Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
Ghost Wrap is your weekly summary of the most interesting and important stories on the JSE. This week, we cover:
Brait’s offering of up to R3.7 billion worth of shares in Premier, with Christo Wiese giving strong support to that listing
A strong second half performance of Tiger Brands – a company where I got it wrong
Purple Group’s results and the need to look deeper to really understand them
The impact of load shedding on media company eMedia and telecoms giant Vodacom
The portfolio effect within Transaction Capital, with WeBuyCars far outperforming SA Taxi in the past year for various reasons – but what will the future hold?
Trading updates and results from Spar, Woolworths and Shoprite – a mixed basket of note
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Harmony Gold’s metrics are under some pressure
Production is lower and costs per kilogram have increased
Harmony released an operational update for the three months ended September. The good news is that free cash flow grew by 17% and the cash flow margin improved to 8% from 7%.
The cash outcome is somewhat surprising, as other metrics don’t look great. Production fell by 4% due to the closure of Bambanani. In the international segment, production fell by 28% with lower production at Hidden Valley as expected.
Group all-in sustaining costs increased by 5% to R907,864/kg because of the decrease in production. With the gold price only up by 1% in rand terms, that’s not ideal.
Net debt to EBITDA increased from 0.1x to 0.26x due to currency translation and working capital movements.
The company believes that it remains on track to meet the FY23 guidance.
Looking ahead, the company believes that its further investment in copper will bring lower-risk, near-term copper into the portfolio, achieving more diversification in the operations.
Investec signs off on a great period for earnings growth
Adjusted earnings per share growth of 25.1% is at the top end of guidance
Investec is a rather complicated animal. There are wealth management and lending businesses and the footprint isn’t just in South Africa, as Investec is active in the UK market as well.
Funds under management fell by 7.6%, a function of the drop in global markets this year. Importantly, net client inflows were strong at £202 million.
In the lending business, net core loans grew 7.1%, driven by corporate lending in SA and the UK as well as UK residential mortgage lending.
Moving to the income statement, revenue grew 18.9% and the cost to income ratio improved from 64% to 60.5%, with the net impact on pre-provision adjusted operating profit being growth of 29.5%. The contribution from both geographies was strong.
Although the credit loss ratio has increased from 7 basis points to 15 basis points, Investec believes that asset quality remains strong.
Return on equity has increased from 11.2% to 13.0%.
At net asset value level, the strong performance was offset by the unbundling of a 15% stake in Ninety One to shareholders. Tangible net asset value per share is flat year on year.
The interim dividend of 13.5 pence per share is 22.7% higher and reflects a 41% payout ratio.
Life Healthcare’s recovery in SA couldn’t offset the UK drop
Although earnings are slightly down, there’s a substantial increase in the dividend
For the year ended September 2022, Life Healthcare enjoyed a better second half after a slow start to the year.
It’s not intuitive, but Covid was a very bad time for hospital groups. Although the beds were filled with Covid patients, they weren’t filled with people recovering from elective surgeries and that’s where the money gets made.
Things are far more “normal” now, with 15.8% growth in acute hospital admissions, 14.8% growth in theatre minutes and 13.8% growth in mental health admissions. The latter statistic is something that I always find upsetting, as that’s the true legacy of the pandemic.
Revenue growth of 6% was enough to drive normalised EBITDA growth of 18.3%, a perfect example of operating leverage. Hospitals have substantial fixed costs, which means the good times are really good and the bad times are horrible.
Life is expanding in the radiology side of the business, with two acquisitions that became effective this year (one in February and one in August). They contributed R94 million to revenue (vs. R28.2 billion group revenue) and the full year impact will only be seen next year.
In the UK, Alliance Medical Group delivered 2.8% revenue growth. Due to Covid-related contracts falling away, normalised EBITDA dropped by 11.9%. Life’s business is interesting in that one part of the business suffered during Covid and the other benefitted.
Net debt to EBITDA of 1.89x is far below bank covenant levels of 3.5x. The group’s inaugural bond programme raised R1 billion during the year and was 4.5 times oversubscribed, which means the market really likes Life’s debt!
The net result of the good news in SA and the drop in the UK is a 4.5% decrease in headline earnings per share (HEPS). With far more certainty on market conditions, the dividend was increased by 60% to 40 cents per share, a pay-out ratio of 37.7%.
Netcare’s earnings are higher
For now, all we have is a trading statement
In a day of news for hospital groups, Netcare added its voice to the recovery party with an expected increase in HEPS for the year ended September of between 20% and 20.7%.
The company also released an adjusted HEPS number that excludes other elements that management believes are not useful for investors to consider. Adjusted HEPS will increase by between 23.1% and 23.9%.
Full results are expected to be released next week Monday.
NEPI Rockcastle revises earnings guidance higher
There is strong momentum in tenant sales
NEPI Rockcastle has had a busy year. The corporate headquarters were relocated to Netherlands, which means the company is now domiciled within the EU. When combined with the fairly modest leverage on the balance sheet (loan-to-value ratio of 31%), this gives NEPI Rockcastle an attractive corporate structure.
Operationally, tenant sales are showing positive cadence, which is a fancy way of saying that sales have accelerated over the course of the year. Fashion retailers are running well ahead of pre-Covid levels and entertainment tenants still haven’t closed the gap to 2019 numbers.
