failure for that matter).

Coronation’s recent AUM trend is as follows:

  • Dec 2021 R662bn
  • Mar 2022 R625bn
  • Jun 2022 R580bn
  • Sep 2022 R574bn

For the year ended September, fund management earnings per share will decrease by between 10% and 20% vs. the prior year. The headline earnings per share (HEPS) movement is worse, as it includes mark-to-market movements on investment securities held. This is expected to drop by between 20% and 30%.

This implies a HEPS range of 341.5 cents to 390.3 cents. At the closing price of R31.20, this means a Price/Earnings multiple of between 8x and just over 9x.

A worst nightmare situation at Gemfields is possible

The insurgency in northern Mozambique is now right on the company’s doorstep

Just yesterday, we saw a stark example of the risks of operating in Africa through bad behaviour by the government in the Republic of Congo towards Kore Potash. That’s mild in comparison to what is playing out in Mozambique.

Letters from ministers are one thing. Live ammunition is quite another.

Gemfields has been keeping the market informed about this risk, so full credit to the company for that. In recent financial reporting, the country even notes that it would be a going concern (i.e. can stay afloat) even if it loses access to the ruby mine in Mozambique. Of course, that would be cold comfort for shareholders as the market cap would surely plummet in that situation.

The guns are a lot closer than before, with an attack at the neighbouring ruby mine belonging to Gemrock, which lies 12km south-east of the operations of Montepuez Ruby Mining Limited, in which Gemfields holds a 75% interest.

Mining at the site has ceased and personnel are being evacuated. The Mozambique police force is on site and the military are apparently arriving.

The share price fell 6% on the day. This tells you that the market is already putting a modest value on the Mozambique assets because of the risk.

Santova is still growing and is worth over R1bn

The company is looking for a new CFO, so get your CV updated

Santova’s share price has been a rare success story on the market this year, registering a gain of over 44%. It has more than doubled in the past year, as this JSE small cap blossomed into a R1 billion market cap group.

The latest news is a trading statement for the six months to August 2021 that reflects HEPS growth of 56.2% to 66.2%. This is a range of 75.22 cents to 80.03 cents vs. a current share price of R7.41.

On an annualised earnings multiple, Santova continues to look “cheap” – this is typical of JSE small caps. The market is also worried about where we are in the cycle regarding supply chains, though Santova can still grow forever if it just keeps winning market share.

CFO Robin Herselman is leaving the group to move offshore and pursue new interests. The process to appoint a successor has commenced.

Sasol suffers a bloody nose

An 8% drop in one day won’t please investors

Energy companies are volatile beasts. Since the beginning of June, Sasol has shed a third of its value. Ouch.

The latest update includes production and sales performance metrics for the three months to September. The pain in the share price is likely because of the additional commentary provided in the SENS announcement. When words like “force majeure” and “fire” are found in the same announcement, you’re going to have a bad time.

Transnet has invited almost everyone to its force majeure party, throwing its hands in the air and apologising for contributing to a rapidly failing state. This has led to Sasol declaring force majeure on the local supply and export of certain chemical products, which in turn has impacted production rates at plants in Secunda and Sasolburg.

Thankfully, the Natref refinery continues to operate. We are all about the silver linings in South Africa.

The real silver lining is that Transnet and the majority trade union concluded negotiations a few days ago, so port and rail activities have commenced. At this stage, the backlog in the South African value chain is significant and Sasol cannot quantify the impact.

The name “Lake Charles” is back, this time with a fire at the new Ziegler alcohol unit. The fire was extinguished and there were no injuries, but Sasol hasn’t given details on the extent of damage and the timeline for repair.

Some Sasol shareholders will feel like looking for that alcohol unit and tucking in.

Little Bites:

  • Director dealings:
    • A prescribed officer of Standard Bank has sold shares worth over R1.5 million.
    • The CEO of Super Group has bought shares in the company worth just R48k, perhaps using the change found under his car seat.
  • There is finally a deal on the table for OneLogix, a company that has been trading under cautionary for far longer than the average UK politician stays in power. Jokes aside, the first cautionary was in December 2021! This is essentially a management buyout (and delisting of the company) at a price of R3.30 per share. The rationale is that OneLogix derives “limited value” from its listing, as liquidity is low and the ability to raise capital is limited. Listings are expensive to maintain, so it becomes hard (or impossible) to justify being listed in such a situation. The price is a premium of 37.5% to the closing price in December before the cautionary came out. Irrevocable undertakings have been received from holders of 40% of the voting class (which excludes management and the B-BBEE partners).
  • Afrimat has confirmed that implementation of the initial phases of the Glenover acquisition is going well. Feasibility studies for follow-up phases have yielded “pleasing results” thus far. The board of Afrimat has approved the acquisition of Glenover shares and the company has exercised its option in this regard. There are major regulatory approvals required (Section 11 MPRDA and Competition Commission), with a long-stop date of 30 April 2024. That year isn’t a typo. From 31 July 2023, interest is payable on the purchase price of R300 million.
  • Brikor closed 10.5% higher after giving more details around its cautionary announcement. We now know that there’s a potential deal to acquire all the shares in Brikor. The key word here is “potential” and we have no idea yet on pricing, so proceed…with caution!
  • In the latest odd story on the JSE, Salungano Group wants to sponsor the Venda Football Academy for an amount of R15 million over three years. The CEO of Salungano Group also happens to be the founder and majority owner of the academy. This is to position the Salungano brand in the market, after the company decided to rebrand from its old (dirty) name of Wescoal. Merchantec acted as independent expert and determined that the terms of the deal are fair to shareholders, so no shareholder vote is required as this is a small related party transaction. As for whether a company should be spending 3% of its market cap sponsoring local soccer, you’ll have to decide that for yourself. The share price dropped 4% as some investors voted with their feet.
  • Anglo American has signed a memorandum of understanding with Thyssenkrupp Steel Europe (a longstanding customer) to work on ways to decarbonise the process of steelmaking. The idea is to do joint research on certain manufacturing processes, as this would help reduce the carbon impact of Anglo’s iron ore products. I must say, I have great admiration for Anglo’s approach to carbon emissions. Instead of just paying lip service in the annual report, the company is actively investing in new technologies (and not just solar panels either).
  • African Dawn Capital has raised R1.9 million through the issuance of new shares representing 10% of issued share capital. The price was 30 cents per share, a premium of nearly 67% to the 30-day volume weighted average price (VWAP).
  • Gary Harlow has resigned from the board of Blue Label Telecoms after more than a decade of service.
  • Theunis de Bruyn of Calibre Capital has been appointed to the board of Ascendis Health. Calibre is now a material shareholder in Ascendis.
  • The chairperson of Attacq will step down within the next 24 months, with Allen Swiegers (a member of the Audit and Risk Committee) nominated as his replacement.
  • The Chief Operating Officer of Eastern Platinum Limited has resigned from the company. Haiying Wang will step into the role, bringing in two decades of international experience.

