Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
Nampak is trying to climb a mountain – and failing.
Pepkor’s like-for-like growth is in trouble.
Shoprite’s top-line story is wonderful, but profitability is being hit by load shedding.
Super Group is living up to its name for shareholders.
Ellies has been telling the market for a while that an acquisition is needed – but it didn’t come cheap.
MTN had a good week in Africa, with Nigeria growing strongly and Ghana withdrawing the tax assessment.
RCL flagged a tough result in its baking business – what is the read-through here for Tiger Brands?
The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.
HEPS is up, despite many reasons why it shouldn’t have been
DRDGOLD tends to offer leveraged exposure to the gold price, as the tailings model is much lower margin than getting the yellow stuff out of the ground for the first time. This means that small changes in the gold price can drive significant changes in profits, both positively and negatively.
For the six months to December 2022, HEPS is expected to be between 2.6% and 17.4% higher, an impressive outcome considering the operating environment.
Revenue only increased by 6%, with the increase in the rand gold price offset to some extent by a decrease in gold sold. Volume throughput fell at both major operations, impacted by load shedding, the weather and other issues.
Cash operating costs increased by 10% in this inflationary environment, so operating margins deteriorated. In absolute terms, revenue was up by R155.8 million and operating costs increased by R159.3 million.
So, how did HEPS increase? Considering that there is no debt on the balance sheet and wasn’t any at the end of the comparative period either, investors will need to scrutinise this carefully when detailed results are released on 15 February.
Hudaco: hello, operating leverage
It’s a beautiful thing when it works in the right direction
I often write about operating leverage. Simply, this is the impact of fixed costs in a business. In good times when revenue is growing strongly, those fixed costs tend to only increase by inflation (and sometimes less). The net effect is margin expansion, where a percentage increase in revenue is “leveraged” up into a larger percentage change in operating profit.
This is why a 12.3% increase in revenue at Hudaco for the year ended November has driven a 23.4% jump in operating profit before fair value adjustments. Before you get worried about whether the story goes wrong further down the income statement, you’ll be pleased to know that HEPS was 22.3% higher.
The cash has followed the earnings, with the dividend per share up by 21.7%. It’s a textbook outcome for shareholders.
This isn’t just a recovery to pre-Covid levels, either. Compared to 2019, HEPS is up 48%. This is a lovely through-the-cycle performance for this industrial company.
Hudaco only closed 1.9% higher at R158 per share. HEPS of R20.07 means that you can buy Hudaco on a Price/Earnings multiple of 7.9x. Things can go wrong for these companies, so be cautious. The share price is only up 3% in total over the past 5 years. Operating an industrial group in South Africa is no joke.
I must give absolute credit to Hudaco here – they don’t mince their words when it comes to how government is destroying our economy:
Implats’ flat result is impressive in these conditions
At a time when many mining houses are struggling, Implats is demonstrating resilience
Before we delve into the details, it’s important to remember that this update covers the six months to December. Given the impact of load shedding towards the year, that’s not directly comparable to the quarterly production updates that we’ve seen from other mining houses. Still, Implats has done well here.
EBITDA for the period is in line with the comparable period at R24.5 billion.
This was achieved despite a drop in group refined production of 9% due to a reduction in smelting capacity during the period. This negative impact of maintenance and load shedding was mostly offset by destocking of refined inventory, so sales volumes only declined by 2%.
Thanks to a positive net impact from the rand price of PGMs, there was a 5% increase in group sales revenue. With solid cost management, this explains how the flat EBITDA result was achieved.
From a cash flow perspective though, investors should note that capital expenditure is significantly higher at R5 billion vs. R3.6 billion in the comparative period.
The group seems to be in a solid financial position as it continues its battle against Northam Platinum to get control of Royal Bafokeng Platinum.
Look for money elsewhere, Ghana
The tax assessment against MTN Ghana has been fully withdrawn
When governments get desperate, they do silly things. Ghana has defaulted on its foreign debt and is in talks with the IMF to restructure its debt. The tax assessment issued against MTN Ghana was quite clearly at attempt to shake the corporate tree to see whether any money falls out of it.
Thankfully, sanity has prevailed. The enormous assessment of $665 million has been fully withdrawn. I have no doubt that some very sensitive meetings happened in the background to achieve this outcome.
Although this is clearly good news for MTN, the share price still closed slightly lower. MTN is up 13% this year and I’ve opted to close my position, as the combination of load shedding in South Africa and foreign exchange availability in countries like Nigeria means that MTN just isn’t appealing enough this year.
Sanlam invests further into retail life insurance in SA
There are two separate deals worth R1.1 billion in total
Sanlam clearly still sees opportunities in South Africa, choosing to deploy a substantial amount of capital into two transactions that will strengthen its retail life insurance operations in South Africa. Sanlam has operations in many countries already, so this is genuinely a choice to invest capital in South Africa.
The first deal is to combine the business of Sanlam Trust with Capital Legacy, with the net result of Sanlam owning 26% in the enlarged Capital Legacy Group. In addition to the obvious benefits of scale, Sanlam will capture extra profit share on business written for its own clients and will be the provider of reinsurance services to Capital Legacy in future. It’s worth noting that African Rainbow Capital Financial Services Investments currently holds 29% in Capital Legacy, a stake that will reduce to 25% post this transaction. This means that Sanlam and Capital Legacy already have a B-BBEE partner in common.
The second deal is to buy out the minorities in BrightRock, taking Sanlam’s stake from 62% to 100%. There is a significant earn-out structure in place, based on new business targets being met. BrightRock has delivered returns well ahead of Sanlam’s hurdle rate (minimum required rate of return) since Sanlam invested in the business in 2017.
Sanlam is a massive operation with a market cap of R131 billion, so these are small deals in the group context. This is a classic example of a “bolt-on acquisition” strategy that uses relatively low risk deals to supplement organic growth in the group.
Guess who’s back? Back again?
Magda’s back!
A few eyebrows were raised on Twitter when the news broke of David Hufton’s resignation from the CEO role at Sygnia. After more than 30 years in the industry, he’s apparently decided to take a career break. Financial freedom is a beautiful thing, isn’t it?
