Financial assistance resolutions remain the cause of many sleepless nights for attorneys and their clients.
The much written on Trevo Capital Ltd and others v Steinhoff International Holdings (Pty) Ltd and others (2833/2021) [2021] ZAWCHC 123 (Trevo Capital) decision has taught us valuable lessons on financial assistance to related companies. In this article, we discuss this case in relation to aspects that have not been highlighted much in previous reports of the case, and which we believe are important for the boards of directors overseeing related and inter-related entities incorporated outside of South Africa.
In this case, the third respondents are the financial creditors of Steinhoff International Holdings Proprietary Limited (SIHPL, previously SIHL) and the investors in a convertible bond (2021 Bond) issued by another company in the Steinhoff Group, namely Steinhoff Finance Holdings GmbH (SFHG), an Austrian entity. SIHPL guaranteed the obligations under the 2021 Bond, in terms of a guarantee (2014 Guarantee).
Following the discovery of accounting irregularities in the Steinhoff Group in 2017, Steinhoff was forced to restructure its debt in the European Union to avoid liquidation. Steinhoff proposed a compromise of its financial obligations to three classes of creditors, including the so-called financial creditors.
The proposed compromise required SIHPL to restructure its debt, and included a contingent payment undertaking (CPU) to the second respondent (an agent for the financial creditors).
Under the CPU, the SFHG debt in respect of the 2021 Bond was restated by way of bondholders providing cashless loans to Lux Finco 1, incorporated in Luxembourg, and on lending the cashless proceeds to SFHG, pursuant to an inter-company loan, to discharge its obligations under existing SFHG debt. The CPU recognises that SIHPL assumes the role of guarantor in respect of obligations originally owed by SFHG under the 2021 Bond, and later to Lux Finco 1.
The board of SIHL took steps to comply with section 45(3) of the Companies Act, 71 of 2008 (Companies Act) in respect of the 2014 Guarantee, but failed to comply with s45(3) in respect of the CPU and the resulting obligations to Lux Finco 1.
Financial Assistance to Related Foreign Companies
In Trevo Capital, the respondents argued that the applicants have no standing and that s45 is not applicable, since the financial assistance was advanced to a foreign company, namely SFGH. This raised the question of whether s45 applies to financial assistance provided to a foreign company.
To answer this question, the Court followed a contextual method of interpretation by referring to the text of s45 and other provisions of the Companies Act, and to the context and apparent purpose of the financial assistance provisions. The Court found that – i. s45 did not expressly refer to a “foreign company” (a defined term in s1 of the Companies Act), but that this did not exclude foreign companies, and that foreign companies fell within the corporation category. As a reminder, the term corporation is referred to in s45(2) in the following context, “the board may authorise the company to provide direct or indirect financial assistance to … a related or inter-related company or corporation, or to a member of a related or inter-related corporation, or to a person related to any such company, corporation…”; the purpose of the financial assistance provisions is to prevent the abuse of the company’s directors’ powers by advancing financial assistance to foreign entities without safeguarding the shareholders’ and the company’s creditors’ interests;
ii. a generous interpretation of s45, to include financial assistance given by a South African entity to foreign recipients, was in line with the purpose of the provision and, in the court’s view, intended by the legislature; and that
iii. SIHL had given financial assistance to a foreign entity and had to comply with s45.
Applying the Solvency and Liquidity Test
The applicants contended that – i. when the board approved the 2014 Guarantee, SIHL was factually and materially insolvent as a result of the overstatement of its assets and the inclusion of misleading information in its financial statements. Therefore, the board could not reasonably find that SIHPL would be solvent and liquid following the conclusion of the 2014 Guarantee; and that
ii. the board had to investigate and interrogate the financial statements before reaching a conclusion.
The Court – i. accepted that the requirement in s45(3)(b) of the Companies Act that the “board is satisfied” is not a purely subjective test and that the board must take reasonably foreseeable circumstances into account; and
ii. noted that SIHL’s board took steps to comply with the requirements of s45 and considered fair and reasonable opinions prepared by reputable auditing and law firms before concluding that the conditions of s45(3) were met.
Thus, the applicant’s retrospective analysis of SIHL’s financial position, following the discovery of accounting irregularities in 2017, did not convince the court that the board had violated the requirements of s45 of the Companies Act when it approved the 2014 Guarantee.
Restructure of Debt – New Financial Assistance
The applicants argued that the CPU amounted to a new loan granted by financial creditors to Lux Finco 1, and that SIHPL’s guarantee of this loan amounted to financial assistance to a related company.
The respondents and the financial creditors argued that the CPU was not a new debt, but merely a restatement of an existing debt under the 2021 Bond and 2014 Guarantee, which was approved by the board. As such, SIHPL did not provide further financial assistance.
The Court disagreed and found that the restatement or restructuring of debt on new terms and owing to a new party amounted to a new debt for the purposes of s45.
The fact that the quantum of the debt remained the same was irrelevant, as SIHPL’s board had to consider the revised terms of the restated debt, including the recipient of payment, and in so doing, the board had to comply with s45.
Conclusion
Trevo Capital has reminded us of three valuable principles relating to financial assistance. Firstly, financial assistance to a related foreign entity falls within the scope of s45 of the Companies Act. It is imperative to bear this in mind when group companies include companies incorporated outside of South Africa. Secondly, when applying the solvency and liquidity and fair and reasonable tests, the board must take reasonable, foreseeable circumstances into account. Thus, if the board is aware of any circumstances that could impact on the solvency and liquidity of the company (which may not be reflected in the company’s financial statements), it must take this into account when complying with s45(3). Lastly, restructured debt on new terms, which includes new counterparties, will require new financial assistance resolutions, even if the quantum of the debt has not changed.
Janke Strydom is a Partner and Jacques Marais a Senior Associate | Fasken.
