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Thorts: Minority shareholders’ appraisal rights

Johan Coertze and Giscard Kotelo
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Thorts: Minority shareholders’ appraisal rights

An important consideration when implementing a repurchase of shares

The repurchase by a company of its own shares is allowed in terms of section 48(8) of the Companies Act 71 of 2008 (the “Act”) provided, inter alia, that the solvency and liquidity test is met. One of the other core restrictions, in terms of s48(8)(b), is that a decision by a company’s board to acquire its own shares is subject to the requirements of s114 and s115 of the Act where the transaction – in terms of which the shares are reacquired by the company, considered individually or as an integrated series of transactions – involves the acquisition by the company of more than 5% of its shares.

S115(8) expressly provides that any person who informed the company of their intention to vote against the special resolution approving a fundamental transaction – and, in fact, attends the relevant meeting and votes against such special resolution – is entitled to seek relief in terms of s164 of the Act.

S164 of the Act provides for dissenting shareholders’ appraisal rights. An appraisal right is best described as the right of a dissenting shareholder, who does not approve of a fundamental transaction, to have its shares bought out by the company in cash, at a price reflecting the fair value of the shares.

In the recent case of Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others1, the Supreme Court of Appeal (the “SCA”) was called upon to consider whether the reference to the requirements of s114 and s115 of the Act in s48(8)(b) means that the appraisal rights in s164 of the Act were triggered when a company proposed to repurchase more than 5% of its shares.

The facts can be summarised as follows: Capital Appreciation issued a circular to its shareholders in which it notified them of its intention to repurchase shares from specific shareholders, and that due to the number of such shares, the transaction was subject to s48, s114 and s164 of the Act. The special resolution for this transaction was passed by a large majority of shareholders.

The minority shareholders in Capital Appreciation approached the High Court, in terms of s164 of the Act, for an order that an appraiser be appointed to assist the court in determining a fair value of their shares in Capital Appreciation. The minority shareholders exercised their appraisal rights in terms of s164 due to the fact that Capital Appreciation proposed to repurchase specific shares from specific shareholders in terms of s48 – which repurchase met the requirements of s48(8)(b). Capital Appreciation changed tack and argued in court that s164 did not apply, with the result that First National Nominees (the minority shareholder) had no right to an appraisal of the fair value of its shares by the court.

Before the High Court, (which judgment became the subject of the appeal) Capital Appreciation argued that the repurchase of shares in terms of s48 does not qualify as a scheme of arrangement, as understood in the authorities related to the previous Companies Act and, accordingly, although s48(8)(b) incorporates the requirements of s114 and s115 into a transaction whereby more than 5% of a company’s shares will be repurchased, this is only a reference to the procedural requirements and not the appraisal rights in s164. Moreover, as s48(8)(b) does not reference s164, the legislature would have made reference thereto in s48 if its intention was that s164 would be triggered in the circumstances referred to in s48(8)(b). The High Court disagreed and held that the inclusion of the requirements of s114 and s115 in s48(8)(b) incorporated all the requirements of these sections into a repurchase in terms of s48(8)(b), including the appraisal rights in s164, irrespective of whether the transaction qualifies as a scheme of arrangement or not.

The SCA, in dismissing the appeal by Capital Appreciation and confirming the decision of the High Court, held that the reference to s114 and s115 in s48(8)(b) establishes a direct link between s48(8)(b) and s164. The SCA held that First National Nominees was, therefore, entitled to be paid the fair value of its shares by Capital Appreciation.

In so ruling, the SCA confirmed that a company wishing to repurchase more than 5% of its shares in terms of s48 of the Act must, in addition to complying with the procedural requirements of s114 and s115, comply with the requirements of s164, should a minority shareholder wish to exercise their appraisal rights. The possibility of a minority shareholder exercising their appraisal rights is, therefore, an important consideration when a company decides to implement a repurchase of shares in terms of s48 of the Act.

1Capital Appreciation Ltd v First National Nominees (Pty) Ltd and Others [2022] ZASCA 85 (8 June 2022).

Johan Coertze is an Associate and Giscard Kotelo a Candidate Attorney. Article overseen by Counsel Michael Van Vuren | Fasken.

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

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

Ghost Bites (Alphamin | Ascendis | Equites | Grand Parade | Massmart)

The Finance Ghost
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Ghost Bites (Alphamin | Ascendis | Equites | Grand Parade | Massmart)

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Alphamin beats its production guidance

But a lower tin price means profits are way off the preceding quarter

Alphamin reminds us in every announcement that the company produces 4% of the world’s mined tin at its operations in the DRC.

Production in this quarter was 3,139 tonnes, a solid beat of the production guidance of 3,000 tonnes. The problem is that the average price per tonne has dropped from $35,345 to $22,011, a nasty 38% decrease in the space of just three months. This drop in the commodity price explains why the share price has lost 32% of its value this year.

The impact on EBITDA is substantial, down 55% from the preceding quarter to $30 million in this quarter.

The company believes that demand for tin is expected to increase over the next five years, with supply expected to remain constrained. Along with the Mpama South project (scheduled for commissioning in December 2023), this is the underpin for the investment thesis in this company.

The share price is back to where it was in May 2021. If you missed the uptick over the pandemic, there’s a chance here for another bite at the cherry if you like the fundamental story of the business and the tin market.

One step closer for Ascendis

The Austell offer has achieved Competition Commission approval

As regular readers know, Ascendis shareholders need to decide whether they like money or not. It’s really as simple as that, as there are two competing offers on the table and one is materially larger than the other.

As a reminder, the offer from the Pharma-Q / Imperial Logistics consortium is a base price of R375 million. Austell Pharmaceuticals has offered R432 million for the same assets. You don’t need to get the calculator out to choose a winner there.

Until the latest announcement, the material difference between the offers was that Pharma-Q / Imperial already had Competition Commission approval in place and Austell didn’t. Ascendis has announced that Austell has also received approval without conditions, so the difference between the offers is only the price.

Obviously, the board has given shareholders a clear recommendation to vote in favour of the Austell deal.

Equites is proof that the grass isn’t always greener

In the six months to August, the UK portfolio lost value and the SA portfolio moved higher

The annoying thing about markets is that they don’t always fit the popular narrative. For example, the SA-bashers tend to conveniently forget that other countries also have problems (though they do tend to have electricity at least).

There are issues in the UK at the moment and the property market there is under pressure. Goodness knows we have our problems in South Africa too, but markets are all about the reality vs. what was already priced in.

Despite load shedding and everything else, logistics property fund Equites is reporting record demand for warehouse development in South Africa. With a substantial amount of land in its portfolio, Equites is well positioned to take advantage of this.

Over this period, like-for-like valuations in South Africa are up 2% and the UK portfolio is 2.9% lower (in sterling). Now, before you point to the weakness in the rand, I must point out that in August 2021 the pound was actually slightly stronger than it is now against the rand. Both currencies have been slaughtered against the dollar.

The loan-to-value (LTV) ratio of 33.3% means that Equites has lower gearing than many other property funds. This conservative positioning isn’t a bad thing in this environment.

The net asset value (NAV) per share is 6.5% higher year-on-year and is up 0.8% since February. The interim gross dividend of 81.58013 cents per share is 4% higher than the interim dividend last year.

Mac Brothers continues to hurt Grand Parade Investments

The latest hit relates to a lease that was guaranteed by GPI

Grand Parade Investments (GPI) had an adventure in the food sector that won’t go down as one of South Africa’s finest success stories. After selling Burger King South Africa to close the curtain on that initiative, the voluntary liquidation of catering business Mac Brothers is going to leave a bitter taste for shareholders.

Back in 2016, Mac Brothers entered into a sale and leaseback transaction with Gumboot Investments. In these transactions, a company looks to raise capital by selling properties and immediately leasing them from the purchaser, thereby securing ongoing occupancy of the property. For the buyer, the appeal is that there is already a tenant in place for the property who clearly wants to be there. For the seller, capital is unlocked and there is no need to move to a new building (at least for the term of the lease).

Sadly, it can go wrong when the tenant goes bankrupt. In this case, GPI gave Gumboot a guarantee for the rental, so the liquidation of Mac Brothers triggers a claim from Gumboot under that guarantee.