This means that Magda Wierzycka is back as CEO. For founders of businesses, succession is one of the hardest things to achieve. The announcement doesn’t indicate how long this arrangement will continue for.
Professor Haroon Bhorat has been appointed as independent non-executive chairman of the company, having previous served as chairman from 2015 to 2021.
The share price closed 3.6% higher on the day.
Thungela isn’t sitting around as a cash cow
Management has global ambitions, for better or worse
There are many wise investors in the market who get nervous when mining companies start doing major deals. When the cash pile is large, investors ideally want to see dividends, not transactions at the top of the cycle. Thungela is insisting on a diversification strategy, so investors will have to decide whether they are coming along for the ride.
The deal is to acquire a controlling interest in the Ensham business in Australia, an established coal operation in Queensland, Australia. Producing high quality thermal coal, the life of mine is all the way out to 2039.
The mining method is similar to Thungela’s existing operations in South Africa and makes use of rail infrastructure to take the product to port. The cool thing about Australia is that the trains actually work.
Thungela believes that the payback period of the deal is as short as two to three years. Of course, it’s intensely difficult to predict supply and demand dynamics of commodities.
Thungela’s co-investors in the project include a Swiss investment group and a private company in Australia that specialises in mining investments.
The deal is structured as an A$267 million equity investment by Thungela and an A$68 million mezzanine loan to the co-investors. The total ticket size for Thungela is thus A$335 million, or around R4 billion.
This is a Category 2 transaction, as Thungela’s market cap is R31.5 billion and thus the deal isn’t large enough to be classified as a Category 1 transaction. The difference is substantial, as Thungela’s shareholders won’t be asked to vote on this deal.
The share price closed slightly higher for the day, although it did dip initially.
Little Bites:
Steinhoff shareholders will have to wait longer for clarity, as the circular and AGM notice have been delayed while Steinhoff seeks regulatory confirmations. The AGM was scheduled for 16 March and no new date has been given.
Spear REIT has completed the disposal of 15 on Orange for R246 million. Spear therefore has no remaining exposure to the hospitality sub-sector. The group’s loan-to-value ratio has been reduced by 335 basis points to 36.8%. This is below the group target of 38% to 43%, but the group is being prudent at the moment given where we are in the debt cycle. That’s probably a smart move.
Copper, steelmaking coal and diamonds dominate the highlights reel
The Anglo companies release quarterly updates at the same time, so you’ll find news on Anglo American as well as Amplats and Kumba in Ghost Bites today. Anglo American sits at the top of the group structure, so it is impacted by the results of Amplats and Kumba as well as its own extensive operations.
The ramp-up of the Quellaveco copper mine in Peru is important news, increasing copper production by 52%. Other good news came from rough diamonds and steelmaking coal (both up 6%), with iron ore up by 4% despite challenges in Kumba. PGMS were 10% lower and nickel fell by 4%.
Over the full year, pricing for diamonds and steelmaking coal was significantly higher than the prior year. Pricing across the rest of the commodity basket was lower.
There is substantial progress being made in renewable energy, like 100% renewable energy supply for the Australian operations from 2025. In January, the transaction to combine First Mode and nuGen was completed, accelerating the development and commercialisation of the zero emissions haulage system that has generated much interest in the market.
Anglo American Platinum production drops 10%
Eskom is only partly to blame
The good news is that Anglo American Platinum’s (Amplats’) guidance for 2023 is unchanged. The bad news is that 2022 ended off with a quarter that was plagued with production issues, though the market response to this update was muted, so those issues were largely known by the market.
Total PGM production dropped by 10% year-on-year.
The mines managed by Amplats fell by 12% due to a combination of lower grades at some mines and an infrastructure closure at another. Due to the delay in the Polokwane smelter rebuild because of sub-standard materials being delivered to the company, refined PGM production fell by 37%. PGM sales volumes fell by 31%, driven by lower refined production.
The rebuild was completed at the end of the quarter and ramp-up was achieved by the end of January, so the first quarter of 2023 should look better. There has been a significant build up of work-in-progress inventory due to the delay in the smelter rebuild and the impact of load shedding.
At jointly-owned operations, production was flat year-on-year.
The share price is down nearly 30% over the past 12 months.
Production nosedived at Kumba thanks to Transnet
Will we ever stop scoring own-goals?
The green highlighted row deals with total production, which is relatively within Kumba’s control (subject to usual mining risks). The yellow deals with total sales, which is where Kumba becomes reliant on dear Transnet to provide infrastructure. Thanks to a wage strike in October and a maintenance shutdown in November, sales fell by 35% year-on-year:
For the full year, production was in line with revised guidance, dropping by 8%. Sales fell by 9% with the fourth quarter being a horror show, as indicated above. Stockpile levels at the mines have reached capacity, so throughput is desperately needed to get the product to the ports. If the stockpiles cannot be cleared, production will be curtailed and that won’t be good news for the cost per tonne.
Costs per tonne ended better than guidance, coming in at $40 vs. expected $44, but this was mainly driven by forex movements. The price achieved by Kumba for its products was $113 per wet metric tonne, higher than the benchmark price of $100 per wet metric tonne.
HEPS for the year is expected to drop by between 38% and 44%, which means a range of between R58.29 and R64.49. This was completely avoidable if Transnet was working properly.
To finish off with Kumba, here’s a chart showing exactly why cyclical businesses are not buy-and-forget investments:
No rainbows at RCL
Both the poultry and baking businesses are under pressure
It’s really not easy to guess how the food producers might perform. RCL has released numbers that look like what I thought would happen to Tiger Brands last year. Instead, Tiger managed to pull off a small miracle (albeit at a different time during the year) and its share price chart reflects that. Of course, we will need to see how well Tiger is navigating current conditions, so perhaps put a pin in this.
The recent Astral Foods update gave us a strong clue that the poultry business within RCL cannot possibly be doing well. This has turned out to be the case, but RCL isn’t a pure-play on poultry, so the impact on group earnings is nowhere near as severe as at Astral.
The bakery business at RCL is struggling as well, with high commodity input costs, substantial cost pressures in energy and packaging costs and of course the impact on productivity of load shedding. With consumers suffering, it’s not easy to push through pricing increases without causing a problem for volumes.