This article first appeared in DealMakers, SA’s quarterly M&A publication
When we consider the modern venture capital (VC) space, the first instrument that comes to mind is a simple agreement for future equity (SAFE). SAFEs were introduced in 2013, by the American start-up accelerator, Y Combinator, and are essentially a financing document based on US law. The premise is relatively easy and attractive: (i) they are simple (as they adopt a standard form); (ii) they have low transaction costs (as they are barely negotiated); and (iii) they contain founder-friendly terms (as they are used to promote start-ups in their seed financing rounds).
To add to this, they have been adaptable for local jurisdictions. In the UK, the SAFE is known as an advance subscription agreement (ASA), and the main difference is that rather than an investor agreeing on a conversion to equity, it is for a subscription to shares.
In Austria, SAFEs are required to be executed in the form of a notarial deed, as is required for any agreement on the transfer of shares of a limited liability company.
In Sweden, the notion that a SAFE can convert into equity without the involvement of the shareholders, i.e. pre-emption rights, only applies if the SAFE is structured as a convertible instrument – the concept of conversion to equity is one that has to be negotiated amongst the parties.
Aside from the nascent risk that the start-up fails and the investment is not realised, one has to understand that there are risks that may outweigh the benefits of using SAFEs or ASAs. Indeed, we need to be aware that the enforceability of the SAFE may soon become an issue to consider.
COMPETITION ASPECTS
The nature of SAFEs is that promised equity and other rights are only available to an investor on the occurrence of a triggering event. The equity, depending on the structure of the agreement, could be pre-determined in the case of a post-money valuation. Further, other rights could also be granted, which include board seats, board observer seats, participation in future SAFEs rights, and information rights, to name a few. Some of these rights, such as board seat and board observer seat rights, may even be granted before the conversion of the SAFE to equity.
Using Kenya as an example, a merger is defined in the Competition Authority Act No. 12 of 2010 (Competition Act) as an “acquisition of shares, business or other assets, whether inside or outside Kenya, resulting in the change of control of a business, part of a business or an asset of a business in Kenya in any manner and includes a takeover” (our emphasis). Further, the Consolidated Guidelines on the Substantive Assessment of Mergers under the Competition Act provide that the competition authority of Kenya will analyse the relationship between the parties on a case by case basis. Some of the factors that they will take into consideration are the ability to appoint, or to veto the appointment of a majority of the directors, or to materially influence the policy of the company in a manner comparable to a person who, in ordinary commercial practice, can exercise an element of control. Based on the definition, we can surmise that in some instances, parties will have to obtain consent from the competition authority for the grant of certain rights to an investor.
However, the question that arises is, should competition clearance be obtained and, if so, when? At the point of entering the SAFE? Or at the point of conversion? Further, is there a risk if local competition authorities refuse to grant approval or, instead, require onerous conditions to be fulfilled before approvals are granted? The greater question then arises as to what happens to the funds that have already been deployed? It is advisable that mechanisms be placed in a SAFE if the rights or equity being promised to the investor change the control of the business (as applicable to the jurisdiction). One may make it a condition to obtain approval from the competition authority before the conversion takes place and, in an instance where approval is not obtained, mechanisms may be included to ensure the ability to unwind the transaction, or to require that the investment converts to debt.
Reassuringly, in most jurisdictions, including Kenya, financial thresholds apply when seeking competition clearance and, in the case of start-ups, these may not be met. However, as an investor, it is important to consider the particular jurisdiction involved, the stage in which you are making your investment, the target’s current cap-table, its turnover, and the number of other SAFEs that may have been issued, prior to making the decision to seek competition clearance.
OTHER REGULATORY APPROVALS
In addition to the competition approvals, one also has to consider whether, with respect to a business, the SAFE is in a regulated industry such as insurance, oil and gas and digital lending. Depending on the regulatory authority, a regulated business may be required to notify a regulator or obtain consent before a new shareholder acquires a certain threshold of equity. In this case, one should consider implementing a mechanism to notify or obtain consent from the regulator before the conversion is finalised.
Local content requirements in specific jurisdictions should also be considered. In Kenya, for example, the insurance industry restricts foreign ownership: at least one third of the shares in an insurance company must be owned by a local. It is, therefore, prudent to ensure before investing in a regulated business that the shareholders maintain local shareholding requirements throughout the seed fundraising process to conversion into equity.
Further, it may be an additional obligation for a director to be deemed fit and proper by the regulatory authority before they take on the position as a board member. This may be of specific concern, especially where the investor obtains a board seat before the conversion to equity. In this case, one must obtain the required consent from the regulator. In the alternative, it may be beneficial for the investor to obtain information rights, giving them the right to receive all information from the board, instead of acquiring a board seat. However, this may not give the element of control that most investors are looking to obtain.
PRE-EMPTION RIGHTS
Similar to Sweden and the UK, Kenya provides for mandatory pre-emption rights in its company law. Therefore, the aspect of automatic conversion to equity will need to be carefully considered, depending on the governing law of the SAFE. It may be a requirement for a waiver to be obtained from shareholders before the conversion to equity. One might, therefore, need to consider whether it is permissible under local law to obtain consent before entering the SAFE.
CONCLUSION
In conclusion, entering into a SAFE, while relatively simple on the face of it, requires much more long-term thinking to ensure that both founder and investor are protected. As practitioners, we need to constantly analyse SAFE documentation to ensure compliance with local laws, to guarantee that our clients effectively reap its benefits. Regulatory and practical aspects need to be considered when one is trying to conclude a SAFE quickly. If acting for an investor, we must advise them that as the SAFE develops, caution needs to be exercised to ensure that their investment is protected.
Njeri Wagacha is a Partner and Rizichi Kashero-Ondego an Associate | CDH Kenya
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
Andre Botha of TreasuryONE reminds us that even if some people are already on the beach, our currency certainly isn’t.
Economic news and events that could affect the rand and the market are continuing as we approach the end of the year. But, before we delve into the events of the week, it is probably an opportune time to take a look back at some of the early-year events that are still affecting the market.
