South Africa is going through a lot right now. Eskom has finally conceded that loadshedding is going to be worse before our energy security crisis gets better; and the country’s economy is sluggish in shaking off the multiple blows thrown at it, COVID-19, the far-reaching impact of unemployment and increased cost of living. For the South African investor, there are limited options available when it comes to investing locally.
The diversity of your portfolio isn’t limited to having access to a multitude of asset classes or varying investment vehicles but also ensuring that these products work for you – beyond the cycles and market sentiments.
Perhaps the value lies in looking within some of South Africa’s local investment and savings vehicles and considering the likes of a Tax-Free Savings Account (TFSA).
Introduced in 2015 to encourage household savings, the current perception around TFSAs is that they are for the investment novice, newly minted professionals or those who’d like to have some money for a rainy day, tax-free. But this is a myth. A TFSA should, in fact, be a serious consideration for all types of investors – including the astute and experienced. It is an investment vehicle that can be considered as a base product to maximise this tax advantage provided by government. Equally important is understanding the Ts and Cs, fees and the transparency of a TFSA to ensure the highest net return.
After having spent hours conducting research, could you confidently say that you understand the returns, the fees, and the value you’ll get from this investment besides its tax-free appeal? Or that you understand the cumulative impact of these hidden costs on the value of your TFSA in the long-term?
In launching our Tax-Free Savings Account, our approach was simple: we wanted to develop a product that investors can include as part of a holistic investment approach where they can benefit from all the tax breaks available to them, and ensure that even the simplest investment vehicle, like a TFSA, continues to enhance their investment portfolios. But the benefits of a tax-free savings vehicle is negated if investors are paying what they would have saved on taxes, in fees. So, to align with the ultimate objective of encouraging investors to save, we charge zero investment fees on our TFSA. We’ve also made it easy for investors to switch their TFSA from another service provider to ours.
By far the biggest benefit, however, is the market-beating return that our tax-free savings product offers. With a minimum effective annual return of 10% per annum, integrating a TFSA into your investment portfolio is a no-brainer. What’s more, we’re so confident in the performance of the underlying assets of this offering, that we’re guaranteeing this minimum return until 29 February 2024. And we are confident that these underlying assets will continue to meet or exceed our targeted returns thereafter.
Ours is an account that’s structured using an endowment policy issued by Fedgroup Life Ltd. and is invested in a bespoke selection of underlying funds and a range of cash and debt instruments. In addition to a market-beating return, the Fedgroup TFSA also offers investors additional benefits. In the event of the investor’s death, named beneficiaries receive the proceeds faster and the TFSA doesn’t form part of the investor’s estate for the calculation of executor fees. These unique benefits help investors get the most out of this product and that’s what we want for our investors – the protection and preservation of their money and investments, a sustainable, diverse portfolio and market-beating returns that don’t just look good on paper but also enhance your investment gains.
We put our clients first in a global economy that’s unpredictable, a local one that’s worrisome, and an industry that frustrates through fees, fine print, and convoluted terms and conditions.
There is no reason to make TFSAs so difficult. They are investment vehicles that can help bolster consumer confidence when it comes to investing and enable investors to structure portfolios that deliver and improve with time while serving as an entry point for many who are looking to secure their financial futures.
Chris Gilmour digs into the Stats SA November release and finds some surprising numbers.
StatsSA never fails to surprise me with its monthly releases and November 2022 was no exception. The rational person in me was expecting to see a really dull November, given the rising interest rate background. I was expecting to see another big yawnfest of a Black Friday/Cyber Monday at month end. I was completely wrong!
Discretionary retailers in the clothing, footwear, textiles and leather (CFTL) and household furniture and appliances (F&H) had an exceptionally strong month. It will be instructive to observe how December retail sales pan out, given the strength of November’s sales.
The best performing category in November was F&H at 6% year-on-year, closely followed by CFTL on 5.9%. We must bear in mind that November 2022’s figures are being compared against November 2021’s figures, which would also have a relatively strong “Black Friday” component built into them, so it’s not as if there some sort of weak base effect at play.
Far from it, in fact, which makes the November 2022 figures all the more interesting, especially as they arise during a period of sustained rising interest rates.
Source: StatsSA; Gilmour Research
Both of these discretionary categories are depicted in the above graph, which shows that they are both quite volatile, though rarely do they dip into negative territory.
Some of the JSE-listed alternatives
From a JSE perspective, it’s difficult to draw any meaningful conclusions. There is only effectively one furniture retailer left on the JSE – Lewis Group – and its share price languishes at somewhat less than half of its 2018 peak.
The CFTL retailers have had a very mixed picture, with Truworths enjoying a very belated surge after years of doing nothing, while Mr Price and The Foschini Group are demonstrating the benefits of investing through the cycle. But even here, there doesn’t appear to be an appetite for either of them.
Perhaps Truworths is worth having a look at, as its trading pattern is not only the best of the listed CFTL retailers but TRU is also the cheapest share of this universe, on a P/E ratio of only 8.5 vs 10 for TFG and 12.2 for MRP.
What is happening in credit sales?
At the most recent Monetary Policy Meeting of the SARB held on 26 January 2023, an interest rate hike of 25 basis points was announced. This is a lot lower than the string of 75 basis point hikes that have preceded this and probably signals a peak in the repo rate.