For the six months ended December, HEPS fell by between 20.1% and 26.8%, which implies a range of 53.2 cents to 58.1 cents.
Super Group lives up to its name
HEPS is running way ahead of even pre-Covid levels
In the six months ended December 2022, Super Group had a lovely time. With commodities still doing well and strong demand for consumer goods over a busy Black Friday and festive trading period, the supply chain operator was kept busy.
Being busy means making money, with revenue up by between 30% and 40%. Profit before tax is up by between 25% and 35%, so there’s some margin compression but nothing major. In this environment, that’s an impressive display of cost management, especially given the pressure on fuel costs and all the issues around load shedding etc.
HEPS is also expected to be 25% to 35% higher.
It’s always nice to see a company quoting long-term value creation statistics. Over 10 years, Super Group has grown shareholder equity at a compound annual growth rate (CAGR) of 17.4%.
There are some other important points to note in this result.
One of them is that revenue growth was flattered by the consolidation of a full six months of revenue from LeasePlan in Australia, so this year-on-year growth rate isn’t an indication of sustainable growth. A large portion of the purchase price was paid for with cash rather than the issuance of shares, so this is accretive on a HEPS level (you’re buying more earnings that aren’t linked to the issuance of more shares).
Another point is that Super Group also owns a car dealership division that operates in the UK and South Africa. Improved availability of vehicles in both countries has been beneficial in this period.
In terms of capital allocation, Super Group repurchased 5.6% of its shares in issue over this period. This obviously helps boost HEPS and is generally seen as a positive move when a company trades at a modest multiple.
The share price jumped over 6% in response to this update.
Little Bites:
Director dealings:
An associate of a director of Salungano has bought shares worth R9.4m
The Finance Director of Tharisa sold shares worth R1.93m
A director of Santova exercised share options and sold those shares and others for a total of R1.4m
Novus has agreed to sell its surplus property in Linbro Park for R125 million. The property became surplus to requirements after rationalising the Novus Print production facilities in Johannesburg. The proceeds will be added to existing group cash resources.
Accelerate Property Fund is in the news again, this time with the sale of the Ford dealership building near The Buzz in Fourways for R80 million. The property was valued as at 31 January at over R87 million, so that’s a disappointing sales price vs. the valuation. When property funds trade at a large discount to net asset value, it’s usually for a reason. The sales price represents a yield of 8.9%.
Wesizwe Platinum announced that there have been deficiencies identified during the test run of the main system of the Bakubung Platinum Mine. The cold and hot commissioning of the processing plant is expected by March – April this year.
Novus Print (Novus) has announced it is finalising the disposal of its Linbro Park Properties which have been carried as an asset-held-for-sale since March 2021. The disposal for R125 million is to Micasa Asset Management. The properties, situated at 46 and 48 Milky Way Drive in Linbro Park have a book value of R109,9 million. The disposal is classified as a Category 2 transaction and therefore does not need shareholder approval.
Accelerate Property Fund has disposed of the Ford Fourways Building to Hatfield Property Holdings. The property is valued at R87,1 million and is being sold for a maximum cash consideration of R80 million at a yield of 8.9%.
Ellies has announced the proposed acquisition of Bundu Power from shareholders for a maximum consideration of R202,6m. Bundu Power specialises in the distribution and rental of generators as well as the distribution and installation of solar and ancillary products providing alternative energy solutions. This is a category 1 transaction in terms of the JSE Listing Requirements and as such requires the approval shareholders.
Unlisted Companies
Vantage Capital, Africa’s largest mezzanine fund manager has successfully closed its fourth mezzanine fund, securing a total of $377 million of commitments from a mix of European and US-based commercial investors and development finance institutions who include IFC, BII, SIFEM, DEG, Norfund, Swedfund and EIB.
Convergence Partners’ Digital Infrastructure Fund has closed a funding round raising $296 million (R5,15 billion). The round was backed by existing and new investors based in Europe and Africa.
Phatisa a local, sub-Saharan African private equity fund manager has acquired a significant minority stake in MHL International, a subsidiary of India’s Manipal Group. MHL is a printing and packaging provider with strong exposure to the food and beverage sector with operations in Kenya and Nigeria. Phatisa’s investment, details of which were undisclosed, will be used to finance expansion opportunities.
Accelerate Property Fund is to proceed with a R50m fully underwritten renounceable rights offer to raise required working capital. The company will issue 71,428,571 shares for a subscription price of 70 cents per Rights Offer share in the ratio of 6 Rights Offer shares for every 100 APF shares held. The subscription price represents a discount of 31.14% to the 30-day volume weighted average price on 9 December 2022.
In an off-market block trade, AltX-listed Heriot REIT, the company which in 2022 undertook an unsuccessful take private of Safari Investments RSA, has acquired 20 million Safari shares. The shares, purchased from SA Corporate Real Estate, at R5.60 per share was for a total consideration of R112m. Following the acquisition, Heriot and its concert parties collectively hold a 47.1% stake in Safari.
Renergen, an emerging integrated renewable energy producer, has announced plans to list on the Nasdaq Stock Market later this year to raise additional funding for the second phase of its Virginia Gas Project.
As part of its capital optimisation strategy, Investec Ltd this week acquired on the open market a further 476,138 Investec Plc shares at an average price of 518 pence per share (LSE and BATS Europe) and 440,987 Investec Plc shares at an average price of R110.00 per share (JSE).
Chrometco, Efora Energy and New Frontier Properties updated shareholders on their suspension status. Chrometco remains suspended due to the late publication of the provisional annual financial statements for the year ended February 2022. The company is struggling to appoint new auditors due to two subsidiaries within the group being in Business Rescue. Efora is yet to publish its consolidated annual financial results for the year ended February 2021 citing delay in the finalisation of subsidiary Afric Oil’s results which has since been sold. New Frontier Properties were suspended for the late publication of the 2020 financial statements.
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 18,000,000 shares for a total consideration of £98,14 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed by February 2023.
Investec continued with its repurchase programme, repurchasing 510,006 shares for a total consideration of R55,8. The shares will be cancelled and reinstated as authorised but unissued shares.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 23 to 27 January, 2023, a further 2,979,757 Prosus shares were repurchased for an aggregate €229,3 million and a further 464,150 Naspers shares for a total consideration of R1,6 billion.