First, there is inflation, which has been on the rise all across the world as central banks struggle to combat the scourge. We have seen unprecedented hikes, with many countries on the verge of hiking themselves into a recession. Given that the majority of the world is anticipated to enter a recession, this is what we anticipate will be the base play of 2023. With the Fed leading the way in the initial part of hiking rates, we saw a rampant US dollar, and risky currencies like the rand were under pressure in the back half of the year.
US dollar rollercoaster for the year:
Second, the aftermath of the conflict between Russia and Ukraine continues to affect the Eurozone, where there have been – and will certainly be – further energy crises because of the reliance on Russian gas. Recent months have seen an increase in gas costs in the UK and the Eurozone due to the anticipated colder winter. This could fuel the inflation monster further in those countries that are most affected by the energy crisis.
Locally, there is the Phala Phala scandal and the possibility of a presidential resignation. Even though the President did not resign, the news surrounding the Presidency has caused the market to experience some volatility. We have the ANC elective conference at the end of the week, but we do not anticipate any significant deviations from the norm. However, stranger things have happened, and any deviation from the narrative could send the markets into a frenzy.
This brings us to this week, where a lot will happen in a very short amount of time. First, we have the US CPI number on Tuesday, where last week’s higher-than-expected PPI number caused some market participants to anticipate a higher-than-expected CPI number following several months of lower-than-expected inflation. Should the number print higher, we can expect the rand and other risky assets to run with it, but with the risk premium already built in, should the number print lower, we can expect a swift reverse in risky assets.
Inflation spike in the US:
On Wednesday, we have the FOMC meeting, where we expect the Fed to hike by 50 basis points. Looking at the US dollar and its performance of late, we expect that lower rate hikes have been priced in, and thus the rally in the US dollar has run out of steam a little. The key will be the press conference after the announcement where the thinking of the Fed will be revealed as well as what the new CPI number will have changed their thinking.
On Thursday we have the ECB interest rate decision and we also expect that the ECB will hike rates by 50 basis points. The ECB are in a bit of a tight spot as they are behind the curve and also hiking into an anaemic economy across the board. It will also be insightful as to where the thinking of the ECB is and how they propose to tackle inflation and interest rates going forward.
We are in for a busy week in the market, before the calm of the December holidays hits us.
To learn more about how TreasuryONE can help you navigate the markets and manage risk in your business, visit the website.
The huge drop in the share price isn’t anything sinister
I must say, I had lost track of the date of the Zeda spin-off. While reading about the exchange control approval that has been obtained for Barloworld’s special dividend of 550 cents, I noticed that the share price had fallen 17%.
Having questioned my sanity for a moment, I realised that Zeda made its debut on the market on Tuesday. It lives and breathes, trading under the ticker JSE:ZZD.
As for Barloworld, the reason for the drop is that the group is essentially significantly smaller now, as Zeda has been unbundled to its shareholders. If you add up the value of your shiny new shares in Zeda and the shares that you still have in Barloworld, it will make a lot more sense.
Change of guard at Gold Fields
Chris Griffith steps down after the Yamana transaction failed
We will never know what the boardroom conversations sounded like, but we do know that Chris Griffith has stepped down as CEO of Gold Fields. The announcement doesn’t even attempt the niceties of “seeking new opportunities” or “broadening his horizons” – instead, it thanks him for his leadership and then reminds everyone that the Yamana deal failed.
The next man in this (particularly) hot seat is Martin Preece, EVP of Gold Fields South Africa, who has been appointed as interim CEO. Preece has been with the company for six years.
It looks like Griffith and Preece have a busy December ahead, as the official handover date is 31 December.
Ouch.
Less comedy (and tragedy) ahead on the JSE
Finally, the listing of Nutritional Holdings is being terminated
In a move that is very long overdue, the JSE is terminating the listing of Nutritional Holdings with effect from 19 December. This mess of a group has delivered comedy and tragedy in almost equal measure, stumbling from one crisis to the next.
This doesn’t give the current shareholders a solution. In fact, it makes the situation even worse, as JSE regulations will no longer apply. Nutritional Holdings will be a public unlisted company, which means it is still regulated by the Companies Act but not by any stock exchange.
The lucky shareholders now hold unlisted shares in a company that can barely string together enough financial information to complete the audits for recent financial years.
With liquidation hearings scheduled for January and February 2023, there might be a short and painful ending to this story anyway.
Orion Minerals secures $87 million funding package
Definitive agreements signed with subsidiaries of Triple Flag Precious Metals Corp
In a major step for Orion, $80 million worth of funding has been raised against the delivery of 87% of future gold and silver by-product production, with the stream rate reducing to 50% after certain milestones. This shows you how specialised junior mining funding is. At the time of delivery, Orion will receive payments of 10% of the delivered value at spot prices.
There’s another $7 million to be advanced against 0.8% of gross revenue from future mineral sales.
This comes after the news of a R250 million convertible loan with the IDC, which is currently at the stage of definitive agreements being drafted and negotiated.
The two sources of funding will be used to complete a feasibility study for early mining at Prieska and enable commencement of mine dewatering.
RMB Holdings updates the market on its value unlock
With interim results now available, value investors got their calculators out
The devil is most certainly in the detail, but orderly wind-downs can offer delicious returns. Anyone who bought shares in Etion at the right time will confirm this. With a drop in the share price of over 10% in response to results, it’s not clear that the market is seeing a juicy outcome for RMB Holdings.
Are they missing a trick?
To help you decide, there are brand new results available. They highlight that since September 2020, a shareholder return of 46.5% has been delivered. That’s way above the market return available over a two-year period but also isn’t lifechanging stuff.
To demonstrate the power of closing the discount to net asset value (NAV), the NAV per share is down 10% over the past year and the share price is up 33%. I must highlight that the NAV includes a huge special dividend of 147.1 cents paid after the end of the reporting period.
If we adjust for that, the “current” NAV is 96.9 cents and the share price is 52 cents.