To avoid a long and expensive fight in court, GPI has agreed to acquire the building from Gumboot at a premium price that reflects the higher-than-market rental that Mac Brothers was paying. GPI will pay R66.5 million for the properties and will immediately sell them for R44 million to unrelated third parties. This locks in a R22.5 million loss for GPI, which is much lower than the exposure under the guarantee that was estimated to be R46 million at the end of June.

Another major blow to Game

There were no buyers for the Game stores in East and West Africa

Anyone who has followed Massmart’s journey in recent years is well aware that Game is a major problem. The business model is struggling to achieve resonance with customers, having been disrupted by eCommerce and its own strategic mistakes.

With Walmart poised to take Massmart private assuming shareholders accept the offer, there will be some major changes required to make Massmart financially viable. Game is the obvious area of focus.

In yet another blow to the business, Massmart couldn’t find a buyer for the Game stores in East and West Africa. Considering that Game is the format that was supposed to win in Africa for Massmart, this is a disaster.

Massmart has started the process to close the Game stores in those regions. This raises yet more questions about the future of Game in South Africa.

Little Bites

  • Director dealings:
    • Des de Beer is back at it, buying shares in Lighthouse Properties for nearly R2.4 million. I just wish they would get their website fixed.
  • Anglo American has released the latest rough diamond sales figures for De Beers. The eighth sales cycle comes at a traditionally quieter time in the year for the industry, so the group is happy with sales of $500 million that it says were in line with expectations. The comparable cycle last year delivered $492 million in sales. The seventh cycle this year was larger at $638 million, so the impact of seasonality is clear.
  • Newpark REIT is a funny little property fund that owns just four properties. There are some iconic properties in the portfolio though, not least of all the JSE building in Sandton and the nearby mixed-use property 24 Central, where yours truly spent many Friday evenings as a young banker attempting to attract ghosts of the opposite sex. Nostalgia aside, the net asset value per share is down 4% year-on-year and the interim dividend per share is 15.4% higher at 25 cents. The loan-to-value (LTV) ratio is slightly lower at 33.1%.
  • Although Europa Metals jumped by over 47%, it’s worth noting that liquidity in the stock is incredibly thin. It doesn’t take much money in absolute terms to really move the price. The company announced a deal with Denarius Metals, a company that sounds like a Harry Potter character, which would see Denarius take up to an 80% interest in the Toral Project in Spain. Denarius has the option to do so rather than the obligation. The first tranche would be for a 51% interest, with the associated cash used to finalise a pre-feasibility study and pay for exploratory drilling. There are plenty of details in the announcement that give you insight into the financial structures used in junior mining, so read it if you are interested in this space.
  • Jasco Electronics released results for the year ended June 2022. It’s been a horrible year, with challenges ranging from civil unrest through to gross misconduct by the leadership team in one of the divisions (a business that Jasco has decided to exit). A rights issue in February raised R42.7 million net of costs. If you’re wondering why the capital raise was necessary, operating profit in this period of R3.2 million vs. net finance costs of R16.5 million should answer the question. The headline loss per share of 6.4 cents caps off another tough year for Jasco. The net closing cash balance at the end of June was R29.4 million.

Ghost Global (Bed, Bath & Beyond | Costco | Nike | Tesla)

Karel Zowitsky and Kreeti Panday
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Ghost Global (Bed, Bath & Beyond | Costco | Nike | Tesla)

In this week’s edition of Ghost Global, Ghost Grads Karel Zowitsky and Kreeti Panday bring us the latest on a variety of consumer facing stocks.

Beyond horrible

Bed, Bath & Beyond keeps capturing our imagination with awful numbers

Brace yourself. Bed, Bath & Beyond has reported a 400% worsening of its net loss, showing that things can always get worse even for listed companies. This was driven by a 28% drop in sales in the quarter ended August.

To compound internal struggles, the company is also subject to external pressures with supply chain costs negatively impacting gross margin by 380 basis points.

As we desperately look for any positives, it’s worth noting that this quarter saw the launch of the Welcome Rewards programme which is now at 6.3 million members. That gives an indication of the scale of the US consumer market. Another important point is that inventory has improved by double digits, thanks to “aggressive inventory optimisation actions” including markdowns and strategic promotions.

No matter how bad things get, the company somehow remains optimistic about the turnaround strategy. Much hope is being pinned on Buy Buy Baby, a chain of baby stores that the group believes can grow. To help with that growth, the company secured a $375 million loan in August. Improvements in the working capital situation also help with matters.

Still, this business is clearly in a world of hurt.

Costco feels the margin pinch

Inflationary pressures are clearly visible, yet Costco is delivering

In the quarter ended 28 August (the final quarter of the 2022 financial year), Costco has demonstrated what happens to retailers when inflation is higher. Typically, overall revenue improves and margin deteriorates based on changes in the underlying product mix.

Costco beat analyst expectations for revenue ($72.09 billion vs. $72.04 billion). In case you aren’t familiar with the model, $1.3 billion of that revenue is sourced from membership fees paid by Costco shoppers. This is a warehouse club model that offers great prices to members, so some of the gross margin is already locked in when subscriptions are paid.

Gross margin of 12% in this quarter is down from 12.9% in the comparable quarter, driven by a change in mix that has included higher fuel sales. Yes, one of Costco’s major selling points is that the retailer sells fuel (or “gas”) in the US, with that change in mix accounting for more than a 50 basis point decrease in the margin.

Despite the gross margin pressure, Costco managed to increase its earnings per share by 11.7%.

Costco normally increases its membership fees every five years. As a sign of the times, the company will hold off on those increases. As another sign of the times and as we look forward to the first post-Covid Christmas, Costco will be pulling out the tinsel and bringing in the holiday season early this year. This has less to do with holiday spirit and more to do with supply chain uncertainty.

If you’re interested in learning more about Costco, this company has been featured in Magic Markets Premium.

A tick on the shoes, a cross in the financials

Nike’s business model is coming under pressure and so is the share price

With a share price that has lost 46% of its value this year, Nike is proof that things can get ugly when bad multiples happen to good companies. With a macroeconomic environment that is presenting many challenges, Nike’s latest quarter is compared to a period last year when things were a lot easier.

An obvious pressure is on freight and logistic costs, with high fuel prices as a major challenge for any global supply chain. Speaking of supply chains and related volatility, Nike’s inventory levels have increased by a gigantic 44% to ensure that demand can be met. This isn’t great when demand is under pressure, as markdown sales can then lead to a lower gross profit margin.

Despite the strength of the direct-to-consumer model, the gross profit margin has fallen from 46.5% to 44.3%. The net impact is that gross profit itself has fallen by 1% to $5.615 billion. This isn’t good news when selling and administration costs are up by 10% and income taxes are up by 55%.

By the time you reach the bottom of the income statement, you find a net income number that is 22% lower year-on-year. Those who bought shares this year will wish they just hadn’t done it.

One small step for a robot, one giant leap for mankind?

For those who believe in the Tesla story, the future is now

Tesla held an AI Day last week Friday at which they unveiled their new prototype robot: Optimus.

The unveiling revealed how far Tesla has come with their design by showcasing a humanoid robot that can walk the stage and bust some dance moves – without any assistance. This is an interesting step for Tesla as it evolves from being just an electric vehicle manufacturer to something more.

The onboard computer is much the same as that used in the Tesla cars, so this is part of the broader push towards autonomous driving. These are the same cars that have allowed Tesla owners to send their dogs for a joy ride without actually needing to be in the car.

Trading on a P/E ratio of around 90x, which understandably is nauseatingly expensive for most investors, it cannot be denied that Tesla is an innovator. Whether that is a sustainable competitive advantage remains to be seen.

Elon Musk hopes to sell each Optimus robot for less than $20,000 as early as next year. Even the most dedicated Tesla fans must acknowledge that Musk is famously optimistic with his guidance of what they can achieve and by when. Time will tell on this one.

Costco, Nike and Tesla are included in the library of 50 research reports and podcasts produced by The Finance Ghost and Mohammed Nalla in Magic Markets Premium. For R99/month or R990/year, the full library is available, along with a new show each week.