While this is a glimmer of good news for the embattled South African consumer, we must bear in mind that rates can stay at these elevated levels for quite some time, so any real relief may be some way off yet. In recent trading updates from discretionary retailers such as Lewis and Mr Price, it is noticeable that credit sales have increased faster than cash sales, suggesting that consumers are losing their fear of credit.
This is fascinating, as rejection rates for new credit applications have actually increased, according to the National Credit Regulator. This seems counter-intuitive as far as the rational person is concerned and yet the figures do suggest that this is indeed the case:
Source: NCR. Gilmour Research
The wooden spoon goes to…
The worst performing sector in November continued to be hardware, paint and glass, a DIY home improvement proxy. There are no signs of a turnaround in this dismal sector, even after many months of secular decline. So, no respite for Cashbuild shareholders:
Source: StatsSA; Gilmour Research
This article reflects the independent views and opinions of Chris Gilmour, which are not necessarily the same as The Finance Ghost’s opinions on these stocks. For equity research on South African retail and other stocks, go to www.gilmour-research.co.za.
There’s progress in the deal to sell PresMed Australia
Back in December, Advanced Health told the market that it had agreed with a consortium of management and medical shareholders, alongside a major private equity backer, to sell its 56.44% stake in PresMed Australia for R522 million. The proceeds will be used to settle debt and support the working capital requirements of Advanced Health’s South African operations.
BDO Corporate Finance has been appointed as independent expert, with that report due to be included in the circular that will be distributed to shareholders. Another important step is that the TRP has been provided with the proof of funds for the consortium, a requirement under takeover law.
The various conditions need to be met by no later than 30 April, so things are heating up in this transaction. Irrevocable undertakings have been received from holders of 68.23% of the share capital of Advanced Health, so the deal looks to be in with a good chance of success.
Record tin production at Alphamin
Margins are juicy even with tin prices under pressure
Alphamin mines around 4% of the world’s tin, a little factoid that the company reminds us of in every announcement.
For the year ended December, the group achieved record tin production of 12,493 tonnes, up 14% from the prior year. In the fourth quarter, production of 3,113 tonnes was ahead of guidance of 3,000 tonnes.
The estimated EBITDA for the full year of $222 million is also a record.
The tin price moved severely over the year, with the average price for the full year at $30,636/tonne and the Q4 price at $21,436/tonne. The current price is around $30,000/tonne, so there’s been a significant recovery in the price this year, which is encouraging for the ongoing development of the Mpama South project.
Importantly, the EBITDA margin in Q4 (when prices were low) was a meaty 41%. When mining goes well, it really goes well!
The full year dividend was CAD$0.06 per share (roughly R0.78 per share). At a share price of R13.00, this isn’t an example of a mining business on a high dividend yield.
The group had net cash of over $109 million on the balance sheet as at the end of December.
Capital & Counties updates the market on 2022
London’s West-Endis experiencing strong demand
In a story that we are seeing from the European property funds overall, Capital & Counties has confirmed that rental demand at properties is strong but valuations are going sideways because of higher yields being demanded by investors.
If you’ve ever run a valuation in your life, you’ll know that a 19 basis points move to a yield of 4.07% is significant. This can offset some really juicy underlying tenant demand.
Net debt at Capco has increased from £599 million to £622 million, with net debt to gross assets increasing from 24% to 28%.
The proposed merger with Shaftesbury is expected to close during the first quarter of 2023.
Italtile: it still hurts
The share price seems to know this already
Unless you’re a hedge fund manager looking to add to your short book, Italtile really hasn’t offered much since the middle of the pandemic. As people returned to work and interest rates went crazy, the thought of spending money on holidays (or even petrol) started to take preference over any plans to renovate the bathroom.
In a trading statement, Italtile has guided that headline earnings per share (HEPS) for the six months to December 2022 will drop by between -8.1% and -5.5%, coming in at between 77.1 and 79.3 cents.
The share price was flat on the day, with a recent downward trend clearly visible in this chart:
Nampak is doing its best, but it isn’t enough
The rights offer has dropped from R2 billion to R1.5 billion
Despite revenue growth of 20% in the three months to December 2022, Nampak’s operating profit is down because of foreign exchange losses.
I’ve beaten this drum many times: running a relatively low margin business with a complicated African treasury is exceptionally hard. Of the cash transfers in the period of R452 million, 68% was from Nigeria at a “significant cost to operating income” – i.e. transferred at a rate that is far more onerous than the quoted rate in the market, due to shortage of foreign currency.
Here’s another view on why operating in risky jurisdictions should only be attempted with very juicy margins:
For those with dodgy eyes, it says that Nampak makes only R474 million in trading profit from jurisdictions with lower foreign exchange risk and R907 million from jurisdictions with higher risk. By the time the forex losses are factored in, the latter number has plummeted to R398 million.
The sad thing is that trading profit increased by a higher percentage than revenue, so all the pain is being felt due to either forex losses or issues further down the income statement (higher net finance costs as well as a higher effective tax rate that have both negatively impacted net profit).
The management team has been focused on the balance sheet and rightly so, unlocking a net working capital and liquidity improvement of R500 million. For this reason, the proposed rights offer has decreased from R2 billion to R1.5 billion.
Interestingly, Nampak notes that the operations can handle load shedding up to stage 4, with anything beyond that level causing trouble. I think we can all relate to that.
A new equity funding package is being negotiated with the lenders who require Nampak to execute a rights offer with net proceeds of at least R1.35 billion. A number of shareholders have pushed against the order of events, saying that the terms of the funding should be finalised before the rights offer is launched.
