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Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

The Finance Ghost
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Ghost Bites (Anglo American | Coronation | Lesaka | Orion | Pick n Pay | Sappi | Steinhoff | WBHO)

Anglo American invests in Canada

The mining giant is acquiring a 9.9% stake in Canada Nickel Company

In addition to this minority stake in the company, Anglo American will have the exclusive right to buy up to 10% of the recoveries of nickel concentrate, iron and chromium in the magnetite concentrates, as well as any corresponding carbon credits from the Crawford project.

Concentrate indeed – that’s what you have to do when reading these mining announcements.

Put simply, this is part of Anglo’s strategy to expand its nickel offering in preparation for electric vehicle demand. I’m sure it also helps that Canada has electricity.

Farewell, Coronation dividend

An 11% drop in the share price accompanied the bad news from SARS

The only reason to invest in Coronation is for the dividend. When that’s gone, shareholders run for the hills. We have perfect evidence of this after the latest news regarding tax litigation in the group’s international operations.

This has been going on since 2021, when the Western Cape Tax Court ruled in favour of Coronation Investment Management. SARS went to the Supreme Court of Appeal in November 2022 and judgement was handed down yesterday, upholding SARS’ appeal and ordering Coronation to pay additional taxes together with interest and costs. Thankfully for shareholders, the claim for costs was dismissed.

This will have a “material impact on earnings and cash flows” although the company needs to quantify the claim first. For this reason, no interim dividend is expected.

Coronation is also considering an appeal to the Constitutional Court.

Lesaka jumps 13% after beating revenue guidance

The company is still loss-making, but to a far lesser extent than before

In the second quarter of the 2023 financial year, Lesaka (previously Net1) exceeded revenue guidance by 4%. The actual growth is a pointless measure, as the acquisition of Connect Group has vastly increased the size of the group.

The operating loss of $2.2 million is a 74% improvement from a loss of $9.4 million in the comparable period. The net loss has improved from $12.4 million to $6.6 million.

Perhaps the biggest milestone of all is positive net cash of $3.4 million vs. an outflow of $13.8 million in the comparative period. The return of the Consumer business to profitability was a major driver of this result.

Guidance for the full year has been reaffirmed, which the market seemed to like. Still, the group isn’t profitable yet and took on a lot of debt for the Connect Group acquisition, so there’s a lot of work still to be done.

Orion signs a definitive agreement with the IDC

The R250 million facility will help fund early works at Prieska

Orion’s funding package with the IDC has been in the works for a while, made possible by the initial $87 million funding package from Triple Flag. The IDC facility has been structured as a senior secured convertible loan facility worth R250 million.

The IDC loan can be converted into shares in the Prieska copper-zinc project based on a pre-money valuation of the project of R1.2 billion.

The company now has funding for demonstration trial mining and dewatering, critical to the early works bankable feasibility study which the company hopes to complete by mid-2023.

This is a mezzanine facility into a risky project, so seeing an interest rate of Prime + 3.5% isn’t surprising. This money doesn’t come for free even if Orion opted not to use it, with the IDC earning a raising fee of 1.25% and a commitment fee of 0.75%. It’s common to see these fees in funding packages.

Pick n Pay – for load shedding, that is

The share price was the most discounted item on the shelf today, down 8.5%

Pick n Pay released a trading update for the 43 weeks ended 25 December 2022. That’s a rather odd period to be reporting on, capturing effectively the 10 months preceding Christmas.

In grocery stores with an all-important cold chain, there’s absolutely no choice but to pay for energy backup solutions when Eskom does what it does best. The company notes “some impact on turnover” which makes sense based on my visit to a depressed, rather dark mall on Wednesday afternoon. The far bigger impact is on operating costs, with generators costing a fortune to run.

Pick n Pay is still tracking miles behind Shoprite, with sales growth in South Africa of 9% and an increase of only 4.8% in like-for-like sales. Rest of Africa was up 17% or 9% on a constant currency basis.

There’s a deceleration here in the South African business, with sales for the 17 weeks to 25 December posting like-for-like growth of just 2%. The shocker is Boxer, which managed just 0.2% like-for-like growth in that period vs. Pick n Pay at 2.8%. The company blames base effects, with like-for-like for Boxer returning to 9.7% in January.

Whichever way you cut it, volumes have dropped severely. Internal selling price inflation for the 17-week period was 10%, below CPI Food of 12.2%. This means volume declines of roughly 8%, which is extraordinary.

Not only is the sales performance poor, but the incremental increase in diesel costs year-on-year was R346 million to run generators. The current run rate is R60 million per month, which is a massive problem. Investment is being made in more efficient power solutions, which impacts the rate of growth in the store footprint. Basically, corporates now need to do what government is supposed to be doing, which will negatively impact economic growth.

Pick n Pay Clothing is a very good little business, with sales up 11% for the 10-month period and 6.2% for the 17-week period, running ahead of key competitors like Mr Price and Ackermans. The standalone clothing stores grew 11.4% in the 17-week period, with the clothing lines within supermarkets suffering from system upgrades.

Clothing isn’t enough, sadly. Previous guidance for earnings was that they would be flat for the full year. Based on these numbers and the management commentary, it’s almost certain that full year earnings will be down year-on-year.

Pick n Pay was managing to hang on to Shoprite in the good times. Now that things are tough, the gap between the two is being opened at a frightening rate.