Ghost Bites (Anglo American | Aveng | Capitec | Oceana | Transcend)

The Finance Ghost
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Ghost Bites (Anglo American | Aveng | Capitec | Oceana | Transcend)

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Anglo American is serious about renewables

A major joint venture will deliver 3 to 5 GW of renewable energy by 2030

Anglo American and EDF Renewables have announced a joint venture to develop a regional renewable energy ecosystem in South Afric.

This is a pipeline of more than 600 MW of wind and solar projects in South Africa, the first step towards an ecosystem that can generate between 3 and 5 GW of renewable energy by 2030.

This is a major step for all involved and adds to the almost 1 GW that EDF Renewables will be building or operating in the country by 2023.

In a particularly good example of achieving a full renewable solution, this ecosystem will serve as a clean energy source for the production of green hydrogen for the nuGen Zero Emission Haulage Solution that Anglo American has invested in:

Aveng gets a great price for Trident Steel

The purchase price is well above the net asset value

Aveng has only been trading under cautionary since June, so this has been a relatively speedy negotiation as corporate deals go. The business of Trident Steel is being sold as a going concern for R700 million, plus an amount of R264 million for the net cash portion of the business. There’s also a ticking fee – more on that later!

In this type of deal structure, the buyer acquires the individual assets and liabilities rather than the shares in the company. This avoids any skeletons in the closet, which isn’t to say that there are any such skeletons to worry about. It just means that the buyer wasn’t prepared to take the risk.

Speaking of the buyers, the consortium includes local and US-based private equity investors, as well as the Trident management team. It is typical for the management team to be included in the equity layer in a private equity deal, as incentivisation is key. I’ve only had limited experience in deals with US-based funds, but I do remember a strong preference to de-risk the deal and buy the business rather than the shares. This seems to tie up with the Aveng structure.

The really interesting point is that Aveng is going to provide R210 million in funding to the company that will be acquiring the business. This will give Aveng a 30% stake in that company on a temporary basis, as that stake is reserved for a B-BBEE investor. The holding period will be up to a year and there is a call option in favour of the consortium for R210 million plus interest, which means they can get Aveng out of the structure at any stage after closing. This tells me that they want to get on with closing the deal even though a B-BBEE investor hasn’t been finalised.

With Trident’s primary business being the supply of steel products to the automotive, rail and mining industries, it’s not hard to see why a strong B-BBEE score is important.

There’s always something new to learn in these deals. In this case, there is a “locked box” mechanism, which means the purchase price is fixed based on the balance sheet at a particular date. The alternative is to use “completion accounts” – a method that considers the balance sheet on the closing date and adjusts the price accordingly.

An additional nuance is the “ticking fee” (in this case R7.45 million per month), which incentivises a faster closing of the transaction. The seller receives a higher fee if the deal takes longer to close.

The net assets at 30 June were valued at R409 million, so the purchase price is well above that level. Operating profit for the year was R220 million and profit after tax was R81 million. I’m no expert in this industry, but it looks like Aveng secured a great offer price here.

As this is a Category 1 transaction, shareholders will be asked to give their views on the price in the form of a vote to approve the transaction.

Capitec rallies after announcing a life insurance licence

Capitec will underwrite its own credit life and funeral policies

With strong growth in the number of insured clients, Capitec has taken the significant step of obtaining its own life insurance licence. Capitec Life (a subsidiary of Capitec) will in due course replace the current cell captive insurers as the underwriters of the credit life and funeral policies.

The bank also highlights proposed changes to the third-party cell captive regulations as a driver of this decision.

In simple terms, this means that Capitec is taking on more risk. Rather than giving away profits to other insurance companies and passing on the credit and mortality risks, Capitec has decided to take those risks and retain the related revenue.

Whether or not this will be beneficial in terms of net profit remains to be seen. The market liked it, with the share price closing 5.4% higher on a day when the ALSI closed 3.25% higher.

There were also major purchases of Capitec shares by directors, which are covered in the Little Bites section.

Oceana sells Commercial Cold Storage Group

Oceana is set to receive R760 million from the deal

The sale of this business, known as CCS Logistics, has achieved an enterprise value of R895 million. The amount of R760 million due to Oceana is after adjusting for minority interests. The net assets on the balance sheet are worth R156.8 million and normalised profit after tax is R48.6 million.

The purchasers are the IDEAS Fund and the AIIF4 Fund, both managed by African Infrastructure Investment Managers. Other partners include Bauta Logistics (a food logistics business focusing on the Middle East – Africa region) and Mokobela Shakati as the strategic investment and empowerment partner.

The CCS business has six cold storage facilities with capacity of around 100,000 pallets across South Africa and Namibia.

There’s yet another locked box mechanism at play here, accompanied by “ordinary course leakage provisions” – the announcement doesn’t go into detail on those. What we do know is that Oceana will use the proceeds to reduce debt.

This is a Category 2 deal under JSE rules, so shareholders won’t be asked to vote on the deal.

Unfair and unreasonable

The board of Transcend Residential Property Fund isn’t impressed with the Emira offer

In times of difficulty, it’s not uncommon to see opportunistic transactions on the market. A great example is Emira’s offer to acquire all the remaining shares in Transcend Residential Property Fund.

I’ve seen many deals that are determined by the independent expert to be unfair but reasonable, reflecting a situation where the offer price is lower than the fair value per share and higher than the traded market price. This is especially the case for small caps that tend to trade at eternally frustrating multiples.

This one is unusual, as Deloitte has opined that the offer is unfair and unreasonable to shareholders. The independent board has agreed with that assessment and has recommended that shareholders reject the offer.

The opinion and the report are contained in the response circular and make for interesting reading. The fair value range for the shares is between R6.00 and R6.60. The offer price is R5.38 per share. The independent board takes it a step further, noting that a liquidation of the fund would realise R11.46 per share.

Of course, if the board was actually asked to achieve an order wind-down of the company and return that value to shareholders, we can only speculate what the answer might be.

Notwithstanding this recommendation, the Public Sector Pension Investment Board and the Development Bank of Southern Africa have already agreed to sell their shares. This represents 22.8% of the company and 38.5% of the shares not already held by Emira.

This is a general offer rather than a scheme, so any number of shareholders can accept the offer. There’s no requirement here for a 75% approval.

Little Bites

  • Director dealings:
    • Capitec’s directors didn’t hold back when it came to their latest purchases, with more than R21 million in aggregate purchases by several directors.
  • Equites Property Fund is in dispute with Promontoria Logistics, the company buying land from Equites that is subject to the approval of a planning application. The initial application was refused and the purchaser wants to cancel the deal based on a claim that certain notification requirements were not met. Equites is disputing this attempted cancellation and is moving forward with an appeal to secure the planning approval. Talk about an awkward relationship.
  • Sirius Real Estate has acquired three properties in Germany for €44.6 million. They were predominantly funded with capital from three disposals in Germany and the UK for a combined €33.6 million. The disposals were all above book value and the acquisitions have an occupancy rate of just 54%, so there is a significant opportunity for Sirius to create value here. Right at the end of the announcement, Sirius notes that the uncertainty in the market is leading to a slower acquisition pipeline.
  • You may recall that Gold Fields is busy with a blockbuster deal that would see the company acquire Yamana Gold. In an update on timing, Gold Fields announced that Yamana shareholders will meet on 21 November and Gold Fields shareholders will meet the following day. It will be fascinating to see what happens here.
  • Newpark REIT released a trading statement noting that distributable earnings per share for the six months to August are 43.9% higher than in the prior period. The company intends to declare a dividend of R0.25 per share.
  • Telkom has renewed the cautionary related to discussions with MTN, noting that the MTN proposal is still under consideration by both parties.
  • Aspen released its annual financial statements and there’s something unusual about them: a change to the reviewed provisional results that were released in August. R1.3 billion worth of liabilities were reclassified from non-current to current, which is a material change. This relates to an amount due by 1 July 2023. The group is in the process of refinancing a much larger amount of R8.4 billion in bank debt, which it expects to have in a new facility before the end of November.
  • Sappi has announced a cash tender offer for 3.125% Senior Notes due in 2026, as issued by one of the group’s European subsidiaries. This simply means that the company wants to settle some of its debt. The notes have an outstanding principal amount of €443 million and the target acceptance amount is €150 million. Holders of notes who wish to be paid out would need to follow the tender offer process, with a deadline of 10 October.
  • Sebata Holdings has renewed the cautionary announcement related to the potential disposal of one or more of Sebata’s businesses.
  • The latest news from the Nutritional Holdings circus is that the court has held the deferral of the liquidation, with a new court date of 20 January 2023. The termination of the listing is under “advanced consideration” by he JSE which doesn’t sound good. In the meantime, the company is looking to finalise historical financial information and proceed with the audit.