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

Announcements on merger and acquisition activity by South Africa’s stock exchange listed companies took a back seat this week with the focus of company releases on financial results. However, the following was announced:

OneLogix has announced details of the management buyout, a deal first proposed in a cautionary announcement to the market in December 2021. Minorities are being offered R3.30 per share, a 17% premium to the 30-day VWAP of R2.82 on October 19 and a 37.5% premium to the closing price on the day preceding the first cautionary announcement in 2021. Extremely low liquidity is the motivation for the proposed delisting, which makes the stock unattractive to institutional investors.

Afrimat has exercised its option to acquire 100% of the shares in Glenover Phosphate for a purchase consideration of R300 million. The option formed part of the company’s deal in December 2021 when it purchased certain assets and the right to mine selected deposits at the Glenover mine. The acquisition positions Afrimat to enter new commodities aligned with global trends relating to the advancement of technology such as electric vehicles.

Delta Property Fund is to dispose of Enterprise Park, located at 15 Simba Road in Sunninghill. Delta will receive R39 million from the sale – the property was valued at R45,4 million in February this year. The sale is a category 2 transaction and as such is not subject to shareholder approval.

Unlisted Companies

MRI Software, a US-headquartered provider of real estate software solutions, has acquired Johannesburg-based TPN Group, a registered credit bureau serving the residential, commercial and educational markets in South Africa. Financial details were undisclosed.

Kasada, a local real estate private equity platform focused on hospitality in sub-Saharan Africa, has acquired The Lamantin Beach Resort & Spa located in Saly, Senegal. Financial details were not disclosed.

Spatialedge, a Stellenbosch-based AI solutions provider, has acquired tech startup Cape AI which assists businesses to make smart decisions through the use of AI technology.

Strove, a local wellness startup, has secured undisclosed funding from Lifetime Ventures, a Japanese venture capital firm. Funds will be used to further develop its product and service offering to improve the holistic wellbeing of employees.

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

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

Outsourcia, a Moroccan customer experience and business process outsourcing provider, has acquired PhoneAct. The Tunisian contact centre acquisition furthers Outsourcia’s international growth strategy and presence in Morocco, France, Madagascar and Niger.

Private equity firm Gulf Capital has successfully exited its investment in CHO, Tunisia’s fully integrated producer and global exporter of olive oil.

valU, the Egypt-based fintech, has acquired a minority stake in Kiwe, a social payment app. Financial details were undisclosed.

Egypt Education Platform (EEP), backed by the Sovereign Fund of Egypt and EFG Hermes, is to acquire a majority stake in Selah El Telmeez, a prime education content developer in Egypt.

Sun King, a major player in the East African solar energy solutions space has acquired Lome-based Soleva, an operator and distributor of off-grid solutions. Financial details were undisclosed.

Cameroonian non-profit organisation Health and Development in Action (HEDA) has acquired Metabiota, a US-based organisation focused on global health and mitigation of pandemic risks.

Kasada, a real estate private equity platform focused on hospitality in sub-Saharan Africa, has acquired The Lamantin Beach Resort & Spa located in Saly, Senegal. Financial details were not disclosed.

MaxAB, the B2B e-commerce platform connecting food and grocery retailers to suppliers across Egypt and Morocco, has closed a pre-series B equity round. The funds, raised from new investors Silver Lake, British International Investment and DisruptAD together with participation from exiting investors such as Beco Capital, 4DX Ventures among others, will be used to scale its expansion across the MENAP region.

Nexta, an Egyptian startup, has raised US$3 million from eFinance Group, the state-owned provider of digital payment solutions. Nexta will use the funds to launch its lifestyle banking app.

Nigerian business management app, Bumpa, has secured US$4 million in seed funding to scale is product offering and enter new markets. Bumpa assists merchants to move their businesses online. The round was led by Base10 Partners with participation from Plug & Play Ventures, SHL Capital and DFS Lab among others.

Saas startup Glamera has secured US$1,3 million in a seed funding round led by Riyadh Angels Investors with participation from Techstars Accelerator, 100 Venture and Silicon Valley’s Lucrative Ventures among others. The Egyptian platform which provides services to beauty and lifestyle services providers will use the funds to expand geographically.

Maplerad, a Nigerian fintech startup, has raised US$6 million in seed funding. The round was led by Valar Ventures with participation from, among others, Golden Palm Investments, Armyn Capital, Dunbar Capital and MyAsiaVC. Funds will be used to expand it footprint across the continent.

