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Ghost Bites (Aveng | Industrials REIT | MTN | Premier | Tiger Brands)

The Finance Ghost
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Ghost Bites (Aveng | Industrials REIT | MTN | Premier | Tiger Brands)

Aveng releases the Trident Steel disposal circular

This disposal is part of a strategic review process that began in 2018

Aveng is a construction group that once spawned a legion of devoted retail traders and investors who called themselves the Avengers, such was their belief in the story. If that isn’t a sign of the frothiness that was found in the market last year, I don’t know what is.

Underneath all this is a serious company, one that is now selling off the Trident Steel business. The proceeds of this transaction (if shareholders give the green light) will settle all of Aveng’s legacy debt in full, putting the company in a net cash position (rather than a net debt position).

Including this amount, the proceeds from non-core asset disposals since 2018 add up to R1.8 billion (net of transaction costs).

The value of the net assets of Trident Steel is R413 million and the profit after tax in the last financial year was R93 million. The purchase price is just under R691 million.

The buyer is a special purpose vehicle backed by private equity investors and the management of Trident Steel. For a period of one year, Aveng will help facilitate B-BBEE empowerment in the new entity through a 30% stake that is subject to call option structures.

If you are interested in learning more about how these corporate finance deals work and what the paperwork looks like, you’ll find the full circular at this link.

Industrials REIT: income up and valuations down

Welcome to the world of property valuations, where “cap rates” matter

The process to value a property is similar to valuing a company, actually. It all comes down to cash flows and a required rate of return.

Property is arguably a lot simpler, as there are contractual cash flows under a lease agreement and the costs of maintenance etc. can be reliably estimated.

Judgement is needed in identifying the correct cap rate, which is the rate applied to those cash flows to work out the value of the property. The cap rate is a bit like the return that a shareholder would want based on that property, so you work backwards from the income and the required return to get to the value.

Properties are extremely sensitive to cap rates, which is how Industrials REIT management to grow its income and suffer a valuation decrease at the same time during the six months to September.

With the company’s Industrials Hive leasing platform working well, there have been eight consecutive quarters of over 20% in average growth in rent at lease renewal or new letting. For the portfolio as a whole, like-for-like annual passing rent was 4% and occupancy reduced marginally from 93.6% to 93.8%.

The interim dividend is up 3.7%.

Despite the positive movement in these metrics, the portfolio value decreased 4.3% and the net tangible assets decreased by 7.4% on a per-share basis.

The loan-to-value is only 26.5% (low for a REIT) and there is no refinancing required until 2025.

In combining all these metrics, the accounting return for the six-month period was -5.4%.

The share price is quite illiquid, so a 13% move on Friday may not be a reliable indicator of the market’s response to this news. After that jump, the share price is down 27.5% this year.

MTN quantifies the loss of subscribers in Ghana

Regulators have pulled the plug on subscribers who didn’t complete a registration process

We’ve seen this before: regulators prescribe a SIM registration process and subscribers don’t comply. Eventually, the regulator issues a directive to terminate services to those who haven’t registered. The latest example is in Ghana, where customers were required to link a card (stage 1) and then capture biometric data (stage 2).

Fingerprints are apparently hard to come by, with a decent chunk of subscribers who decided that stage 2 was too much hard work. An “emergency services only” status on the cellphone screen might provide some much-needed encouragement to get the admin sorted.

MTN Ghana had 22.1 million subscribers that completed stage 1, of which 16.4 million completed stage 2. This means that 5.7 million subscribers were cut off this weekend.

The affected subscriber base sounds huge but presumably these customers aren’t terribly active, which is why they didn’t bother to register in the first place. Despite the large percentage of the subscriber base in terms of subscriber numbers, the affected subscribers only represent 3% – 4% of MTN Ghana service revenue and less than 1% of MTN Group service revenue.

The MTN share price is down by 2% in the past week or so.

Just when we got excited about a new listing…

The listing of Premier has been pulled from the market

Sad news: FMCG group Premier is no longer going to be separately listed on the JSE. After such a long process to prepare the business for listing and all the costs incurred along the way, Brait has blamed the current situation in South African capital markets for the cancellation of the listing.

Brait said that the listing received a “significant amount of investor interest and support,” which makes it sound like it would’ve gone ahead were it not for the huge uncertainty around President Ramaphosa and the impact that this has had on consumer confidence. Brait points the event of the “last 48 hours” and how they were not supportive of a successful IPO.

Here’s the most interesting thing: Brait will still unlock R3.5 billion through the sale of shares in Premier to underwriters Titan and RMB. Despite this, Brait’s share price fell 7.4% on this news.

A Tiger’s tail of two halves

Margin initiatives in the second half were highly effective

Tiger Brands had a horrible start to the year, with a lag in recovering cost inflation and a significant impact on profitability. Supply chain issues certainly didn’t help.

My bearish view on the company turned out to be spectacularly incorrect. In the second half of the year, Tiger made huge leaps in recovering margin and executing other important initiatives to restore profitability.

Full year revenue from continuing operations was 10% higher, with price inflation of 11% and a volume decline of 1%. The Exports and International segments achieved margin growth that was offset by challenges in the local business.

Excluding the impact of the civil unrest and a product recall, gross margin was maintained at 30.3%. That’s a big result after gross margin in the first half of the year was down at 29.2%. It may not sound like much of a difference, but over 100 basis points is a substantial change in margin.

Operating income increased by 53% to R3.4 billion, which includes insurance proceeds of R218 million linked to last year’s product recall and R166 million of civil unrest. Those costs were R647 million and R85 million last year respectively, so you can see the extent of a swing when these unusual costs were in the base and once-off income sits in the current result. Excluding these impacts in both periods reveals an increase in operating income of 10% and an unchanged operating margin of 9.6%, which gives a much fairer reflection of performance.

Helped along by a R1.5 billion share buyback that reduced shares in issue by 1.9%, HEPS from continuing operations was 51% higher to 1,702 cents. With the product recall and civil unrest excluded, it would’ve increased by 11%. Again, this is the “right” view on performance.

A final dividend of 653 cents has been declared, taking the total dividend for the year to 973 cents. This is an 18% increase on the prior year.

After a rollercoaster year of note, the share price is up 5% this year. Over 6 months, it has jumped by nearly 33%!

Little Bites:

  • Director dealings:
    • Adrian Gore has sold a meaty number of Discovery shares, with three tranches for a total of R29.6 million
    • Two directors of Telkom have collectively disposed of shares worth R993k
    • The family trust of the CEO of Altron has bought shares worth R353k
    • In what appears to have been a bad mistake, Richemont has corrected an announcement that was made in November about a director being granted shares worth over R32.6m when in fact the director had sold shares worth that value
    • Des de Beer has bought another R342k worth of shares in Lighthouse and another director has mopped up R196.5k worth of shares in the company
    • Value Capital Partners (which has board representation at ADvTECH) has bought shares in the company worth R6.8 million
    • A non-executive director of Stefanutti Stocks has bought shares worth R254k
    • An associate of the CEO of Spear REIT has bought shares worth R38.5k
  • With much ongoing uncertainty about the future ownership of the company, Royal Bafokeng Platinum has been operating with an interim CFO. This contract has been extended to the end of June 2023, as there are now two offers in the market with Implats and Northam Platinum fighting over the company.
  • There’s a significant director appointment at Sasol, with green energy expert Andreas Schierenbeck appointed to the board. The focus here is on decarbonisation opportunities through the green hydrogen value chain.
  • Property development company Visual International Holdings has released results for the six months ended August. There was almost no revenue because of slower than expected approvals for projects. In that context, a loss for the period of R3 million isn’t surprising. This could be the most obscure company on the JSE, with a market cap of just R8 million!
  • I take it back immediately – Sable Exploration and Mining with a market cap of R2.2 million could take that award. With no revenue being generated in this group either, the net loss of R2.4 million for the six months to August is higher than the market cap!