Interestingly, footfall for the first nine months of the year is 19% higher than the previous year and 12.4% lower than the same period in 2019.
Net operating income is 18% higher year-on-year, driven by the decrease in Covid-related discounts.
Guidance for the full year is growth in distributable earnings per share of 38%. This is up from the previous guidance of 33%. Naturally, this assumes that there won’t be an escalation in the war in Ukraine that affects neighbouring countries.
Little Bites:
Director dealings:
Directors of Gold Fields have taken advantage of the recent share price jump. Across several directors, shares sold were worth over R25 million and shares retained were worth R10 million.
A director of Discovery has sold shares in the company worth R7.4 million.
A significant number of directors of operating subsidiaries of Sasol elected to retain at least a portion of shares that vested under an incentive scheme.
An associate of a director of Afrimat sold shares in the company worth just over R5 million.
The CEO of Altron is still buying shares in the company, this time worth R161k.
The most predictable transaction on the JSE at the moment is Des de Beer buying shares in Lighthouse Properties, this time worth R1.69 million.
It’s been a long wait, but the Competition Tribunal has finally approved the merger between Impala Platinum and Royal Bafokeng Platinum. With Northam Platinum having made an offer at a higher price for Royal Bafokeng, this regulator approval gives Impala Platinum the confidence to potentially raise the offer price. I still have my suspicions that we will see a bidding war here.
Sirius Real Estate released a trading statement for the six months ended September. The dividend is expected to be between 2.683 euro cents and 2.713 euro cents per share, an increase of between 32% and 33% vs. the prior year.
Grindrod Shipping released results for the nine months ended September. As the company is currently under offer, there’s no intention to declare any further dividends this year. Earnings for the third quarter were lower than in the second quarter as shipping rates declined over the period. A reduction in shipping costs is a major driver of lower global inflation.
Novus has announced that the acquisition of a 75% stake in Pearson SA has been approved by the Competition Commission. The deal is thus unconditional and the effective date is 30 November.
Afine Investments released a trading statement for the year ended February 2022 that reflects a decrease of 19.1% in HEPS.
NEPI Rockcastle has entered into a binding agreement to acquire the Atrium Copernicus Shopping Centre in Poland from Atrium Retail. The transaction, for €127 million, includes the adjacent development property. The deal will be funded from existing cash resources.
Delta Property Fund has disposed of its property situated at 96 First Avenue in Greyville, Durban commonly known as Standard Bank Greyville for a cash consideration of R44 million.
Impala Platinum has advised Royal Bafokeng Platinum shareholders that it has extended the closing date of the offer to at least 15 December 2022 and the long stop date to 30 December 2022.
Unlisted Companies
Condra, a local leader in crane and hoist manufacture, has acquired iTek Drives, a distributor of the Optidrive range of variable frequency drives. The acquisition secures for Conddra the supply of a key crane component and reinforces iTek’s position as an important sales partner of Invertek Drives, a UK-based manufacturer of the Optidrive product range.
Technology consulting firm BSG has announced the investment in the company by Mteto Nyati. The former Altron CEO who has taken a 40% stake for an undisclosed sum will become the business’ new executive chairman.
Local healthcare startup Contro, has secured R10,1 million in an oversubscribed pre-seed funding round. Investors included Plug & Play, iCubed Capital, WZ Capital and the Jozi Angels Network. In addition, the telehealth startup received grant funding from i3 fund which is backed by the Bill & Melinda Gates Foundation. The funds will be used to further develop its platform and expand its services.
Power Brands, the parent company of Céréalis a Tunisian producer of salted snacks and baked goods, has received a significant investment from Admaius Capital Partners. The undisclosed investment made via its Virunga Africa Fund 1, will be used to scale the branded FMCG platform through the combination of organic growth and selective acquisitions.
Helios Investment Partners has entered into an agreement to acquire a majority stake in Maroc Datacenter, a carrier neutral data centre in Morocco.
Pearl Capital Partners has invested in Kampala-based agro-processing company Newman Foods via its Yield Uganda Investment Fund. The undisclosed investment is a blend of equity and quasi-equity.
Moroccan group Akwa Africa is set to acquire TotalEnergies‘ fuel distribution subsidiary in North West Africa’s Mauritania. No financial details were disclosed.
Madison Metals, an upstream mining and exploration company focused on sustainable uranium production in Namibia and Canada, has entered into a binding agreement to acquire a 90% direct interest in additional mining and exclusive prospective licences in Erongo uranium province.
TotalEnergies has completed the joint acquisition with ConocoPhillips of the 8.16% interest held by Hess in the Waha Concessions in Libya. Following the close of the transaction, TotalEnergies’ stake will increase to 20.41%
Stable Foods, the Kenyan agri-tech startup, has raised US$600,000 in funding from Acumen Resilient Agriculture Fund and Mercy Corps Ventures. The funds will be used to develop its climate-smart smallholder food production system.
Beekeeper Tech, the Tunisia-based agritech, has raised US$640,000 in a round led by 216 Capital Ventures. The startup creates and sells smart connected equipment for beekeepers. Funds will be used to accelerate deployment in new regions and expand its position in MENA.