Mass e-commerce startup Kenzz which provides online shopping to the mass market in Egypt and MENA, has completed a US$3,5 million seed round led by Outliers Venture Capital, HOF Capital, Foundation Ventures and Samurai Incubate. The funds will be used to grow product categories, invest in technology and launch a new app.

Sghartoon, a Tunisian startup that has developed technology that can identify the signs of learning disabilities in children, has raised US$150,000 from the Oman Investment Fund.

Trella, an Egyptian B2B trucking platform, has secured US$6 million in debt financing from ALMA Sustainable Finance and US International Development Finance Corporation (DFC). The capital will be used to extend into high-growth digital businesses such as financing in lower-middle income countries such as Pakistan and 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

African Dawn Capital, the AltX-listed venture capital vehicle, has issued 6,364,692 new shares at R0.30 per share representing a premium of 66.97% to the 30-day VWAP. The issue represents 10% of the issued share capital of the company. The proceeds of the private placement will be applied towards working capital.

AH-Vest has failed to submit its provisional report within the three-month period stipulated in the JSE’s Listing Requirements. If a provisional report is not submitted on or before 31 October 2022, AH-Vest’s listing may be suspended.

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 18,260,000 shares for a total consideration of £89,05million. The share repurchases form part of the second part 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 3,378,820 shares at an aggregate cost of A$12,62 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period October 10 -14, a further 3,734,417 Prosus shares were repurchased for an aggregate €195,11 million and a further 636,174 Naspers shares for a total consideration of R1,4 billion.

British American Tobacco repurchased a further 859,873 shares this week for a total of £28,27 million. Following the purchase of these shares, the company holds 213,680,980 of its shares in Treasury.

Four companies issued profit warnings. The companies were: Murray & Roberts, Labat Africa, Adcorp and Coronation Fund Managers.

10 companies issued or withdrew cautionary notices. The companies were:
Murray & Roberts, African Rainbow Capital Investments, Brikor, Chrometco, Acsion, Telkom SA SOC, MTN, MTN Zakhele Futhi, MC Mining and OneLogix.

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

Ghost Global (Domino’s | TSMC)

Karel Zowitsky
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Ghost Global (Domino’s | TSMC)

This week, Karel Zowitsky focused on cheese and chips. Before you get too hungry, these aren’t the chips that you’re thinking of.

Less cheese to make more dough

Even pizza isn’t immune to input cost pressures

If you have ordered a pizza recently, you might have noticed that the cheese isn’t as thick or that the toppings are thin. Restaurants are under pressure and with consumers struggling, the way to improve margins is to cut costs.

Domino’s Pizza, listed on the NYSE, hasn’t been immune to rising interest rates and the effects of inflation. The share price has fallen by over 40% this year. The franchise group has a market capitalisation of around $11.4 billion and is trading on a P/E ratio above 25x. Although food groups tend to trade at structurally high multiples, you need to sell a lot of pizzas to justify a multiple like that.

The pizzas must be priced to perfection. At the very least, Domino’s committing the egregious sin of offering pineapple on pizza might break the share price even further.

In its third quarter, Domino’s reported revenue of just over $1 billion. This is slightly up year-on-year. The gross margin has decreased from 38.6% to 35.7%, largely attributable to increases in input costs and supply chain pressures.

As much as we would love it to be, pizza is not immune to inflation. The good news is that the group is still profitable, with net profit for the quarter of $100 million.

Taiwan Semiconductor Company (TSMC) is still printing cash

The biggest risk is the first part of the name

TSMC is listed on the NYSE with a market capitalization of around $322 billion. In a nutshell, TSMC is the largest manufacturer in the world of electronic chips. These chips are required in almost every single piece of electronic equipment from your smartphone and laptop to your automated vacuum and electric car.

We are currently in a worldwide chip shortage as a result of supply disruptions that were caused over the last two years. This has massive ramifications for manufacturing. Although the chip is one of the smallest components, it is absolutely crucial for essentially every electronic device. If you haven’t been able to get your hands on the latest Playstation 5, now you know why.

Revenue for the third quarter saw a 35.9% increase year-on-year to $20.2 billion. Management expects revenue to be between $19.9 billion and $20.7 billion in the fourth quarter. The most impressive feat for TSMC is that the company is able to produce a net profit margin of 45.8%. The operating margin was 50.6% and management expects it to remain between 49% and 51% for 4Q22.

The share price has lost 50% this year despite the strong financial results. This is partly because the valuation was simply too high. We can’t ignore the fact that geopolitical risks around Taiwan are heating up, with China making worrying noises about the region.

Many of these concepts (as well as the capital intensity of the model) were covered in Magic Markets Premium, with TSMC as just one example in the extensive library of reports. Even though it was covered back in January, the insights are just as relevant today.

You’re obviously interested in global stocks if you’ve made it this far. There’s a library of 50 research reports and podcasts produced by The Finance Ghost and Mohammed Nalla in Magic Markets Premium. For R99/month or R990/year, the full library is available, along with a new show each week.

Ghost Bites (BHP | DRDGOLD | MTN and Telkom | Quilter | Standard Bank)

The Finance Ghost
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Ghost Bites (BHP | DRDGOLD | MTN and Telkom | Quilter | Standard Bank)

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 >>>

BHP operational review

Other than coal, production is higher

If you plan to read the entire review in detail, you’ll need to set aside a lot of time. BHP releases quarterly announcements that Tolkien would’ve been proud of.

I’ll focus on some key highlights here:

  • Production and unit cost guidance is unchanged for the 2023 financial year
  • Copper production is up 9% year-on-year and 11% vs. the preceding quarter (sequentially)
  • Western Australia Iron Ore is up 3% year-on-year and 1% sequentially
  • Metallurgical coal production is down 1% year-on-year and registered a significant drop of 19% sequentially
  • Energy coal production fell 38% year-on-year and 33% sequentially
  • Nickel production increased 16% year-on-year and 10% sequentially
  • Jansen potash project is tracking well
  • There are several initiatives underway to reduce group emissions

The sharp contraction in coal production was attributed to several factors including wet weather. It’s not just Eskom who struggles with wet coal.