Nampak has committed to give details of the funding package before the rescheduled extraordinary general meeting on 8th March.
Pan African Resources drops more than 6% after an update
Production came under pressure in the first half of the year
For the six months ended December, Pan African Resources managed to make significant progress on its renewable energy strategy. Aside from solar projects, there was also the issuance of a $47.3 million sustainability-linked bond that will help fund the Mintails project.
The problem lies in the production numbers, not the strategic initiatives. Load shedding and difficult weather conditions put the business under pressure, particularly at Barberton Mines. Production for the period fell by 14.6%, a significant drop from what was admittedly record production in the prior year.
Despite this, production guidance for the full year has been maintained. There’s a big catch though: this guidance is “subject to consistency in Eskom’s electricity supply” – and this probably explains the share price drop.
Investors will also take note of a significant jump in net debt, which is attributed mainly to capital expenditure and the payment of a dividend.
Pepkor is flattered by Avenida, with SA businesses under pressure
The company joins the Mr Price WhatsApp group of like-for-like pain
With Pepkor adding its voice to the retail sales updates over the festive period, we now have a proper overview of what happened in the sector. Revenue increased by 6.5% at group level, but we have to dig deeper to really unpack it.
The number to look for is like-for-like sales, particularly with the major acquisition of Avenida in these numbers. Sure enough, like-for-like fell by 1.4%. This is despite 70% of stores being able to trade with backup power, so there’s more to the festive retail story than just load shedding.
The poor result in clothing was driven by Ackermans, where like-for-like sales nosedived by 8%. That’s a really ugly outcome in an inflationary environment of around 5%, implying that volumes fell by approximately 13%.
Across Mr Price and Pepkor, along with cash vs. credit sales at Lewis, we now have pretty clear evidence that lower income earners are being hammered by current economic conditions. Still, that’s not the only reason for the pain. At Mr Price, I think that the brand isn’t resonating with customers anymore. In Ackermans, Pepkor admits that the merchandise mix wasn’t aligned to the brand promise of “unbeatable value” – and in fashion, that’s a major issue. Markdowns have been implemented, which means gross margins are going to take strain.
There’s some hope in January at least, with the back-to-school rush driving strong sales at Pepkor’s core value brands. This is a necessity though, with parents likely making sacrifices elsewhere to afford school clothes.
The rest of the group posted positive like-for-like growth, with Avenida up 6.8%.
The DIY / building material format within the group performed decently in the broader economic context. The Building Company managed to grow 1.8%. The performance has deteriorated in January, with general iffyness around load shedding not helping matters.
I can’t help but wonder how Pick n Pay Clothing is performing in this environment. One of the best success stories to come out of Pick n Pay in recent years, the value-driven offering has resonated with customers and taken market share. We don’t get to see detailed numbers unfortunately, as the division gets bundled into the broader (and much larger) Pick n Pay business.
A management band-aid at Spar
The group is casting the net wide for a new CEO
With the…sudden retirement of the CEO of Spar, the company has found itself without anyone at the helm. As a temporary measure, non-executive chairman Mike Bosman will now become Executive Chairman (and Spar even uses capital letters here to make this significant upgrade even clearer). He has resigned from the board of AVI after 13 years to make sure he can deliver this role.
With the…sudden retirement of the CEO of Spar, the company has found itself without anyone at the helm. As a temporary measure, non-executive chairman Mike Bosman will now become Executive Chairman (and Spar even uses capital letters here to make this significant upgrade even clearer). He has resigned from the board of AVI after 13 years to make sure he can deliver this role.
Bosman will have his hand held sweetly by the Board Chairman’s Committee, to “strengthen governance” in the aftermath of a really embarrassing period for the company. Lead independent director Andrew Waller will be the chair of that committee.
While Spar fights to regain any level of respect in the market, the search for a new CEO is underway and the company hopes to make an announcement within three months.
The CEO of Tongaat heads for the exit
But the business rescue practitioners are running the show now anyway
Things seem to keep getting worse at Tongaat, with CEO Gavin Hudson retiring from the top job. He joined in the aftermath of the accounting irregularities and tried to steady the ship, but a cocktail of a pandemic, civil unrest and floods made it an almost impossible task.
Tongaat is in business rescue and the plan is expected to be published before 28 February, with the company’s “core team of executives” working with the business rescue practitioners.
The reality is that Hudson’s departure probably doesn’t make a huge difference at this stage, as the business rescue practitioners are in charge of the company’s affairs.
Little Bites:
Director dealings:
A trust linked to directors of Ninety One has acquired shares worth around £86k.
A director of Mustek has sold shares worth around R875k
It’s such a tiny amount that it probably doesn’t matter, but an associate of a director of Ascendis Health bought shares worth nearly R4k
Safari Investments is currently under offer from Heriot REIT at a price of R5.60 per share. Before the latest block trade, Heriot and its concert parties collectively held 40.7% of the total Safari shares in issue. After a deal with SA Corporate Real Estate Limited (also at R5.60 per share), Heriot and its concert parties now own 47.1% in Safari.
Trustco doesn’t seem to be getting anywhere in court. After the High Court dismissed Trustco’s review application regarding the JSE’s decision around Trustco’s financial statements, the company applied for leave to appeal to the Supreme Court of Appeal. This application was dismissed with costs. I’m no lawyer, but I assume they will give up now.