Egypt’s Blnk, a fintech startup enabling instant consumer credit at point-of-sale, has raised US$23,7 million in equity ($12,5 million) and debt funding ($11,2 million) together with a $8,3 million securitised bond issuance underwritten by the National Bank of Egypt and Banque du Caire. The funds will be used to support further development of Blnk’s AI-powered lending infrastructure and the financing of its growing portfolio of customers. The equity raise was led by Emirates International Investment Company and venture capital firm Sawari Ventures with participation from angel investors.
BasiGo, an early-stage e-mobility start-up looking to revolutionise the public transportation sector by providing public transport bus owners with a cost-effective electric alternative to diesel, has raised US$6,6 million. The new funding round was led by Mobility54, Trucks VC and Novastar Ventures with participation from Moxxie Ventures, My Climate Journey, Susquehanna Foundation, Keiki Capital and OnCapital. Funds will be used to acquire new locally manufactured electric buses, charging infrastructure through the company’s Pay-As-You-Drive financing model.
Premier Group is set to list on the JSE by way of an Initial Public Offering. The group will list on the main board under the Food Products’ sector. The offer for the sale of shares held by Brait intends to raise gross proceeds of up to R3,7 billion. The proposed pricing range of R53.82 – R67.04 per share translates into a valuation of R6,9 billion to R8,6 billion – a 10%-28% discount to Brait’s latest valuation of Premier. Titan and Rand Merchant Bank have committed to underwrite R2,9 billion and R500 million respectively. The capital raised from this unbundling will assist in addressing Brait’s future liquidity requirements.
Mantengu Mining intends to raise R15 million by way of a fully underwritten renounceable rights offer. The company will offer 15,000,000,000 shares at 0.1 cent per rights offer share.
EOH has announced a proposed rights offer of R500 million and a specific issue for cash of R100 million to Lebashe Investment Group – EOH’s BEE shareholder. The net proceeds of the capital raise will be used to repay c.R563 million of its bridge facility while maintaining sufficient working capital in the short to medium terms.
Sun International has acquired 49,6 million Grand Parade Investments (GPI) securities in the open market for an undisclosed sum. The shares represent a 10.56% stake in the company. Last week GMB Liquidity Corporation made a mandatory offer to GPI minorities following an increase in its stake to over 35%. GPI holds stake in two of SA’s most profitable gaming assets.
The JSE has warned Fortress REIT that it is at risk of losing its REIT status if a compliance declaration is not submitted before month end.
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:
Capital & Counties Properties has repurchased 684,539 shares for a total consideration of £773,726 in accordance with the authority granted by shareholders at its annual general meeting in June 2022.
Glencore this week repurchased 18,150,000 shares for a total consideration of £92,82 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 1,882,677 shares at an aggregate cost of A$7,38 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period November 7 – 11, a further 5,290,317 Prosus shares were repurchased for an aggregate €271,83 million and a further 787,223 Naspers shares for a total consideration of R1,74 billion.
British American Tobacco repurchased a further 1,250,277 shares this week for a total of £40,64 million. Following the purchase of these shares, the company holds 217,273,604 of its shares in Treasury.
Six companies issued profit warnings this week: Purple Group, Telkom SA SOC, PPC, eMedia, WG Wearne and Afine Investments.
Six companies issued or withdrew cautionary notices. The companies were: African Equity Empowerment Investments, Nutritional Holdings, Trustco, Tongaat Hulett, PSV and Sebata Holdings.
If Fifty Shades of Grey got your pulse racing, then keep your defibrillator on standby as you explore the various nuances of South Africa’s potential greylisting by the Financial Action Task Force (FATF). This is a ‘naughty list’ that we really have no desire to be on.
Who is the FATF? South Africa is a member of the FATF, which is an inter-governmental, policy-making body that acts as a global money laundering, corruption and terrorist financing watchdog.
Why does SA risk greylisting? In 2019, the FATF conducted a mutual evaluation (peer review) of SA’s Anti- Money Laundering and Combating of the Financing of Terrorism system. It published a report in October 2021 (FATF report), in which the country rated poorly and failed in 20 of the 40 FATF standards and in all 11 effectiveness measures.
What are the implications of being on the grey list? The label would raise SA’s risk profile, causing greater scrutiny of finance and investment, ultimately increasing the cost of doing business and affecting the growth of the country.
What needs to be done to avert greylisting? In order to satisfy the FATF, SA has to implement legislation or policies that address the deficiencies identified in the FATF report. For instance:
• The General Laws (Anti Money Laundering & Combating Terrorism Financing) Amendment Bill (GLA Bill), which has recently been approved by Cabinet, attempts to address 14 of the 20 deficiencies identified by the FATF. The GLA Bill is an omnibus Bill that proposes amendments to the Financial Intelligence Centre Act, the Non-Profit Organisation Act, the Trust Property Control Act, the Companies Act and the Financial Sector Regulations Act; and
• The Protection of Constitutional Democracy against Terrorist & Related Activities Amendment Bill will address two deficiencies identified by the FATF report, with the remaining four to be dealt with by regulations. It is expected to be enacted by November 2022.
SA will have to ensure that these Bills are in effect by early January 2023. The more difficult part will be to demonstrate that the laws are effective. These issues relate, for instance, to the country having a national risk-assessment plan, how effective the authorities are in investigating and prosecuting the crimes, and whether the proceeds of illicit activity are confiscated.
What are the most radical changes to be introduced to the Companies Act? The Companies Act enables a company’s issued securities to be held by and registered in the name of one person (nominee) for the beneficial interest of another person (owner), subject to the provisions of the company’s memorandum of incorporation.