DRDGOLD continues to struggle with margins

The gold price needs to stop this nonsense now

In an operating update for the quarter ended September, DRDGOLD reported a 1% sequential increase in production (i.e. vs. the quarter ended June) and a flat performance in gold sold. That’s not good when inflation is going through the roof and the gold price isn’t behaving, as the only way to then close the profitability gap is to ramp up production (easier said than done obviously).

Although the average gold price received was 1% higher than the preceding quarter, the inflationary pressures noted above led to cash operating costs increasing by 2% per kilogram. That’s not happy news for margins per kilogram, now is it?

To make the quarter-on-quarter view look even worse, there was an insurance claim of R84.7 million in the second quarter that obviously didn’t repeat in this quarter. This was the primary driver of adjusted EBITDA falling by 19%.

All-in sustaining costs per kg fell by 14% due to a significant decrease in sustaining capital expenditure. All-in costs per kg were 9% lower.

DRDGOLD remains cash flush (R2.24 billion in the bank) and still expects to declare an interim dividend in February 2023.

The share price has lost 28% of its value this year and I’m glad I got out of the way at the start of the year when I could see that gold wasn’t behaving the way it should during high inflation.

MTN has achieved the near-impossible

Yes, we finally have evidence of someone successfully cancelling a deal with Telkom

It’s time to bring out this gem from my Twitter timeline:

Based on the level of engagement it achieved back in July, it seems that many other people have also experienced the joy of the Telkom cancellations department.

Telkom’s share price tanked more than 21% in morning trade as the news broke of MTN calling off a potential deal with the company. There aren’t many details given in the announcement, other than that the parties failed to “reach agreement” to “mutual satisfaction” on the terms and process going forward.

If you only read the MTN announcement, you might speculate that this could’ve been related to price or other elements of the deal. There was perhaps some concern around how the competition regulators would view the deal, something that many highlighted as a deal risk.

If you read the Telkom announcement, you’ll see that Telkom wasn’t able to provide MTN with exclusivity around discussions and this apparently killed the deal. Before you lay the blame at Telkom’s door, it’s quite right not to grant exclusivity when there isn’t even a binding offer on the table. The board has a fiduciary duty to consider all potential offers.

Speaking of other potential deals and in case you’ve forgotten, Rain has thrown its hat in the ring with Telkom. The idea would be to merge the groups and retain Telkom’s listing. This must’ve played a role in MTN pushing for exclusivity.

With MTN having left the boardroom table, perhaps it’s time for Telkom to make it rain?

Quilter has lost half its market value this year

When markets are falling, you don’t want to own an asset manager

When looking at asset management firms, you have to distinguish between assets under management (or even assets under management and administration – “AuMA” in Quilter’s language) and net flows. AuMA will fluctuate as the market prices of all the underlying investments change. Net flows will tell you whether that asset manager is still attracting money from investors.

Over the course of the third quarter, Quilter’s AuMA fell 2%. There were net inflows representing 1% of opening AuMA, though they were lower than net inflows in the prior period.

Productivity per advisor (measured by gross flows vs. the number of advisors) has been consistent.

Paul Feeney has been at the helm for a decade and is stepping down on 1 November 2022. Steven Levin will take the top job in a difficult market environment. Quilter fell 5.5% after announcing the quarterly numbers and is down a whopping 51% this year.

Standard Bank signs off on another strong quarter

Year-to-date earnings are 42% higher than the comparable period

Each quarter, Standard Bank provides sufficient information to the Industrial and Commercial Bank of China (ICBC) to enable that bank to meet its reporting requirements. The benefit for local investors is that we get quarterly updates from Standard Bank rather than only interim and final reports.

For the nine months to September (i.e. the year-to-date period), net interest income (NII) achieved double-digit growth thanks to higher average loan balances and average interest rates. This is in line with what I wrote about the banks earlier this year, as inflation drives larger balance sheets for corporates.

Encouragingly, non-interest revenue (NIR) continued its strong growth, with market volatility leading to trading revenue growth. Banks love volatile markets with high trade volumes.

Another impressive aspect to the update is positive jaws, which means expense growth was lower than income growth. This suggests an expanding operating margin. I have no idea why the term “jaws” is only seen in the banking sector and hardly anywhere else.

It’s all good and well for balance sheets to grow, but if credit losses increase too quickly then the net impact on profits can be negative. Thankfully, Standard Bank’s credit loss ratio for the nine-month period is in the lower half of the through-the-cycle credit loss ratio range of 70 to 100 basis points.

Looking at other business units, Liberty’s performance improved vs. the comparable period that was impacted by the pandemic provisions. ICBC Standard Bank plc continued to report an operational profit for the nine months.

Return on equity for the nine-month period is higher than the 15.3% achieved in the first six months. The group doesn’t disclose how much higher.

With earnings attributable to ordinary shareholders up 42% year-to-date vs. the comparable period, this is proving to be an excellent year for Standard Bank.

The share price rallied more than 6.5% in response, taking the year-to-date growth to 12%.