Ghost Bites (Emira | HCI | Murray & Roberts | Nampak | Sasol)

The Finance Ghost
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Ghost Bites (Emira | HCI | Murray & Roberts | Nampak | Sasol)

Emira pre-close update

The property fund has updated the market on the four months to October

In the local portfolio, Emira’s vacancies improved from 5.3% to 5.0%, with an 81% retention rate on leases. The problem is that tenants still hold the power, with negative reversions of -7.7% (a big improvement from -15.2% in the year ended June). Remember, a negative reversion means a new lease concluded at a lower rate than the old lease.

Retail vacancies were 3.1%, office vacancies improved by 150 basis points to 13.5% and industrial vacancies improved slightly to 2.6%. Negative reversions are being felt across the portfolio, with office being the worst at -12.6% (as one would expect). Emira also holds one residential property (The Bolton) with a vacancy rate of 2.1%.

The fund is in the process of disposing of its investment in Enyuka for R638.6 million, with Competition Commission approval still needed.

In terms of the indirect portfolio, Emira now holds 68.11% of Transcend Residential Property Fund after making a general offer to all shareholders that closed in October.

The portfolio in the US consists of 12 equity investments in open air retail centres. Vacancies improved from 4.5% to 2.6% and 10 of the 12 investments are expected to pay dividends.

At group level, the loan-to-value has increased from 40.5% to 44.5% because of the additional investment into Transcend and the consolidation thereof.

HCI records a huge jump in profits

The interim dividend is back after a strong period of recovery

For the six months to September 2022, Hosken Consolidated Investments (HCI) benefitted from a strong recovery in segments like Hotels and Gaming as the pandemic subsided. As diversified as the group is, there are still individual segments that are major contributors to profits.

In the context of R902 million in group headline earnings for this period, Gaming was the largest contributor at R304 million (vs. R157 million last year) and Coal Mining was next up with R224.5 million, a huge jump from R85 million in the comparable period.

The third largest segment is Hotels, which swung wildly from a loss of R62.8 million to a profit of R123.6 million.

When your biggest investments are in tourism, entertainment and coal mining, it was pretty hard not to have a good time in 2022 vs. 2021.

At group level, headline earnings per share (HEPS) increased by a spectacular 312% to R11.154 and the net asset value per share is up to R198.11. The share price of around R172 is thus a discount to NAV of over 13%.

The interim dividend is back, with a dividend of 50 cents per share for this period.

Murray & Roberts says bye-bye, Bombela

Murray & Roberts disposes of its interest in the Bombela Concession Company

If you’ve been following the Murray & Roberts story, you’ll know that huge changes are underway. The Australian business (Clough) is being sold and now there’s a deal for the company’s stake in the Bombela Concession Company (the holder of the concession agreement with the Gauteng Provincial Government to run the Gautrain).

The buyer is Intertoll International Holdings and there are two different stakes that collectively deliver a shareholding of 50% in Bombela. The price for both stakes is R1.386 billion, which makes this a Category 1 transaction for Murray & Roberts. Whenever you see this, it means that a circular will be sent to shareholders and that they will need to vote on the proposed deal.

With the concession set to terminate in 2026, the buyer is effectively mopping up a few more years of cash flows. This clearly isn’t a strategic stake for Murray & Roberts and the sale helps the company inject some much-needed equity into the balance sheet.

The proceeds from sale (if the deal goes ahead) will be used to settle the recently announced term facility that was part of the group’s debt restructuring.

To give an idea of valuation, Murray & Roberts received R185 million in ordinary dividends in the past year and the fair value of the effective interest was measured as R1.4 billion. Unless I’m misunderstanding, there must be some pretty lofty assumptions about a recovery at the Gautrain in order to justify this fair value on a concession that only has four years left to run.

If shareholders vote in favour of the deal, that risk will belong to Intertoll rather than Murray & Roberts.

Nampak: when bad balance sheets happen to good people

If you know any Nampak shareholders, give them hugs today

Sometimes, a company’s balance sheet is simply too far gone to be saved. Despite the best efforts of the management team and the staff, the interest on the debt just ends up eating the profits and any remaining equity in the structure.

In that situation, the keys to the business slowly start to slip into the hands of the banks. This only ends in one of two ways: business rescue or an equity capital raise. If the capital raise fails (as happened with Tongaat), then business rescue is the outcome anyway.

For poor Nampak, even a really good effort by the team wasn’t enough. Between the pressures of inflation and difficulty in extracting cash from Africa, it was always going to end this way. The market seemed to be caught by surprise though, with the share price losing a third of its value shortly after the announcement!

Notably, the company is still profitable at headline earnings per share (HEPS) level, with expected HEPS for the year ended September of between 33 cents and 37 cents. Although this is a decrease of between 41% and 47%, at least it’s a positive number.

So, where do the problems lie if the company is profitable?

The problem is the timing of repayment of debt, with Nampak needing to refinance R1.35 billion by the end of March. That’s not the kind of amount that you find by accident under your pillow.

The company is going to ask shareholders for permission to proceed with a rights offer of up to R2 billion in the first quarter of 2023. It’s not all bad news, with R1.35 billion to repay lenders, R350 million to upgrade a beverage can line in South Africa, R150 million to provide “operating flexibility” (i.e. working capital) and R150 million for the costs of the refinancing and rights offer.

Ultimately, the expansion into Africa funded by US dollar denominated debt has proven to be Nampak’s downfall. With operations across 10 African countries and a general lack of liquidity doing the rounds, managing the treasury function is a nightmare. When large levels of gearing are added to this, the results are clear to see.

There’s a worrying read-through here for MTN shareholders like me, with shortages of foreign currency in Nigeria continuing to be a major problem. Nampak has suffered substantial net foreign exchange losses. This isn’t great for MTN but in my opinion it’s even worse for MultiChoice, as MTN is at least still a growth company in Nigeria that needs to self-fund an in-country expansion. In other words, I see MultiChoice as being under more pressure to upstream cash than MTN, especially now that MTN’s balance sheet looks better.

Rest assured, the volatility is far from over and that applies to any country with exposure to Nigeria in particular.

Sasol drops 4.5% after releasing a trading statement

The HEPS range has been left wide open

The minimum HEPS growth to trigger a trading statement is 20%, and this is exactly the growth rate that Sasol has given, leaving the trading statement wide open for interpretation. It doesn’t help that the announcement talks about other adjustments and valuations on the balance sheet that will impact HEPS and cannot be reliably estimated.

