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Ghost Global (Bed Bath & Beyond | Affirm Holdings | Amazon and EA | Farfetch)

Kayla Soni
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Ghost Global (Bed Bath & Beyond | Affirm Holdings | Amazon and EA | Farfetch)

Ghost Grad Kayla Soni is new to the team and has hit the ground running with this week’s Ghost Global, covering a great variety of companies.

Bed Bath & Beyond Bounces Back

Bed Bath & Beyond (BBBY) has been a Ghost Global favourite recently, earning numerous headlines throughout August. Why not continue the trend?

The share price is up more than 130% this month, enjoying strong continued support from so-called “meme stock” enthusiasts who seem to buy shares regardless of fundamentals.

Speaking of the fundamentals, the company has plans to grow its customer base and win market share, while driving growth and profitability in addition to a stronger balance sheet. It all sounds great on paper. A “strategic update” is due from the company this week, which will give investors more to think about.

It’s also worth highlighting the “short squeeze” phenomenon – a surge in the share price that forces bearish investors with short positions (a bet on the price dropping) to repurchase shares at higher prices to limit their losses, thus driving demand and further inflating the price of these assets. The potential for a short squeeze can be measured through the “short interest” or percentage of shares in a short position, with reports that BBBY had short interest of over 50%!

Following a period of intense decline, BBBY is finalising fresh financing through a $400 million loan from Sixth Street Partners to counteract the “balance sheet swirl” as they are calling it. This caused a flurry of activity in the company’s bonds, with volumes in the 2044 bond making it one of the highest traded yield bonds on the market at the end of last week

Affirm Holdings: revenue rises and the stock slides

The “buy-now-pay-later” FinTech company slumped by 13.5% in premarket trading last Friday (and eventually closed nearly 20% lower) after the company announced a bigger-than-expected quarterly loss of 65 cents per share (vs. market expectations of a 58 cents per share loss). Revenue ran ahead of estimates though, coming in at $364.1 million vs. expected $355 million.

The biggest issue lies in the 2023 revenue predictions. Affirm expects $1.6 billion – $1.7 billion as online shopping heads towards pre-Covid levels, whereas the market expected $1.9 billion as a continuation of rapid growth during the pandemic.

The Covid darlings are struggling with growth as the world has normalised, driving Wall Street jitters that Affirm’s business model (providing short-term loans) will not succeed in a weak economy that is characterised by rising interest rates and surging inflation. There are many players competing for credit among shoppers, with pressure likely to be felt on demand for non-discretionary goods that shoppers would typically use credit for.

Investors have raised concerns around stagnant growth and the likely rise of delinquencies among borrowers as the economy weakens. Affirm’s credit loss provisions spiked to $72.7 million from $25.5 million in the comparable quarter last year!

Some analysts are looking through the noise and remaining confident, with Morgan Stanley giving it a Buy rating with a health warning that it could take a few more quarters for investor confidence to return. Those with a bearish view are pointing to a complacent company that is untested in an economic downturn.

Amazon: NOT in the game despite acquisition rumours

Will they? Won’t they? Rumours ran wild that Amazon would be making an offer for video game developer Electronic Arts (EA), driving a strong rally last week including a 15% pre-market gain. Things have settled down since then, so those who rushed into the spike are already nursing their losses.

If this deal is real, the technology giant would become the one of the leading video game companies in the world and this would likely be Amazon’s largest acquisition to date (at least $35 billion and far in excess of the acquisition of Whole Foods for $13.7 billion back in 2017).

The story is believable, with Microsoft in the process of acquiring Activision Blizzard (currently going through regulatory approvals). Electronic Arts is known for sports titles in particular, which is both a strength and a weakness as the business is dependent on being granted licences from sports clubs and associations. Average annual active users of 580 million is 16% higher than the prior financial year, so EA is still growing.

If not Amazon, would Apple or Disney make a move here? Microsoft won’t be able to, as competition authorities would certainly block a further acquisition after Activision Blizzard.

Amazon has been quick to shut down these rumours and EA followed the same route. Make no mistake though: EA is a logical acquisition target for the world’s tech and media giants. EA CEO Andrew Wilson hinted that EA would be “open” to doing business differently – read into that what you will.