And in this chart, I demonstrate that “defensive” is the joke of the day when looking at grocery retailers:

Sappi: another way to get a klap on the market

With a drop of 10%, there really are some bruises after this day on the JSE

For the quarter ended December, sales ere down 2% but profit was up by 54%. Net debt reduced by 35%. Headline earnings per share increased by 55% and the company declared a dividend again.

So why on earth did the share price tank after Sappi released its best ever first quarter result?

If you skip right down to the bottom of the announcement, you’ll see a comment that they “anticipate a return to a normalised level of earnings in FY2023” – a stark reminder that share prices are forward looking.

The market assesses cadence (results vs. the immediately preceding quarter) rather than just year-on-year numbers, looking for signs of a slowdown in the conditions that have been so beneficial to Sappi. With customer inventory levels now much higher, there’s a destocking cycle that is hitting sales volumes.

That slowdown is clearly visible and Sappi is as cyclical as a company gets, so share price volatility is par for the course.

The good news is that the balance sheet is vastly stronger than it was a year ago, with net debt of $1.24 billion vs. $1.92 billion a year ago.

Steinhoff is shedding assets faster than Eskom sheds electricity

The latest sale is a portion of the stake in Pepkor

The Steinhoff garage sale continues. After recently reducing its stake in Pepco in Europe, the company is now selling a 6.5% stake in Pepkor. This would take its ownership from 51% to 44.5%. Needless to say, the proceeds will be used to reduce debt.

Investec and Morgan Stanley will be getting their cellphones (and Bloomberg terminals) out to find buyers. Keep an eye on the Pepkor share price on Thursday!

WBHO expects a significant jump in earnings

The share price closed 3.5% higher in response

With operating profit from continuing operations expected to be up by at least 10% thanks to a revenue increase of 12%, WBHO shareholders have something to smile about regarding the six months to December 2022. The Building and Civil Engineering segment worked all the magic, with operating profit up 50% vs. a decline of 8% in the Roads and Earthworks segment. The Construction Materials and Property Developments segment expects an increase of 8% in operating profit.

Looking abroad, the UK business was flat on the revenue line and down 35% at operating profit level. WBHO is in the middle of a complicated exit from Australia, with further costs of A$5.5 million recognised in this period.

In Africa, a notable update is that income from associates and joint ventures should be up 160% thanks to the completion of the refinancing of the Gigawatt Power Station in Mozambique.

The financial position has been strong over the six months, perhaps the most important measure in the construction industry.

It also helps that the continuing operations order book is at R26.5 billion vs. R22.2 billion at the end of June 2022 and R17 billion at the end of December 2021.

A tighter range for HEPS will be given once available, with the company flagging a 20% increase in earnings from continuing operations.

Little Bites:

  • We only had Big Bites today!

Ince Individual DealMaker of the Year 2022

Marylou Greig
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Ince Individual DealMaker of the Year 2022

This is the 15th year in which such an award is to be made. Candidates are nominated by their peers in the M&A industry. From these nominations a shortlist of four candidates has been chosen by the Independent Selection Panel. They are (in alphabetical order):

Charles Young (Bowmans)

Partner and Head of Mining at Bowmans, Charles has led many high-profile and intricate transactions in the African resource sector. He led the team on behalf of NYSE-listed Ardagh Group on its entry into the African glass-packaging market with its acquisition of Consol, in a deal valued at $614m (R10bn). In another complex cross-border deal, Charles led the team representing Yamana Gold on its proposed acquisition by Gold Fields in a transaction valued at $6,7bn (R103,85bn). He advised Harmony Gold Mining on its acquisition of AngloGold Ashanti’s remaining operations in South Africa for $300m (R2,96bn), Orion Mine Finance on a complex $200m gold streaming arrangement and a $100m platinum streaming arrangement with Platreef Mine, a subsidiary of Ivanhoe Mines.

Christo Els (Webber Wentzel)

Christo has over 25 years of experience in the areas of corporate law and M&A, making the shortlist of candidates for DealMaker of the Year five times, and taking the title in 2011. He led teams in three transformational transactions during 2022, two of which have been shortlisted for the Brunswick Deal of the Year – the take private by the Manta Bidco consortium of Mediclinic International, and the Sanlam/Allianz joint venture of their insurance assets in Africa. In addition, Christo worked with Walmart on the acquisition of the remaining shares in Massmart. He also provided strategic advice on a number of matters, including Gold Fields’ proposed acquisition of Yamana Gold, and the disposal and repurchase programme implemented by Naspers and Prosus.

Johan Holtzhausen (PSG Capital)

During 2022 Johan, who has been at the forefront of South African dealmaking for the past 24 years, led his team in the PSG Group restructuring which involved the unbundling to shareholders of its six JSE-listed companies, two of which were dual-listed (R19,4bn), a scheme of arrangement for the repurchase of PSG shares, representing the unlisted portfolio, (R3,15bn) and the concurrent delisting of the group. His notable transactions from the past few years include the 2019 Brunswick Deal of the Year awarded to PepsiCo for the acquisition of Pioneer Foods (R23,6bn) and PSG Group’s unbundling of its 28.11% stake in Capitec (R28,9bn). This is the second year that Johan, who is the Managing Director of PSG Capital, has been shortlisted for the Ince Individual DealMaker of the Year.

Michael Dempster (Standard Bank)

In 2022 Michael, a corporate finance executive at Standard Bank, advised on two high profile and public M&A transactions in the local market – Walmart on its acquisition of the remaining stake in Massmart (R6,4bn), and Allianz on its joint venture with Sanlam, advising on the amalgamation of their respective African assets in a deal valued in excess of R33bn. The combined operations of Sanlam and Allianz will create the premier pan-African, non-banking financial services entity. Michael also advised the African Finance Corporation on its $100m (R1,7bn) equity investment from the Public Investment Corporation, which is a catalyst for private sector-led infrastructure investment across Africa.