Three companies issued profit warnings this week: Italtile, Sea Harvest and RCL Foods.
Three companies issued or withdrew cautionary notices. The companies were: Lux Holdings, African Equity Empowerment Investments and Ellies.
Environmental, social and (ESG) review, in broad terms, refers to the examination of a company’s environmental, social and governance practices, their impact, and the company’s performance against benchmarks. The implementation of ESG practices has swiftly risen up the corporate agenda as a mainstream issue in the last few years, and has profoundly reshaped business models globally.1
As a ripple effect of this, ESG factors are now steadily gaining importance in mergers and acquisitions(M&A) transactions, and are predicted to become embedded across M&A in the coming years.2 South African businesses are, therefore, advised to harness this global appetite for ESG by taking into account such considerations in their M&A transactions, as a means to achieve maximum value and monitor risks. In doing so, South African businesses will be set to unlock competitiveness and profitability, and attract investment.3
An overview of ESG factors
The most prevalent ESG factors which have prompted many businesses worldwide to focus on environmental impacts and risk management practices include:
1) Environmental factors, such as climate change, energy, water scarcity and usage, biodiversity, destruction of natural habitats, environmental pollution and waste management;
2) Social factors, such as employment and labour issues, employee benefits, diversity, health and safety, human rights, community relations, and the manner in which broad- based black economic empowerment is advanced; and
3) Governance factors, such as corporate structure and management, strategic direction and oversight, compliance, anti-bribery and corruption, board composition and executive compensation.4
Growing pressure to support the inclusion of ESG in M&A transactions
Investors believe that companies with strong ESG initiatives are more lucrative investments, pose less risk, and are better positioned for the long term. If a company fails to consider all important ESG aspects, it risks reputational damage. Globally, we have witnessed growing regulatory frameworks which now prescribe intensified accountability for ESG in M&A transactions, such as the new efforts to enhance disclosure of ESG factors in M&A transactions in the United States.5
Locally, the regulation of ESG principles has already been adopted for pension funds, insurers and the Public Investment Corporation.6 However, recently, there have been widespread voluntary ESG initiatives, which indicate that South Africa has been taking steps to follow international ESG trends in M&A. These initiatives include:
• the revised draft Code for Responsible Investing in South Africa (CRISA) 2.0, which stipulates that investment activities must reflect the integration of material ESG factors and which should also reflect in due diligence investigations;7 and
• the Johannesburg Stock Exchange (JSE) Sustainability and Climate Change Disclosure Guidance document, which caters to the growing expectations from various stakeholders on businesses to report on respective impacts on the environment, people and financial performance, incorporating both global and local context to help companies understand how the various standards relate to one another.8
Businesses also ought to take heed of the final guidelines on the considerations to be taken into account when considering the impact on the public interest, published by the Competition Commission in 2016. These guidelines consider the social aspect of ESG. It is typically a conscientious process. For instance, in the merger where ECP Africa Fund IV LLC & ECP Africa Fund IV A LLC sought to acquire Burger King (South Africa) RF (Pty) Ltd and Grand Foods Meat Plant (Pty) Ltd, the Commission initially prohibited the merger on public interest grounds that the shareholding of historically disadvantaged persons in Burger King would decrease from more than 68% to 0% as a result of the merger.9 The Commission prohibited the merger on such grounds for the first time ever. It saw parties having to go back to the drawing board to reconsider public interest concerns, which were later addressed by the parties and accepted by the Commission. This case serves as a pertinent example of the importance of considering social wellbeing and economic needs of South African communities in relation to ESG. Seemingly, investors are taking ESG risks into account now more than ever, due to global pressures as well as increasing shareholder, employee and consumer activism.
ESG considerations in M&A due diligence and M&A agreements
Due diligence allows the buyer in the M&A process to confirm undisclosed details about a selling company’s financials, contracts, personnel and customers. The buyer is then able to derive a complete picture of the business or company being acquired. In light of the ESG-focused shift in the market, we urge buyers to broaden the scope of their due diligence to include performing targeted ESG investigations, in order to identify ESG-related risks which may influence a target’s price and overall deal structure. Once fully aware of the potential liabilities and risks of a transaction, companies may mitigate ESG risk through the transaction agreement. A focus on ESG can be a competitive advantage for businesses, private equity funds and many other strategic acquirers. By integrating ESG considerations into each stage of the deal, this will inform the buyer of any potential impact of the merger or acquisition on its sustainability strategy and the long-term value of the combined entity.
Red flag checks may include assessing the future fitness of the target and relevant assets, and media scans to understand any major ESG-related risks. Thereafter, the buyer can look to address any ESG risks in the transaction agreement through specific indemnities, targeted representations and warranties addressing ESG matters, or through various pre-closing conditions or post- closing covenants by the seller/s. If an issue cannot be addressed pre- or post-closing, such as non-compliance with ESG-related regulations, the buyer may wish to negotiate a reduction in the purchase price to reflect the risk assumed.10
Conclusion
Although ESG is still in its budding phase in South African M&A, it is critical that investors, companies, private equity funds and other strategic acquirers follow in the footsteps of global majors in the widespread incorporation of ESG factors in M&A. Any delay in doing so may result in companies risking reputational damage in the long run and losing out on access to capital and lucrative opportunities often offered by ESG compliance.