Luxury fashion platform’s performance is not so farfetched

I’m sure all the shopaholics and fashionistas know about Farfetch, but for those of you that rotate through the same three outfits in your wardrobe, Farfetch is an online luxury fashion retail platform that sells goods from 700+ boutiques and brands worldwide.

Despite facing considerable exchange rate headwinds, FarFetch’s revenue beat estimates. Gross merchandise value (GMV) grew sharply in the pandemic and is still inching upwards, despite Russian operations being suspended (a critical market for luxury goods) and ongoing Covid-related lockdowns in China.

The New Guards Autumn-Winter 2022 collection proved to be a shopper favorite, with the Brand Platform contributing just over 10% of GMV.

The share price is up 25% in the past month, thanks mainly to the news of Farfetch acquiring 47.5% of Richemont’s YOOX Net-A-Porter (YNAP) online fashion group. With Richemont identifying Farfetch as its online platform of choice for luxury goods as the companies work closer together, this company is firmly on the map for South African investors.

It’s safe to say that Farfetch is a popular choice for investors, shareholders and shopaholics alike, which is why The Finance Ghost and Mohammed Nalla chose to focus on the company in this week’s episode of Magic Markets Premium. For insights into Farfetch (including its very worrying balance sheet) and over 40 global stocks, with a new report and podcast released every week, visit the Magic Markets website to subscribe. At R990/year, it’s the best investment you can make – an investment in yourself!

The Family Finance Show: Personal Finance Habits for Entrepreneurs

The Finance Ghost
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The Family Finance Show: Personal Finance Habits for Entrepreneurs

Hosted by Diana Granoux, The Family Finance Show focuses on real-world tips and advice to help people do a better job of managing their finances. After I appeared as a guest in the first season to talk about dividends, Diana invited me back for a raw discussion about life as an entrepreneur.

Whether you are contemplating a side hustle, already executing that strategy or so far down the road that you’ve quite your corporate job, there is something in here for you. I may be a ghost, but the stories and insights are authentic and based on my actual experience in “escaping” corporate.

The world of entrepreneurship isn’t for everyone, as you’ll discover by listening to this show:

Potential offer by Walmart to acquire all outstanding shares in Massmart

Sponsored Content
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Potential offer by Walmart to acquire all outstanding shares in Massmart

Detailed cautionary announcement regarding a potential offer by Walmart to acquire all the outstanding shares in Massmart that it does not already own, excluding treasury shares.

Note from The Finance Ghost:

It’s finally happened. Walmart has decided to take Massmart private, enabling the group to execute a turnaround strategy away from the public eye and without the agony of releasing such tough results every six months.

The mechanics of the potential deal are still being finalised and this is not a firm intention announcement. The potential offer price is R62 per share, representing a premium of 53% to the closing share price and a 68.7% premium to the 30-day VWAP.

After injecting R4 billion into Massmart to keep the business afloat during Covid and the riots, it has become clear that this turnaround is far from over.

Refer to the detailed announcement below for the official statement from Walmart and Massmart:

Massmart-Holdings-Cautionary-AnnouncementDownload

Ghost Bites Vol 79 (22)

The Finance Ghost
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Ghost Bites Vol 79 (22)

Corporate finance corner (M&A / capital raises)