The concern for investors is the operational update for the Secunda coal value chain, with problems in October and November impacting the outlook for the remainder of the year as well. With load shedding and rainfall causing many difficulties in the coal value chain, there is a downstream impact on the chemicals value chain. To add to the mix, there are also the usual problems at Transnet and the declaration of force majeure on the local supply of ammonia in November.

In the international business, Sasol talks about the delivery of “steady performance” and gives examples of operating challenges that were addressed.

Across all Southern African activities except for gas production, production guidance has been revised lower.

A further update will be provided in January.

Little Bites:

  • Director dealings:
    • In addition to Des de Beer buying another R659k worth of shares in Lighthouse, another director has bought shares worth R136k
    • The CEO of Life Healthcare’s South African business has acquired shares in the company worth R746k
    • A director of a major subsidiary of PBT Group sold shares worth nearly R2.4 million. Also in PBT Group, two directors sold a combined R26.1 million worth of shares to Pulsent OH, PBT’s B-BBEE partner. The acquisitions were funded with 60% third-party debt which has been guaranteed by PBT Group
  • Resilient REIT released a pre-close update for the year ending December. In South Africa, reversions for renewed leases were positive 3.4%, which is strong. Leases with new tenants were on average 17.2% higher than the outgoing tenants. To add to the happy news, vacancies fell to 1.7%. After an accelerated solar and battery rollout, Resilient now produces 15% of its own energy requirements. Resilient has also acquired a 3.94% interest in Hammerson.
  • Lighthouse Properties released an operational update for the third quarter of 2022. Vacancies are below 4% across the portfolio and footfall is still 6.7% below 2019 levels. Also, after receiving a scrip dividend from the company, Lighthouse has confirmed that it now owns 22.82% of Hammerson.
  • In a voluntary performance update, Ethos Capital confirmed that net asset value (NAV) per share has decreased by 0.6% in the quarter ended September, coming in at R10.60. This is if you include Brait at its own NAV per share. If you use the Brait share price instead, the NAV per share has decreased by 1.4% to R8.37. MTN Zakhele Futhi was one of the pressure points in the portfolio. Importantly, Ethos is planning to partially realise the stake in financing solutions business Optasia, which contributes 31% to Ethos’ NAV as the largest investment. A new investor in Optasia is taking a 17.4% stake and Ethos will dilute from 8.7% to 7.4%, banking cash proceeds of R165 million in the process that will be used to reduce debt and possibly fund a share buyback program. This excludes the option structure granted to the purchase. Based on the increased valuation in Optasia, Ethos achieves a times money return of 3x and this uplift isn’t reflected in the NAV per share, which would increase by R0.73.
  • In line with the extensively communicated timetable, Fortress has announced that the JSE sent communication to the company noting that Fortress has not submitted a compliant REIT declaration and that the JSE intends to remove REIT status for Fortress. There is an objection process set out in the listings requirements. With the shareholder meeting to potential save the day just around the corner in January, the clock is really ticking now.
  • MTN Group announced that the Turkcell litigation has been dismissed with costs. This is important, as Turkcell was seeking substantial damages from MTN based on allegations of impropriety in the award of the first private mobile telecommunications licence in Iran. The High Court of South Africa has dismissed the action by Turkcell’s subsidiary EAC with costs, bringing an end to this overhang for MTN.
  • MC Mining announced that the IDC has extended the date for repayment of the R160 million loan and interest, as well as the draw-down date for the R245 million for the Makhado hard coking coal project, to 30 June 2023. The Makhado project facility remains subject to the IDC confirming due diligence and credit approval. The IDC has a 6.7% equity stake in that project.
  • Way back in October 2021, Sanlam announced a deal with Absa that would see Absa Financial Services exchange its investment management business for a shareholding in Sanlam Investment Holdings. The deal closed on 1 December 2022 and this takes Sanlam Investment Holdings’ assets under management, administration and advice of over R1 trillion.
  • AB InBev is in the process of settling up to $3.5 billion worth of its USD notes. In simple terms, this means that the company is reducing debt. With various tranches of notes existing in the market with different maturities and costs, the company has created a priority list for the repurchases. That list is about to come in handy, because debt holders have tendered far more than the offer cap: $7.24bn worth of USD notes and £852 million worth of GBP notes!
  • Delta Property Fund has agreed to sell the Capital Towers property in Pietermaritzburg for R65.55 million. The net proceeds of R57 million will be used to reduce debt, which will improve the loan-to-value ratio by 30 basis points to 57.6% – a level that is still far too high. Vacancy levels will reduce by 80 basis points to 33.1%. The property was recognised at R47.1 million as at the end of August and registered a net operating loss of R0.9 million in the six months ended August. The painful news is that because of JSE aggregation rules and the prior deals done with the buyer, this transaction is a Category 1 deal that requires a circular and shareholder vote. That’s an expensive and time consuming process.
  • Salungano released a trading statement for the six months ended September. There’s a huge swing in earnings from HEPS of 20.69 cents to a headline loss of between 18.60 cents and 22.30 cents.
  • African Equity Empowerment Investments (AEEI) reported a 0.24% drop in revenue and a 68% deterioration in the headline loss per share. The total headline loss is a whopping R182 million off a revenue base of R2.3 billion. In case you’re prepared to use management’s view of normalised headline loss instead, that’s only R12.5 million.
  • Acting as independent expert, BDO Corporate Finance confirmed that Sun International’s acquisition of 7.8% in Grand Parade Investments from Value Capital Partners was fair to shareholders of Sun International. This is a requirement for a small related party transaction (deal value between 0.25% and 5% of market cap) on the JSE.
  • After a substantial share repurchase of R16 million, 4Sight Holdings reduced its shares in issue by 19%. The company is also in the process of redomiciling from Mauritius to South Africa.
  • There have been five investigations by the FSCA into the trading activities of shareholders of Trustco Group (i.e. not the operations of the company itself). The company announced that the FSCA had notified Trustco that four of the investigations are closed. This means that one is still open.

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

Murray & Roberts (M&R) is to sell its stake in the Bombela Concession Company (BCC) to Amsterdam-based Intertoll International. M&R will dispose of its 33% stake in BCC together with the Murray & Roberts BCC Financing Company which holds a further 17% stake in BCC for a total purchase consideration of R1,39 billion, payable in cash.

Following the conclusion of its strategic plan to unlock shareholder value, Etion will proceed with the repurchase of all ordinary shares in the company (excluding those shares held by Garlotrim) by way of a scheme of arrangement for a cash scheme consideration of 55.58 cents per share for an aggregate purchase consideration of R313,72 million. Following the delisting of the company from the AltX Board of the JSE, scheme participants will receive an agterskot payment, the total amount of which is equal to a maximum of R17 million.

A consortium (Newco) of commercial cane growers have submitted an expression of interest to acquire certain assets of Tongaat Hulett which is in business rescue. The proposal to acquire operating mills, refinery, animal feeds and brands aims to ensure the survival of farming operations linked to Tongaat’s operations in the North Coast of KwaZulu-Natal. Funding arrangements are still to be secured.