Herman Bosman has moved on as CEO and financial director, with Brian Roberts (the current CEO of RMH Property) stepping up to the top job. This tells you where the bulk of the remaining value lies: the property portfolio.
Not a pyramid scheme
Vodacom has closed the deal for a 55% interest in Vodafone Egypt
If my own experience with my local Vodacom tower is anything to go by, load shedding is causing a lot of pain to the network. I’m sure Vodacom’s board is only too happy to be taking a 55% stake in Vodafone Egypt, where they hopefully have a lot more electricity than we do.
With the seller of the stake in Egypt being wholly-owned subsidiaries of Vodafone Group Plc, that company’s stake in Vodacom has increased from 60.5% to 65.1%. There was also a cash portion to the deal worth R10.8 billion.
A trading update from Vodacom is expected at the end of January, which will include an update on the medium-term growth outlook.
Little Bites:
Director dealings:
The Mouton family (across several trusts etc.) have loaded up on Curro shares worth nearly R7 million
You know it’s getting bad when several Nampak directors have headed for the exit with parts of their shareholdings. From the CEO’s sale of R985k down to much smaller sales by prescribed officers, it really isn’t looking good for this company.
The CEO of FirstRand has put a collar structure in place over R50.3 million worth of shares, with a put strike price of R55.82, a call strike price of R75.06 and an expiry date in December 2023. The current traded price of FirstRand shares is just over R61.
A prescribed officer of Impala Platinum has disposed of shares worth R1.05 million
A director of Raubex has bought shares worth R247k
The CEO of Calgro M3 has bought shares worth R353k
Via their shared investment vehicle, key directors of Ninety One have acquired shares worth £31.3k
Merafe has announced the European benchmark ferrochrome price for the first quarter of 2023. At 149 US cents per pound, this price is a rollover from the fourth quarter of 2022.
Delta Property Fund has announced an agreement to sell the Beaconsfield property in Kimberly for R22.1 million. This will reduce the loan-to-value by just 10 basis to 58.1%, so there isn’t much to get excited about here.
The shareholders of RCL Foods voted almost unanimously in favour of the resolutions required to unwind the B-BBEE Structure.
Glen Anil Development Corporation has agreed a deal with an associate of a director of Purple Group. The deal is complicated enough that I didn’t just box it under the other director dealings, as the director of Purple only holds an 18.1% stake in Serialong Financial Investments, the company selling the shares. The initial deal is worth R24.3 million and increases Glen Anil’s stake in Purple to 1.2%. The price of 202.08 cents per share is significantly higher than the closing price of 170 cents. The parties have also entered into option agreements that give Glen Anil the ability to buy another 31 million shares over the next few years at strike prices ranging from 175 cents to 310 cents.
Allan Gray is trying hard to get out of the way of Nampak, but it still owns a whopping 16.44% in the company. The share price has nearly halved in the past month on news of the pending rights offer.
Featuring two special guests who bring loads of real-world experience to the table in this industry, our latest bizval webinar was packed with insights into the world of online retail.
In this webinar, we featured two pioneers in the direct-to-consumer retail space. Michael Dixon from Desray Fashions and Justin Blake of Silvery shared their unique insights into how they built their successful businesses.
This deal includes the receipt of $30 million in funding
Back in August, Aspen announced an agreement with the Serum Institute of India that would allow Aspen to manufacture, market and distribute four routine vaccines in Africa under license from Serum.
Before you wonder about whether this is a Covid product long after Covid has gone away, you can feel better about the fact that these are Pneumococcal, Rotavirus, Polyvalent Meningococcal and Hexavalent vaccines.
I’m no doctor, but ctrl-F “Covid” in the announcement yields no results, so that’s good news.
To help fund this 10-year deal with Serum, Aspen had been negotiating for funding with the Bill & Melinda Gates Foundation and the Coalition for Epidemic Preparedness Innovations (CEPI).
The exciting news is that $30 million in funding will be received ($15 million from each of those parties), which supports this initiative and creating regional vaccine manufacturing capacity that would put Africa in a better position going forward for future public health emergencies.
The restructuring of Ellies is an expensive process
There are glimmers of hope in the operations, although they are still making losses
Ellies has released a trading statement for the six months ended October. The headline loss per share is expected to be between -4.17 cents and -4.99 cents, which gives an interesting range vs. the loss of -4.36 cents in the comparable period.
The restructure process has had an impact of R18 million, which equates to -2.24 cents per share. This suggests that things are looking better at operational level, albeit still a loss-making reality.
This is confirmed by the further commentary, which notes revenue up by 5.6% and gross profit marginally higher than the comparable period. Operating costs (excluding retrenchment costs) have been contained below inflation.
Ellies has signed a term sheet with its bankers to restructure the working capital facilities. There are other negotiations to “support the business” in areas of substantial growth for products and services, which probably means the introduction of strategic partners – we can’t be sure until any proper details are announced though.
Interim results are expected to be released on 14 December.
The share price has been ugly this year, losing half its value in largely one-way traffic:
Northam juices up the Royal Bafokeng offer
Cash is king and Northam is putting more of it on the table
NB: this is not an increase to the offer price for Royal Bafokeng Platinum. Instead, Northam Platinum is increasing the cash element of the offer and reducing the share-based element accordingly.
The overall impact is that the cash portion of the offer has increased from R10 billion to R17 billion. Expressed on a per-share basis, the cash consideration is now between R92.48 and R172.70 per share, depending on the level of acceptances.
The total offer price is R172.70, which is unchanged as highlighted above.
The trick here is that if Impala Platinum doesn’t accept the offer for its current shareholding in the company of 40.71%, then all other shareholders that accept would be paid R172.70 in cash.
Northam is trying hard to outfox Impala Platinum in this deal and a greater cash component is another step in that direction.
PBT pulls off a smart deal with Sanlam
The keys to the B-BBEE funding structure have been passed to the right place
PBT Group is a successful tech consulting company that should be running a tight balance sheet, as this is essentially a management consulting model that focuses on selling time.