  • I’ve been writing for a long time about Walmart’s incredible patience with the attempted turnaround of Massmart. If you read about the latest interim results in the financial updates section of Ghost Bites today, you’ll see why I call it an “attempted” turnaround. Sure enough, the Americans are tired of trying to save this business in the public environment, particularly after they had to inject R4 billion in financial support to help the group survive Covid lockdowns and the riots. It is much easier to make really tough choices when a company is private, particularly with the financial disaster that is Game. Walmart bought 51% of Massmart in 2011 for R148 per share when the USD:ZAR was around the R7 mark. The potential offer of R62 per share at a time when the rand is struggling to stay below R17 means that the 49% could be acquired for around $3.60 vs. the original deal at $21 per share. Talk about averaging down! It is very important to note that this is only a potential offer at this stage, not a firm intention announcement that commits Walmart to making an offer.
  • Grindrod Shipping is the other big name that looks set to disappear from the JSE, after Taylor Maritime Investment Limited (listed in London) made a non-binding indicative proposal to acquire all the shares in Grindrod Shipping not already held by the group. The potential offer price is $26 (over R436) per share, comprising a $21 cash purchase price and a $5 special dividend. The rand amounts will vary with the USD/ZAR exchange rate. The board of Grindrod Shipping has entered into exclusive discussions with Taylor Maritime but has not agreed definitive terms at this stage. The share price of Grindrod Shipping closed nearly 20% higher on the day at R397.
  • Zeder has announced the disposal of Zeder Africa, which holds a 55.62% stake in Agrivision Africa. This business produces and mills agricultural grain in Zambia and has been problematic for Zeder, as agriculture is hard enough before you take into account African economies that are notoriously volatile. The acquirer is ForAfric Forestry, a company registered in Zambia but with South African shareholders based on the names of the beneficial owners. The price is R160 million, a decent premium over the R146 million value at which the investment was recognised in the financials at the end of February 2022. This is a Category 2 transaction, so Zeder shareholders will not be asked to vote on it.
  • Master Drilling acquired just over a 25% interest in A&R Group back in 2021 and the deal included a call option to take that stake above 51% within a period of two years. A&R Group focuses on technology to improve the safety and operational performance of miners globally, so this is a diversification play for Master Drilling. A call option gives Master Drilling the right (but not the obligation) to increase its stake. The strike price on the option (the amount payable for the shares) is calculated using a formula that references recent financial performance. The estimated amount is R129.4 million. A&R’s profit after tax for the year ended February 2021 (now an outdated number) is R26.5 million, but there are distortions from payments on shareholder loan accounts etc. This is a Category 2 Transaction, so shareholders won’t be asked to vote.
  • Huge Group has renewed its cautionary announcement. The company is considering a series of discussions that would be a Category 2 Transaction in aggregate. There are no further details at this stage. Based on what I saw when Googling the website, I wouldn’t be surprised if a name change is coming soon and their SEO person jumped the gun:

Financial updates

  • Aside from the huge news of the Walmart offer, Massmart also released interim results for the 26 weeks ended 26 June 2022. Revenue was almost identical to the comparable interim period but gross profit margin contracted by 100 basis points. Combined with inflationary pressure on costs, the impact on trading profit was highly negative – it tumbled by 27.2%. The headline loss per share worsened by 45.7%. Even from continuing operations, the group registered a headline loss of R903.5 million. The group headline loss was R942.5 million, so the discontinued operations can’t be blamed for this. To put the financial nightmare into perspective, trading profit was R323.5 million and insurance proceeds for business interruption were R270 million. At the time of the terrible looting of the Game warehouse, I tried to make light of the situation by joking that it was possibly the only way to move that stock. A lot of truth is said in jest. Walmart man Mitchell Slape is moving on from the CEO role at the end of 2022, with current COO Jonathan Molapo moving into the top job. Personally, I wonder whether Walmart will ever learn that the “American Way” doesn’t necessarily work in other regions. It’s good to see a South African taking the reins again, though it is going to be a really tough job as Massmart likely moves into a private environment.