Ghost Bites (Motus | Pick n Pay | Prosus | Sibanye-Stillwater)

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Ghost Bites (Motus | Pick n Pay | Prosus | Sibanye-Stillwater)

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Motus finally spills the beans (well, mostly)

The target acquisition has a name: Motor Parts Direct (UK)

Regular readers would’ve seen the weirdness around Motus withdrawing a cautionary announcement regarding this acquisition and then announcing extensive sales of shares by certain directors. In a clarification announcement that I’m certain was due to pressure placed on them in Ghost Mail, Motus confirmed that the sales were part of an incentive scheme and happened automatically as part of the scheme.

Leaving all of that aside, the company has now announced the full details of the transaction. Motus will be acquiring 100% of Motor Parts Direct in the UK for R3.64 billion. This is a family-owned business that has been around 1999. There are 175 branches that that sell vehicle parts to workshops in and around the UK.

Based on a quick look at the website, it looks a lot like the UK equivalent of Midas.

There are 14,000 customers and 1,700 employees, so this is a business of scale. It does move the dial for Motus in reducing the group’s reliance on car sales.

The sustainable EBITDA of the business is R580 million. Irritatingly, the announcement doesn’t confirm whether there is any debt in the company. If there is no debt or excess cash (i.e. the purchase price is equal to the enterprise value), then the EV/EBITDA multiple is around 6.3x.

But, hang on a second.

When they withdrew the cautionary, Motus said that the deal multiple is between 6.5x and 6.9x. This means that there must be debt in Motor Parts Direct. The announcement just doesn’t bother telling us how much debt and also doesn’t confirm the multiple.

Based on the recent quality of disclosure by this company, could I really have expected anything better?

Pick n Pay maintains strong momentum

The share price closed 6.8% higher in a nod to great performance

In a trading update covering the 26 weeks to 28 August 2022, Pick n Pay reported sales growth of 11.5% without adjusting for the riots and liquor restrictions. Here’s the impressive part: if you strip out those issues, normalised sales growth for the period is 8.2%.

Selling price inflation for the period was 7.2%, a depressing reality for the many South Africans who were already struggling to put food on the table. Literally.

The cadence is even more worrying, with CPI Food inflation at 11.3% in August vs. 8.6% in June.

The group acknowledges that a strong performance in Boxer helped drive this result, with the upgraded Pick n Pay stores performing well but remaining a small contributor to group revenue. As more stores are upgraded to the new format, the impact on group level numbers will become more significant.

Of course, with sales growth like this vs. such a soft base, it’s not surprising that headline earnings per share (HEPS) growth is through the roof. Even if you exclude the impact of business interruption insurance proceeds in this period and the effect of hyperinflation in Zimbabwe, HEPS is between 20% and 30% higher. This is a range of 85.01 to 92.10 cents per share.

Finally, the group notes that this includes R83.7 million worth of restructuring costs related to the Ekuseni strategic plan, which includes the repositioning of some stores under the QualiSave banner (which I still think is an awful name).

Prosus pulls out of BillDesk deal

This is another example of how tight things are getting in the world of venture capital

Venture capital investors are focused on stories and strategies rather than profits and dividends. They invest in companies that have exciting growth runways ahead, which is a nice way of saying companies that “invest through the income statement” – a wonderful term that Prosus previously used to describe a scenario where startups incur operating losses while building important assets.

Of course, this assumes that the assets are valuable at some point, which is by no means guaranteed.

An environment of low yields is favourable for venture capital, as money is “cheap” and plentiful. When the holding cost of capital is low, you can afford to take long-term bets on companies. When inflation and interest rates are biting, then the pressure is on to earn dividends.

With a major deterioration in macroeconomic conditions this year, the wheels came off for tech companies that relied on multiple funding rounds just to stay afloat. There have been many casualties along the way, ranging from layoffs of staff through to closures of companies.

Against this backdrop, Prosus has walked away from the BillDesk transaction. This was a $4.7 billion deal that would’ve cemented the market position in India alongside existing subsidiary PayU. Prosus has invested close to $6 billion in India since 2005, so this deal would’ve been a major further investment.

Prosus walked away despite the Competition Commission of India granting approval on 5 September. There were other conditions that needed to be met by 30 September that were not met, giving Prosus an escape hatch for the deal. The announcement doesn’t disclose which conditions those were.

In my opinion, Prosus is no longer comfortable with the terms of the deal (probably including the valuation) based on pressure from shareholders. When a company is keen to do a deal, they extend the deadlines for conditions to be met. At the very least, they make a lower offer based on the conditions not being met in time.

In this case, there’s no indication of that happening. The announcement simply states that the deal won’t be happening.

Spare a thought for the founders of BillDesk. I hope they didn’t already order their yachts.

Sibanye-Stillwater invests further in green metals

In a world far away from local labour issues, Sibanye is looking at European battery demand

Through a series of transactions, Sibanye now holds 84.96% in Keliber, a lithium group located in Finland. When Sibanye first announced its interest in Keliber earlier this year, it noted that the group is aiming to be the first fully integrated lithium producer in Europe.

This is strategically important because Europe is obviously a major manufacturing hub for electric vehicles.

The other shareholders are Finnish Minerals Group (13.9%) and various minority shareholders with a total of 1.14%.

The next step is an equity capital raise by Keliber that would require Sibanye to inject another €104 million. The company is also raising debt to at least match the €250 million equity on the balance sheet.

Little Bites

  • Director dealings:
    • Des de Beer is still putting serious money into Lighthouse Properties, with the latest investment worth R3.3 million (and no, I didn’t forget to hyperlink the name – the website is under maintenance!)
    • In good news for those with hospitality shares, the CEO of Southern Sun Limited has bought shares worth over R1.3 million.
    • A director of a subsidiary of Vodacom has sold shares in the company worth R3.76 million.
    • In a strange turn of events, an associate of a director of Thungela seems to have dealt in shares in numerous transactions this year without alerting the director. It’s actually the director’s wife who traded in the shares, so perhaps they are taking “no work at the dinner table” a little bit too far.
  • Etion has implemented the deal to sell Etion Create to Reunert for just under R202 million and has received the cash.
  • Schroder European Real Estate has confirmed that its net asset value per share at 30 June 2022 was 147.9 euro cents. This represents an 0.6% return for the quarter and 8% over a 12-month period.
  • Vunani will subscribe for a 50% stake in the Verso Group, a wealth management and fund administration group that has its own umbrella fund solution. If you know anything about the Vunani group, you’ll immediately recognise that this seems like a good strategic fit. As this is a small transaction, Vunani isn’t required to announce the purchase price.
  • Aveng has made further progress in improving its balance sheet. External debt was reduced by R75 million to R406 million on 30 September 2022. Performance guarantees were reduced by 45% to R191 million. The share price closed 3.7% higher on this news.
  • Merafe has announced that the ferrochrome price for the fourth quarter of 2022 is 17.2% lower than the third quarter. Although the share price is only down 5.9% this year, the chart is wild. It has lost over 41% in the past six months!
  • Investec has announced a programme to purchase Investec PLC shares with a value of up to R1.2 billion. Investec has a complicated dual-listed structure. In practice, this is same as the company announcing a normal share buyback strategy.

A check-in on the hotel sector

Chris Gilmour
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A check-in on the hotel sector

Until the Covid-19 pandemic, most experts were of the opinion that tourism was the world’s largest industry (based on percentage of global GDP) – bigger than oil and agriculture! Chris Gilmour unpacks the industry and takes a deeper look at City Lodge.

Tourism was a growing industry until the pandemic. It had special relevance to less developed countries, where it made a disproportionately large contribution to GDP. Sadly, the pandemic (with enforced lockdowns) changed everything. Travel and tourism as a sector was hit harder than most and has taken longer to recover.