(Peterdy, “A Framework for Understanding and measuring how sustainably an organisation is operating” 2022 (https://corporatefinanceinstitute.com/resources/knowledge/other/ esg-environmental-social-governance/) accessed on 20 October 2022)
(Deloitte, “Unlocking transformative M&A value with ESG” 2022 (https://www2.deloitte.com/us/en/pages/mergers-and-acquisitions/articles/unlocking-transformative-m-and-a- value-with-esg.html) accessed on 20 October 2022)
(Kim, Mallia-Dare “ESG: Creating value and mitigating risk in mergers & acquisitions” 2022 (https://www.millerthomson.com/en/publications/articles/esg-mergers-acquisitions/) accessed 20 October 2022
(Davis, Kitcat “Environmental, Social and Governance Law South Africa”, 2021 (https://iclg.com/practice-areas/environmental-social-and-governance-law/south-africa) accessed on 19 October 2022)
(Gez, Pullins, Druehl, Ali “SEC Proposes Amendments to Rules to Regulate ESG Disclosures for Investment Advisers and Investment Companies” 2022 (https://www.whitecase.com insight-alert/sec-proposes-amendments-rules-regulate-esg-disclosures-investment-advisers-investment#:~:text=On%20May%2025%2C%202022%2C%20the%20US%20 Securities%20and,disclose%20extensive%20climate-related%20information%20in%20their%20SEC%20filings.2 (2022 accessed 20 October 2022)
(Davis, Kitcat, 2022)
(Second Code for Responsible Investing in South Africa, 2022 (https://integratedreportingsa.org/ircsa/wp-content/uploads/2022/09/CRISA2.pdf.) accessed 20 October 2022)
(Roy, “JSE ESG standards lift the game for SA companies” 2022 (https://www.dailymaverick.co.za/article/2022-08-10-jse-esg-standards-lift-the-game-for-sa-companies/) accessed 20 October 2022)
(ECP Africa Fund IV LLC; ECP Africa Fund IV A LLC And Burger King (South Africa) RF (Pty) Ltd; Grand Foods Meat Plant (Pty) Case no. IM053Aug21 para 4)
(Kim, Mallia- Dare, 2022)
Roxanna Valayathum is a Director and Shanna Eeson a Candidate Attorney | Cliffe Dekker Hofmeyr.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Travis Robson (CEO of Trive South Africa) takes a deeper look into meeting the needs of the modern investor.
We aren’t strangers to change. From the market crash in 2008 to the Steinhoff saga, investors have become more desensitised towards change and have adapted to the new worldinvesting order. But what does this mean for an FSP, and how do we stay up to date with the behavioural changes we see in the lives of modern investors?
As CEO of an FSP, I’ve always believed that it’s essential to have a thorough understanding of your business and industry, which allows you to build your business and unique selling points (USPs) around the needs of your target market; something needs to set you apart from the crowd and propel you into the mind of your target market.
To get there, you first need to understand your target market.
Over the years, I have gained extensive industry knowledge through customer engagement and direct research, which led me to identify two key segments: the Alpha Trader and Investing Potential. Using these two categories, we can recognise and meet their needs.
Alpha Traders are the confident group of investors who constitute the largest trading segment in South Africa. Research shows that this group is not beholden to one broker and that members usually have around 2 – 3 different broking accounts, with a propensity to manage these accounts online. This group is taking control of their investment journey and is no longer relying as heavily on traditional brokers as they did in the past. As a result, these investors have impeccably high standards for the service and do-it-yourself technology their broker provides. Seeing as there is typically minimal relational activity between the brokerage and these investors, they would soon change their broker if their service needs are not being met or if they feel that the commissions and fees charged by the brokerage do not allow them to maximise their investment portfolio.
Investing Potential is the group of upcoming investors soon taking over or falling into the Alpha Trader group. We identified this group of investors as young, tech-savvy investors with more advanced insight and technology experience as they have grown up with the latest tech at their disposal. As these tech-savvy investors enter the market, their main focus and decision-making factors focus on pricing, quality of tech and a sense of community or partnership with their brokerage.
What Does The Research Show?
This shift in focus waves goodbye to the old tactics of ‘selling’ a product to a ‘customer’. With a wide range of brokers available and communication capabilities at an all-time high, we see the power tables turn in South Africa as consumers now have the final say in whether your product is industry-worthy.
This highlights the massive industry changes that have happened over the years. We currently see that the share dealing market is in a growth phase and are finding new entrants that are disruptive to previous traditional telephone broking environments. While these disruptors might have done a great job of serving as a gateway for new investors, there is still a large portion of investors whose needs aren’t being met entirely.
As the market has grown and segmentation occurred, execution-only broking is experiencing significant growth because increasing investment in digital platforms results in a wider product offering.
However, it’s important to remember that growing market share means growing customer segmentations. Whilst some investors use gateway brokerages to enter the market, they typically outgrow the ‘milkshake and slushie phase’ and search for a more sophisticated product that grants access to a wide range of local and global products at a competitive rate. Encapsulating these features is something that local brokers have either struggled with or offered at such a premium that a large part of the market share is not interested.
Identifying and Meeting The Need
Considering all this information we uncovered during our research, we’ve identified the following as some of the predominant ‘needs’ that the modern South African investor’s focus has shifted to:
Next-generation tech that allows the investor to plan, execute and monitor their investments.
A wide range of local and global products under one umbrella that’s easily accessible through the platform.
Partnership or a sense of community facilitated by their brokerage makes the investor feel valued and not like just another number in the bunch.
Trust in a brand with a strong reputation that is monitored and compliant with local laws and legislation.
But how does one practically add value to the modern South African investor’s life with so many different offerings up for grabs?
The simple answer is to understand that their needs are ever-changing and to keep a two-way communication flow between you (the brokerage) and your customer (the investor).
Trive South Africa has tapped into the comms flow in the investment world and built our offering around these four specific needs whilst maintaining healthy and necessary flexibility.
On a practical level, we’ve implemented the following strategies to meet the modern South African Investor’s needs:
Quality and Functioning of Next-Generation Tech Trive SA has partnered with a well-respected third-party platform provider, allowing our clients to access a multi-asset investment platform with a simple interface, quick trading options and web functionalities. Not only does this allow us to offer our clients the benefits of a fully customisable and rich trading experience, but it also empowers them to take back control of their investment journey by allowing them to choose what they would like to see and when they’d like to see it.
Providing a Wide Range of Products In today’s world, the client is spoiled with choice and as such a range of markets and instruments is essential for the client, as they would like to trade all their products on one trading portal with one provider. Therefore, Trive SA provides a one-stop shop for every client’s investment needs. From tax-free savings accounts (TFSA) to over 2800 JSE listed and offshore shares, ETF investment opportunities and leveraged products, Trive South Africa offers it all at highly competitive fees and commissions.
Investor and Brokerage Partnerships Whilst clients from ‘traditional’ brokers still value ‘personal service from the broker’, we also see an uprise in need for partnership amongst younger investors. This may be because high-standard services were inclined to good impressions, thus allowing the customers to repurchase with assured satisfaction and expectations of a similar level of service and information. For example, Trive SA has a whole Sales Trading and Research & Education Team supplying our customers with information and a two-way comms channel, positioning ourselves as their partner.