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

  • Steinhoff has released a trading update for the nine months ended June 2022. Steinhoff still has debt of €10 billion, which must be why the team is far too busy to write a decent short-form announcement, instead sending you to the website to go hunting for the report. Credit markets aren’t great at the moment and interest rates are rising, so restructuring the debt is critically important and far from easy. Moving from group level into the operations, we see minimal growth on a constant currency basis, other than in Pepco Group. With Europe facing economic headwinds of note, operating a discount retailer is probably the right strategy in the region. It still won’t be easy.
  • MAS plc has released results for the year ended June 2022. This group is focused on property in Central and Eastern Europe and achieved adjusted distributable earnings per share of 6.83 euro cents, up 15.2% year-on-year. At the end of June, shareholders approved important transactions related to the relationship with developer Prime Kapital. One was for the acquisition of six Romanian commercial centres and the other was to extend the duration of the joint venture and the funding commitment. Tangible net asset value of €1.40 per share is 12.9% higher vs. June 2021, reflecting a combination of improved performance and higher asset valuations. A dividend of 3.82 euro cents per share has been declared. It’s fascinating to note that open-air malls saw a footfall recovery vs. pre-pandemic levels whereas enclosed malls are still lower. Has there been a permanent shift in shopper preferences?
  • ADvTECH has released results for the six months ended June 2022. Revenue increased by 18% and operating profit was up 19%, so there was limited operating leverage in this result. When you see a larger percentage change in operating profit vs. revenue, you know that operating leverage is at play (the impact of fixed costs in the structure). Headline earnings per share was up 23% and the interim dividend of 23 cents per share is 21% higher than in the comparable period. It’s worth noting that operating cash flow before capex was only 8% higher due to a similar working capital result in this period vs. the prior period. The schools division achieved 9% growth in enrolments year-on-year and tertiary (full qualifications) was only 4% higher.
  • Sea Harvest Group released results for the six months ended June 2022. Although revenue jumped by 29%, a contraction in gross margin from 32% to 25% means that gross profit was flat year-on-year, wiping out the benefit of higher revenue. With inflationary pressure on expenses, EBIT (earnings before interest and taxes) was down 10% and so was headline earnings per share. Fishing is an incredibly tough industry, with unique challenges like fishing quota volumes. You also have to remember pressures like fuel costs, as the fishing vessels aren’t cheap to run. I also found it interesting that although the Aquaculture (abalone) segment grew revenue by 55%, the business is still loss-making (R18 million).
  • Hulamin released results for the six months ended June 2022. Although sales volumes were fractionally higher, revenue was up 45%. Operating profit increased by 144%, with the massive increase relative to revenue growth as a result of operating leverage and the structurally low margins in this business. Headline earnings per share increased by 147% to 47 cents. No dividend was declared for this period or the comparable period.
  • Sun International Limited has released results for the six months ended June 2022. Here’s the really big news: the company has declared its first dividend payment since 2016! Income was up 37% year-on-year, with adjusted headline earnings swinging wildly from a loss of R7 million to earnings of R438 million. As the group was forced to find cost savings to survive during the pandemic, the adjusted EBITDA margin improved from 26.8% to 29.1%. Debt has been reduced from R6.4 billion to R5.9 billion, which helps justify the return to paying dividends. Headline earnings per share was 93 cents and the interim dividend is 88 cents per share.

Operational updates

  • Southern Palladium has announced the commencement of the Phase 1a drilling programme at the Bengwenyama project. 31 boreholes will be drilled in this phase, with a further 32 boreholes planned for Phase 1b. The goal is to increase confidence in the orebody and convert a portion of the Inferred Resource and Exploration Target into Indicated Mineral Resources. I repeat these terms verbatim because I know they are important in the world of junior mining, a sector that I leave to the geologists to invest in (although I always enjoy reading the updates).
  • Orion Minerals released a critical update, making it a big day for junior mining. The South African Department of Mineral Resources and Energy has granted a mining right for the Flat Mines Area of the Okiep Copper Project in the Northern Cape. The right lasts for 15 years and can be renewed on application for a maximum of a further 30 years. The next steps are final engineering studies, Mineral Resource upgrade, drilling and bulk sampling for metallurgical optimisation. An updated feasibility study is targeted for completion in early 2023.

Share buybacks and dividends

  • Glencore has confirmed the exchange rate applicable to the $0.24 dividend per share, of which $0.11 is an additional distribution alongside the H2 distribution. South African shareholders will be paid R4.03351 per share on 22nd September.
  • Similarly, Textainer has confirmed that the dividend of 25 US cents per share will be converted to a rand equivalent of R4.1725 per share.

Notable shuffling of (expensive) chairs

  • After 32 years of service, including nearly five as CEO, Pepkor CEO Leon Lourens has advised the board of an intention to take early retirement. Pieter Erasmus will move back into the top job that he held from 2001 to 2017, going full circle in his relationship with the group.
  • Woolworths has announced the appointment of Robert Collins as an independent non-executive director. Collins served as managing director of Waitrose until 2020, so he brings plenty of retail experience to the table.
  • Salungano Group has announced the appointment of Kabela Maroga (currently a non-executive director of the company) as CFO. Ms Maroga has experience in banking and in the mining industry, with a very unusual combination of a CA(SA) professional designation and a post-graduate diploma in mining engineering.
  • Adcock Ingram has appointed Ms Busisiwe Mabuza as independent non-executive director. Ms Mabuza is the chair of the IDC and the lead independent director of Tsogo Sun Gaming, in addition to being an independent non-executive director of Ninety One Limited. Professor Matt Haus will retire from the board in May 2023.