The owner is entitled to the rights attached to the share, notwithstanding that the shares are registered in the nominee’s name. There are a number of reasons why an owner may not want the shares of a company to be registered in its name, and – although such reasons may not be sinister – it is imperative from the perspective of the FATF that the identity of such owner is easily attainable and accessible in order to avoid the abuse of company ownership for crimes and illicit purposes.
Some also argue the import of corporate transparency to protect the board of the company, the shareholders and the public for purposes of detecting insider trading; minority shareholders being able to identify a change in the controlling shareholder; and the board of directors and shareholders being in a position to predict a hostile takeover. This does, however, need to be carefully balanced with what is reasonable and practically enforceable.
The Companies Amendment Bill, 2021 (Companies Bill), which has been in the pipeline for several years, recognised the need for more transparent companies, and proposes, among other significant changes, extensive amendments to the disclosure requirements contained in the Companies Act.
Subsequent to the publication of the last draft of the Companies Bill, the GLA Bill was released for comment, which also proposes changes to the same provisions of the Companies Act as the Companies Bill, with the aim of creating transparent companies.
Whilst it is not yet clear which iteration of these amendments will ultimately come into force, what is apparent is that corporates will soon be faced with more onerous beneficial owner disclosure obligations. Disclosure obligations are likely to apply both to public and private companies, and apply up the ownership chain, well beyond what is currently required, to the natural persons ultimately behind the ownership. The same is true for beneficiaries behind trusts. Disclosures will be required in securities registers, recorded at the Companies and Intellectual Property Commission, and filed with annual returns, with that information to be available for inspection.
The proposed amendments by the GLA and the Companies Bill to the Companies Act have been hotly contested by corporates that foresee the obstacles in compliance, based on experience in other jurisdictions that have implemented other variations of similar laws. It has also been contested by the Johannesburg Stock Exchange, South Africa’s primary exchange (the JSE), which denounces the proposed beneficial- owner disclosure and reporting requirements as too onerous on publicly listed companies. This is because listed companies have significantly more shareholders than non-listed companies, which undergo frequent changes. The Treasury has rejected a plea by the JSE for listed companies to be entirely exempt from the requirement to register their beneficial owners. However, it undertook to refine the proposals to make them “reasonably implementable” by listed companies.
How long do we have? SA had until the end of October 2022 to satisfy the FATF that it has addressed its concerns. The FATF will make its final decision in February 2023.
Should SA, notwithstanding its efforts, ultimately be greylisted, then the country will have to do further work to be removed from the list. In the best- case scenario, we can try emulating Mauritius, which was able to get off the greylist in less than two years.
A report commissioned by Business Leadership SA determined that there is an 85% chance that SA will be greylisted. Although there is hope that we can avert this altogether, extensive legislative changes are on their way. Best be prepared.
Ricci Hackner is a Knowledge Lawyer | Bowmans South Africa
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Mediclinic’s earnings are a mixed bag
As the group is currently under offer, there is no dividend
In the six months ended September, Mediclinic’s revenue increased by 10% and the adjusted EBITDA margin fell from 15.8% to 14.2% due to increased operating expenses.
Despite an 8% drop in operating profit, headline earnings per share (HEPS) increased by 36% to 11.3 pence.
Cash conversion was poor in this period, dropping from 104% to 72%. This resulted in a higher leverage ratio vs. the comparable period.
Because of the current offer on the table from Remgro and MSC Mediterranean Shipping Company, no interim dividend has been declared.
PPC expects a substantial drop in earnings
The only good news is that net debt is much lower
The PPC recovery story has had a considerable wobbly this year. The share price has lost more than half its value in 2022, which must be heartbreaking for those who didn’t take profit after a huge 2021 for the stock:
There are significant cost pressures in the group and the competitive nature of the industry means that sales price increases were limited to 5% in the six months to September 2022. This has led to the two words that no investor wants to see: EBITDA compression.
Understanding the numbers is difficult, as hyperinflation in Zimbabwe is skewing the results.
In South Africa and Botswana, sales volumes were down 2.6% and revenue was up 4% thanks to price increases and product mix. The impact on margin is severe unfortunately, dropping from 18.7% to 12.2%. The good news is that positive cash generation resulted in net debt reducing by R140 million to R935 million.
In Rwanda (the CIMERWA business), volumes increased by 11% and EBITDA jumped by 63% to R249 million. Margins increased from 28.3% to 32.3%. This is a terrific result, with the business in a net cash position of R345 million.
In Zimbabwe, a planned kiln shut-down in the first quarter and some other factors led to a decline of 13% in volumes. Reported EBITDA fell by 48%, impacted by hyperinflationary accounting in addition to the pressures in the business. With more foreign currency available, PPC Zimbabwe paid a dividend of $4.4 million to PPC in June. The business ended the period with R253 million in cash.
Group EBITDA fell by 23% for the period. Excluding PPC Zimbabwe, EBITDA fell by 12%. The net debt of the group improved at least, reducing to R677 million from over R1 billion in March.
With Zimbabwe included, HEPS is now negative. Excluding Zimbabwe, the drop in HEPS is still pretty ugly, from 10 cents per share to between 2 cents and 6 cents.
The focus remains on cash generation and operational efficiencies.