Building Trust and Reputation As a new entrant into the South African market, we understand that building a solid relationship and trust in our brand will take time and hard work. To assist with these efforts, we have taken every possible step to provide our customers with a credible, FSCA-regulated service. We can also leverage the expertise of a strong holding company, Trive Financial Holdings, based in the Netherlands.
Whilst we believe that we are stepping in to fill the gap and meet the needs of the modern South African investor, we understand that this relationship and development will be an ongoing task that will require a lot of introspection and research to ensure we’re heading in the right direction. But, with our fantastic, diverse team and the global group backing us, we believe Trive is always keeping an ear to the ground and has the resources to adapt with our investment partners.
There’s “cautious” optimism for diamond demand at De Beers
AngloAmerican shareholders continue to benefit from the rock that everyone wants
Diamonds. Sparkly things that have been the downfall of many. These rocks benefit from a wonderful marketing campaign by De Beers over the years, positioning them as the best way to show how much you love someone (and to what extent your credit card is part of your life).
For Anglo American shareholders, that’s just fine thank you very much. De Beers gives a solid underpin to the Anglo business, with totally different fundamentals to the other commodities in the group.
Based on the latest sales cycle, the management team was happy with consumer demand over December. Bulk diamond purchasers (or “sightholders” as De Beers calls them) have been careful with their planning for this year given the broader macroeconomic conditions. In a recession, even love gets cheaper.
Given the reopening of China, there is “cautious optimism” for diamond demand this year.
Bidcorp stuns the market – in a good way
A share price jump of over 6% was the reward for punters
Bidcorp is in the food service game, with a wide range of customers in the restaurant and hospitality industry. It’s a wonderful business model, with Sysco as a great example in the US of a similar business.
Despite all the ingredients for a disaster, ranging from consumer pressure through to high energy costs causing margin compression for restaurants, Bidcorp has been riding a wave of consumer demand in the aftermath of the pandemic. Financial pressure or not, people just cannot handle being stuck at home anymore.
After releasing a positive update in November, the momentum continued over the festive season and even into January. Europe has been having a far better winter than anyone expected, so that certainly helped. The lifting of lockdowns in China will be a major boost as well.
For the six months ended December, headline earnings per share (HEPS) will be between 43% and 49% higher year-on-year, implying a range of between 960 and 980 cents. For context, the previous record interim performance was only 714 cents per share, achieved in 2019.
The share price is now at its highest levels since being unbundled from Bidvest. I think you would be quite brave to buy this chart, with a meteoric increase of over 35% since October when the worst was expected for a European winter:
Ellies is paying top dollar to stay relevant
Or is that top rand?
Ellies has a core business has that been dwindling. The company didn’t make it a secret that alternative energy is where its future lies, an industry that Eskom is doing its very best to support.
The problem is that Ellies needed to make an acquisition in this space. With these companies currently all the rage, the risk of overpaying for an asset was always there. With a deal now announced, we have confirmation that a significant multiple is being paid.
With most industrial companies on the JSE trading at mid-single digit Price/Earnings multiples, it’s worrying to see Ellies agree to pay a 10x multiple for Bundu Power, an alternative energy (i.e. generators / solar etc.) business that is expected to make profit after tax for the year ending February 2023 of R20.4 million.
The value of net assets in the business is R48.7 million and Ellies is paying R202.6 million, so there’s a very large goodwill payment here. This means that either Ellies loves the brand (unlikely I would think) or is desperate to get a foothold in this industry (bingo).
Don’t get me wrong: it just might work. Ellies brings a distribution network and Level 2 B-BBEE status, both of which are valuable in South Africa. Perhaps more importantly, there’s a deal structuring trick that has been used here to give Ellies shareholders some protection.
Of the purchase price, only R72.6 million is payable when the deal closes. The remaining R130 million has been structured as three earn-out payments over the next three years. There would typically be earnings targets attached to these payments, though the announcement doesn’t give those details at this stage.
This is a category 1 transaction for Ellies, so a detailed circular will be released and shareholders will need to vote on the deal. If I was an investor in Ellies, I would give the earn-out structure a careful read.
Glencore’s production is higher in Q4
The fourth quarter saw sequential improvement across most commodities
Full year production numbers for 2022 were in line with revised guidance issued in October, so there were no major shocks in the final weeks of the year. Although the fourth quarter was better than the third quarter (a “sequential improvement”), the full year was a mixed bag.
On a like-for-like basis, group production fell by 7% due to abnormally wet weather. Due to a number of disposals and acquisitions, the reported percentage differs significantly from the like-for-like number.
Production challenges aside, Glencore is up nearly 40% over the past 12 months as the commodity cycle played out in its favour.
Harmony reports better production numbers
With the substantial positive momentum in the gold price, this came at the right time
Thanks to improved underground recovered grades in the second quarter, production increased vs. the first quarter of the financial year. This means that Harmony is on track to achieve full-year production guidance, which is exactly what shareholders want to see when the gold price is finally doing the right things.
All-in sustaining costs for the first half of the year were in line with guidance at below R900,000/kg. The gold price per kilogram is currently nearly R1,080,000/kg.
Since the recent lows in September 2022, the share price has skyrocketed 85%. It is nearly 14% up over twelve months.
MTN Nigeria continues to grow
As the most important African subsidiary, this is material to MTN
Nigeria is a good country when you can operate at high margins and enjoy decent growth rates. It’s a terrible place to try and extract money from, as evidenced by the challenges that the likes of Nampak and MultiChoice have been having. MTN is no stranger to those challenges, though a great run during the pandemic means that MTN’s holding company debt has been brought under control and repatriation from Nigeria is less of a key dependency.
And unlike Nampak and MultiChoice, MTN operates at exceptional margins in Nigeria that make it worth the risk. In 2022, service revenue grew by 21.5% and EBITDA grew by 22%, so margins expanded even further to a whopping 53.2%.
The company is investing just as quickly as it is growing earnings, with capital expenditure up 23.5%. The useful thing about MTN Nigeria is that there’s a strong case to be made for in-country investment, rather than trying to get all the cash back to South Africa for other purposes. This helps mitigate some of the repatriation issues.