Little Bites:

  • Adcorp has released a trading statement for the six months ended August. Revenue is up by between 1.2% and 5.2% which isn’t thrilling. HEPS from continuing operations is expected to be between 2% and 14% lower than in the comparable period. Sadly, because of “exceptional losses” in allaboutXpert Australia (classified as a discontinued operation), the group HEPS result is expected to be between 54% and 74% lower. At the end of August, Adcorp was in a net cash position of R144.8 million.
  • Delta Property Fund has agreed to dispose of 15 Simba Road, Sunninghill for R39 million. The property was valued at the end of February 2022 at R45.4 million. The buildings are vacant are need significant refurbishment. The proceeds will reduce the loan-to-value from a horrible 57% to a marginally less horrible 56.8%. Fund vacancy levels will reduce by 70 basis points to 30.6%. The buyers include a few names that I remember from my varsity classes at Wits, but that’s my little secret.
  • Kore Potash is a reminder of why doing business in Africa is fraught with risks. The Minister of Mines of the Republic of Congo has “expressed his discontent” with aspects of the administration of subsidiary companies and the lack of progress made towards financing the Kola Project. This comes after two senior employees were arrested and released without charge. The government has the “right to take measures” if the company doesn’t respond within 30 days. Kore Potash has actually made great progress in this project, so this feels like an African government just doing what so many of them are famous for: shaking the foreign corporation tree to see how much money falls out of it.
  • Specialist property developer Acsion Limited has released a cautionary announcement related to a potential cash offer for the company and subsequent delisting. There are such thin volumes in this company that it wouldn’t be much of a loss to the market. I’m not surprised to see this one potentially leaving the market.
  • Brikor released a textbook “bland cautionary” – there are literally no details. At all. We only know that the company has entered into negotiations that may impact the share price. Watch this space.
  • After uncovering gross misconduct by the leadership team in Jasco’s security and fire business, the board planned to restructure the business and exit this market segment. On further scrutiny though, the board has decided to rather place the business into voluntary liquidation. This can only mean that things were so bad that the business couldn’t be salvaged. The share price fell 30% as another reminder of the risks of investing in marginal microcaps.

British pound: the new emerging market currency?

Andre Botha
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British pound: the new emerging market currency?

TreasuryONE’s Andre Botha highlights the volatility in the pound in a week that is almost devoid of data.

As we move through this week of relative calm in the market, it is important to reflect on some of the key themes of the market over the last couple of weeks. Central to the whole market movement currently is the Fed and its reaction to both higher inflation and the fear that inflation puts into the market.

No sharp reversal in inflation

Last week, we saw that inflation in the US printed a little higher than expected at 8.2% vs 8.1%. This caused a little bit of panic in the market with the rand reaching a new high of R18.5700 against the US dollar. The effect of the higher-than-expected inflation number will surely be that the Fed will hike by 75 basis points at its next meeting in November and that the Fed will be quite aggressive going forward. The markets are pricing a 100% chance that the Fed will hike interest rates by 50 basis points.

While the dollar has been the main mover of markets in the past few months, we have seen great volatility in the British pound of late. The volatility stemmed from the tax cut reforms by ex-Chancellor Kwasi Kwarteng a couple of weeks ago. The fallout from the announcement was the pound and UK Government bond yield going into a free fall, with the pound hitting an all-time low against the US dollar.

Mr Kwarteng, who was fired on Friday after just 38 days in the job, paid the price for a giveaway that called into question the government’s economic credibility on financial markets. Mr Kwarteng’s replacement, former foreign and health secretary Jeremy Hunt, has since promised to win back the confidence of the financial markets by fully accounting for the government’s tax and spending plans.

Rollercoaster GBP

What does the above mean for the market in terms of direction for the next week?

As we stated earlier this week, we will have little in the way of data that is coming up. We have seen that emerging market currencies have borne the brunt of the US dollar attack last week and are slowly but surely gaining some ground against the US dollar. The US dollar has been overextended – especially after last week’s CPI print – and with the pound gaining some stability it bodes well for risky assets this week.

However, we need to watch out for any announcement from the Fed or recession talk for the markets to move substantially this week.

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Ghost Bites (Cashbuild | CMH | Hyprop | Pick n Pay)

The Finance Ghost
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Ghost Bites (Cashbuild | CMH | Hyprop | Pick n Pay)

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The DIY and building industry keeps falling

The latest update from Cashbuild isn’t good news at all

Cashbuild has released a voluntary operational update for the first quarter of the 2023 financial year. Revenue is down 4% year-on-year, with existing stores 5% lower. Volumes in existing stores fell by 8% and pricing increases helped mitigate some of that pain. Selling inflation was 4.8%.

Once again, the P&L Hardware business is taking the most pain. That segment is down 11% year-on-year and contributed 8% of sales. The core Cashbuild South Africa segment (81% of sales) fell by 2% overall, with new stores contributing 1% growth and existing stores down 3%.

This was a negative update that drove the share price down by 6%, taking the year-to-date drop to over 24%. The share price is back to September 2020 levels and there seems to be little relief on the horizon for this particular sector of the market.

CMH posts another bumper earnings result

The outlook tells a very different story

CMH is primarily a car dealership business and has had a great time of things in the aftermath of the pandemic. High used car prices means that margins have been great, with the impact of operating leverage leading to bumper profits.

There’s also a car hire business. Although it makes far less revenue than the car dealership segment, you need to look at profit before tax to get the real picture:

I also suggest that you pay close attention to the commentary in the result. Investing is about what will happen next, not what has already happened. The group talks about “weathering a short- to medium-term storm” driven by rising interest rates, worsening loadshedding and economic despondency, pressure from manufacturers to reduce inventory and a fall in confidence levels.

That final point is critical, measured by the number of deals initiated by customers and approved by finance houses before the customer has a “change of heart” and pulls out of the deal.

CMH is up 14% this year. I would be careful here.

Hyprop gets a positive credit outlook

In a REIT, equity investors need to pay attention to the credit rating

In many cases, you can largely ignore a company announcing its credit rating. As an equity investor (and provided the company is in sound financial health), the credit rating is no indication whatsoever of potential equity returns.

I see it a bit differently in REITs, as these are highly leveraged structures where the return to shareholders is heavily influenced by the availability and cost of debt.