I’m glad I gave up on Spar
The market was rather horrified at a 51% drop in the dividend
The Spar announcement started with commentary on a “resilient performance” for the year ended September 2022, yet the market was having none of it. The share price fell 12.3% on the day despite a 6% increase in group turnover.
Margins are under serious pressure at Spar. Operating profit increased by just 1.1%, with Spar taking pain from load shedding and fuel cost pressures in South Africa. Remember, Spar is a wholesaler that supplies franchisees, so this is mainly a logistics play.
Diluted HEPS fell by 2.9% to 1,159.1 cents per share, putting the group on a 12.5x Price/Earnings multiple after the sharp fall in the share price.
Although Spar had previously told the market about an expected decrease in the pay-out ratio, the extent of that decrease was clearly a shock. The group is making a strategic investment in SAP and shareholders will have to stomach a lower dividend for a period of two years.
In South Africa, the core grocery business grew sales by 5.3%. Against a Covid-ruined base, TOPS at SPAR grew by 42.6% and reaffirmed its position as the “number one liquor brand” in South Africa. A far more impressive number is Build it growing by 3.1% at a time when the DIY market has been hammered.
BWG Group in Ireland and South West England grew turnover by 7.6% in euros. The story in Switzerland is far less appealing, with consumers having returned to large supermarkets as the pandemic waned. Turnover in that country fell by 3% in local currency, though it is 14.4% higher than pre-pandemic levels. In Poland, turnover grew by 8.2% and operating losses reduced by 9.5%.
In my view, Spar is stretched thin with many operations and challenges in each one. There are no “easy wins” at the moment and the more focused competitors are winning this fight. As a case in point, Spar reckons that the SPAR2U on-demand offering is achieving positive feedback from consumers.
I just wish I knew who those consumers are, because I don’t know a single person who has used SPAR2U and I’ve never heard anyone talking about it. Meanwhile, the on-demand offerings from Checkers, Pick n Pay and Woolworths are all clearly visible on our roads. When I asked on Twitter, it seems as though some people are impressed with the SPAR2U offering, but few have ever even heard of it.
I’m glad I gave up on Spar after I bought the share in late 2021 after the first set of bad results out of Poland. I sold it a few months later. At one stage, it looked like a cute value play. It turned out to be a value trap of note.
I got it badly wrong with Tiger Brands
The business has achieved more pricing power than I expected
Full credit to the team at Tiger Brands: they managed to pull off a much better result than I anticipated. With consumers clearly under pressure and inflation running away from all of us, I didn’t give Tiger Brands much credit for its pricing power. In the second half of the financial year, the company clearly managed to push price increases through to consumers.
In an updated trading statement for the year ended September, HEPS from total operations is expected to be between 48% and 53% higher than in the comparable year. This suggests a range of 1,668 cents to 1,724 cents. After the share price closed 2.5% higher, the Price/Earnings multiple is between 11.4x and 11.8x.
A 37% increase in the share price in the past six months has been highly rewarding for punters who believed that the worst was behind Tiger Brands.
I remain bearish on the business in general. With a track record that has been in the headlines for all the wrong reasons, Tiger Brands isn’t a company I ever see myself investing in. Those who are interested in this sector should also refer to Brait’s announcements this week regarding the separate listing of Premier, a business that competes directly with Tiger Brands.
Woolworths continues a strong run
I’m becoming increasingly impressed with the new management team
Woolworths has released a trading update for the 20 weeks ended 13 November 2022.
Before you get excited by the percentages that I’ll shortly be giving you, it’s worth remembering that the prior period included terrible lockdowns in Australia and the aftermath of the riots in South Africa. Still, sales are up 23.3% in this period.
Interestingly, online sales fell by 13.7% as customers returned to stores. Online sales now contribute 10.1% to group turnover, which is still a meaningful contribution.
In Southern Africa, the Fashion Beauty Home (FBH) business grew turnover by 10.8%. The biggest win is in profitability rather than sales, with full-priced sales up 15.2% and clearance sales down 20%. This game is all about driving margins, not just revenue at any cost. In a perfect example of why I like what I’m seeing at Woolworths these days, the winter sale was the smallest and most profitable to date. Trading space reduced by 2.4%.
The local Woolworths Food business is still investing in price to be more competitive against the likes of Checkers and Pick n Pay. Product inflation was 7.9% and price movement was 6.3%, which means Woolworths had to eat some of the increases itself. With Food turnover up by 7.3% and online sales up 26% thanks to the success of Dash, we will have to wait for more detailed results to see the net impact on profits.
Comparing the two businesses in terms of online sales is fascinating. Online grew by 26% in FBH, now contributing 4.2% of sales. In Food, online is now 3.6% of total sales. Long-term, I think online penetration in Food will be significantly higher than in FBH. Based on comments on Twitter though, there is still grumpiness around the user experience in Dash and the integration with the broader online offering. Woolworths has more work to do.
Keep an eye on South African consumer health. The annualised impairment rate in Woolworths Financial Services increased to 6.2% vs. 4.1% in the prior period. That’s not good.
In the lands of kangaroos and kiwis, Country Road Group grew sales by 36.2% and reduced space by 5.1%. David Jones increased turnover by 55.3% and decreased trading space by 3.7%. In both cases, the growth rate is flattered by extensive lockdowns in Australia in the comparable period.