Capital intensity (capital expenditure as a percentage of revenue) increased from 24.7% to 25.1%. This is a key ratio for telcos, as high capital expenditure is part of the game and is obviously a drag on free cash flow available to shareholders.
MTN Nigeria is separately listed on the Nigerian Stock Exchange and is up more than 18% over the past year.
Vukile gives an update on festive trading
Vukile offers a unique combination of South African and Spanish exposure
In Vukile’s South African portfolio, footfall was higher than last year by 8%, with township and community malls outperforming the likes of regional malls. Despite the obvious issues around load shedding, trading density was up across the local portfolio by mid-to-high single digits. Trading density for grocery (+8.5%) was well ahead of clothing (+4.8%), which ties in with recent updates we’ve seen from retailers.
In Spain, the Castellana portfolio also showed improvement in all major metrics, with footfall running ahead of even pre-pandemic levels. It seems as though growth was strong across all major categories.
This bodes well for Vukile, with a share price chart that has lost momentum in its recovery:
Little Bites:
Director dealings:
A director of PSG Konsult has disposed of a sizable number of shares, worth R7.75m
A director of Stefanutti Stocks has bought shares worth just over R160k.
A director of Invicta has bought listed preference shares in the company worth R136k
Those interested in Kibo Energy should refer to the detailed operational update released by the company, which gives extensive details on the various energy projects in the group. Overall, management seems happy and expects to see projects achieve revenue generating status in the next 12 to 24 months.
Gemfields has record-high net cash on the balance sheet
There’s even some good news from Fabergé
After record combined auction and Fabergé revenues in 2022, the balance sheet at Gemfields has more net cash than ever before – $104 million, to be exact! This excludes another $55 million in auction receivables.
The group’s market cap is only R4.5 billion, so a huge chunk of the value sits in cash.
Luxury jewellery business Fabergé has historically been a financial drag on the business. It has now achieved the lowest annual funding required, which means it’s still hurting the company but is on the right path.
The market continues to value this company at a very modest multiple, not least of all because of the risks of mining in Mozambique in a region that has been dealing with terrorist activity.
Hudaco’s earnings are going up
A trading statement delivered good news for shareholders
For the year ended November 2022, Hudaco’s earnings did the right things. Headline earnings per share (HEPS) is expected to be between 20% and 24% higher year-on-year, coming in at between R19.77 and R20.37 per share.
At a closing price of R145 (flat for the day), the Price/Earnings multiple is around 7.25x at the midpoint of the earnings guidance.
The share has been range-bound for a year now, up just 6.4%. Difficult operating conditions in South Africa keep the multiples for industrial companies low, especially in light of load shedding (pun intended).
Renergen looks to the US market
The group is preparing for further equity raises
With helium production now underway, Renergen is clearly worried about whether the local market will provide sufficient capital for the next phases of development.
The plan is to potentially offer American Depositary Shares on the Nasdaq in 2023, which means that Renergen will look to tap the US market for capital. This won’t impact the local listing, though shareholders will need to approve the listing of additional shares.
The company already applied to the SEC in late 2022, so that regulatory approval process is underway but isn’t completed yet. The company has reminded shareholders that the SEC may not approve the listing, which would scupper this plan.
Sea Harvest Group: not the catch of the day
The fuel price is really hurting this business
Sadly, boats need fuel to run. That’s not great news when fuel costs have gone through the roof.
For the year ended December 2022, Sea Harvest Group expects HEPS to decline by between 32% and 35%, coming in at between 102 cents and 107 cents. The share price closed 5.3% lower at R10.47 in response to this news.
A 10% drop in hake volumes as a result of quota losses was more than offset by pricing gains thanks to firm demand for the product. Despite an effort to control costs, there was nothing that the company could do about a R240 million impact from fuel price increases. When combined with once-off acquisition costs for the MG Kailis deal and other issues like higher interest rates and load shedding, profitability could only head in one direction.
Shoprite achieves 46 months of market share gains
Shoprite is still my pick in the retail industry in 2023
For the six months ended 1 January 2023, Shoprite managed to post seriously impressive growth. Even if we exclude LiquorShop to try and adjust for the base effect of lockdowns, group sales growth was 15.6%. Even the furniture business managed to achieve growth of 8.6%, so Shoprite really has done well here.
Like-for-like growth in Supermarkets RSA was 11.1%, a really strong performance vs. a base period where like-for-like growth was 11.3%. On a two-year basis, that’s impressive. The underpin in this period was a record Black Friday and festive season, capping off 46 months of uninterrupted market share gains.
Selling price inflation was 9.4%, which means there was volume growth in the business as well. The difference between like-for-like growth and selling price inflation is volume growth.
The growth is happening across the group, with Checkers and Checkers Hyper up 16.9% and Shoprite and Usave growing by 15.1%. The group’s greatest strength is that it resonates with consumers of all income levels.
It’s not all rainbows. Gross margins are slightly down, driven by fuel price pressures in supply chain and the need to be aggressive on price to support this sales growth.
The pressures further down the income statement are a lot more worrying. For example, employee costs experienced a “notable increase” because of increases in the minimum wage, the employee incentives from government coming to an end and other factors as well.
There’s also a whopping figure of R560 million spent on diesel for generators over this period. This only covers load shedding stages five and six, which happened right at the end of the period. What does this mean for retailers if these stages become the norm?
A positive impact will be the receipt of a R245 million insurance claim, offset to some extent by an additional R90 million in the cost of cover.
The stores bought from Massmart have been integrated into the group and rebranded into Shoprite, Usave and Cash and Carry stores as required. The acquisition was effective from 9th January.
Transpaco jumps 9.6% on strong earnings
Be careful though: illiquid stocks can post big daily moves
In a trading statement for the six months ended December, Transpaco’s HEPS is expected to be between 41.3% and 48.6% higher. This is a range of between 309 and 325 cents per share for the interim period.
So, how do you work out a Price/Earnings (P/E) multiple from this update?
You have to be careful of doubling this result, particularly given the tricky conditions that everyone is operating in at the moment. Also, doubling an interim number means you are actually looking at a forward Price/Earnings multiple rather than a trailing multiple.