Only now is the aviation industry at last managing to see the light at the end of the tunnel as more and more tourists make up for lost time during the pandemic. And hotel chains, too, are starting to get back to pre-pandemic occupancies and room rates.

Can a recession derail this story?

But times remain tough. A global recession is looming on the not too far horizon and that must surely put a dampener on travel and tourism. But having said that, the latest surveys from the UN World Tourism Organisation (UNWTO) suggest that the improvements seen in in 2022 will carry through to 2023 and beyond.

Source: UNWTO Tourism Barometer

They (almost) all survived

Locally, the hospitality (accommodation and restaurant) groups in South Africa, such as City Lodge, Famous Brands, Spur, Southern Sun and Sun International all suffered especially badly during lockdown and it is frankly miraculous that they have all survived.

Of course, the big listed casualty was Comair, which went into business rescue almost immediately when the pandemic struck and which looked like it might survive in unlisted form as lockdown restrictions eased. But it wasn’t to be and it eventually it went bust in June this year.

Checking in at City Lodge

City Lodge released its full year results to end June on 23 September. They were slightly better than expected, with full-year EPS being slightly positive at 14c but HEPS still slightly negative at -8.6c. But average occupancies were above breakeven for the first time in two years and all the hotels were open from about March this year.

The east African hotels were sold off and the proceeds received in July. The funds were used to pay down debt, which now stands at around R250 million.

The graph of average occupancies masks the harsh reality of what occurred at the deepest part of lockdown restrictions in 2020. In those days, the only City Lodge hotels permitted to remain open were so-called “quarantine hotels” that housed repatriated South Africans. Average occupancies plummeted to around 4% at one point during the darkest days of lockdown.

City Lodge also had to contend with a massive rights issue to fund its BBBEE programme. This was highly dilutive.

A shift in the model

The basic philosophy of City Lodge has always been to offer a quality room at a relatively low price without much in the way of food and beverage choice. Basically, that meant bed and breakfast. Discounting of room rates was never a big deal apart from promotions such as “Spouse on the House” and “Bid2Stay” for example. The target market was predominantly the corporate sector.

With the onset of the pandemic, that has all changed. A full repertoire of food is now offered at most hotels now, though without going totally overboard in terms of choice. So for example, tasty items such as pizza, burgers and shisa nyama are offered. This type of food undoubtedly appeals to both corporate and leisure travellers who often don’t want to venture out at night due to drinking and driving considerations or general safety concerns.   

Discounting takes place on weekends, with weekend special rates as well as a discounted Friday rate once a month at month-end called Woza Friday. Average room rates are moving up nicely and are not far off where they were pre-pandemic. Before getting excited, it’s worth remembering that City Lodge has effectively endured four years of inflationary cost growth and will only now be recouping a full room rate.

As with most global hotel chains, City Lodge makes extensive use of artificial intelligence when calculating room rates and this has helped to recoup better room rates in recent times.

A lower breakeven

Unlike most hotel chains, City Lodge doesn’t employ the services of a hotel management company, so there is a huge cost saving involved here. This is reflected in the much lower than average breakeven occupancy rate. Breakeven occupancy level for a chain such as City Lodge, with its predominantly three and four-star properties, would typically be in the high 50%’s / low 60%’s. However, thanks to its very low-cost structure, absence of a management company and the fact that it owns most of its properties, City Lodge’s breakeven occupancy level is nearer 38%.

Analysis of hotels primarily revolves around occupancy levels and is a classic case of marginal cost analysis. In other words, beyond breakeven occupancy level, operating profit falls almost unhindered (apart from tax) to the bottom line. This is due to the heavy capital nature of hotel construction and is especially relevant in City Lodge’s example, where most of its properties are owned.

The new financial year has started off well for City Lodge, with occupancies in September hitting a high of 58% after achieving 52% in July and 56% in August. The inbound foreign tourist season begins this month and runs all the way through to at least March next year and indications are that it is going to be substantially better than last year’s very low base of comparison. A number of new airline routes have either opened up already or will be opening up by year end, including Air Belgium from Brussels, United from Washington and Delta to Cape Town from Atlanta. Additionally, BA and Virgin Atlantic will be adding an extra 25 fights per week at the height of the holiday season.

And all the while, corporate travel is slowly but measurably improving as office workers return to their desks.

There are some options for investors, but not many

There aren’t too many options available on the JSE for investing in the hotel business: City Lodge, Southern Sun Hotels and Sun International.

Sun International is predominantly a gaming operation and the hotel side is mainly an interesting add-on in my opinion.

Southern Sun is by far the largest hotel chain in the country and the one with the longest pedigree. It is a quality operation but it lacks the elegant simplicity of City Lodge, with its 15 different brands, its multitude of hotel management agreements and its higher breakeven occupancy level.

So, the bottom line is that the worst now appears to be over for City Lodge and investors can reasonably look forward to a gradual improvement in earnings. Having said that, dividends may still be a while away.

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

Ghost Bites (ARC | EOH | Nampak | Mr Price | Renergen | Telkom)

The Finance Ghost
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Ghost Bites (ARC | EOH | Nampak | Mr Price | Renergen | Telkom)

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ARC shareholders are putting pressure on management fees

There are more proposed amendments to the fee structure

African Rainbow Capital Investments (ARC) has been a disappointment for investors. One of the reasons is the management fee structure which is out of line with the market norm. In funds like these, the fee is typically calculated based on net asset value (NAV). At ARC, the focus has been on invested NAV, which would exclude cash.

There have been some recent changes to try and fix various elements of the cost structure.

For example, the base fee is now the lower of a fee based on invested NAV (a sliding scale from 1.75% if NAV is below R10 billion to 1.25% if NAV is above R15 billion, plus a 0.25% cash management fee) and the actual costs of managing the fund, plus a 5% markup. This is important because the management costs were historically lower than the fee being charged based on the sliding scale.

In addition to the base fee, there is a performance fee that is triggered if the growth in invested NAV is at least 10%. This is already better than the old structure. A further enhancement is that the calculation will be based on the total NAV, not just the invested NAV. In other words, the “cash drag” in the fund will be taken into account. This puts pressure on the management team to deploy cash or return it to shareholders.

EOH is stable operationally

The problem is that there is still far too much debt

EOH is still languishing below R5 per share, so I remain thankful that I got out of the way at around R7 per share for a breakeven result on my EOH punt. I had originally bought into the turnaround story, hoping that the company would be able to execute disposals quickly enough to bring down the debt.

It took longer than I had hoped, unfortunately, so the interest bill simply gobbled up large parts of the remaining equity value.

In a trading statement for the year ended July, EOH has confirmed that the business is operationally stable with an operating profit of between R250 million and R310 million. The prior year operating profit was R147 million. The number that really counts is operating profit from continuing operations, which was between R90 million and R110 million.

There’s still a loss at group level, though EOH doesn’t attribute it to the levels of debt. The loss from continuing operations has improved by between 43% and 53%, which implies a loss of between -109 cents and -90 cents. The increased provision for a settlement with the Special Investigating Unit in the Department of Water and Sanitation investigation is what drove the group into a loss this year.

As at the end of July, the group had a net cash balance of R460 million. Gross leverage is R1.3 billion and unutilised short-term facilities are R250 million. Within those numbers, the bridge facility balance is R732 million and this is repayable by 1 April 2023. The other important debt structure is a R500 million three-year senior loan, which was part of a balance sheet restructure in this financial year.

Clearly, there’s still a challenge in settling the bridge facility. As I’ve been saying for a long time now, I don’t see how EOH will avoid a rights issue or a major strategic investor coming on board and diluting existing holders. We will only find out after results are released on 27 October.

Nampak has achieved strong revenue growth

As is the case for so many companies though, the pressures are on profitability

Nampak released a voluntary trading update for the 11 months to August 2022.

Beverage cans enjoyed strong volume growth and higher selling prices. South Africans are clearly having a good time around the braai, with demand for large can sizes being particularly strong. Not all the metal businesses did well though, with the DivFood business suffering the impact of consumer pressures. Raw material shortages didn’t help matters.

In the plastics division, revenue was stable vs. the comparable period. A strong performance in Zimbabwe was offset by significantly weaker currency in that country. Overall, trading profits in this segment were impacted by reduced volumes and higher input costs.