For the 26 weeks ending 25 December 2022, Woolworths expects HEPS to be at least 20% higher than the comparable period. This is the minimum percentage that triggers a trading statement. Based on these numbers, I’m expecting a significantly higher growth number than that.
Little Bites:
Director dealings:
A non-executive director of African Rainbow Minerals has sold shares worth R9.7 million (that’s a big one) and a director of a subsidiary of the company has sold shares worth R1.45 million
The CEO of Motus has sold shares in the company worth R3.8 million
A director of a subsidiary of Shoprite has sold shares worth just under R3 million
The CEO of Altron is still buying shares in the company, this time for just over R900k
I was waiting for this one – a director of Santova has sold shares to cover the tax on the options trades, but they have retained the rest of the shares (usually the announcements of the award and the sale are made at the same time)
After my commentary on Delta Property Fund in yesterday’s Ghost Bites, the CEO responded to me on Twitter (an approach which I always have a lot of respect for). This was in relation to the timing of a share purchase by a director relative to the announcement of a disposal of property. I offered to republish the full response here in Ghost Bites (along with my final comment on the matter):
Investec Property Fund released interim results for the six months to September. Distributable income per share has increased by 2.7%. The balance sheet is stable with a loan-to-value (LTV) ratio of 38.3%. The net asset value per share increased by 4% to R17.36 and the current share price is R10.20 – a significant discount to NAV.
In good news for Murray & Roberts, the refinancing of debt with South African lenders has been completed and the facility has been upsized from R1.675 billion to R2 billion. The structure is a R1.35 billion term loan facility for 18 months and a R650 million overdraft repayable on-demand. This gives the company breathing room to make progress on the deleveraging plan.
Argent Industrial released results for the six months ended September. Revenue increased by 13.5%, EBITDA jumped by 19.5% (so margins improved in the process) and HEPS was 22.4% higher. This is the perfect shape to an income statement, with operating leverage and financial leverage at play. This is why a percentage increase in revenue leads to higher increases in EBITDA (operating profit) and HEPS. An interim dividend of 45 cents per share has been declared.
Dipula Income Fund released results for the year ended August 2022. The net asset value (NAV) per share is R6.63 and the share price is R4.15, so this is yet another property fund trading at a discount to NAV. This was an important year for Dipula, as the fund collapsed its dual share class structure into a single share class structure. This limits comparability with previous years. The dividend is 30.977724 cents per share.
Reinet Investments released results for the six months ended September 2022. The net asset value has grown at 8.8% in euro terms since March 2009. The latest growth isn’t nearly as pretty as that number, with a decrease of 7.6% between March 2022 and September 2022.
Premier Fishing and Brands released results for the year ended August 2022. Although revenue fell by 17%, EBITDA was 11% higher. The group swung into a profit, with HEPS increasing from a loss of 3.39 cents to a profit of 5.65 cents. If you’re wondering how profits improved against that revenue result, the answer lies primarily in a grant from the Department of Trade Industry and Competition.
Load shedding is really hurting eMedia’s business, as there are simply fewer eyeballs watching TV. When combined with a more depressed economic environment, market share gains by e.tv couldn’t offset the negative impact on advertising revenue. To add to the struggles, the company is taking MultiChoice South Africa to the Competition Commission regarding the removal of four entertainment channels off the bouquet. Against this backdrop, the earnings for the six months ended September 2022 have taken a significant knock. HEPS from continuing operations will decrease by between approximately 18% and 29%. Even the famous Anaconda reruns couldn’t save this result!
Anglo American announced De Beers’ rough diamond sales value for the ninth sales cycle of 2022. Provisional sales of $450 million are higher than $438 million in the comparable cycle last year. This is a traditionally quieter sales cycle, so a drop vs. $508 million in the eighth sales cycle was expected.
In a separate announcement, Anglo American announced that it has secured the supply of 100% renewable electricity for the Australian steelmaking operations. The source is two major wind and solar projects in Queensland. From 2025, the company expects 60% of global electricity requirements to be met from renewable sources. As I’ve said before, Anglo is doing a lot more than just paying lip service to the carbon reduction push.
The shareholders of African Rainbow Capital Investments were almost unanimous in their approval of the new management fees structure. It’s not hard to improve on the old structure, so I guess they will take whatever they can get.
Stefanutti Stocks is executing various disposals in line with a restructuring plan. This has initiated a split of the accounting into continuing and discontinued operations. For the six months ended August, HEPS from continuing operations is expected to be a loss of between 29.47 cents and 18.76 cents vs. a loss of 53.59 cents in the comparable period. From all operations, the loss is between 30.20 cents and 16.78 cents per share vs. 67.12 cents in the comparable period. Either way, it’s all rather ugly.
In a rather unusual step, BDO’s status as external auditor of Putprop was terminated with immediate effect because shareholders didn’t approve the resolution to appoint BDO as external auditor.
Southern Palladium has released more drilling results. Unless you have a qualification in geology, it’s best to just skip to the commentary by the Managing Director on the results. He sounds happy with the results.
Globe Trade Centre’s FFO (Funds From Operations) increased marginally from EUR52 million to EUR54 million in the nine months ended September. I have no idea why the company bothers with a JSE listing as you’re more likely to have two months of no load shedding than see a trade on the local market.
In the related party transaction between AEEI and Sekunjalo, Merchantec was appointed as independent expert and has opined that the transaction is fair to shareholders of AEEI.