The winner will be announced at the ANSARADA DealMakers Annual Awards on 21 February, 2023 at the Sandton Convention Centre.

www.dealmakerssouthafrica.com

Ghost Bites (Bowler Metcalf | PPC | Renergen | Sasol)

The Finance Ghost
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Ghost Bites (Bowler Metcalf | PPC | Renergen | Sasol)

Bowled over by load shedding

“Plastic converting is energy hungry” – Bowler Metcalf CEO

Some industrial companies are managing to deal with load shedding successfully. Others are not, with the difference often coming down to the engineering realities sitting behind the process.

Despite a 13% increase in revenue for the six months ended December 2022, Bowler Metcalf experienced a 25% decline in profit from operations. The biggest culprit was a 25% jump in raw materials and operating costs, with a 13% increase in staff costs not helping either.

The management team is outspoken about load shedding, which is causing absolute havoc for many South African businesses. They do not expect the full year result to be an improvement, although operating costs are expected to have a less severe impact over the full year.

The share price is down 13.3% over the past year, trading at R9.31. Substantial share repurchases were executed during the period at an average price of R10.01.

PPC jumps 20% on deal speculation

This is a perfect example of “buy the rumour” in action

Media speculation in the morning sent the PPC share price running, as reports came out on PPC apparently considering a sale of its business in Zimbabwe. The market reaction to this news tells you what people think of the Zimbabwe investment.

After the share price shot up 20%, the company formally responded to the market speculation via a SENS announcement in the afternoon. The share price didn’t move much in response to the announcement, which was a loosely worded piece that reminded the market that PPC regularly receives unsolicited approaches for various parts of the business, including PPC Zimbabwe.

This didn’t exactly squash the rumour, did it?

Renergen taps the local market for capital

The company raised over R110 million in an accelerated bookbuild

First thing in the morning, Renergen announced an intention to place 4.6 million shares, which represents around 3.2% of existing share capital. This capital will be used to support the investment required for phase 2 of the Virginia Gas Project.

In an accelerated bookbuild, the bookrunner (in this case Standard Bank) contacts institutional investors to get them to support the capital raise. The general public doesn’t get the opportunity to invest.

The capital raise was successful, raising over R110 million at a price of R24 per share, a 6.5% discount to the pre-launch price. The discount is important to entice institutions to invest.

For retail investors, this means dilution at a discount.

Sasol takes a 7% hit to the share price

The market clearly didn’t like the trading statement

For the six months to December, Sasol is expected to report core HEPS growth of between 2% and 12%. That doesn’t exactly sound terrible, yet it is clearly well below what the market wanted to see.

Despite the stronger oil price and weaker rand, Sasol’s results are uninspiring because of operational challenges in the mining business and the impact of inflationary pressures on the business and the global economy. Adjusted EBITDA is expected to be flat year-on-year, so the business is going sideways operationally.

Net impairment losses were R6.4 billion in this period, with the largest write-down being R8.1 billion in the Secunda liquid fuels refinery based on macroeconomic price assumptions and input price pressures. Aside from a couple of other much smaller impairments, there’s a reversal of R3.6 billion against Lake Charles.

Little Bites:

  • Director dealings:
    • A director of Thungela has sold shares worth R5.3 million – that’s a rather large disposal, fresh off the back of the announcement of an acquisition in Australia.
  • Following the resignation of Gavin Hudson, Tongaat Hulett has announced the internal appointment of Dan Marokane as CEO of the group.
  • Outsurance Group announced the retirement of the CEO of the Australian business, Youi Holdings. Hugo Schreuder has been with Outsurance and was the founding CEO of Youi when it was launched in 2008. A continuity plan is underway.
  • Suspended company Pembury Lifestyle Group seems to be making progress on the schools that it is trying to rezone and register as part of a strategy to get the business back on track. There’s a long way to go though, not least of all with the 2019 audit having not yet commenced. That’s not a typo.

Ghost Bites (Blue Label Telecoms | Cashbuild | Orion Minerals | Sibanye | Southern Palladium | Santova)

The Finance Ghost
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Ghost Bites (Blue Label Telecoms | Cashbuild | Orion Minerals | Sibanye | Southern Palladium | Santova)

An auditor change at Blue Label Telecoms

The importance of Cell C is clear

Normally, news of an auditor rotation is about as exciting as the after-lunch session of parliament. When it comes to Blue Label Telecoms though, I thought this one was worth mentioning.

SNG Grant Thornton has been appointed as auditor, a name that you don’t see too often in JSE companies. PWC has rotated off this audit.

So, why is this interesting? Well, SNG Grant Thornton happens to be the auditor of Cell C, so the idea here is to save costs on the group audit, as Cell C is such a major component of the audit. Having the same auditor throughout the structure helps with audit fees.

Cell C is a big part of the Blue Label investment thesis, with the share price down 27.5% over the past six months. It has climbed 7% in the past 30 days though, so momentum is encouraging.

Cashbuild wants to mop up retail shareholders

The costs of maintaining a wide shareholder register are significant

An odd-lot offer isn’t an attempt to get rid of the strangest shareholders on the register. Instead, it’s a tool that lets a company mop up the register to decrease the costs of being listed.