The paper division performed well across several countries. Again, the currency translation from Zimbabwe had an adverse impact.

Looking at the balance sheet, Nampak has managed to upstream cash from Angola at decent rates. Foreign currency shortages in Nigeria led to cash transfers being executed at weaker rates than the official rates. The cash movements are important as borrowings are higher due to elevated working capital requirements, leading to increased net finance costs.

At this stage, it’s unclear whether Nampak will need to execute a significant equity capital raise. Extensions on existing facilities make a big difference, with the revolving credit and term loan facilities extended from 1 April 2023 and 25 September 2023 to 31 December 2023. The group is required to repay at least R1.35 billion in debt by no later than 31 March 2023.

The share price fell 13% on the day, taking the move this year to -52%.

Mr Price beds down the Studio 88 acquisition

South Africa’s largest independent apparel retailer now wears a red cap

Back in April (on Toddler Ghost’s birthday, actually), Mr Price announced the acquisition of 70% of the issued share capital of Blue Falcon Trading 188. That name is absolutely meaningless until you learn that it is the company that owns the Studio 88 group, described as South Africa’s largest independent retailer of branded leisure, lifestyle and sporting apparel and footwear. The business has been in operation since 2001.

The sellers are private equity group RMB Ventures and the current management of Studio 88.

The great news for all involved is that all conditions have been met (including approval from the competition authorities without any conditions), so the deal will close on 3 October. The final consideration payable is R3.6 billion.

Studio 88 Group has achieved a compound annual growth rate (CAGR) of more than 20% over the past ten years, across both revenue and EBITDA. This is impressive growth, with the group having generated R6.4 billion in revenue for the year ended September 2022 from 788 stores.

The fit with Mr Price is interesting. This is a cash-only business, so that ties in well with the Mr Price model. It targets more aspirational customers though, which is different to Mr Price’s traditional model of value fashion. Like the recent Yuppiechef deal, this is an indication that Mr Price isn’t shy to step outside of its comfort zone.

With Mr Price’s stated ambition of being the most valuable retailer in Africa, there will need to be some substantial transactions. Capital allocation is the name of the game here. With a market cap of R45 billion, Mr Price is ahead of The Foschini Group (R39.5 billion) but still much smaller than Pepkor at R77.5 billion.

Here’s the most interesting thing though: Mr Price’s ambition is to be the most valuable retailer, not the most valuable apparel retailer, so it has a very long way to go before bothering Shoprite (R130 billion) at the top of the food chain. Pun shamelessly intended.

Renergen quarterly update

These announcements give useful recaps of progress made at the company

There’s nothing new in here, before you get too excited. The quarterly updates give shareholders a useful summary of what happened over the past three months.

This was an important quarter for Renergen, with the phase 1 plant now producing liquefied natural gas (LNG). The Central Energy Fund has completed its due diligence on the proposed investment for 10% of the South African operational entity, which would mean a cash injection of R1 billion. Two additional wells are being completed as gas producers and other exploration work is being analysed and processed.

Renergen’s share price is down 20% this year.

Making it Rain

There’s more action around Telkom

After a very awkward initial play by Rain that got it into hot water with the Takeover Regulation Panel (TRP), the latest news is that Rain has put in a non-binding proposal that asks Telkom to acquire the company in exchange for shares. This would essentially be a merger transaction that would make use of the Telkom listed vehicle.

This is a very different deal to the potential MTN transaction, which would see the yellow giant acquire all the shares in Telkom for shares or a combination of cash and shares. On that note, MTN has announced that it has given its comments to the Telkom board, although the company hasn’t confirmed what those comments are.

At the moment, we just have no idea what will happen here. Caution is required across the board.

Little Bites

  • Director dealings:
    • A director of MAS property fund has acquired shares worth R545k
    • A director of Kaap Agri has acquired shares worth R103k and an associate of a director acquired shares worth R398k
    • The CEO of Growthpoint has sold shares in the property group worth nearly R300k
    • The chairman of Sirius Real Estate has acquired shares worth £50k
    • Directors of Argent Industrial have acquired shares worth nearly R85k in aggregate
  • This really hasn’t been a good year for Sibanye-Stillwater. A wage agreement has been reached for the South African PGM operations with two of the three recognised unions. AMCU isn’t in agreement and has declared a dispute, which has been referred to the CCMA for conciliation. The offer presented by Sibanye is an inflation linked, five-year offer with an average of 6% increases for three years and CPI-linked increases in years four and five.
  • In a pre-close update, Accelerate Property Fund noted that the loan-to-value (LTV) ratio is stable at 43%, still above the target level of 40%. There are signed disposal agreements in place that should reduce this by 120 basis points. The vacancy rate based on gross lettable area is 20.63%. Based on expected revenue for the empty space, the vacancy rate is under 9%. This is because much of the vacant space is in lower income properties.
  • Grand Parade Investments released results for the year ended June 2022. After posting a loss of R27 million last year, this year’s result of R13.7 million is still significantly negative. If the impairment of Mac Brothers was excluded, adjusted headline earnings would be R47.9 million. Despite the loss, a final dividend of 12 cents per share has been declared.
  • Calgro M3 has released a trading statement for the six months ended August 2022. HEPS will be between 23.2% and 43.2% higher than in the comparable period. The gross profit for the period is within the target range of 20% – 25% and interest bearing borrowings are slightly lower.
  • Heriot will release the offer circular related to Safari Investments by 14 October, with the general offer expected to open on the business day immediately following the publication date of the circular.
  • Trustco has been in a long-standing negotiation regarding a specific repurchase of Trustco shares from Constantia Risk and Insurance Holdings for N$93.7 million. As the conditions precedent were not fulfilled by 31 August 2022, the agreement is null and void from inception and the repurchase will not proceed.
  • Wesizwe Platinum released results for the six months to June 2022. A headline loss of 4.09 cents per share has been reported and there is no interim dividend.
  • Jasco Electronics released a trading statement for the year ended June 2022 and it’s ugly. Having dealt with issues like social unrest and a three-month strike in one of its operations, Jasco is now in a deeper loss-making position. Headline earnings per share is -6.4 cents vs. -0.6 cents in the past year.
  • If you’re waiting for the Rebosis business rescue plan, you’ll have to be more patient. The release date has been extended to 4 November.
  • Ascendis Health has reminded the market that the corrected pro forma financial information for the potential disposal of Ascendis Pharma to Austell doesn’t include the additional R22 million that has been added to the selling price. The effect of this would be an increase to the Ascendis bank balance by that amount. It isn’t considered material enough to justify the pro formas or circular being redone.

Ghost Bites (Capitec | Hyprop | Kibo Energy | Netcare | Thungela)

The Finance Ghost
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Ghost Bites (Capitec | Hyprop | Kibo Energy | Netcare | Thungela)

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Capitec’s valuation finally takes a knock

At some point, the valuation matters even for the likes of Capitec

There are a few companies on the JSE that cause a feeling of great disgust for value investors. Capitec is one of them, trading on a gigantic multiple that has defied all common sense for a long time now.

Price/book is the right metric to use for banks, as the book value (assets less liabilities) is a decent approximately of the market value of the net assets. This is because banks need to recognise almost all their assets and liabilities at “fair value” rather than “historical cost” as is the case for e.g. a manufacturing company. The only other sector where price/book is very useful is property, as once again the assets are held at fair value.

The next important concept is return on equity, commonly called ROE.

Now, if a bank’s ROE is say 15% and as an investor you expect a return of 15% from the company, then what would you pay for the equity? You would pay 1x the book value, right?

But if you expected a return of 15% and ROE is only 10%, then the bank needs to trade at a discount to book. In this case, it would trade at a price/book of 0.667x (10% / 0.667 = 15%).

If ROE was 20% vs. an expectation of 15%, it would be at a premium to book of 1.33x. You calculate this as 20% / 0.15 = 133.33 and then express the answer as a premium to a book value of 100.

If it’s too early in the morning for the maths, don’t stress. The principle is what counts.

You see, Capitec’s net asset value per share at the end of August has now been confirmed as R308.87 and the share price is R1,614 – a gigantic price/book of 5.2x even after the recent sell-off! With a ROE of 26%, the effective ROE (as you are paying 5.2x the book value) is 26/520 = 5%.