Despite this, the need to have the right empowerment credentials is a reality in the South African business landscape, so investors have been forgiving of a preference share funding structure that saw PBT Group providing funding to Yonex Investments (a B-BBEE investment entity).
In a smart move, PBT Group has managed to offload this preference share to Sanlam Investment Management for R53.3 million. This is a perfect example of capital allocation discipline, as PBT Group should be chasing a return on capital that is much higher than the yield on the preference share. In contrast, Sanlam Investment Management is looking for yield instruments that offer diversified exposure.
In other words, the deal makes sense for all involved, as Sanlam is a far better owner of these preference shares.
Prior to the disposal, PBT will receive a dividend of R1.4 million on the preference shares. A special distribution of R31.5 million will be paid to PBT shareholders after this deal closes. If you’re wondering where the rest of the money went, it’s important to note that a prior special dividend was higher than the value of non-core asset disposals that had been achieved by that time. There’s effectively a catch-up process underway here.
Importantly, PBT Group still holds R133.1 million in non-core assets. With a market cap of under R1 billion, that’s a substantial special dividend if PBT can get the remaining assets sold.
The Competition Commission has ruled on Shoprite – Massmart
Shoprite can buy most of the intended stores, but not all of them
In an important step for Massmart’s balance sheet, Shoprite has been given the green light to acquire most of the stores that were part of the initial proposed transaction to acquire the heavily loss-making cash and carry business from Massmart.
The competition authorities determined that 15 stores should be excluded from the deal, so Massmart will need to try and sell them off separately.
Shoprite is allowed to acquire 42 Cambridge Food and Rhino Cash and Carry stores, two Fruitspot facilities, the Massfresh Meat business and 12 Masscash Cash and Carry stores.
The effective date of the transaction is 9 January 2023.
I remain a bit skeptical of this deal from a Shoprite perspective. The stores will obviously be renovated and rebranded as Shoprite (and probably Usave) stores, so this was really a process of just securing the sites. Still, it seems like an expensive exercise just for that, as the stores would’ve likely gone bankrupt anyway and the space would’ve become available for “free” from a Shoprite perspective.
Little Bites
Director dealings:
An executive of Gold Fields sold shares worth a meaty R9.6 million.
A director of Stor-Age has acquired shares worth R116k.
Althea Grewar sold shares in Luxe Holdings worth R12 million and we have to assume that the buyer is Mohamed Holdings, which now owns 34.99% of the company.
A director of Sable Exploration and Mining has sold shares worth R808k, with PBNJ Trading and Consulting having increased its stake in the company to 38.4% and having triggered a mandatory offer a well. We can’t be sure if PBNJ bought the shares sold by this director but it seems likely.
Marshall Monteagle PLC released results for the six months to September 2022, reflecting an increase in revenue of 53% and a jump in profit before tax on trading and property operations of 77%. Net of revaluations and other moves, the group is in a loss-making position. The headline loss per share of $0.069 is down from the profit of $0.01 per share in the comparable period. Despite this, there’s a dividend of $0.019 per share.
The general offer by Heriot to purchase Safari shares was accepted by holders of 7.6% of Safari shares in issue. Heriot and its concert parties now hold 40.7% of total Safari shares in issue.
Tharisa released the results of the private placement of bonds related to the Karo Platinum Project. The company was looking to raise $25 million and managed to attract applications of $31.8 million for the bonds being listed on the Victoria Falls Stock Exchange. This is a great result in the strategy to fund this open-pit PGM asset located in the Great Dyke in Zimbabwe.
After announcing that current CFO Charl de Villiers will be taking the top job at Libstar as CEO from January, Terri Ladbrooke as been appointed as interim CFO. This is an internal appointment.
In anticipation of the potential loss of REIT status, Fortress REIT Limited has changed its name to Fortress Real Estate Investments Limited
Mantengu Mining has concluded its rights offer to raise R15 million, with 77.69% of the new shares being allocated to the underwriters. This means that other shareholders didn’t exactly fight each other to get to the front of the queue, with applications for only 22.31% of the available shares.
In a role that might not be the easiest to fill based on everything going on with the company, Conduit Capital is looking for a new non-executive director and Chairperson of the Audit and Risk Committee, after Nonzukiso Siyotula resigned from the role.
Rodger Walters has been appointed as an independent non-executive director of RECM and Calibre Limited and as the chairman of the Audit and Risk Committee. He is currently the CFO of ASISA (the Association for Savings and Investment South Africa).
Luxe Holdings renewed the cautionary announcement related to a potential disposal of assets to Go Dutch in a cash deal.
Another company that renewed its cautionary is Afristrat, which is currently in a fight for its life with its balance sheet. I can’t give you the website because it appears to have been hacked and redirected.
Sebata Holdings released results for the six months to September. Revenue is up 26% and the headline loss per share improved from -132.25 cents to -5.27 cents. The website hasn’t worked for as long as I can remember.
With some sparkling alliteration, Chris Gilmour digs into credit demand by South African consumers.
Just when you thought South African consumers had become so debt-averse that this trend would carry on ad infinitum, lo and behold Lewis Stores made abundantly clear that their customers have a preference for credit over cash once more.
In the latest interim results from Lewis to end September 2022, there was a distinct change in the composition of cash:credit sales. From being nearer 50:50 cash:credit, the interim 2023 figures saw a big jump in credit sales to 56.5%:
And the latest consumer confidence indicator from the Bureau for Economic Research in Stellenbosch also suggests that consumers became more confident in the final quarter of 2022:
“The FNB/BER Consumer Confidence Index (CCI) recovered from -20 to -8 index points during the fourth quarter of 2022. Although the index remains in weak terrain relative to its long-term average, it has regained all the ground lost during the first half of 2022. The rebound in consumer sentiment shows an improved willingness to spend among consumers, but consumers’ ability to spend would also need to improve in order to translate into a significant increase in consumption.”