An odd-lot offer impacts anyone holding fewer than 100 shares. Cashbuild’s share price of R190 makes this a significant holding of R19,000 – a number that will catch many retail shareholders in its net.

There are 2,477 shareholders that fall into this category, representing 57.59% of the total ordinary shareholders in the company but representing only 0.16% of total issued shares.

The price is a 5% premium to the 30-day volume weighted average price based on close of business on 17 March. This will make it tricky for those looking for an arbitrage (building up a position of fewer than 100 shares and getting out for a profit).

Critically, if you do not specifically make an election with your shares, you will be deemed to sell them under the odd-lot offer!

The approval of the odd-lot offer and a specific repurchase of R194 million from Patrick Goldrick will be the subject of a general meeting on 6 March.

Mining Indaba presentations

A couple of junior miners have made their presentations available

Having sat in ridiculous traffic in the Cape Town CBD earlier today, I can confirm that the Mining Indaba has attracted a lot of people. Even CNN’s Richard Quest is in town, doing what most tourists do: landing in Johannesburg and heading to Cape Town as quickly as humanly possible.

For investors in this sector, newsflow from the Indaba is critical. Some of the mining companies on the JSE will release their presentations this week, so budding geologists and mining investors will have lots of new material to dig into.

To get you going, Orion Minerals made its presentation available here and Southern Palladium has released its presentation at this link.

Sibanye has received environmental permits for Keliber lithium

The project in Finland is moving forward solidly

Sibanye-Stillwater’s environmental permit for the Keliber lithium project’s Rapasaari mine and Päiväneva concentrator has been received. I’m glad I don’t have to pronounce these names, particularly the second one that sounds like a type of pastry.

The permit came with 144 conditions and the company has made a submission to court for clarification or changes to six of those conditions.

Along with the approval for the Keliber lithium refinery in Kokkola, this permit means that Sibanye is still on schedule for the project. The construction phase for the refinery is expected to start within weeks.

It’s been a tough 12 months for the company, having dealt with major operational challenges in its gold and PGM businesses:

Santova’s buyback is progressing well

Nearly R32 million has been deployed into share repurchases

In the US, share repurchases are practically a national sport. Companies use them as an alternative to cash dividends, thereby crowing about “years of uninterrupted cash dividend growth” – yes, because share repurchases are simply increased or decreased in response to performance!

In South Africa, our listed companies are better than that. They generally use share repurchase programmes in the right manner: deploying capital into buybacks when they believe that their shares are undervalued.

Between 1 November 2022 and 2 February 2023, Santova invested R31.9 million in its own shares at an average price of R7.77 per share. The current share price is R8.10, so those shareholders who stuck around will be happy with that.

This repurchase represents 3% of the company’s issued share capital. The remaining authority for buybacks is for 16.3% of total issued shares.

Particularly in smaller companies on the JSE, seeing management teams with capital allocation discipline is encouraging.

Little Bites:

  • Director dealings:
    • A director of Stefanutti Stocks has bought shares worth R38.75k
    • A director of EOH has bought nil paid letters worth R11.6k (these give the right to participate in the rights offer and those who don’t want to invest further capital can sell their nil paid letters)
  • The institutional investor activity in Spar continues, with Old Mutual buying more shares in the retailer.
  • Those closely following York Timber will be pleased to know that the new CFO (Schalk Barnard) will start in his new role on 1 May 2023.
  • The CEO of African Dawn Capital (David Danker) has resigned, with the current executive chairman James Slabbert serving as interim CEO.
  • If you are a shareholder in Sable Exploration and Mining, be aware that the circular related to the mandatory offer by PBNJ Trading and Consulting has been released.

Ghost Stories #5: The Importance of China (Siyabulela Nomoyi, Portfolio Manager at Satrix)

The Finance Ghost
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Ghost Stories #5: The Importance of China (Siyabulela Nomoyi, Portfolio Manager at Satrix)

In this episode of Ghost Stories, Siyabulela Nomoyi (Quantitative Portfolio Manager at Satrix) joined me to talk about the importance of China not just to our market, but to global markets in general.

In this podcast, we discussed:

  • Why China is such an important partner to South Africa, specifically regarding commodity prices.
  • The sheer scale of China as a consumer market and the impact this has not just on US-based companies, but on a locally listed company like Richemont.
  • The obvious link to the JSE that everyone talks about: Naspers/Prosus and the investment in Tencent.
  • The risks in Chinese stocks over the past year or so, with Alibaba as the perfect example.
  • Historical valuation multiples in Chinese stocks and how the current levels compare to those lows.
  • How the relationship between sentiment and reality can drive substantial changes in valuation, particularly in geographies like China.
  • Our political allegiance in BRICS and the related strategic partnerships.
  • The importance of the property sector in China and related support measures.
  • The comeback in Chinese valuations as the economy has reopened.
  • Interesting ways to play the look-through to China, with Nike as an example of a company with significant indirect exposure to the country.
  • The importance of diversification in managing volatility.
  • Demographic changes in China in terms of the working population and how this drives investment in different sectors, like healthcare.
  • China’s approach to interest rates, which has been different to other emerging markets that tried to hike ahead of the Fed.
  • The use of ETFs, like the Satrix MSCI China ETF which tracks the MSCI China Index that captures large and mid-cap Chinese equities, or the Satrix MSCI Emerging Markets ETF that has China as the largest country in its holdings. Bond exposure through an ETF is possible as well. Don’t forget the Satrix RESI ETF, which gives exposure to the resources sector.