Unlisted Companies

Bushveld Energy, a subsidiary of Bushveld Minerals, a South African vanadium producer and energy storage provider, has disposed of its 51% stake in VRFB to London-based Mustang Energy. VRFB is a 50% shareholder in Enerox, an Austrian-based vanadium redox flow battery manufacturer. The transaction, valued at US$19,4 million, will be settled by the issue of 79,4 million new Mustang shares to Bushveld Energy.

South African end-to-end information and communications technology company Redwill ICT has acquired Opentel, a local fibre and wireless internet service provider (ISP).

Chariot, an African focused transitional energy company, has formed a joint venture through a 25% stake in a new SA electricity trading company Etana Energy. Other shareholders include Nerua Group (49%), H1 Holdings (21%) and Meadows Energy (5%). Etana Energy has been granted an electricity trading licence by the NERSA.

Local healthtech startup LIQID Medical has secured R30 million in investment from the SAB Foundation. A medical device development company, LIQID Medical will use the funds to further the development of three core devices (OptiShunt, iPortVR and iFlow) which offer clinically effective, cost-saving and quality-of-life-improving solutions for glaucoma.

Investment Fund for Developing Countries (IFU), a Development Financial Institution owned by the Government of Denmark, has exited its investment (in the form of loan capital) in local blubbery exporter United Exports.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

In its trading update for the year, Nampak announced a proposed capital raise of up to R2 billion during the first quarter of 2023. The group’s current debt package and the US Private Placement funding are due to mature in December and May 2023 respectively. This requires the group to refinance its debt package before the end of March 2023 if management is to put in place a simplified and more robust capital structure and so deliver on its growth strategy.

Lighthouse Properties is offering shareholders up to R50 million in new Lighthouse shares. The company will list up to 7,575,757 new shares with the purpose of providing the company with additional liquidity primarily for capital expenditure at its shopping centres.

A2X Markets is set to welcome three new listings. Woolworths will list on 2 December, Truworths International on 5 December and Hyprop Investments on 7 December 2022.

Rand Merchant Investment Holdings will officially change its name to OUTsurance Group under the new JSE code OUT from commencement of trading on Wednesday 7 December 2022.

The JSE has censured suspended Nutritional Holdings following the company’s “failure to inform the market of price-sensitive information without delay [and] failed to apply the highest standard of care in disseminating information to the market.”

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 1,194,773 Investec Plc shares at an average price of 499 pence per share (LSE and BATS Europe) and 1,450,228 Investec Plc shares at an average price of R102.81 per share (JSE). Since October 3rd the company has purchased 9,50 million shares.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

Glencore this week repurchased 13,351,854 shares for a total consideration of £72,67 million. The share repurchases form part of the second phase of the company’s existing buy-back programme which is expected to be completed by February 2023.

South32 has this week repurchased a further 1,828,308 shares at an aggregate cost of A$7,21 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period November 21 – 25, a further 3,693,220 Prosus shares were repurchased for an aggregate €213,56 million and a further 716,371 Naspers shares for a total consideration of R1,76 billion.

British American Tobacco repurchased a further 684,561 shares this week for a total of £22,88 million.

Nine companies issued profit warnings this week: Mantengu Mining, Mahube Infrastructure, Crookes Brothers, Nictus, Visual International, Sable Exploration and Mining, African Equity Empowerment Investments, Nampak and Salungano.

Four companies issued or withdrew cautionary notices. The companies were: Finbond, Acsion, Brikor and Chrometco.

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

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

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

DealMakers AFRICA

Nama Holdings, a subsidiary of Moroccan alternative investment firm CDG Invest, has taken a minority equity stake in Vita Couture, an industrial platform in the clothing sector. Vita Couture provides international and national clients with a complete ‘one-stop-shop’ service covering the entire ready-to-wear clothing production supply chain.

Marula Mining, an African focused mining and exploration investment company listed on the LSE, has entered into a binding agreement with Tanzanian mining company Kusini Gateway Industrial Park to secure a 73% commercial interest in the Bagamoyo Graphite Project. The project extends over approximately 180 hectares and comprises 22 granted graphite mining licenses in Tanzania. The licenses are valid for seven years. Under the terms of the agreement, Marula will fund (undertaken in two phases) all exploration and development costs through to commencement of commercial graphite mining and processing operations.

Marsh, a subsidiary of NYSE-listed Marsh McLennan, is set to acquire a majority stake in Moroccan insurance broker Beassur Marsh. Prior to the announcement Marsh held a minority stake in the business which it acquired in June 2019. Transaction details were undisclosed.

Diamond Fields Resources (DFR) and TSX-listed company is to dispose of its Namibian diamond assets to Jean Boulle Diamond Mines. As consideration for the sale of its Namibian Concessions, DFR will receive an initial cash consideration of US$150,000, annual cash payments of $100,000 and a 1% royalty of net sales.

CFI Financial, a multi-asset brokerage firm, has acquired Egyptian brokerage firm El Mahrousa. The deal bolsters CFI’s position in the Middle East and East Africa region. Financial details were not disclosed.

The Competition Authority of Kenya (CAK) has approved two M&A transactions. It announced the approval of the proposed acquisition of a 20% stake in Credit Bank plc by Shorecap III unconditionally. Credit Bank operates in Kenya through 17 branches offering services such as personal banking insurance intermediary services, trade finance, insurance premium financing, SME and corporate banking. In a second notice, CAK approved the acquisition of a majority stake in Ranfer Teas (Kenya) by Akbar Brothers. Prior to the acquisition, Ranfer had a minority stake in the firm which exports tea to South Africa, Egypt, Pakistan, US, Europe and Sri Lanka.

Orda, the Nigerian food-tech startup has raised US$3,4 million in a seed round led by FinTech Collective and Quona Capital. The cloud-based restaurant operating system offers services to small, independent customers via access to various software features, including order management, intergradations with food aggregators and delivery platforms. Funds will be used to add more functionalities to the platform particularly around financial products.

Djamo a personal finance company based in Abidjan, Côte d’Ivoire, has raised US$14 million in equity funding. Funds will be used to expand it footprint into new markets and to scale its service offering. The round was co-led by Enza Capital, Oikocredit and Partech Africa with participation form Janngo Capital, P1 Ventures among others.

Crypto and saving platform Ejara has raised US$8 million in a Series A round co-led by London-based venture capital firm Anthemis and crypto-focused fund Dragonfly Capital. The Cameroonian fintech will use the funds to broaden its customer base in Francophone Africa.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.comwww.dealmakersafrica.com

Competition Commission aims to capture more notifiable mergers

Daryl Dingley and Elisha Bhugwandeen
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Competition Commission aims to capture more notifiable mergers

The Competition Commission has published new rules on notifying small mergers, which could increase the regulatory burden for potential investors in South Africa and further strain the Commission’s resources.

The Competition Commission recently published the final revised Guidelines on Small Merger Notification1 (the Guidelines), effective from 1 December 2022, which state that small mergers and acquisitions in all industries may now have to be notified to and approved by the Commission if certain criteria are met.