That’s all. 5%.

This means that the market is still pricing in a huge amount of growth for Capitec. Headline earnings per share growth of 17% isn’t shabby by any means. It’s just nowhere near enough to justify this valuation.

Hyprop’s balance sheet is looking much better

Fully consolidated loan-to-value (LTV) ratio down from 45.8% to 36.4%

I hold shares in Hyprop as part of a property recovery play. It warms my heart to see this drop in the LTV, though it will actually be 39.2% after the proposed October dividend. Still, we are talking about a reduction in borrowings of R5.6 billion in the past year.

Importantly, most key trading metrics in the portfolio have exceeded 2019 levels. All you have to do is visit your local mall to see the recovery in retail, in my opinion driven by the removal of the mask mandate. As soon as we were no longer forced to walk around with underwear on our faces, we started having fun at malls again.

A dividend of 293.6 cents per share has been declared and Hyprop will use a dividend reinvestment plan to try retain up to R500 million in cash. I’m looking forward to seeing what the discount to the share price will be under this reinvestment option.

With the South African portfolio accounting for 63% of group assets and 85% of distributable income, Hyprop will be looking at opportunities to expand the Eastern European portfolio. The assets in the rest of Africa are in the process of being sold.

Kibo looks to create a dedicated renewables company

An IPO of Ultimate Sustainable Energy Ltd would raise capital on the AIM

Kibo Energy is hardly the biggest company around, so the strategy to potentially split it in two is unusual. The idea here is clearly to tap into investor demand for renewable energy assets, particularly in London where the entity would be listed on the development market of the London Stock Exchange (the AIM board).

The company hopes to achieve this separate listing by the first quarter of 2023. Kibo Energy will retain a stake of 75% in the new entity, which will be named Ultimate Sustainable Energy. It sounds like a drink you might buy at the local garage.

Kibo hopes to raise between £7 million and £10 million in this listed vehicle. The projects that would be included are the waste-to-energy projects in South Africa and the UK, as well as all biofuel projects. Kibo will retain the rights to the long-term energy storage technology (CellCube), the majority interest in National Broadband Solutions, the 61.2% interest in Mast Energy Developments and the 21% interest in Katoro Gold.

The costs of maintaining two listed entities shouldn’t be ignored here. There will need to be considerable capital raised to justify this strategy.

Netcare confirms a normalisation of hospital activities

Case mix is closer to pre-Covid levels, which makes me happy

In a pre-close update on its trading performance, Netcare notes that occupancy levels were higher in the second half of the year and that patient days were 13.3% higher vs. the first half of the year.

The case mix is closer to pre-pandemic levels, which has driven higher than expected patient growth but lower than expected revenue growth. Acute revenue per patient day fell by 1.7%, reflecting a decline in higher complexity Covid admissions vs. the normalised case mix. The average length of stay fell from 4.8 days to 4.3 days.

For the year ended September, normalised revenue is expected to be between 2% and 3% higher. EBITDA margins are expected to be between 60 and 150 basis points higher than last year’s number of 16%.

The sad news is that the fastest growing category of patient days is mental health, up 15.7% in the second half of the year vs. the first half. People are under incredible pressure and so many just aren’t coping. In contrast, theatre minutes only grew by 5.9% in the second half vs. the first half.

Interestingly, elective surgery as a percentage of total admissions has recovered to 24.1% of total admissions against an average of 28.5% pre-pandemic.

Thungela has no interest in renewables

The company has strongly refuted a Bloomberg article

In an article that seemed to set hares running, Bloomberg claimed that top coal miners (including Thungela) are considering bids for certain renewable energy assets held by Actis. Thungela has strongly refused this claim, confirming “categorically” that it is not considering the acquisition of any renewables businesses.

This is the correct approach, as investors look to Thungela as a pure-play coal asset. Acquiring any other assets would simply muddy the waters. Those who specifically want to own renewables can just do it through other companies. Those who want to own coal do so through Thungela.

It sounds as though Bloomberg really got this one wrong, as a claim that Thungela declined to comment on the story isn’t correct. Thungela wasn’t even requested to comment in the first place!

The only renewable energy assets that Thungela will invest in are solar plants at the operating facilities.

Little Bites

  • Director dealings:
    • The chairman of Ascendis Health has acquired shares worth nearly R54k
    • Two prescribed officers of Old Mutual have bought shares in the company worth over R1.5 million in total
    • The CEO of Invicta has bought shares in the company worth R2.575 million
    • A director of a subsidiary of Netcare sold shares in the company worth R116.5k
  • After I pointed out the massive disclosure shortcomings in Motus’ latest director dealings announcement, the company issued a clarification announcement. It noted that the sales happened automatically as part of covering the tax on the vesting of a long-term incentive scheme. Whilst that may be the case, I’m not sure it addresses the need to announce dealings within four days, something that clearly didn’t happen. Either way, the initial announcement was a poor showing of governance, as this clarification should’ve been in the first announcement.
  • Sappi has agreed to sell three European graphic paper mills to Aurelius Investment Lux One, a multi-asset manager group with diversified investments across Europe. The deal is expected to close in the first quarter of 2023 and the price is €272 million, though the cash price will be different as this includes adjustments for receivables and liabilities. The net loss after tax for the mills in the year ended March 2022 was €6.5 million and EBITDA was €58 million. Sappi will use the proceeds to invest in the commercial print market in Europe.
  • Gemfields has released results for the six months to June 2022. The share price jumped another 8% as strong free cash flows drove an interim dividend declaration of USD0.01266 per ordinary share. The exchange rate will be confirmed at a later stage but this is around R0.22 per share, a yield of over 6% just based on this interim dividend. The company really is doing well at the moment.
  • Indluplace Properties released an pre-close operational update that reflects an occupancy rate in the residential portfolio of 92%. The Johannesburg inner city portfolio is around one third of the total portfolio and has a vacancy rate of 10.8%, well above the rest of the portfolio’s vacancies of 6%. Trying to reduce the vacancies has put pressure on average portfolio rentals. In the student portfolio, the universities didn’t renew the head leases and Indluplace had to enter into individual leases with students. The over-supply of accommodation has had a negative impact and Indluplace is in discussions with the universities to avoid this situation in 2023. The loan-to-value ratio is below 40% and the distribution per share is expected to be between 31 and 32 cents.
  • 4Sight Holdings is repurchasing R16 million worth of shares at a price that represents a 41.83% discount to the 30-day VWAP. The seller is a material shareholder and thus a related party, as the group’s market cap is only R145 million.
  • Rex Trueform’s HEPS will increase by 81.9% in the year ended June 2022. Related entity African and Overseas Enterprises Limited has seen HEPS growth of 117.5% over the same period.
  • Zeder’s disposal of The Logistics Group (TLG) was implemented on 31 March 2022. The initial consideration payable was R1.35 billion, with another R218 million subject to earn-out payments. One of the earn-out triggers has been achieved, so Zeder has received another R178 million. The remaining earn-out isn’t certain, with Zeder hoping to receive it in the current financial year.

Unlock the Stock: CA Sales Holdings

The Finance Ghost
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Unlock the Stock: CA Sales Holdings

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

With several of these events under our belts, we are thrilled with the corporate access that we are bringing to retail investors in association with our sponsor Kuda, a specialist insurance and forex services provider.

I co-host these events with Mark Tobin, a highly experienced markets analyst who has worked in several global markets, as well as the team from Keyter Rech Investor Solutions who help numerous JSE-listed companies with investor relations services. The South African team from Lumi Global looks after the webinar technology for us.

You can find all the previous events on the YouTube channel at this link.

The latest event saw us welcome JSE newbie CA Sales Holdings to the platform. This fascinating FMCG group has an exciting story to tell, particularly with ambitious growth targets over the next few years. You’ll be seeing this name on SENS fairly often I think, as acquisitions are core to the strategy.

Watch the presentation and vibrant Q&A session here:

Ghost Bites (Anglo Platinum | Barloworld | Motus | Truworths)

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Ghost Bites (Anglo Platinum | Barloworld | Motus | Truworths)

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Anglo Platinum stretches the definition of ESG

Is an employee share ownership plan now ESG as well?

When you give people a fashionable label, they will try and stick it on everything. The very best example of this is ESG, which has become the most flexible term in the world.