Ideally, you want to use the last twelve months’ numbers, which is what LTM stands for on trading systems.
The manual way to do this is to take the prior year’s HEPS and subtract the prior interim period’s HEPS from that number, thereby isolating the second half of the prior year. You then add it to this interim period to arrive at HEPS over the last twelve months.
The FY22 result was 475.5 cents and the interim number was 218.8 cents, so the second half of the year (H2) saw HEPS of 256.7 cents.
Adding it to the current guidance for H1 of FY23 gives us a range of between 565.7 cents and 581.7 cents in HEPS over the last twelve months. At the midpoint and using the latest closing price of R28.51, that’s a Price/Earnings multiple of just under 5x.
And there we go – now you know how to work out a LTM P/E multiple! Those acronyms aren’t so hard, once someone explains them.
Vodacom: profits almost certainly under pressure
The quarterly update gave no details on profits, but we can reliably guess…
Vodacom’s quarterly update is 17 pages long. A quick CTRL-F for the word “profit” reveals just one mention, in the disclaimer of all places. We know that the telecoms companies are taking strain at the moment thanks to energy backup costs related to load shedding, so this spells trouble in my books.
Another clue about profitability lies in normalised revenue growth of just 4.7% for the group. This excludes the transformative Vodafone Egypt deal, with those numbers consolidated in December. Revenue in South Africa grew by 5%, which we know is well below many of the inflationary input costs. It’s very unlikely that operating margins went in the right direction.
Speaking of the Vodafone Egypt deal, it was worth R43.6 billion and is the largest in Vodacom’s history. They have pyramids in Egypt and they hopefully also have electricity.
MTN gets all the credit for being a FinTech play, but Vodacom is holding its own in that space, with a 30.6% increase in financial services revenue to R2.6 billion. That’s still small compared to group revenue of R30.7 billion, but it makes a meaningful contribution. M-Pesa is Africa’s largest mobile money platform by transaction value, processing $366.7 billion over the past 12 months.
Capital expenditure is a major focus point, as telecoms businesses have a reputation for generating sub-economic returns for shareholders over a long period of time. This is due to the need to continuously upgrade the network to stay ahead of technological developments. In South Africa, capital expenditure increased by 15.6% year-on-year vs. revenue growth of 5.0%.
Can you see the problems yet?
I can, yet the share price is down just 2% in 2023. It trades on a trailing dividend yield of 6.3%. I suspect that “forward dividend yield” is a term that Vodacom investors will learn about in 2023, but perhaps I’m wrong here.
Little Bites:
Aveng announced that its subsidiary Moolmans has entered into a new five-year contract with manganese mining company Tshipi é Ntle, valued at around R7 billion. Significant investment is required against this contract, including major yellow earthmoving equipment that would certainly get Toddler Ghost very excited and screaming “DIGGER!” at every opportunity. Moolmans has been servicing this client since 2011.
In a quarterly activities report, Southern Palladium reminded the market that drilling results to date have been in line with expectations, with some results coming back even better than expected. Phase 1 drilling is underway and the company has $14.2 million in cash.
MC Mining’s quarterly activities report looked at pressure on production from geological conditions and load shedding. It was also an important period for the balance sheet, with a A$40 million rights issue completed. The focus is on the financing of the flagship Makhado Project.
Orion Minerals also released a quarterly report, recapping a period that saw a major funding package signed with Triple Flag Precious Metals Corp. Off the back of that, terms have been agreed with the IDC and definitive agreements are being negotiated. There is now sufficient funding for trial mining at Prieska.
Accelerate Property Fund has more related party weirdness than a hillbilly annual convention. To help clean that up, there’s now a R50 million rights offer. The company already trades at a huge discount to NAV, yet the rights offer is is at a discount of over 31% to the 30-day VWAP. This has been fully underwritten by “U Big Investments” for a juicy fee of R2.5 million.
Zeder has completed the deal to sell its stake in Agrivision Africa, which means that the company has now received the R160 million selling price in cash.
In news that should shock absolutely nobody, Trustco has missed its own deadline of publishing its annual financial statements by 31 January. The auditors are apparently still finishing their work. The company hasn’t given any guidance regarding a new release date.
With just a few weeks to go until the ANSARADA DealMakers Annual Awards, the following deals have been shortlisted for the Brunswick Deal of the Year 2022. The DealMakers Independent Panel have selected these deals from the nominations submitted by the M&A industry advisers. They are, in alphabetical order:
Mediclinic International take private
The offer by Remgro and MSC Mediterranean Shipping (MSC) to Mediclinic shareholders owning the remaining 55.44% stake, provided Mediclinic shareholders with an exit premium of 50% on the six-month average price at the time, valuing the offer at £2,05bn (R41,85bn). In terms of the offer, by special purpose vehicle Manta Bidco, they would receive 504 pence (R102.06) per share in cash, plus the declared final dividend of 3 pence per share.
Local Advisers: Standard Bank, Morgan Stanley, Rand Merchant Bank, Webber Wentzel, Bowmans and Cliffe Dekker Hofmeyr.
PSG Group restructuring, unbundling and delisting
The ever-increasing discounts at which investment holding companies trade marked the catalyst for a transaction which would pursue a value-unlock initiative for shareholders through a restructuring of a nature not seen before in South Africa; one involving six JSE-listed companies, two of which were dual-listed. The value of R115.59 per share was unlocked for exiting shareholders, representing a 41.3% premium to the closing price on 28 February 2022, amounting to c. R22,54bn.
Local Advisers: PSG Capital, Tamela, Cliffe Dekker Hofmeyr, BDO and Deloitte.
Sanlam Allianz joint venture
The deal announced in May 2022 was almost two years in the making, and valued in excess of R33bn. The combined African operations of Sanlam and global integrated financial services group, Allianz creates the premier pan-African, non-banking financial services entity, operating in 27 countries across the continent, with positions strengthened in 12 overlapping countries. The ambition is to be a ‘Top 3’ insurance company in all chosen markets.
Local Advisers: Standard Bank, J.P. Morgan, Webber Wentzel, Bowmans and PwC.
The winner will be announced at the ANSARADA DealMakers Annual Awards on 21 February, 2023 at the Sandton Convention Centre.
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