Small mergers are transactions that do not meet the prescribed intermediate or large merger thresholds and, therefore, do not require a mandatory notification. In terms of the Competition Act, however, the Commission may require, up to six months after a small merger has been implemented, that such mergers be notified to and approved by the Commission if, in the opinion of the Commission:

• the merger may substantially prevent or lessen competition; or

• cannot be justified on public interest grounds

Why were the Guidelines revised?

When amendments were proposed to the Guidelines last year, the revisions were specifically aimed at capturing small mergers, where the merger parties operate in digital or technology markets. The Commission is concerned that acquisitions in this space often escape regulatory scrutiny because they occur at an early stage in the life of the target, before these entities have generated sufficient turnover or accumulated capital and physical assets. For example, the competition authority in the US recently reported that Microsoft, Amazon, Google, Apple, and Meta Platforms (formerly known as Facebook) engaged in 616 acquisitions between 2010 and 2019 that fell below the merger thresholds but were worth at least US$1m.

Significantly, the final version of the Guidelines obliges merger parties to inform the Commission of all small mergers that meet the criteria, not only those in the digital space.

When will firms need to inform the Commission about small mergers?

• The older version of the Guidelines has been in place for many years. The revised version still states that, if at the time of entering into the transaction, any of the firms (or firms within their groups) are:

(i) Subject to a prohibited practice investigation by the Commission, or

(ii) Are respondents to pending proceedings following a referral by the Commission to the Competition Tribunal, the Commission must be informed in writing before the implementation of the small merger.

• The Commission will, however, also require that it be informed of all small mergers and share acquisitions where the acquiring firm’s turnover or asset value alone exceeds the large merger combined asset/turnover threshold (currently R6,6bn) and at least one of the following criteria must be met for the target firm:

(i) the consideration for the acquisition or investment exceeds the target firm’s asset/turnover threshold for large mergers (currently R190m)

(ii) the consideration for the acquisition of a part of the target firm is less than the R190m threshold, but effectively values the target firm at R190m or more.

What is the procedure for informing the Commission?

Parties to small mergers which meet the above criteria are advised to inform the Commission in writing of their intention to enter into the transaction. The parties should provide sufficient detail on the acquiring and target firms, the proposed transaction, and the relevant markets in which the firms compete.

How does this development impact transactions in South Africa?

The Guidelines create an additional regulatory obligation for merger parties. They will need to assess whether they meet the criteria detailed above and if it is necessary to inform the Commission about their merger, even if the firms involved in the transaction do not meet the prescribed South African merger thresholds. This is a particularly important consideration when the merger parties operate in digital / technology markets.

The Commission has warned that it will remain vigilant in identifying small mergers that require notification. It remains to be seen whether there will be any consequences for firms involved in mergers that meet the relevant criteria but fail to inform the Commission. It is also uncertain how the thresholds should be interpreted and why the scope of the Guidelines was not limited to digital markets.

Daryl Dingley is a Partner and Elisha Bhugwandeen a Senior Knowledge Lawyer | Webber Wentzel.

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

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

Investing in Africa energy – the carbon conundrum

Kenny Fihla
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Investing in Africa energy – the carbon conundrum

The recent severe floods in Nigeria, as well as record high temperatures in various parts of the world have placed the spotlight on the growing threat posed by climate change and the urgent need to ramp up investments in green energy solutions.

The world’s attention has also been fixated on the Ukrainian invasion – a human crisis that has thrown into stark reality Europe’s dependence on Russian hydrocarbons and the pipeline infrastructure that delivers oil and gas to the region’s consumers.

Energy prices have skyrocketed since early 2022, highlighting the strategic and moral dilemma facing Europe’s most industrialised economies. Germany, due to its own limited natural resources, is heavily reliant on Russia for more than half of its gas, almost half of its coal, and about a third of its oil, according to Bloomberg. While already one of the world’s most advanced economies, in terms of greener energy usage, Germany has found that its renewables are nowhere near enough to sustain its population’s demands for electricity and fuel, while also powering its economy.

Like most of Europe, Germany is balancing its need for energy security and economic growth, even as it embarks on a decades-long transition to greener fuels and greater energy independence.

African Opportunity

The need for Africa to follow a just transition to greener energy and advance the development of its people is imperative. The developed world has a significant head-start. Compare Germany and Uganda. According to the World Bank, GDP per capita in Germany was $46,208 in 2020, while for Uganda it was a paltry $822. In the same year, German life expectancy at birth was 81.4, while in Uganda, it was 63.7. Likewise, in 2018, Germany emitted 8.22 metric tons (tonnes) of CO2 per person, while Uganda’s carbon footprint was just 0.143 tonnes per person. There are many statistics that reference this, and Uganda, like most other African countries, still has a long path ahead to catch up with the developed nations of the world.

It is against these disparities that Africa needs a multi-stakeholder and multinational approach to curb the climate crisis. The latest United Nations Intergovernmental Panel on Climate Change (PCC) report warns that limiting global warming to 1.5°C is looking ever more unlikely without urgent global action on drastic reductions in greenhouse gas (GHG) emissions.

Even though Africa is a minor contributor to global GHG emissions (3.8%), the climate risks
for our continent are real and ominous. Not only are African countries most vulnerable to the effects of climate change, despite contributing significantly less to global carbon emissions, they face greater dilemmas than their European counterparts in meeting the legitimate needs of their people today, while transitioning to a greener, more just society.

Historically, renewables were criticised as being too expensive. However, we have seen a significant decline in their cost, due in large part, to advancements in technology, making renewables more efficient and affordable. Technological advances have increased the possibility of achieving a transition away from non-renewable energy sources, with Africa being rich in untapped renewables – solar, wind, hydropower and geothermal.

In the medium to long-term, there is an immense opportunity for Africa to produce and export green energy solutions to sunshine-poor northern climates. There are innovative opportunities with vast potential that aim to re-tool economies to run on hydrogen produced from African sunshine and wind.

Earlier this year, Anglo American unveiled the world’s biggest green hydrogen-powered truck at a platinum mine in Limpopo, South Africa. The mining giant intends to replace its existing diesel-fuelled fleet, which uses an estimated 40 million litres of carbon-based fuel a year, with green hydrogen-powered trucks. This early-stage development shows the innovative work underway on our continent, and creates room for us to be world leaders in the green hydrogen economy. President Ramaphosa called the initiative, “a gigantic leap for South Africa’s hydrogen future economy”, representing “the genesis of an entire ecosystem powered by hydrogen.”

Funding a Just Energy Transition

The International Labour Organisation and United Nations Framework Convention on Climate Change defines a just transition as, “greening the economy in a way that is as fair and inclusive as possible to everyone concerned, creating decent work opportunities and leaving no one behind.”

While Africa must join the global drive towards limiting GHG emissions, this action must be considered within the context of Africa’s just transition towards a low-carbon economy, and in a manner that recognises and addresses the deep energy deficit across African economies. The transition away from non-renewable energy will necessarily be a gradual and measured process, given widespread energy poverty across sub-Saharan Africa, where less than 50 percent of the population have access to electricity.