The latest example is Anglo Platinum’s headline, which proudly screams: “Anglo American Platinum continues to lead in ESG with the introduction of a new employee share ownership plan (ESOP)” – yes, these days, just incentivising your staff to keep working is leadership in ESG.

This is where my irritation with the entire “ESG industry” comes in. Paying your people fairly is good social practice, yes. It’s also just a sensible business practice, otherwise you’ll end up with labour unrest and all kinds of other issues. In most cases, ESG is a label that has been placed on things that are common sense, especially when it comes to staff.

For me, ESG is an appropriate label for initiatives like reducing carbon emissions. This isn’t necessarily a capitalist pursuit, though saving money on Eskom by using renewables makes business sense too. ESG is where companies look beyond their profits for the greater good.

I’m sorry Amplats, but achieving 2% evergreen staff ownership of Rustenburg Platinum Mines is many things, but it’s not ESG. In case you’re curious, the day 1 value of this new staff scheme is R6.5 billion. This is the organisation’s third ESOP and I suspect that if you fish out the announcements for the first two, the term “ESG” won’t be highlighted.

Barloworld is seeing solid results in its operations

After trying to wriggle out of the Ingrain acquisition during the pandemic, it’s proven to be a winner

Barloworld released a voluntary update for the 11 months ended 31 August 2022. Right up front, the company reminds investors that growth in the order book means pressure on working capital and the balance sheet in general. This is why actively managing the group’s funding is so important.

Barloworld paid R1.97 billion to settle UK defined benefit obligations (retirement obligations) and paid a special dividend of R2.3 billion back in January. Even after these big moves, the balance sheet is well within debt covenants.

In the Equipment Southern Africa business, revenue was 19.6% higher and operating margin was maintained at 10.2%. The joint venture in the DRC is delivering positive income. Thanks to strong mining demand, the order book is up from R4.5 billion to R5.3 billion.

Bottlenecks at Chinese ports negatively impacted the business in Mongolia, with revenue down by 2.6% in USD terms at Equipment Eurasia. Operating profit for the segment was 5.3% lower despite a 6.3% increase from Russia.

As sanctions have hit, the Russian order book has shrunk to $30 million from $94 million. Barloworld faces huge challenges in trying to manage its exposure there, including an effort to look after its employees.

Ingrain appears to be a great acquisition, with revenue up 36.4% and operating profit 40% higher. This is despite a 120 basis point contraction in gross margin as a result of sales mix.

The car rental business is classified as a discontinued operation. It’s doing a lot better though as people are moving around again, with revenue up 7.3% and operating profit up 110%. Fleet utilisation was 80%! Barloworld hopes to unbundle and separately list Avis, though this is hardly a friendly market for new listings.

The leasing side of the business is also a discontinued operation. It fought its way back to be 1% higher in revenue. Operating profit was 10% higher though, despite the almost flat revenue performance.

In the logistics segment, the only remaining business is in warehousing and distribution. This is in the process of being sold, which would sign off on a full exit from the logistics industry.

There are director dealings, and then there’s Motus

Motus execs formed a stampede for the exit door in the past couple of weeks

This story stinks. Truly, it does.

Motus was trading under cautionary since 28th June, citing a potential deal to acquire an offshore aftermarket parts business. On 14th September, they withdrew the cautionary as they were ready to announce details of the transaction.

But here’s the thing: they hardly announced any details. They didn’t even tell us who they are buying. In fact, all they did was give a deal value range and not much else.

It all looks terribly suspicious in terms of timing. From 15th September, four directors hit the sell button in a big way. Here is just one example:

So, what do we notice here?

Firstly, why are director dealings from the 15th only announced on the 28th? I’ll tell you why. If such large sales were announced the day after they happened, the price would’ve started to fall. It’s far more favourable to the directors to announce the full tranche in one go.

Motus withdrew the cautionary without making a full acquisition announcement (which isn’t good) and the directors then got through enormous sales on the market before bothering to tell anyone about them.

We are talking about over R60 million sales by four directors.

Of course, you may choose to trust Motus after this. I’ve never owned shares in the company and after this little display of governance, I certainly never will.

Truworths: the corporate edition of Hunger Games

Announcing two deputy CEOs is never a good sign

Investors love seeing decisive, strong decisions around succession planning. The appointment of joint executive leaders is usually viewed with trepidation, as it sends a signal that the board can’t make a decision.

This is the problem when the group has had one CEO for a whopping 26 years. Michael Mark indicated that he would step down at the 2022 AGM. The board has now asked him to stick around, in a wonderful example of a corporate that just can’t let go.

In an attempt at succession planning, two deputy CEOs have now been appointed. Sarah Proudfoot comes with plenty of experience in store operations and procurement, so these are great skills in retail. Her competitor (even though the announcement would never bluntly say that) is Mannie Cristaudo, the current CFO of the group. This is clearly a financial skillset.

So not only is Truworths incapable of letting Michael Mark retire in peace, but the board also can’t decide whether the next CEO should be stronger at operations or finance.

The Truworths share price is trading at the same levels as in 2010. With zero value created since the 2010 World Cup other than dividends to shareholders, it’s perhaps not a surprise that the management transition looks like this.

Little Bites

  • Director dealings:
    • An associate of a non-executive director of PBT Group has sold R10.1 million worth of shares to Pulsent OH, the major B-BBEE investor in the group. The entity is linked to Pule Taukobong, a highly experienced venture capital investor.
    • An associate of a director of Kaap Agri has bought shares in the company worth over R102k.
    • The CEO of Sirius Real Estate has bought shares worth £11.3k. The share price came into 2022 on a ridiculous valuation and is down 58% this year.
    • An associate of a non-executive director of Capital & Counties bought shares worth £100k
  • In case you’re wondering what happened to the Distell deal, the company announced that the Competition Tribunal will consider the transaction at a hearing from 18 to 20 January 2023. Importantly, the Competition Commission has recommended that the Tribunal approve the deal with conditions.
  • Ascendis Health released results for the year ended June. In continuing operations, revenue increased by 15% and the normalised operating loss was R317 million. The real story is the balance sheet, with senior debt of R498 million vs. a spectacular R7.8 billion at 30 June 2021. The vote for the disposal of Ascendis Pharma is due in October.
  • Alviva released its results for the year ended June 2022 and they are great, with revenue up 57% and EBITDA up 62%. HEPS is up by a whopping 91%. The dividend per share is 90% higher at 55 cents. As a reminder, a non-binding expression of interest has been received by Alviva regarding a potential offer. At this stage, no firm offer has been made.
  • With its share price having lost half its value this year, Ellies needs to do something to make its business more viable over the long term. In a cautionary announcement, the company notes that it is in negotiations for potential acquisitions in the solar, uninterrupted power supply and renewable energy sectors. Load shedding is literally creating a new sector in the economy. Non-binding term sheets have been signed and a due diligence is underway, so a more detailed announcement can’t be too far away. Of course, there’s every chance that it falls through and no deal gets announced.
  • Tongaat Hulett has updated shareholders that its capital restructuring plan will be ready by 14 October, so investors need to be patient for a couple more weeks. Given the state of play at the company, it’s also notable that Louisa Stephens has been appointed as acting chair of the Audit and Compliance Committee following the resignation of Linda de Beer.
  • EPE Capital Partners (Ethos Capital) released results for the year ended June 2022. If you use Brait’s share price to calculate the net asset value (NAV) per share, that metric increased by 27% in the past year. If you use Brait’s NAV instead, EPE’s NAV per share grew by 16%.
  • Southern Palladium released its numbers for the year ended June 2022. This is a junior mining group, so an operating loss of A$2.5 million isn’t uncommon.
  • There’s finally some continuity at Oceana Group, with Zafar Mahomed appointed as CFO designate. He will take the top finance job with effect from 1 February 2023 after a handover process from the existing interim CFO, Ralph Buddle. He comes to Oceana having previously served as CFO of Cell C and McDonald’s South Africa, two businesses that have walked very different financial roads.
  • In an interesting move with its balance sheet, BHP is going to redeem and cancel £600 million worth of debt instruments that had been issued in 2015 and priced at 6.5%. They were due in 2077 – so I think we can all agree that this was a long-term debt instrument.
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