By Duma Mxenge, Business Development Manager at Satrix
The global move to a gig economy has accelerated in recent years as workers exit formal employment in favour of flexible freelance work or take on freelance assignments in addition to their main jobs. In fact, online platform Statista expects gig workers to gross over USD455 billion globally in 2023.
With this economy growing so rapidly, asset managers and financial advisers need to think smart when developing and recommending financial solutions to this growing market segment. Most importantly, we must remember that gig workers’ earnings may vary wildly from one month to the next.
Income volatility and inadequate savings to pay for unexpected expenses stand out as the main financial challenges facing South Africa’s gig workers, described by Oxford Languages as “individuals who do temporary or freelance work, often as independent contractors engaged on an informal or on-demand basis”.
Many traditional investment products are designed with those in formal employment in mind. For example, retirement annuity products and pension funds assume that clients can afford a fixed monthly contribution, plus an annual increase. These products can present difficulties for gig workers due to their uncertain earnings.
In additional, research by the United States based Commonwealth (assisted by Green Dot, Gig Wage and Steady) found that most gig workers had no savings for emergency expenses, observing that financial ‘blows’ of USD1,000 to fix a vehicle or make up a rent payment were often insurmountable. As such, the starting point for a gig-worker-appropriate financial solution is a product that allows for irregular cash savings and gives workers access to that money in the event of an emergency.
Although cash savings can be accumulated in a bank account, it makes sense for gig workers to consider money market funds that allow them to earn ‘better than bank’ interest rates while avoiding the price uncertainty that goes hand-in-hand with stock market investments. As the gig worker accumulates sufficient savings and his or her earnings become more stable, the adviser may suggest lump sum or once-off investments in a range of discretionary investment products.
South African gig workers can choose from hundreds of collective investment schemes such as unit trusts and exchange traded funds (ETFs), which allow them to build a savings portfolio with exposure to any asset class, both locally and offshore.
An individual with volatile income should not neglect saving for retirement. After building an adequate emergency fund, equivalent to around six months of average income, the gig worker can begin contributing to a retirement annuity offered by one of the country’s Linked Investment Service Providers (LISPs). Retirement annuity products are also available on the SatrixNOW investment platform. These retirement annuities are balanced funds and they allow flexibility in contributions introducing gig workers to a highly-regulated retirement fund industry.
The gig economy carries significant risks and a high level of uncertainty. This uncertainty makes it difficult for gig workers to choose investment products for housing emergency funds or securing retirement. Satrix believes that gig workers should approach financial advisers to assist in managing uncertain cashflows, and over time build the necessary exposure to savings, retirement funds and discretionary investments.
Asset managers and financial advisers can work together to ensure that gig workers benefit from sound financial advice and the investment returns on offer to appropriately match the needs of the client.
Satrix is the leading provider of index-tracking investment products and exchange traded funds (ETFs) in South Africa, with over R160 billion in assets under management invested in the range of ETFs, index-tracking unit trusts, life pooled and segregated portfolios that are specifically tailored for client-specific mandates or retail funds.
It pioneered index investing in South Africa, launching the flagship Satrix 40 ETF as the first locally listed ETF in November 2000. The business services the institutional, intermediary, and individual investor markets. Satrix has proven expertise in risk management, portfolio analysis and index construction.
A core part of the Satrix purpose is to drive the democratisation of investments for all South Africans, where SatrixNOW, the no-minimum amount online investing platform, is a key enabler to provide access for South Africans to “Own the Market”.
For more info on ETFs, unit trusts and retirement annuities, visit the Satrix website.
Disclosure Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
Renergen finally becoming a helium producer.
The Foschini Group releasing impressive numbers over the festive season.
Truworths giving the market a positive surprise with its growth.
Clicks showing solid retail growth, with question marks over the wholesale performance.
Lewis demonstrating that lower income consumers are clearly under pressure, with strong credit sales and a drop in cash sales.
Astral Foods reminding the market that poultry is perhaps the toughest industry around.
ArcelorMittal showing a resilient performance (by its standards) in tough operating conditions.
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.
The company is working closely with Taylor Maritime Investments
After the recent corporate action, Taylor Maritime Investments is the proud owner of 83.23% of the shares in Grindrod Shipping. The company is still listed, so the shareholders who stayed behind will now participate in a journey of (hopefully) value creation as the companies explore synergies.
The companies are looking for efficiencies across insurance, commercial management, technical management and corporate activities. There is also a plan to reduce debt on Taylor’s balance sheet, which would give the company more firepower to support Grindrod Shipping.
There’s already a deal in place to sell a vessel to free up some cash, though the announcement doesn’t give an indication of the selling price.
This is a highly cyclical industry, as evidenced by the share price chart:
Industrials REIT is enjoying rental uplifts, but vacancies are down
In a quarterly update, the company gives a mature view on things
Industrials REIT – a fine example of a company that “does what it says on the tin” – is still enjoying an environment that is favourable for industrial properties. High demand and limited supply means that incredible uplifts in rent can be achieved when leases are renewed.
How much? Try a 31% average uplift on for size! It’s even better for new lettings rather than renewals, with an average uplift of 36%.
Of course, these growth rates are not applied mid-lease, so the entire portfolio certainly isn’t growing at these levels. Like-for-like rents were up 5% for the portfolio over the past 12 months.