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Equites announces a R1.245bn deal with Shoprite
In line with its strategy, Equites will develop a logistics facility for Shoprite in Gauteng
One of the metrics that investors love looking at is return on equity. There are other metrics like return on invested capital that do a similar (but not quite the same) job.
For a group like Shoprite, the best use of capital isn’t to tie it up in large new properties, as that capital cannot earn the same return that the store operations are able to achieve.
For Equites, the mandate is to invest in property that offers investors a hybrid return between debt and capital. It therefore makes sense for a retailer like Shoprite to use a property fund like Equites to develop its warehousing. With a defensive tenant like Shoprite, the risk profile is appealing for income-focused investors who also want protection against inflation.
The initial lease is for 20 years, with the right to renew for three additional 10-year periods. The contracted initial yield is 7.75% and the rental will escalate by 5% per annum. You can now see how property funds deliver income to investors along with some inflation protection. A loan-to-value ratio of 30% is assumed by the company in its forecasts and the marginal cost of debt is assumed to be 9%.
These things take time to build, with the lease only expected to commence on 1 July 2024. The construction cost is R979 million and it will increase the group loan-to-value ratio by 2.3%. This is a Category 2 transaction, which means shareholders won’t be asked for their opinion on whether they think the deal should go ahead or not.
Ninety One takes a knock to earnings
They say it best: a risk-on business operating in a risk-off environment
Asset management firms simply don’t perform well when markets are heading in the wrong direction. Assets under management (the basis for charging fees) falls as the market falls, with client inflows as a potential mitigating factor.
Ninety One couldn’t even rely on that, with net outflows of £3.2 billion at a time when assets under management fell by 8% in the six months to September. That’s not good, as client flows are usually seen as the best way to assess the performance of an asset manager. Ninety One attributes the outflows to lower levels of new business volumes and clients choosing to derisk their portfolios.
Unsurprisingly, HEPS fell by 7% to 9 pence per share.
The group anticipates that challenging markets will persist for the foreseeable future. The share price has lost nearly 26% of its value this year.
Renergen switches LNG back on
But there is growing impatience for the helium module to be turned on
The market seems to be a little nervous about Renergen. In the past 90 days, the share price has dropped over 23% as jitters have crept in about the helium module being activated.
Recent issues with the liquefied natural gas (LNG) plant did nothing to calm those fears, with Renergen announcing that the LNG system has at least been repaired and turned back on.
To give investors something to hold onto, Renergen noted that the helium separation and recovery module is providing “high levels of confidence with recovery exceeding design parameters” – yet the share price only increased by 0.5% on this news.
Another solid result from Stor-Age
The share price drifting lower this year is a function of valuation, not the business model
For the six months ended September, Stor-Age achieved a dependable 6.1% increase in distributable income per share. It won’t set your hair on fire but won’t set your portfolio on fire either, with Stor-Age known for being a solid business.
The group owns 86 self storage properties, of which 56 are in South Africa and 30 are in the UK. The UK portfolio (branded Storage King) is worth R5.8 billion and the local portfolio is worth R5.1 billion. Growth in the portfolio is achieved through developments (eight new properties are scheduled to open in the next 18 months) and acquisitions of existing storage parks.
Same-store occupancy in South Africa increased from 87.6% to 89.4%. In the UK, that metric decreased from 94.1% to 91.8%. Overall portfolio vacancy is lower because new properties take a while to fill up. It’s interesting to note that commercial tenants contribute 38% of total tenants in South Africa and only 22% in the UK. The average length of stay for existing tenants is 24.4 months locally and 29.2 months in the UK, so churn is surprisingly low.
In a move reminiscent of how hotel groups like Hyatt operate, Stor-Age is now offering third-party management contracts to independent operators, developers and private equity owners. This is helping Stor-Age earn revenue in various European countries without deploying capital. This is a tiny part of the group (less than 1%) but looks like an interesting source of future returns.
The balance sheet is strong, with a loan-to-value (LTV) ratio of 30%. Over 85% of net debt is subject to interest rate hedging.
Growth in headline earnings per share (34.77%) and net asset value per share (10.17%) has far outpaced the dividend per share (6.1%). The net asset value per share of R14.79 is higher than the current price of R13.69, which is what an investor wants to see in a property fund before taking a position.
The share price is down 6% this year and the annualised dividend yield is around 8.8%. I made good money on Stor-Age during the pandemic and then sold as the share has looked fully priced to me since then. It turned out to be the right decision.
Transaction Capital gives the market a scare
I’m keeping a close eye here to potentially add to my position
The Transaction Capital share price is down nearly 16% this year, with a rude awakening for those who got way too carried away with the valuation earlier this year. If you bought at the peak, this is an ugly chart:
With results for the year ended September now available, we see an increase in core earnings per share from continuing operations of 17%. Notably however, return on average equity has dropped from 15.1% to 14.0%, although return on assets is steady at 4.4%. The dividend per share increased from 52 cents to 70 cents.
The issues this year were felt in the SA Taxi business, as the floods in KZN that shut the Toyota factory had a knock-on effect on a business that makes money from financing taxis. Core earnings in this business fell by 26%.
I found it very interesting that the SENS announcement deals with the Nutun division first, previously called TCRS. This division was all but ignored over the pandemic, yet it now features right up front. I guess that with earnings growth attributable to the group of 28%, that position has been earned.