I bought Hyprop shares earlier this year at R33 and they are currently trading just below R38, so this is proof that there have been ways to make money this year. My thesis is that retail property funds are due a significant recovery in a post-Covid world and I felt that the share price was undervalued.

GCR Ratings has given Hyprop a solid investment grade credit rating and has also noted a positive outlook, driven by a faster than anticipated recovery in the group, reduced risk on the balance sheet from recent transactions in Europe and the overall strategy around deleveraging the balance sheet.

As a happy shareholder, all of this is music to my ears.

Pick n Pay is on sale

You can QualiSave right now on the share price, which lost 9% on Tuesday

Pick n Pay has released interim results for the 26 weeks ended 28 August and the market appears to be upset. There isn’t much to fault in the results themselves, so this could be a function of a high valuation multiple that is finally unwinding. It may also be linked to visibility on Boxer vs. the rest of the group.

Recognising that the comparable period was impacted by the pandemic, turnover is up 11.5% and gross margin improved from 18.2% to 19.4%. The company suggests that 8.2% turnover growth is a normalised view after adjusting for civil unrest and liquor trading disruptions. If you read carefully in the detailed results, you’ll also find that gross margin on a normalised basis actually fell from 20% to 19.4%. The year-on-year improvement (as reported) is thanks to disruptions in the base.

Trading expenses were 10.6% higher, so operating margin expanded and profit before tax increased by 22.2%.

In Pick n Pay South Africa, like-for-like sales and expense growth were similar at 4.5%. The margin expansion didn’t come from that part of the business.

Although HEPS was 59.5% higher, pro-forma HEPS is what matters as this adjusts for the business interruption proceeds that were in this period and not in the base. That metric is 25.3% higher, which makes sense compared to the increase in profit.

To help you understand the group strategy, it’s useful to note that Pick n Pay refers to “high performance but under-penetrated formats” – in this case Boxer and Pick n Pay Clothing. The group believes that there is a significant runway for growth in these formats and I agree with that assessment, with Boxer posting growth of 27.2% and Pick n Pay Clothing up 14.8%.

In the core business, it’s all about separating the Pick n Pay footprint into two differentiated banners: Pick n Pay (for higher income shoppers) and Pick n Pay QualiSave (for lower- to mid-income shoppers). Although I still think it’s a terrible name, all that will ever matter is the financial results. The QualiSave name has been rolled out to 93 stores and a further 41 stores have been refurbished in line with the new plan.

In case you’re wondering, the difference is the amount of choice in store vs. how aggressive the pricing is. Higher income shoppers value choice and quality above all else. Lower income shoppers struggle to put food on the table and need the best possible prices. It’s as simple as that.

Online sales grew 82%. I would caution that this is still off a very low base.

Ultimately, the biggest news for investors who closely follow Pick n Pay is that Boxer is now separately disclosed for the first time. As this table shows, it is the crown jewel of the group in terms of future prospects:

With no other obvious reasons for the sharp decline in the share price, perhaps it was because the market realised that Boxer has been flattering the group story and that Pick n Pay needs more work than people thought?

Little Bites

  • Selected director dealings:
    • A director of Blue Label Telecoms sold shares worth R558k. In general, I’ve seen Blue Label insiders as being net sellers despite (or because of?) the deal with Cell C.
    • A prescribed officer of Standard Bank sold R2 million in shares.
  • Insimbi Industrial Holdings reported results for the six months ended August 2022. Revenue increased by just 1% but net profit jumped by 47%, helped along by an increase in gross margin thanks to higher commodity prices. For a real example of how badly Transnet is hurting the economy, switching from rail to road transport caused direct transport costs to increase by 219%! Cash generated from operations was down by 17%, driven by a significant decrease in trade payables. The best news in the result is that debt has come down considerably.
  • With the Emira – Transcend offer well underway, Emira now owns 68.03% in the company.
  • Ninety One has confirmed its assets under management (AUM) as being £132.3 billion. That’s lower than £134.9 billion at the end of June and £140 billion a year ago.
  • In a nasty display of the yield curve, British American Tobacco has priced $600 million of notes due 2032 (i.e. 10-year borrowings) at 7.75%. Debt is nowhere near as cheap as it used to be.
  • African Rainbow Capital Investments has sent out the circular related to the proposed change to the management fee. If you are invested in that company, I highly recommend you check it out as this has been a major source of underperformance since the group listed.
  • In a weekly reminder of how poor everyone is relative to Naspers and Prosus, those companies have repurchased shares worth $77 million and $190 million respectively. Best of all, that’s only one week’s worth of repurchases!

Ghost Bites (Calgro M3 | Labat | Mpact vs. Caxton | Murray & Roberts)

The Finance Ghost
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2
Ghost Bites (Calgro M3 | Labat | Mpact vs. Caxton | Murray & Roberts)

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Calgro M3 is lining up a huge pipeline

Investors will keep a close eye on the balance sheet

Residential property developer and memorial park operator Calgro M3 has released results for the six months ended August. It looks like good news, with HEPS up a meaty 33% to 57 cents. This was driven by 5% growth in revenue and an improvement in gross margin from 19.7% to 22%.

Although interest bearing borrowings have decreased by 3%, no dividend has been declared for this period. This seems to be because of general pressures on the balance sheet and the extensive development pipeline. Cash needs to be retained here.

Looking deeper, the residential property development business had 3,868 opportunities under construction as at the end of August. Around half of these are expected to be completed or handed over before February 2023, so revenue is expected to increase in the second half of the financial year. That would be a big finish to the year, as there were only 1,193 opportunities completed in the first half of the year.

The full pipeline in that segment is 24,000 opportunities for R15.9 billion, excluding the Frankenwald development. Calgro plans to exercise the Frankenwald land option at the end of June 2023 and is confident that internally generated cash can fund that option. This would unlock an additional 20,000 residential units across eight distinct income groups.