Despite the company highlighting strong demand, occupancy actually fell by 0.4% this quarter. That’s not as small a move as you think, as the percentage is measured based on the entire portfolio.
To help with occupancy, the company has its own leasing platform in the UK that has boasted a 15.4% increase in visitors year-on-year. There is obviously a dedicated sales team as well. An efficient leasing strategy helps keep costs down, with 73% of leases contracted through Industrial REIT’s short-form digital “smart leases” (as the company likes to call them).
Although the company notes that the trading environment may become more difficult this year, they also believe that attractive acquisition opportunities may become available. That makes sense, as the best deals are to be found when things get tough. At that stage, companies with strong balance sheets can pounce. The company is sitting on its cash for now, with no new deals during the quarter.
In some cases, the opportunity exists to take an active asset management approach. Simply, this means buying a fixer-upper. A recent project near Edinburgh is expected to achieve a yield on cost of 17.7%. Bearing in mind that this is measured in GBP, that’s a proper yield!
Is Lewis a good barometer for consumer health?
If so, we are going to be in trouble soon
Over the past week or so, we’ve had a flurry of updates from clothing and homeware retailers. These are semi-durable goods, which means they aren’t as necessary as the bread in your shopping basket but they are also a much easier purchasing decision than a new car or TV.
With Lewis, we take a big step into the world of durable goods. To feel confident about these major purchases, consumers need to believe that everything is going to be alright. Whether they buy on cash or credit, there’s still a significant difference in the psychology behind these decisions vs. clothing or especially food.
In the nine months to December, Lewis could only increase sales by 2.0%. Inflation, higher interest rates, growing unemployment and load shedding are all major factors here, with same-store sales barely inching upwards by 0.4%.
If you dig deeper, you’ll find the really scary statistics: credit sales over the nine-month period increased by 16.8% while cash sales declined by 13.5%. That’s a worrying outlook for South African consumers. Credit sales contributed 58.3% of total sales, well up from 50.9% in the comparable period.
If that’s not enough to concern you, the trend over the period might just do it. In the three months to December, sales fell by 1.1%. Credit sales were 17.3% higher and cash sales were whacked by 20.7%, with a net sales result that is in the red.
Once other income is taken into account, total revenue was up 2.8% over the nine-month period.
The silver lining is that collection rates are strong, so those credit sales are working out for the time being. Collection rates came in at 82.7% this quarter, up from 79.7% in the comparable quarter. The trend is going in the right direction in this metric, as the nine-month collection rate is 82.0%.
Whilst it certainly helps to see collection rates improving as credit sales increase, it’s also important to remember that the collection rate is more of a lagging indicator. What really matters is whether collection rates will stay strong this year. With consumers clearly under pressure, that’s the risk that the market didn’t like, with Lewis dropping 2.3% on a trading day that was generally poor for retailers on the JSE.
The other risk lies in what could be happening to profitability, as the announcement only dealt with sales. With rampant inflation, that sales growth number doesn’t sound high enough to avoid margin compression.
Little Bites:
Director dealings:
The CFO of Naspers has sold shares through an option scheme worth R92.4m. That’s not a typo.
The CEO of Sirius Real Estate has bought shares in a self-invested pension (a structure you find in the UK) to the value of £21k.
A prescribed officer of Alexander Forbes has sold shares worth nearly R84k.
If you are wondering what’s going on at Steinhoff, the agenda for the AGM will be published on 2 February and a circular with full details of the balance sheet restructuring will be published on the same date.
The meeting to approve the scheme of arrangement at Alviva was approved by a strong majority of shareholders, with around 94% voting in favour of the deal that will see Alviva taken private.
In a sign of the times, there were two updates on SENS regarding business rescue processes. One was Rebosis, announcing an extension to the deadline to publish a business rescue plan (now 17 February 2023. The other was Basil Read, which noted that the company is currently operating steadily despite the obvious economic challenges.
AVI is treading water and maintaining flat earnings
But consumer pressures are a bigger problem than load shedding
For the six months ended December, AVI suffered the significant impact of load shedding in its manufacturing operations. Keeping the lights on in a retail store is one thing, but managing an entire manufacturing back-end is something else entirely.
Alternative power solutions added R22 million to operating costs. Although that isn’t a catastrophe for a R25 billion market cap company, it’s still painful. It may be a red herring though, as the bigger problems are in consumer spending.
Volumes are under pressure in some categories, as cutting luxuries from the grocery basket is an easy way to save money. Group revenue increased by 7.2%, with pricing as the bulk of the story here. As is always the case in these types of businesses, category-level performance can vary drastically. For example, I&J fell 2.3% with lower catch rates and other issues, while the fashion brand portfolio grew by 17.4%.
An important update is that the consolidated gross margin increased slightly, a solid outcome in an environment where margin pressure is common. The mix effect will be a major contributor here.
Without I&J, operating profit would’ve been up 8.4%. Including that business, group operating profit could only manage growth of 1.7%.
Below that line, there’s still the pressure from net finance costs, which increased as borrowings and rates were both higher. Inflation leads to bigger balance sheets, which is why I was bullish on banks last year. They sit on the other side of this issue for operating companies.
Overall, headline earnings per share (HEPS) for the period are expected to be between 0% and 1% higher, coming in at between 316.9 cents and 320.1 cents. The share price fell more than 3% on this news, as AVI doesn’t trade at the cheapest multiples around.