The company has been acquiring non performing loan portfolios more frequently in South Africa this year and has sold its Australian book. Nutun is focused on providing services internationally (including the new push into customer engagement services that clients can outsource to South Africa) rather than buying books abroad.
WeBuyCars is up next as the largest contributor to the group (43% of earnings), growing earnings by 41% and earnings attributable to Transaction Capital by 100% as the stake in the business has been increased. All metrics are heading in the right direction, with F&I penetration (the percentage of sales with finance and insurance products in addition to the car) increasing from 13.6% to 18.2%.
Overall though, the market is worried about WeBuyCars in this environment. The contribution to group earnings is huge and if used car prices drop in anywhere near the same fashion as in the US, things could get ugly. On the plus side, SA Taxi is likely to have a better year after such a terrible 2022.
I’m holding my shares and chewing on whether to add to the position.
Little Bites:
Director dealings:
The CEO of Grindrod bought shares in the company worth R1.3 million.
The CEO of Altron has acquired shares worth R16k (one of several recent purchases).
A director of AB InBev exercised options for 140,000 shares and sold all of them.
Two directors of Impala Platinum have sold shares worth R6.9 million. That sends a pretty strong message about how Impala has been outgunned by Northam Platinum on the Royal Bafokeng Platinum deal.
A director of ADvTECH exercised share options and then sold all the shares received.
Directors of Santova exercised share options worth an aggregate of nearly R1.6 million.
Of concern in the context in the director dealing above, Delta Property Fund announced the disposal of the Standard Bank Greyville building in Durban for R44 million. This will reduce the fund’s loan to value by 20 basis points from 58.2% to 58%. Vacancy levels will reduce by 40 basis points to 33.5%. The property has a vacancy rate of 64.4% so the buyer (a private individual) will have to work hard to make this asset a success. This is a category 2 transaction as it is significant for Delta, which is why I’m surprised to see a director buying shares just days before this announcement.
Trematon released a trading statement for the year ended August 2022 and the company wants you to focus on intrinsic net asset value (INAV) as the most sensible financial metric. INAV is expected to be between 485 cents and 495 cents, between 8% and 10% lower than the comparable period.
In the Tongaat Hulett business rescue process, the first meetings of employees and creditors have taken place. Post commencement finance has been advanced by lenders and will be used to pay salaries and critical suppliers. Naturally, funding operating costs through further debt won’t do any favours to whatever equity value might still be left in this thing.
With terrible news coming out of Poland, I suspect the NEPI Rockcastle share price is going to take a dive. This is such unlucky timing, as the company has announced an agreement to acquire 100% of the Atrium Copernicus Shopping Center in Torun, Poland. The deal value is €127 million, which is too small to even be a Category 2 deal under JSE rules. The acquisition will be funded by existing cash resources.
Premier Fishing and Brands released a trading statement for the year ended August 2022 that shows a strong swing back into profitability. After posting a headline loss per share of -3.39 cents in the comparable period, headline earnings per share is up to 5.65 cents.
Deneb Investments released a trading statement for the six months ended September 2022 that anticipates HEPS growth of between 49% and 69%, with an expected range of between 15 cents and 17.1 cents per share. The story looks very different if you exclude the insurance claim received in this period for Covid business interruption, as HEPS would then be down by between 30% and 50%.
Safari Investments released a trading statement for the six months ended September 2022 that reflects growth of between 28% and 36% in the distribution per share. The distribution will be between 32 cents and 34 cents per share and the share price closed at R5.60.
African Media Entertainment, owner of several major radio stations among other assets, has released a trading statement for the six months ended September 2022. HEPS will be between 140 cents and 160 cents per share, an increase of between 43.9% and 64.4%. The share price closed 6.7% higher at R37.25.
In a complicated restructure of its treasury function, Invicta needed to announced the steps in detail as one of them triggers a Category 2 announcement under JSE rules. Ultimately, a wholly-owned subsidiary is disposing of a R2.355 billion preference share to a part of the group that has 25% B-BBEE ownership. This is like selling off 25% of the preference share and the value is high enough to trigger the Category 2 announcement. Invicta’s group structure has always been complicated, so a restructure isn’t anything surprising.
Trustco is busy with a deal related to the Meya business that would give SJSL an option to become a 70% shareholder in Meya for up to $50 million. There are now discussions around a larger deal and Trustco believes that definitive agreements may be concluded by the end of December 2022.
Mantengu Mining is looking to raise R15 million through a fully underwritten, renounceable rights offer. There are several underwriters who have agreed to underwrite the rights offer in a way that would reduce or settle their loan balances.
Sebata Holdings has lifted its cautionary announcement as negotiations related to the potential disposal of one or more businesses have been terminated. Predictably, the website isn’t even working.
Nutritional Holdings has been a soap opera for ages now, with a liquidation court date set for 20 January 2023 and the JSE at advanced stages of considering a delisting of the company. In the meantime, a new firm of auditors has been approached to assist with audits and accounting consultants have been engaged for the consolidation of certain subsidiaries.
If I understand the legal position correctly, it looks like PSV Holdings may yet be saved in a business rescue process. A material shareholder appears to have secured enough funding to keep the lights on.
I always include the Naspers and Prosus share repurchase numbers because they are so utterly enormous. Between 7 November and 11 November, Naspers shares worth R1.74 billion and Prosus shares worth $276 million were repurchased.
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