In the first six months, R47 million of annually planned infrastructure was self-funded. A further R73 million is coming in the second half of the year, which the company plans to fund internally. This is despite the first half of the year registering negative cash from operations due to infrastructure development and other factors.

In the Memorial Parks business, the goal is to grow cash receipts to support all group overheads and interest obligations. In this period though, sales slowed due to various factors including lower burial volumes, affordability constraints and the restructuring of the sales and marketing department. When adjusting for excess Covid-related debts, the memorial parks business is 5.6% lower than the comparable period.

To find out more about Calgro M3 and to ask questions like a proper sell-side analyst, join us on Thursday 20 October at midday on Unlock the Stock. You can also enjoy a presentation by Pan African Resources on the day. Register here for free>>>

Labat needs capital as cash is running low

And sometimes, clarity can be obtained between 10:27am and 11:25am

If there’s one thing that irritates me on the market, it’s when companies treat shareholders like a joke.

The JSE rules are clear. A listed company must publish a trading statement when a “reasonable degree of certainty” exists that results will differ by at least 20%.

At 10:27am, Labat released a trading statement for the nine month period ended 31 May.

Not even an hour later, the detailed results were released. It’s impressive to move from a “reasonable degree of certainty” to “certainty” in less than an hour. Perhaps those cannabis products really do help you focus.

The headline loss per share of 6.6 cents is already worse than 6.5 cents for the 12 month period ended August 2021, as there was significant “other income” last year that hasn’t repeated this year.

The company is looking for capital, which makes sense when you look at the balance sheet. This is a highly speculative play, with a loss of R34.7 million and the largest current asset being a receivable from SARS. I’m quite happy to keep my money away from this one as the risks seem to be as high as the customers.

Mpact responds to Caxton

It’s time for the latest salvo from the green corner of the ring

Of everything I’ve read thus far in the Mpact vs. Caxton fight, this is my favourite line thus far:

“Shareholders should note, however, that as SENS is not a forum for argument, Mpact does not intend to respond to every statement or allegation made in the Caxton Announcement and will confine itself to the matters of relevance to Mpact shareholders.”

Mpact SENS announcement, 17 October 2022

In this announcement, Mpact has reiterated / clarified its position on several matters:

  • The investigation by the Competition Commission started in 2016 and the Commission is not seeking to impose a penalty against Mpact. The company notes that this matter is not linked to the merger dispute with Caxton and calls Caxton’s references to this investigation “opportunistic and unwarranted”
  • The Mpact board cannot assess the merits of an offer from Caxton because there is no offer as of yet, so Mpact equally cannot support a joint or separate merger filing.
  • The Tribunal has referred the matter back to the Commission to determine if Caxton should be allowed to file a merger notification. Notably, the Tribunal commented on the lack of details around a potential offer and noted that firms cannot approach the regulator for a “blank cheque of competition approval” on “terms that are non-existent” – I fully agree with that!
  • In respect of the potential “customer flight” of Golden Era, Mpact confirms that Golden Era confidentially registered its opposition to Caxton’s proposed acquisition on the basis that Golden Era is a major competitor of Caxton and is worried about its supply from Mpact if control changes. Mpact derived less than 10% of total revenue from Golden era in 2021. The Mpact board considers it unlikely that Golden Era will be lost as a client, as supply in the market is tight at the moment and Caxton hasn’t even made an offer. On that basis, the board believes it would be irresponsible to announce the potential risk.

There are various other points in the announcement. If you want to read the entire fight, then refer to the full text on SENS.

Ultimately, there’s an underlying principle here that I fully agree with. Until Caxton actually makes a formal offer for the Mpact board to consider, this is all just noise over SENS and allegations flying in every direction. It would clearly be difficult or impossible for the current board to work with Caxton, so this would be anything but a harmonious relationship in the event of a formal offer being made.

The market will now await the next move, presumably from Caxton.

Disaster at Murray & Roberts

If you aren’t a MUR shareholder, then put a smile on your dial – life could be worse

If you are looking for an investment that you can buy and forget, then please don’t invest in cyclical stocks. Here’s another example from Murray & Roberts of why the only thing you’ll want to forget in that scenario is your share price return:

It’s not often that you see a major company shed a third of its market cap in a single day, yet here we are. Murray & Roberts is officially a loss-making entity thanks to supply chain disruptions and delays in projects which have eroded margins.

Construction is perhaps the toughest industry of all, which is why I’ve never invested in this sector. It’s a serious guessing game. If there are delays to fixed price contracts, then the costs rack up and the revenues don’t.

Here’s the really ugly news: for the six months ending December 2022, the group expects earnings to be at least 100% lower than the previous period which means the company is officially loss-making (again).

To make it worse, there are “especially acute” working capital requirements in the Energy, Resources & Infrastructure platform. That’s a private school way of saying that the place is deep in the smelly stuff.

This is another painful example of why I believe in highly diversified portfolios. You may think you’re investing in great businesses that tick all the fundamental boxes around infrastructure development etc. and you can still be sitting with a 34% drawdown in the time it took you to have your breakfast. When it happens to 3% of your portfolio, it’s painful. When you have 20% in a company and this happens, it’s catastrophic.

Size your positions carefully!

Little Bites

  • A director of AVI has sold all the shares received under a bonus share plan (vs. the usual situation which is to sell enough shares to cover the tax).
  • Southern Palladium has given an update on its Phase 1 drilling programme at the Bengwenyama PGM project. As is always the case in junior mining, the SENS announcement is a crash course in geology. Five drill rigs are drilling and the first samples have been dispatched for assessment. This means that further updates are expected in coming weeks.
  • I find it interesting that Shoprite is publicly inviting stakeholders to engagement sessions ahead of the AGM, particularly regarding the non-binding advisory resolutions relating to remuneration policy. A feature of the local corporate landscape is that many remuneration policies are being voted down by shareholders. These engagement sessions are designed to identify issues ahead of time and avoid the non-binding resolution being a negative outcome.