In other words, what the BER is suggesting is that, provided consumers have the wherewithal to spend, they will now be more inclined to do so.
Source: FNB/BER; Gilmour Research
This is not to suggest for a moment that Lewis or any other credit retailer for that matter is about to embark on a program of reckless credit-granting. Far from it, in fact. The credit application decline rate at Lewis improved to 35.8% (previous year 39.1%). Over the years, Lewis and others have learned a lot more about their customers’ spending patterns and have adopted very conservative credit-granting procedures. And for quite some time, South African consumers generally have expressed a preference for cash purchases over credit, as household debt to disposable income has declined progressively. Over the past thirteen years, household debt to disposable income has declined from 85% to nearer 65%.
Thus there is probably some capacity for consumers to take on extra debt, provided they are comfortable in their ability to repay it.
The statistics from the National Credit Regulator (NCR) are seriously lagged – the Q3 figures will only be available by early January – and so it’s not possible to draw any high-level conclusions about consumers’ willingness and/or ability to take on more credit at this point in time.
This comes as South African GDP growth surprised on the upside last week, with Q3 growth beating all estimates, coming in at 4.1% year-on-year and 1.6% quarter on quarter. Admittedly, the figures were helped by a bumper agricultural harvest coupled with a low base of comparison in Q2 . But nevertheless it’s a good outcome and suggests that SA won’t enter recession next year like many of its developed economy trading partners. Obviously the high incidence of rotational power cuts (loadshedding in Eskom-speak) may well dull GP growth in Q4 but across the spectrum, consumers and industry are making plans to combat loadshedding.
But we have to be realistic about the impact of higher credit sales. There can be no doubt that in a “normal” economy, furniture & appliance retailers much prefer credit sales to cash sales. It reminds me of a comment that JD Group CFO Gerard Volkl made at a presentation to the effect that “if we could just find a way of offering consumer finance without having to worry about this pesky furniture, it would be so much easier.”
Lewis CEO Johan Enslin pointed out at the results presentation that a credit sale is, on average, four times more profitable than a cash sale, even allowing for the fact that the group has to wait many months for the proceeds to arrive. This is not surprising, considering that the maximum interest rate allowed under the National Credit Act is the repo rate plus 21%.
Up until now, consumers have been wary of taking on more debt and understandably so at these kind of interest rates.
So, provided the retailer is happy that the consumer can afford to take on more debt and the consumer is happy to assume more debt, there does appear to be a bit of capacity for improving retail sales growth, even in a rising interest rate environment.
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.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
A smell at Spar that is worse than the polony
Equites’ latest property deal with Shoprite in their joint venture
Absa’s impressive update with ROE running ahead of Nedbank and Standard Bank
Italtile’s insights into the state of South African consumers
How it is all going down to the wire at Fortress
Sanlam’s mixed bag of results for the 10 months to October
Transnet’s negative impact on Thungela and Kumba
A record year for Gemfields
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.
Production is lower in 2022, with Quellaveco still in ramp-up phase
Anglo American is an interesting, complicated group that has exposure to a variety of commodities including PGMs, iron ore, nickel and copper. Don’t forget that De Beers (the diamond giant) is in there as well. The management team talks about the group being a “resilient business through the cycle” – a clear nod to diversification.
In the latest update, Anglo American has advised that production should be down around 3% this year, with unit costs up by 16%. That’s an unhappy story as input cost pressures combine with production decreases to create a nasty outcome.
The situation should improve in 2023, with production expected to increase by 5% and unit costs expected to increase by only 3%. Capital expenditure is anticipated to be around $0.8 billion higher than in 2022 as the Woodsmith project picks up.
In 2024, production is expected to increase by 5% and capex would return to current levels. The expectation for 2025 is flat production (i.e. similar to 2024) and ditto for capex.
Woodsmith is the group’s next major greenfield project after Quellaveco, bringing a diversified source of income in the production of Poly4, the low carbon fertiliser. Speaking of copper project Quellaveco, that operation increases Anglo’s global production base by 10% and is expected to be highly margin accretive over the next decade.
Other than the immediate pressures, the group sounds bullish about its prospects.
Anglo American Platinum faces operational pressures
2022 production is expected to be within guidance, but beyond that looks tricky
At Anglo American Platinum, the good news for 2022 is that refined PGM production is 3.8 million ounces, smack in the middle of the guided range of 3.7 million to 3.9 million. The bad news is that because of inflationary pressures, the unit cost of R15,300 per ounce is higher than the guidance of R14,000 to R15,000.
There is a build up in work-in-progress inventory because of loadshedding and the delay in the Polokwane smelter rebuild. This inventory will be refined in 2023, which will give some benefit to the next financial year and 2024 as well.
Looking at the medium-term guidance (2023 – 2025), the business is clearly under pressure. Drilling initiatives have reflected a reduction in higher-grade ore volumes at Mogalakwena. There are also lower volumes expected from Amandelbult, with infrastructure closures, challenging geological ground conditions and the pending end to the life-of-mine of the current opencast operations. The company also expects to receive lower purchase-of-concentrate volumes than previously anticipated.
The production forecast for 2023 and 2024 is 3.6 million to 4.0 million ounces. It was previously between 3.8 and 4.2 million ounces for 2023 and between 4.1 and 4.5 million ounces for 2024, so this is a significant drop. It gets worse in 2025 (a new forecast), with production estimated at 3.3 million to 3.7 million ounces.
With ongoing inflationary pressures on top of production challenges, the unit cost guidance for 2023 is between R16,000 and R17,800 per PGM ounce.
This isn’t great news for shareholders at all, with a 7.3% drop in the share price on Friday as a result.
ARC gives an update on its investments
With investments like rain and TymeBank, this is always worth a read
The updates on each underlying company don’t go into much detail, but there’s enough to get a good sense of how the portfolio is doing.
African Rainbow Capital Investments (ARC) is split into a diversified investments portfolio and a financial services portfolio, so I’ll stick to that approach for this update.