As the World Bank has argued, Africa’s recovery from the COVID-19 pandemic, and its medium-term development, both require a degree of openness to further investment in ‘brown’ activities. Many argue that a refusal to accept this would amount to denying Africa’s right to sustainable development. A total or immediate ban on further transitional projects in Africa to help reduce environmental pressure in much richer regions is simply unjust.

Energy, in general, underpins economic growth in emerging markets, specifically in Africa, where affordable and reliable energy access is fundamental to development. Therefore, non-renewable energy will likely remain key to ensuring energy security in many African regions requiring broad access to electricity, as well as transportation.

Africa’s growing urban populations will require a reliable and sustainable energy supply to power industrial production, electrify more households, and expand the use of transport to drive socioeconomic development. Certain countries – Nigeria, Angola, Ghana and Mozambique – produce oil and gas for international markets, thus providing foreign currency and tax revenues to develop their respective economies. It is important to objectively acknowledge the pressing need to balance all these realities as part of ensuring a just energy transition.

Having said that, Standard Bank Group’s long-term goal is clear. We will achieve a portfolio mix that is net zero by 2050. That will entail reducing our financed emissions and simultaneously scaling up our financing of renewables, reforestation, climate-smart agriculture, decarbonisation and transition technologies, and supporting the development of credible carbon offset programmes. We are already a major funder of renewable energy projects in Africa. Since 2012, 86 percent of our new energy lending has been to renewable energy, and we have not financed any new coal-fired power stations since 2009.

Responsible investment means following globally accepted environmental, social and governance (ESG) best practices like those embodied in the Equator Principles (EP) and the International Finance Corporations (IFC’s) best practice standards, both of which underpin Standard Bank’s investment portfolio. Here, responsible investors can not only support development, but can work with carefully selected clients to ensure that carbon-based energy projects are responsibly developed with the lowest possible carbon footprint. This is how Standard Bank intends to play our role in Africa.

We will finance initiatives that drive economic growth and human development across Africa. Much of this will be investments in renewable energy infrastructure and transitioning to a new sustainable economy, even as we unlock opportunities from Africa’s existing natural endowment. Every major investment must be done according to the highest ethical and governance standards.

Ultimately, just as Europe doesn’t “un-develop” itself by switching off gas, Africa cannot keep itself under-developed by forgoing all carbon-based fuel investment opportunities at the same pace as the developed global north. This would be at great social cost for the continent. Both need to transition to something better – and Standard Bank will support Africa’s just energy transition.

Kenny Fihla – Chief Executive of Corporate and Investment Banking | Standard Bank Group

This article first appeared in the DealMakers’ Renewable Energy 2022 Feature

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

Thorts Africa: Is it time to have a Kenya-Mauritius double taxation agreement in force?

Alex Kanyi
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Thorts Africa: Is it time to have a Kenya-Mauritius double taxation agreement in force?

Kenya is among the leading investment destinations in Africa. The Africa Private Equity and Venture Capital Association (AVCA) 2022 H1 report, highlighted Kenya’s remarkable growth in deal volume compared to the corresponding period last year (a 153% increase compared to 2021 H1).

Double taxation agreements (DTAs) are an important consideration for investors. Kenya currently has 14 DTAs in force. While Kenya has signed a DTA with Mauritius, the DTA is not yet in force. Nevertheless, Kenya is among the largest recipients in Africa of investments from Mauritius.

The Kenya-Mauritius DTA has faced a myriad of challenges; the DTA was subject to litigation in the High Court (the Court) for a period of six years. The Tax Justice Network Africa (TJNA) challenged the DTA in the case of Tax Justice Network Africa v Cabinet Secretary for National Treasury & 2 others [2019] eKLR. TJNA argued that the DTA conferred special rights to Mauritius-based investors by reducing withholding tax rates. TJNA further argued that companies were selling shares at the Mauritius level to avoid paying capital gains tax in Kenya, and this meant that Kenya was losing revenue. Finally, TJNA argued that the treaty did not follow the procedure laid out in law and was, therefore, unconstitutional.

The TJNA case was opposed by the Cabinet Secretary, National Treasury, the Kenya Revenue Authority, and the Attorney General, on behalf of the Government of Kenya (GoK). GoK argued that the DTA with Mauritius was meant to attract foreign investment and compared well with other African countries that have a DTA with Mauritius. GoK further argued that the treaty was ratified by Cabinet and published in Legal Notice 59 of 2014, as required by the law.

In determining the case, the Court observed that TJNA did not demonstrate how the DTA contravened the Constitution of Kenya. However, the Court noted that Legal Notice 59 of 2014 was a statutory instrument and should have been tabled in Parliament for approval as required under the Statutory Instruments Act. The Court declared the DTA void for this reason. The Court did not delve into whether the DTA was beneficial to Kenya or not.

It is important to note that certain things have changed since the case started in 2014. As an example, while Kenya and Mauritius did not have Capital Gains Tax (CGT) in 2014, Kenya introduced CGT at 5% in 2015. The Kenya Finance Act, 2022 has increased the rate to 15% with effect from 1 January 2023. In addition, Kenya and Mauritius re-signed the DTA on 10 April 2019, and the renegotiated DTA was published in the Kenya Gazette as Legal Notice 114 of 2020. The DTA is not yet in force, and the process that was initially signed on 7 May 2012 is still not complete after 10 years!

The renegotiated DTA comes with some changes, including a change on withholding tax rates. An example includes an increase in withholding tax rate on royalties from 10% to 12%, and an introduction of withholding tax on technical fees (managerial, technical or consultancy fees) at 10%. The withholding tax rates are attractive to investors based in Mauritius because the corresponding rates for investors in countries that do not have a DTA with Kenya are higher. For example, while the withholding tax rate on management fees in the DTA is 10%, the rate for a country without a DTA is 20%. The reduced rates may offer a good reason to push for the DTA to come into force.

The new DTA, however, has other changes which might make an investor want to have its coming into force delayed further. The most significant is the CGT on transfer of shares. The DTA provides that gains derived by a Mauritius resident from selling shares may be taxed in Kenya if, at any time during the past year, these shares or comparable interests derived more than 50 percent of their value directly or indirectly from immovable property situated in Kenya. In addition, gains derived by a Mauritius resident from selling shares of a Kenyan company may be taxed in Kenya if the seller, at any time during the 12-month period preceding such sale, held directly or indirectly at least 50 percent of the capital of the Kenyan company. The new changes seek to give power to Kenya to collect CGT in some instances where the sale of shares happens at the Mauritius level. The changes may not be attractive to some investors who set up holding companies (Hold Cos) in Mauritius and use such Hold Cos to transfer their underlying shares in Kenyan companies.

The new, renegotiated DTA between Kenya and Mauritius was approved by Kenya’s National Assembly on 22 December 2020, and now we await notification for it to come into force. It is not clear why Kenya is yet to notify Mauritius that it has completed procedures required by its law for the DTA to come into force.

Whether it is time for the DTA to come into force will depend on the perspective that you take. For investors who are resident in Mauritius, it is a delicate balance because, while they may want to benefit from the reduced withholding tax rates, they may not want to pay CGT in Kenya, where applicable. For the civil society in Kenya, such as TJNA, the renegotiated DTA is better when compared with the one signed in 2012, although there is still room for improvement. Other stakeholders may prefer to keep the status quo, because Kenya is still attracting investment from Mauritius even without a DTA.