You can find out more information about these ETFs on the Satrix website.

Listen to the podcast using the podcast player below:

Follow Siya on Twitter here

Disclaimer

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance.

Don’t get ahead of yourself

The Finance Ghost
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Don’t get ahead of yourself

Chris Gilmour cautions against getting swept away by the equity market euphoria we saw in January.

The US Federal Reserve (the Fed) reduced its interest rate hikes from 75 basis points to 25 basis points last week. As, incidentally, did the SA Reserve Bank.

Does this mean that it’s A-for-Away into a new round of unfettered equity market euphoria? Hardly.

The world is in a very different place to where it was even a year or so ago. The global dynamics have changed almost beyond recognition. We’re likely going to have to contend with lower growth, higher inflation, higher interest rates and much greater overall volatility in markets for the foreseeable future. So while conventional wisdom dictates that we should reasonably look forward to inflation and interest rates falling as we approach the end of 2023, that doesn’t necessarily translate into good news for equity markets.  

The reasons for this apparent pessimism are many and varied but mainly revolve around deglobalization, depopulation and the rise of noisy autocratic states in many parts of the world. So for example, the war in Ukraine is likely to drag on well into 2023 and probably into 2024 and maybe even longer. The Russians are showing no signs of giving up, even though their economy is taking massive strain under the impact of international sanctions.

Geopolitical turmoil

A big spring offensive by the Russians is widely expected, with the Russians throwing everything they possibly can at the Ukrainians. This is why the Ukrainians are so keen to be ready for just such an attack. All through Russia’s military history, their campaigns have started off slowly and badly and have improved as the various wars have progressed. Russian commanders are obviously hoping that a similar pattern will emerge this time around, however, it is generally agreed by most military experts that the current Russian military is in much poorer shape than anyone could possibly have imagined at the outbreak of this conflict.

The NATO allies are upping the ante by supplying over 300 tanks, including the US Abrams and German Leopard to the front line. Faced with an increasingly difficult environment in which to sell its energy, Russia will be forced to cut back on production, all the way back to the well-heads in Siberia, which will tend to increase the price of that energy.

Agricultural products coming out of Russia and Ukraine will continue to be limited for as long as the war rages. So wheat and corn prices will remain high, as will fertilizer prices. While the FAO world food price index appears to have stabilized at higher levels, it is not showing any real signs of coming off. If the fighting in Ukraine intensifies, which it seems likely to do, that doesn’t bode well for agricultural product exports from either Ukraine or Russia.

The Americans are intent on bringing back large chunks of their manufacturing that hitherto was outsourced to China and other far east Asian countries. At least in the first instance, this process will be inflationary, until America gets economies of scale that work in its favour.

The UK is reprising its long-forgotten role as the “sick man of Europe”, following the Brexit disaster. Inflation remains stubbornly high, well above 10% year-on-year, and the IMF now forecasts that its economy will contract by 0.6% this year. Britain will likely be a drag on the rest of Europe as it muddles its way out of the mess created for itself by leaving the EU. It still has another two years before the next general election in December 2024, during which time it has to somehow bring inflation back to more manageable levels. According to the Office for Budget Responsibility, it can be done, but the political cost will likely be high.

German manufacturing has managed to secure some temporary relief from higher gas prices, due to a very benign winter. However, next winter is anyone’s guess and there will be zero cheap Russian gas available by then. So once again, an inflationary spiral is about to hit one of the largest economies on earth.

And China?

China remains the big unknown factor in the whole global GDP equation for next year and beyond. But it can no longer export its way out of trouble into a world that is increasingly wary of its supply chain fragilities.

As an increasing number of countries move back to manufacture onshore, Chinese companies are progressively losing out. China’s GDP growth rate of 3% for 2022 was the worst in 50 years, though admittedly that was due in large measure to the stubborn Zero-Covid policy that has finally been abolished.

However, Beijing’s options for stimulating its economy are limited.

Lest we forget our own problems…

South African load shedding is now adding to inflation thanks to the much greater frequency of power cuts. Supermarkets are having to cut back on supplies in order to minimize wastage due to food rotting in fridges that are turned off for hours on end. And the cost of using diesel to keep generators going is becoming prohibitive.

Costs can no longer be absorbed by retailers and producers and are being passed onto consumers via higher prices.

Ghost Wrap #10 (Nampak | Pepkor | Shoprite | Super Group | Ellies | MTN | RCL)

The Finance Ghost
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Ghost Wrap #10 (Nampak | Pepkor | Shoprite | Super Group | Ellies | MTN | RCL)

Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.

In this week’s episode of Ghost Wrap, we cover:

  • Nampak is trying to climb a mountain – and failing.
  • Pepkor’s like-for-like growth is in trouble.
  • Shoprite’s top-line story is wonderful, but profitability is being hit by load shedding.
  • Super Group is living up to its name for shareholders.
  • Ellies has been telling the market for a while that an acquisition is needed – but it didn’t come cheap.
  • MTN had a good week in Africa, with Nigeria growing strongly and Ghana withdrawing the tax assessment.
  • RCL flagged a tough result in its baking business – what is the read-through here for Tiger Brands?

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

Listen to the podcast below:

Ghost Bites (Hudaco | DRDGOLD | Implats | MTN | Sanlam | Sygnia | Thungela)

The Finance Ghost
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Ghost Bites (Hudaco | DRDGOLD | Implats | MTN | Sanlam | Sygnia | Thungela)

DRDGOLD manages to stay positive

HEPS is up, despite many reasons why it shouldn’t have been

DRDGOLD tends to offer leveraged exposure to the gold price, as the tailings model is much lower margin than getting the yellow stuff out of the ground for the first time. This means that small changes in the gold price can drive significant changes in profits, both positively and negatively.