Before going into the portfolio updates, take note that the lower management and performance fees for the fund were approved by shareholders in November. Although I still don’t like the structure, it’s better than it used to be.
Diversified investments
The only comment on rain is that the business is performing well and the additional spectrum is expected to positively impact the valuation.
At phosphate business Kropz, the Elandsfontein phosphate plant has suffered several setbacks to its commissioning. This caused operational cash shortfalls and ARC increased the convertible loan facility by R550 million as a result, of which R247.5 million has been drawn.
The last of the Afrimat stake was sold in November, generating an internal rate of return (IRR) of 21.72% on that investment. Another disposal of a public company was the 3.2% stake in Capital Appreciation, with an IRR of 12%.
Most of the assets in the ARC Services group of company are being disposed of in line with the carrying value of R291 million.
Bluespec is performing in line with expectations and meeting profit targets. Weelee, the online vehicle bidding platform, is also growing in line with the business plan.
The disposal of Humanstate and Payprop SA for R496 million has been concluded. The IRR on disposal was 20%, excluding any earn-out structures. There is the potential to receive another R52 million over 30 months.
Fledge Capital is in an acquisition phase, having sold its remaining investment in WeBuyCars earlier in the year.
Linebooker is enjoying strong month-on-month volume growth in the online booking platform and the management team is exploring options beyond South Africa.
Financial services
Alexforbes is a publicly listed company and ARC doesn’t go into any details beyond what the company already discloses in its own reporting.
TymeBank always gets a lot of focus and deservedly so, as this is a significant and interesting investment. October saw 228,000 new customers onboarded, a record month for the bank and vastly higher than 130,000 to 140,000 customers per month in the first half of 2022. With the acquisition of Retail Capital, TymeBank is looking to enhance its offering to its business banking clients. Retail Capital is a large SME funder that has disbursed over R5.5 billion to more than 43,000 business owners in the past decade. Notably, Tyme Global has launched GOtyme in the Phillipines.
Crossfin has increased the number of merchants utilising its services and has achieved revenue and EBITDA growth on a year-on-year basis.
In Sanlam, the deal with Absa Investments to create one of South Africa’s largest black-owned asset managers has been concluded. Also related to Sanlam, ARC highlights that Sanlam is looking to take a controlling stake in Afrocentric.
Rubies are red, Gemfields is green
After some major scares this year, Gemfields is at a 52-week high
There’s been no news for a while on the insurgency in Mozambique that got dangerously close to Gemfields’ Montepuez ruby mine. The army was sent in to stabilise the situation and it seems to have worked. Although the risks aren’t gone by any means, the market seems to have relaxed after seeing support from government to protect the mine.
In the latest ruby auction, the company achieved auction revenues of $66.8 million after selling 94% of the lots offered for sale. Over the full year, the 2021 auction revenue record for Montepuez rubies ($147.4 million) was smashed with a performance of $166.7 million.
Looking at the broader group (i.e. including the Kagem emerald mine in Zambia), Gemfields’ auction revenues of $316 million have set a new annual record, up 32% from 2021.
It’s been a year of immense volatility and huge opportunities for traders:
Italtile hints at its performance
Revenue is higher, but retail volumes are surely down
Italtile has updated the market on its sales for the five months to November.
It’s important to understand that the group has manufacturing operations (Ceramic Industries and Ezee Tile Adhesive Manufacturers) as well as retail operations (CTM, Italtile Retail, TopT and U-Light). The integrated supply chain import businesses are Cedar Point, International Tap Distributors and Distribution Centre.
The businesses continue to face serious macroeconomic headwinds. Under considerable pressure from interest rates and inflation, consumers are deferring or scaling down on renovations and new build projects. To make it worse, loadshedding is causing a lot of pain for Italtile in the manufacturing division.
Although the update doesn’t give the percentage increases in selling price inflation, we can safely assume that a 2.3% increase in sales in the Retail division means that volumes are down. This is the case where inflation is higher than the percentage increase in sales. I have the same concern about the integrated supply chain businesses, which are up just 3%.
The Manufacturing division is up 7.8%, a performance that is “primarily due to price increases” (which implies some volume growth at least).
The company expects difficult conditions to persist for the rest of the year and no specific earnings guidance has been given due to the uncertain operating conditions.
Kumba updates production guidance
With issues at Transnet, you can guess in which direction the guidance went
After a tricky first half of the year for Kumba, matters were made more difficult by a two-week strike at Transnet in October. This has a negative effect on throughput, which in turn leads to a build-up of iron ore stockpiles at the mines.
Something has to give somewhere, in this case in the form of lower production due to the lack of storage space. Thankfully, the group has managed to maintain its unit cost guidance for the year despite lower production.
For 2023, production is expected to be 35 – 37Mt, down from 39 – 41Mt. The unit cost is $44 per tonne, achieved through lower anticipated diesel prices and currency depreciation. Of course, if the macroeconomic picture works out differently, then things could get ugly.
There is some light at the end of this railway tunnel. Kumba highlights various steps being taken by Transnet to improve matters, including a major maintenance programme, an extra set of trains, the removal of speed restrictions and the implementation of weather-related mitigations. This supports a production outlook of 37 – 39Mt in 2024 and 39 – 41Mt in 2025.
Still, that’s well down from the 41 – 43Mt previously guided for 2024. Our infrastructure challenges are throttling our economy.
Spar responds to media allegations
The share price is quickly becoming the least of the problems
In an explosive recent piece by Ann Crotty of the Financial Mail, a number of allegations were put forward about governance at Spar. It also highlighted the legal proceedings by the Giannacopoulous Group, which owns 45 Spar stores.
In this edition of My Big Fat Greek Dispute, the article sets out a long-standing dispute between Spar and the Giannacopoulous Group with respect to its guild membership, a prerequisite for owning a Spar store (you need to remember that they are franchises).