MiX Telematics releases strong quarterly results
Shareholders can smile at record subscriber growth and significant margin expansion
For some reason, MiX Telematics doesn’t bother to write a proper SENS announcement to go out with the results. Instead, you have to go digging on the website for the quarterly update. Investor relations laziness aside, the results look good.
With record net quarterly subscriber additions of 44,600, the subscriber base is now over 959,000. Revenue increased by 14% on a constant currency basis and adjusted EBITDA increased from $6 million to $8.4 million for the quarter.
You probably noticed the dollar signs. This is because MiX Telematics is listed on the JSE and the New York Stock Exchange, with the company choosing to report in dollars.
With adjusted EBITDA margin of 22.2% vs. 17% in the prior quarter, there’s good news here for the company. The other good news is that free cash flow is positive again, after timing of investment in inventory worked its way through the system.
In the next quarter, the management team hopes to see further improvement in margins. Heck, they might even make enough money to afford someone who can write a decent summary of the result on SENS.
Shareholders look set to get something OUT
Core earnings at OUTsurance are looking strong
For the six months ended December, the listed group formerly known as Rand Merchant Investment Holdings has released results that are mainly attributable to the OUTsurance business. Having cleaned out almost everything else, the group recently changed its name to OUTsurance Group Limited.
The insurance operations are in Australia (under the Youi brand) and in South Africa under the OUTsurance brand that we all know. In both cases, the performance is good. The reasons vary.
In Australia, fewer natural peril claims have helped alongside premium growth and a more favourable investment environment. Indeed, the only recent disaster in Australia of any consequence was our cricket tour there, which is sadly an uninsurable event.
In South Africa, premium growth was strong and the claims experience was in line with historical levels, so there’s a return to normality.
There are a million distortions in the headline earnings per share (HEPS) number at group level, due to the extensive disposals of assets by the group. The important number is normalised earnings for the insurance businesses that are now the core of the group, which increased by over 20% for the six-month period.
Even Truworths can figure out load shedding
The market doesn’t give Truworths much credit – will this update change that?
You know, it doesn’t seem that hard to think of a solution here. When the power is out, invest in energy backups so your customers aren’t shopping by smartphone torchlight.
Yes?
No?
It depends on which retailer we are talking about. Whilst Mr Price spent its time writing SENS announcements about how bad load shedding is, the likes of Truworths (and The Foschini Group and Woolworths) just got on with it.
With the Truworths numbers now in the wild, there are no excuses left for the shocking numbers from Mr Price. Truworths grew retail sales by 13.0% on a comparable basis for the 26 weeks to 1 January 2023. The growth was strong both locally (13.4%) and in the UK (12.3%).
Yes, there’s a timing impact here. The first part of the 26-week period was much butter than in the last 9 weeks that were hit by load shedding. I suspect that Mr Price would raise this point in its defence, as the Mr Price update only covered the Black Friday and festive season. Still, the gap in performance is so huge that timing alone cannot explain it.
Perhaps the extent of backup power has something to do with it? I’ll just defer to my Twitter here:
The numbers look good even as you dig deeper, with healthy growth across account (16.0%) and cash (9.9%) sales. Account sales contributed 51% of group sales. With inflation of 13.3%, I must highlight that volumes seem to have dipped slightly. Still, that’s decent in this environment.
In the UK where they have lots of electricity and not a lot of sunshine, retail sales at the Office segment were up by 12.3% in local currency. Online sales contributed 44% of total revenue, down from 47% in the comparable period. There was a nifty acceleration in that business, with sales up 15.1% in the last nine weeks of the period.
Trading space increased by 0.8% in Truworths Africa and was reduced by 3.8% in Office.
Headline earnings per share (HEPS) for the 26 weeks to 1 January 2023 are expected to be between 8% and 11% higher, coming in at 485 to 498 cents. Famous for trading on a modest multiple, the Truworths share price increased by over 4%.
Little Bites:
Director dealings:
An associate of the CEO of Spear REIT sold shares worth R309k and an associate of the CFO sold nearly R3.4m worth of shares – are interest rates starting to bite?
A director of Dipula Income Fund bought shares worth over R207k and an associate of a different director bought shares worth R1.44m.
A director of EOH has bought shares worth just under R100k.
Anglo American continues to make progress in having more efficient heavy machinery in its operations. You may recall the hydrogen mining truck that caused quite a buzz when it was launched. Now, we have an LNG dual-fuelled vessel, the first of ten such vessels that Anglo will use in its chartered fleet in 2023 and 2024. As part of the goal to achieve carbon neutrality by 2040, these vessels will cut CO2 emissions by 35% vs. conventional marine fuel vessels. The maiden voyage is a haul of iron ore from Kumba.
Here’s an unusual one for you: the CEO of AECI has accelerated his retirement by a few months, leaving to pursue other interests. A current independent non-executive director has been appointed as CEO while the group looks for a successor. This isn’t exactly a great handover, is it?
The ANSARADA DealMakers Annual Awards are just a few weeks away. The following are those transactions shortlisted for the Business Rescue Transaction of the Year 2022 and highlight the process as a tool to preserve value. The DealMakers Independent Panel have selected these transactions from the nominations submitted by the M&A industry advisers. They are in no particular order:
Ster-Kinekor
SA’s largest cinema chain with 65% of market share entered business rescue in January 2021 citing financial distress due to COVID-19 related restrictions and increased competition from streaming platforms. The consortium comprising UK-based asset manager Blantyre Capital and local private debt manager, Greenpoint Capital emerged as the successful bidder in the R250 million refinancing, restructure and sale of Ster-Kinekor’s assets. In November 2022 the company exited business rescue having continued operating throughout the process and without the loss of +-800 direct jobs.