After DIY stocks have been hammered, are there opportunities?

Chris Gilmour
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After DIY stocks have been hammered, are there opportunities?

After things cooled down in the DIY retail industry, are there some opportunities to be found locally and abroad? Chris Gilmour gets out his hammer and nails.

The home improvement industry is a large element of discretionary retailing globally and has, generally speaking, been in an uptrend for many years. However, in recent times, this sector has been perceived by investors to be vulnerable to a downturn in consumer spending and share prices have come off accordingly.

But some of them may now be looking good for the longer term.

Home Depot

Back in the late 1990s when I was a retail analyst with the great Merrill Lynch (now part of Bank of America), I regularly attended retail field trips in the US with institutional fund managers and my fellow sell-side analysts at Merrills from many different parts of the world. One of the highlights of those trips was always the visits to Home Depot locations in America. These were vast stores; so vast in fact that electric golf buggies were provided inside in order to get around. There was nothing like Home Depot in South Africa in those days and there still isn’t.

Today, Home Depot is the world’s largest home improvement company. The group employs around half a million peoples and operates out of more than 2000 stores in north America and China.  

As can be seen in the price chart, Home Depot’s price has taken a beating in the past year. But earnings have been growing steadily for many years and last year was no exception. The share is trading on an historic P/E of 17x, which is not expensive for a company of this quality.

UK alternatives

The UK also has a large home improvement/DIY market but only very few of the companies are listed. The biggest is Screwfix, which caters predominantly to “the trade”, with its counter-only service that doesn’t permit the buyer to browse for products. It’s an unpleasant experience for the amateur DIY-er and if you’re not lucky enough to be served by a switched-on person behind the counter, the experience can be agonising. Professional tradespeople seem to enjoy this approach, however. Screwfix is owned by Kingfisher plc, which is listed on the London Stock Exchange.

Then there’s B&Q, which is also owned by Kingfisher. This closely resembles Builders Warehouse in South Africa, which is not surprising, as an ex-director of B&Q was consulted by Massmart to design Builders Warehouse. Kingfisher also owns the European brands Castorama in France & Poland and Brico Depot in France, Spain, Portugal and Romania.

Kingfisher has been a lousy performer over many years. Although it participated in the recent “homebody bounce”, it is pretty much where it was thirty years ago.

Another big home improvement company in Britain is Travis Perkins. This company refers to itself as the largest builders merchant in the UK and has a slightly attenuated range of products in comparison with B&Q for example, though its still includes general building materials, timber, plumbing & heating, kitchens, bathrooms, landscaping materials and tool hire. Until last year, it owned the Wickes DIY chain but unbundled that and listed its separately on the LSE.

Again, a fairly erratic performer, even over the longer term.

Wickes has a chequered history, being founded originally in the US in the 19th century, though it is more commonly associated with a UK domicile. Superficially at least, it looks very similar to B&Q and there are over 200 Wickes store in the UK.

It was previously listed on the London Stock Exchange but delisted amid scandals in the 1990s and was eventually bought out by Travis Perkins. It was demerged and re-listed on the LSE in April last year and the share price has been on a downwards trajectory every since.

Other non-listed home improvement retailers in the UK include The Range and Homebase, the latter being founded by Sainsbury’s in the late 1970s. These are fundamentally different in scope to the likes of B&Q / Screwfix / Travis Perkins and Wickes insofar as they more closely resemble home furnishing retailers with the addition of garden centres. These are not necessarily the type of places that handymen would go to for supplies.

Local hasn’t been lekker this year

This brings us to South Africa. Although there are a great many outlets around the country where the dedicated DIY-er can find satisfaction, only a couple are listed, those being Cashbuild and Italtile. Italtile is a highly specialised home improvement retailer, focusing on tiles and sanitaryware and doesn’t quite compete in the same space as the others.

Builders is part of the struggling Massmart operation and the Build it franchise is part of Spar. There are plenty of other independent hardware retailers all over South Africa, including the Mica and Jack’s Hardware buying groups as well as EST Africa. Collectively, this industry is estimated to be worth around R80 billion a year.

To put this in context, Pick n Pay estimates that the total food & grocery market in SA is worth around a trillion rand. This would mean that the home improvement market is estimated to be worth about 8% of the food and grocery market. The DIY category, as proxied by StatsSA’s “Hardware, Paint & Glass”, has been a dismal performer since a degree of normality returned to these retailers in April and May 2021, following a series of lockdowns in 2020. The accompanying chart demonstrates that this category has experienced negative growth for most of that time. Having said that, the trend may have troughed earlier this year with a very gradual uptrend now apparent.

Of the 318 stores Cashbuild operated at end June 2022, only 9% were located in metropolitan areas, with a relatively even split for the rest between townships, towns and rural areas. The biggest sales declines last year were in Gauteng (-21.2%) and KZN (-22.2%) reflecting the impact of the riots in those two provinces in July 2021. Overall group revenue was down by 12% to R11.1 billion, operating profit fell by 16% to R876 million, headline earnings collapsed by 33% to R436 million and the dividend was slashed by 57% to 1 264c/share. Admittedly, the dividend cover changed from 100% payout to 67%, which also impacted the severity of the fall in the dividend.

EBIT margin was 7.9% last year but management reckons this is not sustainable. The new year started off relatively weak and conditions in this highly competitive industry are forecast to remain very tough.

This is a great company with an outstanding pedigree and is exceptionally well-managed. But it is going to struggle this year and next. On a PE ratio of 10.6x, it’s not especially cheap either.

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

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