Alex Kanyi is a Partner in the Tax & Exchange Control Practice | CDH Kenya

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

Ghost Global (Disney | Warner Music Group)

The Finance Ghost
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Ghost Global (Disney | Warner Music Group)

In this week’s edition of Ghost Global, we look at two huge brands in the media and entertainment industries: Disney and Warner Music. The products and brands have been far more fun than the share prices this year!

Disney airs its dirty laundry after investors were hung out to dry

As my portfolio confirms, things haven’t been fine and dandy in the Magic Kingdom this year. After throwing the kitchen sink and Mickey’s ears at streaming in the past year and burning billions along the way, it seems that the knives came out for Bob Chapek.

From one Bob to another, with the surprise announcement last week that Bob Iger is returning as CEO, effective immediately. This came after several Disney senior executives (including CFO Christine McCathy) informed board members that they have lost confidence in Chapek’s leadership.

Earlier this month, Chapek had announced the company’s plans of a hiring freeze, layoffs and cost cuts. It was too little, too late for the mess that had been created. Employees may have hoped that the rapid changes at the top would save them from this fate, but those dreams have been dashed. Returning CEO Iger has stated that he felt Chapek’s strategy was the “right thing to do” and that he therefore doesn’t plan to change it.

Looking at Disney’s full year earnings for the 2022 fiscal year ended 1 October 2022, there appears to be a little bit of frosting on this particular cinnamon bun. Revenue is up by 23% from last year to $82.7 billion. Net Income from continuing operations increased by 58% to $3.2 billion.

While streaming may be working out really well for Warner Music (see below), it certainly isn’t doing the same for Disney. Fortunately, the company’s Parks, Experiences and Products segment has grown revenue by 73% and operating income by a nonsensical percentage, up from $471 million to $7.9 billion. A year-on-year move like that isn’t normal obviously, but then again neither were the Covid lockdowns that killed the magic in this part of the business for many months.

Although the news of Iger’s return is probably positive overall, the share price has a lot of damage to repair. Down 38% this year, even the fairy godmother seems to have given up on turning this pumpkin into a carriage.

As for Ghost, he’s still giving the House of Mouse a chance to get it right. To find out why, you can become a Magic Markets Premium subscriber and get access to a library of research that includes reports on Disney.

Warner Music sings a happy tune

It’s safe to say that the global music industry is currently experiencing a bit of a Renaissance moment. After the introduction of the MP3 in the 90s did to record sales what Yoko Ono did to the Beatles, the industry was pummeled by internet piracy and then, climactically, a full-scale pandemic, which stopped concerts and tours overnight. Whoever decided to become a record executive between 1991 and 2021 must have possessed a special kind of clairvoyance to be able to predict that the industry would recover at all.

Here’s the unexpected upside: since the move away from physical record sales, the industry has seen a steady increase in revenue over the past six years.

How is this possible, you ask?

This sudden and rapid growth has been driven largely by the popularity of streaming services such as Spotify and Apple Music. Taking into account what a subscription to Spotify costs versus the cost of a physical album, you wouldn’t think that the math adds up.

Yet, according to recent figures, streaming services yielded a total of $13.4 billion in global revenue in 2020, making up 62.1% of the music industry’s total income. The majority of this revenue comes from paid monthly or annual subscriptions, which have seen steady growth in recent years – pandemic be damned.

Enter Warner Music Group, a shining example of the good space that music is in right now. The American entertainment company and record label conglomerate has released results for its fourth quarter and financial year ended September 2022, and there’s nothing off-key here. For the full year, total revenue rose by 11.7%, though there was an extra trading week in this period which boosted Recorded Music streaming revenue. This total revenue is split between Recorded Music, which increased by 9%, and Music Publishing, which rose by an impressive 26%. Total streaming revenue increased by 9.1%.

In Q4, revenue grew by 9% as reported and 16% in constant currency. And while advertisers are slowly starting to get the message that Gen Z are not impressed by unskippable brand messages popping up in the middle of their low-fi hip hop playlists, Warner still saw 5% growth in subscription streaming, which compensated for the decline in ad-supported streaming revenue.

Underlying growth aside, share price performance still comes down to valuation. With a year-to-date drop of 20%, there’s no sweet melody for your portfolio here:

Warner Music has expressed intentions to focus on Eastern Europe as an area for growth in 2023 (and not because they manufacture ammunition, either). Ukraine is a mess of course, but the broader area saw an increase in music consumption of 20% in 2021 thanks to major economies like Poland. As a result, the company has put effort into intensifying its presence with investments such as Grupo Step and Big Idea in Poland, as well as Mascom Records in Serbia. The group has also launched the Out of Order label aimed at advancing artists in Europe and other emerging markets.

Every war needs a peace anthem, right?

The company will be appointing new CEO, Robert Kyncl, in January 2023. Kyncl is no stranger to streaming either, as he is currently YouTube’s Chief Business Officer. As one of the best businesses in the Alphabet (Google) stable, any experience from YouTube can only be helpful.

Magic Markets Premium subscribers pay just R99/month for access to a library of over 50 reports and podcasts on global stocks like these. Subscribe today and give yourself an edge in the market.

Ghost Bites (Fairvest | Mahube | PBT | Santam)

The Finance Ghost
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Ghost Bites (Fairvest | Mahube | PBT | Santam)

Fairvest releases its first results since the Arrowhead merger

Comparability is very limited here, so we focus on other metrics

With the merger between Arrowhead Properties and Fairvest Property concluded, the merger was accounted for as a reverse acquisition. This means that the financials are a continuation of “Old Fairvest” and cover a 15-month reporting period from 1 July to 30 September. To make it even trickier, Arrowhead has only been consolidated since January.

This makes comparability of the numbers practically impossible. The most we can look at is specific metrics in the business.

For example, a loan-to-value ratio of 38.1% is well in line with what you want to see in a REIT. Vacancies are down to 5.9% and tenant retention is 87.4%.

The pay-out ratio is 100%, so there are no issues here in passing profits onto shareholders as a REIT should. With two classes of shares, it’s notable that the distribution for the B share exceeded guidance by 4.4%.

The net asset value per A share is R13.1878 and for the B share is R5.1901. The shares are trading at R13.90 and R3.37 respectively, so the A shares are above NAV and the B shares are at a discount. Dual-share structures can get complicated, as we’ve seen in the huge problems at Fortress which is on the verge of losing REIT status.

Before investing, you would need to do detailed research into the differences between the share classes.

Mahube Infrastructure achieves modest growth in NAV

This renewables group has investments in two wind farms and three solar PV farms

Those interested in renewable energy should do more research on Mahube Infrastructure, as pure-play renewable investments are hard to come by. Although dividend income in the six months to August decreased sharply by 65.6%, this is mainly because the subsidiary company needed to redeem preference shares rather than pay ordinary dividends.

The tangible net asset value increased by just 2% to R11.18 per share, but at least that’s a move in the right direction. A dividend of 45 cents per share has been declared.