The local advisers were: EY, Webber Wentzel, Baker McKenzie and Mike Pienaar Consulting.
Andalusite Resources
The country’s remaining independent andalusite producer exited the business rescue process in May 2022 having been placed under supervision in June 2019. A world class strategic asset, Andalusite Resources is one of three main suppliers of andalusite globally with a 23% market share. Eight expressions of interest were received with ARM (a subsidiary of Nikkel Trading 392) winning the bidding process which began in July 2019. The business and all 181 employees were successfully transferred to ARM, a South African entity, under the same terms and conditions.
The local advisers were: GCW Administrators and Werksmans.
Consolidated Infrastructure Group (CIG) and Consolidated Power Projects (CONCO)
The GIC and CONCO business operate in the infrastructure and construction sectors focused primarily on energy, electrification, building and oil and gas and as a result the business rescue of these groups were both large and complex due to multi-disciplinary operations involved. GIC was listed on the JSE when it entered business rescue. The successful operational restructuring implemented disposed of operationally stable, efficient and profitable going concerns resulting in the retention of jobs within those businesses and maximisation of net proceeds for all affected parties.
The local advisers were: Birkett Stewart McHendrie, Metis and Werksmans.
The winner will be announced at the ANSARADA DealMakers Annual Awards on 21 February, 2023 at the Sandton Convention Centre.
Astral shows us that chicken farming isn’t for chickens
The horrible numbers shouldn’t be a surprise to anyone who was paying attention
If you’re looking for a business with extraordinary operating leverage and very thin margins, then poultry is for you. Back in November, Astral warned the market that things would get ugly, with record high feed input costs and the terrible impact of load shedding on operations.
In the Feed division, costs came under pressure as the group navigated load shedding. To help manage its impact, capital expenditure will be required. The good news is that the Poultry division will require substantially higher internal feed volumes, which will positively impact this division’s financial performance.
This brings us neatly to the end of the good news.
We move on to the Poultry division, where feed input costs are causing havoc. Contributing around 70% of the cost of producing a live broiler, any significant movements in this cost have a substantial knock-on effect on margins. Load shedding is a huge problem here, with abnormal costs and production cutbacks of at least 12 million broilers for the interim period.
That’s a lot of chickens.
With a backlog in the slaughter programme, the chickens are quite literally older and heavier, which means they are consuming more feed before being slaughtered.
So in fact, that’s a lot of fat chickens.
If costs could be passed on to consumers, some of these issues could be mitigated. Sadly, consumers are under so much pressure that Astral is having to subsidise the increased cost of productions. Right now, Astral is making a loss on every chicken of at least R2/kg. This will lead to this division incurring “significant losses” for the interim period.
In summary, there are a lot of fat, loss-making chickens. This is a cluck up of note.
Most of the capital expenditure plans of R737 million have been put on hold, with some funds committed towards backup electricity generation to reduce the impact of load shedding.
For the six months to March 2023, headline earnings per share (HEPS) will drop by up to 90%, coming in at 142 cents or more. The comparable period saw HEPS of 1,420 cents.
Although the group balance sheet is healthy, the reality is that the monthly run-rate in the business sounds really bad. This period may have been profitable, but the next one won’t be unless something changes in Astral’s operating environment.
The market clearly thinks that things will get better, based on this five-year share price chart:
Quilter reports further net inflows
The company manages and administers just under £100 billion in assets
Quilter’s assets under management and administration increased by 3% in the three months ended December. Now coming in at £99.6 billion, net inflows of £159 million in the quarter represented around 1% of the growth.
This was lower than net inflows in the preceding quarter (£236 million) and vastly reduced from inflows of £950 million in the comparable quarter of the prior year.
Clearly, inflationary pressures are really hitting household savings, including in the UK.
Quilter’s own distribution channel is performing far better than the independent financial advisor channel, which makes sense when you have your own army of advisors out there selling your products. This is a major part of Quilter’s investment case.
2022 was a tough year for asset management. Quilter ended 2021 with £111.8 billion in assets under management and administration. A year later and at £99.6 billion, that’s nearly an 11% drop in 2022.
The market movements are outside of Quilter’s control but inflows are not, so investors will be pleased with net inflows, even if they dropped sharply for the year to £1,787 million from £3,967 million the year before.
The share price has lost nearly 40% in the past 12 months.
Little Bites:
Director dealings:
The chairperson of RFG Holdings has bought shares worth nearly R36k
An associate of a director of Dipula Income Fund bought shares worth over R42k
Eastern Platinum has announced that the contract to deliver PGM tailings concentrate to Impala Platinum has been extended on the existing terms until 21 December 2023. The relationship between the companies is important, with Eastern Platinum targeting a restart of the Zandfontein underground section in 2023 based on an off-take agreement with Implats.
Trencor released a trading statement that shows the company swinging into a loss for the year ended December 2022. The headline loss per share is expected to be between 0.7 and 1.3 cents vs. headline earnings per share of 3 cents in the prior year. This structure is a leftover on the JSE, so this isn’t as newsworthy as you may think. It is essentially a cash shell that will be wound up at a future point in time.