For the six months to December 2022, HEPS is expected to be between 2.6% and 17.4% higher, an impressive outcome considering the operating environment.

Revenue only increased by 6%, with the increase in the rand gold price offset to some extent by a decrease in gold sold. Volume throughput fell at both major operations, impacted by load shedding, the weather and other issues.

Cash operating costs increased by 10% in this inflationary environment, so operating margins deteriorated. In absolute terms, revenue was up by R155.8 million and operating costs increased by R159.3 million.

So, how did HEPS increase? Considering that there is no debt on the balance sheet and wasn’t any at the end of the comparative period either, investors will need to scrutinise this carefully when detailed results are released on 15 February.

Hudaco: hello, operating leverage

It’s a beautiful thing when it works in the right direction

I often write about operating leverage. Simply, this is the impact of fixed costs in a business. In good times when revenue is growing strongly, those fixed costs tend to only increase by inflation (and sometimes less). The net effect is margin expansion, where a percentage increase in revenue is “leveraged” up into a larger percentage change in operating profit.

This is why a 12.3% increase in revenue at Hudaco for the year ended November has driven a 23.4% jump in operating profit before fair value adjustments. Before you get worried about whether the story goes wrong further down the income statement, you’ll be pleased to know that HEPS was 22.3% higher.

The cash has followed the earnings, with the dividend per share up by 21.7%. It’s a textbook outcome for shareholders.

This isn’t just a recovery to pre-Covid levels, either. Compared to 2019, HEPS is up 48%. This is a lovely through-the-cycle performance for this industrial company.

Hudaco only closed 1.9% higher at R158 per share. HEPS of R20.07 means that you can buy Hudaco on a Price/Earnings multiple of 7.9x. Things can go wrong for these companies, so be cautious. The share price is only up 3% in total over the past 5 years. Operating an industrial group in South Africa is no joke.

I must give absolute credit to Hudaco here – they don’t mince their words when it comes to how government is destroying our economy:

Implats’ flat result is impressive in these conditions

At a time when many mining houses are struggling, Implats is demonstrating resilience

Before we delve into the details, it’s important to remember that this update covers the six months to December. Given the impact of load shedding towards the year, that’s not directly comparable to the quarterly production updates that we’ve seen from other mining houses. Still, Implats has done well here.

EBITDA for the period is in line with the comparable period at R24.5 billion.

This was achieved despite a drop in group refined production of 9% due to a reduction in smelting capacity during the period. This negative impact of maintenance and load shedding was mostly offset by destocking of refined inventory, so sales volumes only declined by 2%.

Thanks to a positive net impact from the rand price of PGMs, there was a 5% increase in group sales revenue. With solid cost management, this explains how the flat EBITDA result was achieved.

From a cash flow perspective though, investors should note that capital expenditure is significantly higher at R5 billion vs. R3.6 billion in the comparative period.

The group seems to be in a solid financial position as it continues its battle against Northam Platinum to get control of Royal Bafokeng Platinum.

Look for money elsewhere, Ghana

The tax assessment against MTN Ghana has been fully withdrawn

When governments get desperate, they do silly things. Ghana has defaulted on its foreign debt and is in talks with the IMF to restructure its debt. The tax assessment issued against MTN Ghana was quite clearly at attempt to shake the corporate tree to see whether any money falls out of it.

Thankfully, sanity has prevailed. The enormous assessment of $665 million has been fully withdrawn. I have no doubt that some very sensitive meetings happened in the background to achieve this outcome.

Although this is clearly good news for MTN, the share price still closed slightly lower. MTN is up 13% this year and I’ve opted to close my position, as the combination of load shedding in South Africa and foreign exchange availability in countries like Nigeria means that MTN just isn’t appealing enough this year.

Sanlam invests further into retail life insurance in SA

There are two separate deals worth R1.1 billion in total

Sanlam clearly still sees opportunities in South Africa, choosing to deploy a substantial amount of capital into two transactions that will strengthen its retail life insurance operations in South Africa. Sanlam has operations in many countries already, so this is genuinely a choice to invest capital in South Africa.

The first deal is to combine the business of Sanlam Trust with Capital Legacy, with the net result of Sanlam owning 26% in the enlarged Capital Legacy Group. In addition to the obvious benefits of scale, Sanlam will capture extra profit share on business written for its own clients and will be the provider of reinsurance services to Capital Legacy in future. It’s worth noting that African Rainbow Capital Financial Services Investments currently holds 29% in Capital Legacy, a stake that will reduce to 25% post this transaction. This means that Sanlam and Capital Legacy already have a B-BBEE partner in common.

The second deal is to buy out the minorities in BrightRock, taking Sanlam’s stake from 62% to 100%. There is a significant earn-out structure in place, based on new business targets being met. BrightRock has delivered returns well ahead of Sanlam’s hurdle rate (minimum required rate of return) since Sanlam invested in the business in 2017.

Sanlam is a massive operation with a market cap of R131 billion, so these are small deals in the group context. This is a classic example of a “bolt-on acquisition” strategy that uses relatively low risk deals to supplement organic growth in the group.

Guess who’s back? Back again?

Magda’s back!