At a closing share price of R6.43, this puts the company on a discount to NAV of 42%. The interim dividend yield alone is nearly 7%. I would be nervous annualising this given the unpredictable nature of the underlying portfolio.

PBT Group hasn’t escaped the pressures of inflation

Although margins are under pressure, the technology group is still moving forward

PBT Group is one of those companies that is annoyingly good at gaining ground and then staying there. I keep waiting for the share price to drop so I can make up for previous mistakes in missing the opportunity and it simply doesn’t happen.

In the six months to September, results were pleasing on the top line, but the margin growth that is plaguing so many companies at the moment was clearly visible. Organic revenue growth was 14.5% and EBITDA inched higher by 3.2%.

The pressure on EBITDA was mostly from the international segments, where EBITDA decreased year-on-year despite an 18% increase in revenue. In South Africa (92% of group revenue), revenue increased by 16% and EBITDA was up by 10%. This means that both regions experienced margin pressure, with the situation particularly difficult in the UK and Europe.

Some of the margin pressure came from increased incentives paid to the sales team in June based on the success of the prior financial year. These are annual incentives that won’t repeat in the second half, as they are paid once per year based on the previous year’s performance. The point is that there’s a mismatch in timing between the revenue and the related incentives.

Given the prevailing market conditions, it’s likely that there are pressures beyond just the incentives. Nevertheless, the company is hinting at an improved margin performance going forward.

A quick look at the balance sheet would raise some concerns around accounts receivable, with R136.9 million in debtors at the end of the period in the South African segment. A disappointing cash conversion performance isn’t what investors want to see in this environment. In very good news, the situation has normalised after the end of the reporting period, with R115.3 million of the debtor balance collected. Investors will breathe a collective sigh of relief.

A feature of this result is the progress made on the strategy of selling non-core assets and returning the proceeds to shareholders. Net proceeds from non-core assets were R20.9 million. The group chipped in from the reserves and paid a special distribution of R31.8 million to shareholders in addition to executing R7.3 million worth of share repurchases.

There should be more to come, with R187.1 million in non-core assets still on the balance sheet at the end of September.

In the meantime, the board has declared an interim distribution of 25 cents per share.

Santam is set to change its operating model from January

Net underwriting margin and return on capital targets are still valid

Santam has provided an update to the market on its performance for the 10 months ended October.

In conventional insurance, gross written premium growth was 8%, proving that any reputational damage during the pandemic has been successfully managed by the group. Due to numerous weather-related disasters in South Africa and high claims inflation (an inflationary increase in premiums lags the increase in underlying costs), the net underwriting margin is below the bottom end of the target range of 5% to 10%. Steps have been put in place to amend this situation heading into 2023.

The investment return on insurance funds has been volatile as one might expect, with improved performance since June as Santam put steps in place to steady the ship. With such a strong recent rally in the local market, the company would’ve been better off without the zero-cost collar to hedge performance. Hindsight is always perfect, of course.

Looking at the Sanlam Emerging Market partner business, investors are reminded that Santam entered into an agreement in May to sell its 10% interest in the SAN joint venture to Allianz Europe. Regulatory approvals are expected to be obtained by mid-2023.

In India, Shriram General Insurance suffered lower sales, but an improved claims experience and higher investment returns on insurance funds took the net performance into the green.

Santam is making operational changes with effect from 1 January, with the biggest change being to the multi-channel business that will be restructured into three business units to focus on distribution channels.

The company has reiterated the targets of a net underwriting margin of 5% to 10% and a return on capital target of 24%. A target isn’t the same as guidance.

Little Bites:

  • Director dealings:
    • A non-executive director of KAP Industrial has bought shares worth nearly R100k
    • The former CEO of Cashbuild has sold shares and now owns 4.48% of shares in issue
    • A director of a major subsidiary of Santova has sold shares worth R373k
    • The family trust of a director of Curro has sold shares worth nearly R8.1 million
    • A long-standing director of Invicta has bought R414k worth of the company’s preference shares
  • In very good news for Stefanutti Stocks (with a 13% jump in the share price in response), a dispute related to a project in Zambia has attracted an arbitration award in favour of the 50-50 joint venture that Stefanutti Stocks was part of for the contract. The award is for 510 million Zambian Kwacha, which just so happens to be worth 510 million Randelas as well! Although this is a final arbitration award and the decision is final, there is a risk of the award being set aside on procedural grounds. Still, the market clearly likes this and with good reason.
  • Anyone who followed the Ascendis Health battle in recent times will remember shareholder activist Harry Smit. At the AGM of the company, his re-election as a non-executive director was voted down. Smit’s journey as a director of Ascendis has come to an end.
  • PGM and chrome business Tharisa has extended its fixed income note offer to raise $50 million for the Karo Platinum Project. To accommodate institutional investors in the final approval process, the deadline has been kicked out by a week and a half and the offer closes on 9 December.
  • AYO Technology released results for the year ended August. Revenue increased by 3% and the headline loss improved by 10% to 60.25 cents. This group never lets a loss get in the way of a good dividend, declared a dividend of 60 cents per share (up 100% vs. the prior period). You can go do some digging for yourself on why that might be the case.
  • At an extraordinary general meeting, shareholders of Gemfields approved a general share buyback programme of up to $10 million. With all the hassles in Mozambique, this is an encouraging show of faith by the board and the shareholders in the balance sheet.
  • After a mandatory offer made by GMB Liquidity Corporate to the shareholders of Grand Parade Investments, GMB now holds a stake of 48.97% in the company excluding treasury shares. It’s worth noting that Value Capital Partners (VCP) has disposed of shares in the company worth nearly R205 million, which means VCP no longer holds any shares in the company.
  • If for some reason you want to see the sheer extent of paperwork that goes into a merger on the London Stock Exchange, you can find all the documents (including the newly released supplementary prospectus) for the Capital & Counties / Shaftesbury merger at this link.
  • Property development and holding company Acsion Limited renewed its cautionary announcement related to a potential delisting and cash offer. No indicative value of the offer is given in the announcement. The company also released results that indicated a 34% increase in revenue and a 72% increase in HEPS. Net asset value per share has grown by 13% and the loan-to-value is only 7.3%, which tells you that this is a developer rather than a REIT that has much higher gearing and focuses on rental properties. With a net asset value per share of R22.8006 and a share price of just R6.17, the discount to NAV is huge.
  • Europa Metals has announced a 19% increase to the indicated mineral resource and a 14% increase in grade following a successful 2022 drilling campaign. This compares “very favourably” with the company’s mineral resource estimate announced in October 2021.
  • African Dawn Capital has released results for the six months ended August. Revenue increased by 17.6% to R7.3 million and the loss is also R7.3 million, an unusual set of numbers for several reasons. This obscure (and tiny) company was also loss-making in the comparable period.
  • There’s been a change in approach in Chrometco’s business rescue process, with the practitioner deciding to proceed with the accelerated sales process rather than the restart of the underground mining operation.
  • Sable Exploration and Mining released a trading statement for the six months ended August. The headline loss per share is expected to be between 50 cents and 61 cents, which is between 38% and 68% worse than the comparable period’s loss of 36.30 cents per share.
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