Profitability has been hammered as conditions turned against the company
For the year ended December 2022, ArcelorMittal’s headline earnings per share (HEPS) is expected to nosedive by between 60% and 65%, coming in at between R2.15 and R2.45 per share. To be fair, this still puts the company on a Price/Earnings multiple of under 2x!
Despite that low multiple, the share price fell 11.6% on this news.
There are various reasons for this, ranging from declines in steel prices through to the global energy crunch and the impact on the company’s operating costs. With destocking by local customers, demand also came under pressure. To make everything even worse, there was a shortage of road trucks for domestic and African overland deliveries in the final quarter of the year.
As the company points out, these results were actually much stronger than in previous times of crisis. Despite obvious operating challenges, there was still a profit on the table for shareholders.
Clicks posts solid growth
The share price was flat, showing just how much is priced in
Clicks is famous in the local market for (1) exceptionally long queues at the dispensary and (2) a share price that trades at very high multiples. Investors have a soft spot for Clicks because of its defensive characteristics. The company is especially popular among global investors.
Still, the share price has been under pressure over the past year:
Credit where credit is due: the sales performance for the 20 weeks to 15 January 2023 is more than decent. Excluding vaccinations (which were huge in the base period), group turnover is up 7.8%.
Retail sales excluding vaccinations were up 12.2%, so the wholesale growth is significantly lower. Wholesale turnover in UPD fell by 0.6%, so it was turnover managed on behalf of bulk distribution clients that helped that side of the business.
Volumes were up, with like-for-like sales of 8.9% vs. selling price inflation of 6.8%.
Interim results are due in April. I’ll be interested to see why the wholesale side of the business is under pressure when things are clearly doing well on the retail side.
Datatec wants you to get to know Westcon International
The company has released a detailed investor presentation
The release of an investor presentation is always worth paying attention to. Generally, these are proper learning opportunities and the latest example from Datatec is no different.
For example, here’s an interesting chart showing how skinny the EBITDA margins are in the IT distribution game:
The yellow highlight is obviously my handiwork, drawing your attention to the EBITDA margin history. As you can see, there isn’t much room to make a mistake in this business!
Grindrod has alerted shareholders to a press release by the Port of Maputo that highlights a new handling record in 2022, having grown a whopping 20% compared to 2021. Volume handled was 26.7 million tons, up from 22.2 million tons in 2021.
The growth is attributed to infrastructure investment and the decision of the Government of Mozambique to establish a 24-hour border operation.
To depress you further about the trajectory of our infrastructure in South Africa vs. other countries, rail volumes for chrome and ferro-chrome jumped by 73% vs. the prior year. The press release notes that 26% of cargo is now carried by rail, with links into South Africa helping with this. It’s just a pity that other parts of our country aren’t working nearly as well as the Mozambique corridor.
Sasol jumps 4.7% after releasing a production update
The market also liked the news about renewable energy procurement
Eskom is doing a wonderful job of helping companies move towards meeting emissions targets. Not only does it make the ESG section of the report look better, but having alternative sources of power has become a business imperative thanks to the state of our national grid.
Sasol has announced three power purchase agreements, including 69MW of wind power for Sasolburg and 220MW of wind power for Secunda under two separate agreements. There’s a long way still to go, with Sasol aiming to procure 1,200MW of renewable energy by 2030.
Looking to the detailed numbers, external sales revenue for the half year was down 2% vs. the prior year.
Productivity in the mining business was lower in this period. The coal stockpile remains above the minimum level, helped by growth in external purchases. This is important to ensure continuous coal supply. Export sales fell by 25% in this part of the business, attributed to challenges at Transnet Freight Rail and the diversion of export coal to the stockpile.
In the Gas business, production fell by 2% due to reduced demand from Sasol itself and its external customer, attributed to load shedding and the impact it has on our industrial companies.
The Fuels business reported a 2% drop in production, hurt by various factors ranging from coal quality to rainfall incidents. Although Sasol hopes to achieved the original full year guidance, there are challenges in sourcing hydrofluoric acid and this is a risk to the numbers being achieved.
The Chemicals business experienced a 5% decrease in external sales volume and a 2% decrease in external sales revenue. The major pressure was in the Eurasia business, where volumes fell by 19% due to economic challenges in Europe and the war in Ukraine. The African and American businesses were positive.
Little Bites:
Director dealings:
The former CEO of Famous Brands has executed a collar structure over R12.28 million worth of shares, with a put strike price of R55.26 and a call strike price of R86.33. This is a way to protect the value of a stake within a certain range (the latest closing price is R61.96).
A director of CMH has acquired shares worth nearly R53k.
A director of Barloworld has acquired shares worth R77.5k
Reinet has released its net asset value per share update for the quarter ended December 2022. The net asset value per share is up 6.5% vs. September 2022 and the company has achieved a compound annual growth rate of 9.1% in euro terms since March 2009, including dividends paid.
Kore Potash has announced further drilling results form the DX extension in the Republic of Congo. Note that this is different to the Kola project that is usually in the headlines. The management team seems to be pleased with the results. If you want to learn about geology, you’re welcome to go read the complicated announcement!
In further junior mining news, Southern Palladium is pleased with the results of an internal scoping study for the Bengwenyama PGM project. It confirms that UG2 has the best development potential, with the company now believing that a mining rights application should be submitted earlier than first envisaged. The board has decided to initiate the Prefeasibility Study this quarter.
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