A very embarrassing court judgement is quoted, in which high court judge Judy Kollapen talked about a “spectacular failure on the part of the Spar Group” – not what shareholders (or others for that matter) want to read.
The family is now claiming R2.1 billion in damages. That’s a lot. There is also a criminal proceeding underway, with the backing of AfriForum. This is getting very ugly, very quickly.
The governance concerns go deeper than just a legal dispute that hasn’t been given much attention in the company disclosure. There are allegations of fictitious loans and major question marks around Graham O’Connor’s independence as chairman. He was the previous CEO and his family appears to have various commercial interests with Spar.
I won’t reveal more of Ann Crotty’s excellent work in Financial Mail. Being a subscriber to the publication is a worthwhile investment and you can read it there (along with my weekly column in the magazine if you so desire).
On Friday, the retailer responded to the media allegations, the summary being as follows:
The “fictitious and fraudulent loan allegations” relate to what Spar describes as an “isolated matter” – that’s not a great sign
The company refutes allegations of discrimination against retailers based on race or store location, noting that “perfection” (a process of taking legal ownership under a bond i.e. Spar Group taking ownership of a franchise store) is only a method of last resort to protect Spar as a creditor
O’Connor was appointed as chairman after serving as CEO because the board felt this was in the best interest of the company, with a lead independent director appointed to balance this as is suggested under the King Code
Amidst the allegations, O’Connor has stepped down as chairperson of the board and will remain a director. Andrew Waller, the current lead independent director, will serve as interim chairperson.
The share price tells the story here:
Little Bites:
Director dealings:
Having banked a juicy allocation of shares after the Avito disposal, Prosus and Naspers CEO Bob van Dijk exercised his options and disposed of all the shares. CFO Basil Sgourdos sold the shares required to cover the taxes and kept the rest.
A director of Afrimat has sold shares worth around R4.5m
A director of Sea Harvest has acquired shares worth R466k
The chairman of Hulamin has bought shares worth R203k
African Equity Empowerment Investments has provided Premier Fishing and Brands with notice of a firm intention to make an offer to acquire 6.14% of shares in the company. Premier would subsequently delist from the exchange if this scheme of arrangement is approved by shareholders. The offer price is R1.60 per share. In case you’re wondering about that shareholding, AEEI already holds 56.23% in Premier, 34.06% is held by 3Laws Capital and 3.57% is held by Sekunjalo. The 6.14% is therefore held by the general public. With such a tiny free float, there’s really no point in being listed.
Equites has announced the development of a logistics campus for Shoprite, with this particular property being built in the joint venture that the company has with Shoprite (50.1% – 49.9% in favour of Equites). The structure is that the joint venture will acquire an existing warehouse from Shoprite for R90 million and extension land for R75.6 million. This is minor in the context of the development cost, which is over R1 billion! With a 20-year lease and three rights to renew for 10 years each, this substantially increases the weighted average lease expiry period of the portfolio. The initial yield is 7.8% and rentals will escalate at 5%. Equites recently joined us on Unlock the Stock to talk about the strategy and performance, with the recording available for you to watch here:
SA Corporate Real Estate released a pre-close investor presentation. The portfolio has delivered like-for-like net property income growth of 7.3% with the office portfolio as the (predictable) ugly duckling. The vacancy rate in that part of the portfolio is over 20%, expected to reduce to below 17% by the end of December. The negative reversion in the office portfolio is huge at -27.6%! The Industrial portfolio has a vacancy rate of 0.82% and negative reversions of -5%. The retail portfolio has a 3.9% vacancy rate and although there is a slight negative reversion for the year thus far, this is expected to turn positive by December.
After an oversubscribed bookbuild for sustainability-linked notes, Pan African Resources will issue notes to the value of R800 million. Pan African is the first mining company to issue a sustainability-linked bond in the South African market.
Salungano Group released interim results for the six months to September. With the hilariously named Vanggatfontein on care and maintenance and lower demand from Eskom, the company hasn’t put in a good performance. Revenue fell by 13% and the group swung from an operating profit of R190 million to an operating loss of R16 million. The headline loss per share of 19.64 cents is ugly vs. HEPS of 20.69 cents in the comparable period.
Delta Property Fund just can’t catch a break, with an embarrassing announcement that the interim results for the period ended August included an error. These aren’t small errors either, with some line items in the cash flow statement being wrong by over 30%. This shouldn’t be happening in a listed company.
Trustco has renewed the cautionary announcements related to the management agreement and the resources transaction, both of which are making progress.
The JSE has appointed Ms Fawzia Suliman as its group CFO. Many people forget that the JSE is a company that is listed on the JSE! This always confuses newcomers to the market. One is a corporate entity and the other is an exchange, so the company effectively uses its own product in order to be listed.
Ascendis announced that Ms Bharti Harie has been appointed as chairman of the board.
There are wholesale changes to the Grindrod Shipping board as part of the transaction with Taylor Maritime Investments. There are five new appointments to replace the two directors who have stepped down as part of the agreement with Taylor.
Luxe Holdings doesn’t exactly have the best reputation in the market, so the news of the independent non-executive director resigning isn’t promising. He is also the Chairperson of the Audit and Risk Committee, so there’s another red flag for you.
PBNJ Trading and Consulting has acquired 38.4% of the shares in Sable Exploration and Mining Limited, which means that there is now a mandatory offer process underway. A mandatory offer to all remaining shareholders is triggered whenever a company acquires a stake of more than 35% in a regulated company. At a price of R1 per share (the current market price), this gives shareholders a liquidity mechanism in this incredibly obscure company.
It’s been…a year, hasn’t it? The team from TreasuryONE kicked off December by recapping the major recent moves in the market and the macroeconomic data that makes all the difference. Of course, we looked to the future as well.
In this interactive session, attendees had some really interesting questions that included a few that I needed to answer about equity strategies.
It was a brilliant webinar that I highly recommend making time to watch:
To learn more about how TreasuryONE can help your business navigate these conditions, visit their website.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