A few eyebrows were raised on Twitter when the news broke of David Hufton’s resignation from the CEO role at Sygnia. After more than 30 years in the industry, he’s apparently decided to take a career break. Financial freedom is a beautiful thing, isn’t it?

This means that Magda Wierzycka is back as CEO. For founders of businesses, succession is one of the hardest things to achieve. The announcement doesn’t indicate how long this arrangement will continue for.

Professor Haroon Bhorat has been appointed as independent non-executive chairman of the company, having previous served as chairman from 2015 to 2021.

The share price closed 3.6% higher on the day.

Thungela isn’t sitting around as a cash cow

Management has global ambitions, for better or worse

There are many wise investors in the market who get nervous when mining companies start doing major deals. When the cash pile is large, investors ideally want to see dividends, not transactions at the top of the cycle. Thungela is insisting on a diversification strategy, so investors will have to decide whether they are coming along for the ride.

The deal is to acquire a controlling interest in the Ensham business in Australia, an established coal operation in Queensland, Australia. Producing high quality thermal coal, the life of mine is all the way out to 2039.

The mining method is similar to Thungela’s existing operations in South Africa and makes use of rail infrastructure to take the product to port. The cool thing about Australia is that the trains actually work.

Thungela believes that the payback period of the deal is as short as two to three years. Of course, it’s intensely difficult to predict supply and demand dynamics of commodities.

Thungela’s co-investors in the project include a Swiss investment group and a private company in Australia that specialises in mining investments.

The deal is structured as an A$267 million equity investment by Thungela and an A$68 million mezzanine loan to the co-investors. The total ticket size for Thungela is thus A$335 million, or around R4 billion.

This is a Category 2 transaction, as Thungela’s market cap is R31.5 billion and thus the deal isn’t large enough to be classified as a Category 1 transaction. The difference is substantial, as Thungela’s shareholders won’t be asked to vote on this deal.

The share price closed slightly higher for the day, although it did dip initially.

Little Bites:

  • Steinhoff shareholders will have to wait longer for clarity, as the circular and AGM notice have been delayed while Steinhoff seeks regulatory confirmations. The AGM was scheduled for 16 March and no new date has been given.
  • Spear REIT has completed the disposal of 15 on Orange for R246 million. Spear therefore has no remaining exposure to the hospitality sub-sector. The group’s loan-to-value ratio has been reduced by 335 basis points to 36.8%. This is below the group target of 38% to 43%, but the group is being prudent at the moment given where we are in the debt cycle. That’s probably a smart move.

Ghost Bites (Anglo American | Amplats | Kumba | RCL | Super Group)

The Finance Ghost
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Ghost Bites (Anglo American | Amplats | Kumba | RCL | Super Group)

Anglo American: news from the mothership

Copper, steelmaking coal and diamonds dominate the highlights reel

The Anglo companies release quarterly updates at the same time, so you’ll find news on Anglo American as well as Amplats and Kumba in Ghost Bites today. Anglo American sits at the top of the group structure, so it is impacted by the results of Amplats and Kumba as well as its own extensive operations.

The ramp-up of the Quellaveco copper mine in Peru is important news, increasing copper production by 52%. Other good news came from rough diamonds and steelmaking coal (both up 6%), with iron ore up by 4% despite challenges in Kumba. PGMS were 10% lower and nickel fell by 4%.

Over the full year, pricing for diamonds and steelmaking coal was significantly higher than the prior year. Pricing across the rest of the commodity basket was lower.

There is substantial progress being made in renewable energy, like 100% renewable energy supply for the Australian operations from 2025. In January, the transaction to combine First Mode and nuGen was completed, accelerating the development and commercialisation of the zero emissions haulage system that has generated much interest in the market.

Anglo American Platinum production drops 10%

Eskom is only partly to blame

The good news is that Anglo American Platinum’s (Amplats’) guidance for 2023 is unchanged. The bad news is that 2022 ended off with a quarter that was plagued with production issues, though the market response to this update was muted, so those issues were largely known by the market.

Total PGM production dropped by 10% year-on-year.

The mines managed by Amplats fell by 12% due to a combination of lower grades at some mines and an infrastructure closure at another. Due to the delay in the Polokwane smelter rebuild because of sub-standard materials being delivered to the company, refined PGM production fell by 37%. PGM sales volumes fell by 31%, driven by lower refined production.

The rebuild was completed at the end of the quarter and ramp-up was achieved by the end of January, so the first quarter of 2023 should look better. There has been a significant build up of work-in-progress inventory due to the delay in the smelter rebuild and the impact of load shedding.

At jointly-owned operations, production was flat year-on-year.

The share price is down nearly 30% over the past 12 months.

Production nosedived at Kumba thanks to Transnet

Will we ever stop scoring own-goals?

The green highlighted row deals with total production, which is relatively within Kumba’s control (subject to usual mining risks). The yellow deals with total sales, which is where Kumba becomes reliant on dear Transnet to provide infrastructure. Thanks to a wage strike in October and a maintenance shutdown in November, sales fell by 35% year-on-year:

For the full year, production was in line with revised guidance, dropping by 8%. Sales fell by 9% with the fourth quarter being a horror show, as indicated above. Stockpile levels at the mines have reached capacity, so throughput is desperately needed to get the product to the ports. If the stockpiles cannot be cleared, production will be curtailed and that won’t be good news for the cost per tonne.

Costs per tonne ended better than guidance, coming in at $40 vs. expected $44, but this was mainly driven by forex movements. The price achieved by Kumba for its products was $113 per wet metric tonne, higher than the benchmark price of $100 per wet metric tonne.

HEPS for the year is expected to drop by between 38% and 44%, which means a range of between R58.29 and R64.49. This was completely avoidable if Transnet was working properly.

To finish off with Kumba, here’s a chart showing exactly why cyclical businesses are not buy-and-forget investments:

No rainbows at RCL

Both the poultry and baking businesses are under pressure

It’s really not easy to guess how the food producers might perform. RCL has released numbers that look like what I thought would happen to Tiger Brands last year. Instead, Tiger managed to pull off a small miracle (albeit at a different time during the year) and its share price chart reflects that. Of course, we will need to see how well Tiger is navigating current conditions, so perhaps put a pin in this.

The recent Astral Foods update gave us a strong clue that the poultry business within RCL cannot possibly be doing well. This has turned out to be the case, but RCL isn’t a pure-play on poultry, so the impact on group earnings is nowhere near as severe as at Astral.

The bakery business at RCL is struggling as well, with high commodity input costs, substantial cost pressures in energy and packaging costs and of course the impact on productivity of load shedding. With consumers suffering, it’s not easy to push through pricing increases without causing a problem for volumes.

For the six months ended December, HEPS fell by between 20.1% and 26.8%, which implies a range of 53.2 cents to 58.1 cents.

Super Group lives up to its name

HEPS is running way ahead of even pre-Covid levels

In the six months ended December 2022, Super Group had a lovely time. With commodities still doing well and strong demand for consumer goods over a busy Black Friday and festive trading period, the supply chain operator was kept busy.

Being busy means making money, with revenue up by between 30% and 40%. Profit before tax is up by between 25% and 35%, so there’s some margin compression but nothing major. In this environment, that’s an impressive display of cost management, especially given the pressure on fuel costs and all the issues around load shedding etc.

HEPS is also expected to be 25% to 35% higher.

It’s always nice to see a company quoting long-term value creation statistics. Over 10 years, Super Group has grown shareholder equity at a compound annual growth rate (CAGR) of 17.4%.

There are some other important points to note in this result.

One of them is that revenue growth was flattered by the consolidation of a full six months of revenue from LeasePlan in Australia, so this year-on-year growth rate isn’t an indication of sustainable growth. A large portion of the purchase price was paid for with cash rather than the issuance of shares, so this is accretive on a HEPS level (you’re buying more earnings that aren’t linked to the issuance of more shares).

Another point is that Super Group also owns a car dealership division that operates in the UK and South Africa. Improved availability of vehicles in both countries has been beneficial in this period.

In terms of capital allocation, Super Group repurchased 5.6% of its shares in issue over this period. This obviously helps boost HEPS and is generally seen as a positive move when a company trades at a modest multiple.

The share price jumped over 6% in response to this update.

Little Bites:

  • Director dealings:
    • An associate of a director of Salungano has bought shares worth R9.4m
    • The CEO of Bytes Technology Group has acquired shares worth £200k
    • The Finance Director of Tharisa sold shares worth R1.93m
    • A director of Santova exercised share options and sold those shares and others for a total of R1.4m
  • Novus has agreed to sell its surplus property in Linbro Park for R125 million. The property became surplus to requirements after rationalising the Novus Print production facilities in Johannesburg. The proceeds will be added to existing group cash resources.
  • Accelerate Property Fund is in the news again, this time with the sale of the Ford dealership building near The Buzz in Fourways for R80 million. The property was valued as at 31 January at over R87 million, so that’s a disappointing sales price vs. the valuation. When property funds trade at a large discount to net asset value, it’s usually for a reason. The sales price represents a yield of 8.9%.
  • Wesizwe Platinum announced that there have been deficiencies identified during the test run of the main system of the Bakubung Platinum Mine. The cold and hot commissioning of the processing plant is expected by March – April this year.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Novus Print (Novus) has announced it is finalising the disposal of its Linbro Park Properties which have been carried as an asset-held-for-sale since March 2021. The disposal for R125 million is to Micasa Asset Management. The properties, situated at 46 and 48 Milky Way Drive in Linbro Park have a book value of R109,9 million. The disposal is classified as a Category 2 transaction and therefore does not need shareholder approval.

Accelerate Property Fund has disposed of the Ford Fourways Building to Hatfield Property Holdings. The property is valued at R87,1 million and is being sold for a maximum cash consideration of R80 million at a yield of 8.9%.

Ellies has announced the proposed acquisition of Bundu Power from shareholders for a maximum consideration of R202,6m. Bundu Power specialises in the distribution and rental of generators as well as the distribution and installation of solar and ancillary products providing alternative energy solutions. This is a category 1 transaction in terms of the JSE Listing Requirements and as such requires the approval shareholders.

Unlisted Companies

Vantage Capital, Africa’s largest mezzanine fund manager has successfully closed its fourth mezzanine fund, securing a total of $377 million of commitments from a mix of European and US-based commercial investors and development finance institutions who include IFC, BII, SIFEM, DEG, Norfund, Swedfund and EIB.

Convergence Partners’ Digital Infrastructure Fund has closed a funding round raising $296 million (R5,15 billion). The round was backed by existing and new investors based in Europe and Africa.

Phatisa a local, sub-Saharan African private equity fund manager has acquired a significant minority stake in MHL International, a subsidiary of India’s Manipal Group. MHL is a printing and packaging provider with strong exposure to the food and beverage sector with operations in Kenya and Nigeria. Phatisa’s investment, details of which were undisclosed, will be used to finance expansion opportunities.

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

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