Director dealings

  • A director of a subsidiary of Nu-World has sold shares in the company worth nearly R20k.
  • An entity related to Christo Wiese has purchased debt instruments in Brait worth £3.8 million.
  • The company secretary of Afrimat has bought shares in the company worth R52k.

Unusual things

  • For once – none!

Round up of H1 2022 M&A activity in Africa (excl. SA)

Marylou Greig
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Round up of H1 2022 M&A activity in Africa (excl. SA)

The total value of local M&A deals captured for H1 2022 (excluding South Africa) was US$12,28 billion, almost double that recorded over the same period in 2021. This number only includes those transactions where at least one of the parties is headquartered in Africa, or where the target is African based. Where the parties are foreign, or the target has subsidiaries in an African country, the transaction is classified by DealMakers AFRICA as foreign, and these deals totalled US$50 billion in H1 (US$9,6 billion in H1 2021).

West Africa was the most active region with 118 deals valued at US$2,48 billion, 77% of which involved private equity; followed by Southern Africa (US$1,57 billion) and East Africa (US$1,06 billion). By country, Egypt led the pack with 90 deals (US$565 million), followed by Nigeria with 82 deals valued at US$1,97 billion and Kenya with 67 deals valued at US$790 million.

The trend that emerged during the pandemic continues with private equity the main driver of investment on the continent, representing 65% of all local deals. Much of this investment found its way into start-ups and, in particular, those in the fintech space – increasing access to banking and energy to the underserved population, providing strong traction in terms of revenue. The two largest private equity deals for H1 2022 (where deal values were disclosed) were the US$260 million investment into Sun King (previously Greenlight Plant) – a distributor, installer and financier of solar home energy products for people currently living without reliable energy access, and the investment in Nigerian Flutterwave’s series D capital raise of US$250 million.

According to The Big Deal, an Africa-focused database, Africa bucked the trend in declining venture capital investment as the only region in Q2 2022 to record three-digit growth, raising US$1,3 billion against US$600 million in Q2 2021; this against a 29% decline year-on-year globally. Yet despite this growth, the numbers represent c.1% of global venture funding. Analysis by DealMakers AFRICA supports this trend, as seen in the growth of deal activity by private equity in the table below.

Data sourced from DealMakers AFRICA

Included in this issue for the first time is the feature, Women of Africa’s M&A and Financial Markets Industry, the first of its kind to be published by DealMakers AFRICA. It carries unique and inspiring stories, and it is hoped that these journeys will offer inspiration to young women, giving them courage where needed and the realisation that they are not alone.

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za

DealMakers AFRICA is Africa’s corporate finance magazine
www.dealmakersafrica.com

TreasuryONE: Reduce cash flow forecasting time by 75%

TreasuryONE
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TreasuryONE: Reduce cash flow forecasting time by 75%

TreasuryONE is proud to announce our newest treasury technology & services solution, Cash Flow Forecasting, which eases the forecasting burden on finance and treasury teams.

Now, with cutting-edge technology at the heart of our treasury portfolio, we help businesses transform their process of forecasting cash by cutting manual workload and reporting timelines by 75% – saving finance teams countless hours of valuable time and bringing crystal clear visibility over current and future cash flows with increased accuracy and interrogation capabilities.

CashAnalytics, a cloud-based system powered by TreasuryONE, eases the burden of preparing and collating multiple CFF workings and consolidation reports via spreadsheets, freeing up time to review forecasts, highlight potential issues and resolve where necessary. It also stores historical data and forecast submissions – allowing for forecast vs forecast reports, as well as actuals vs forecast.

In this video, Pieter Cronje, Head of Cash & Liquidity at TreasuryONE, discusses how CashAnalytics transforms the forecasting process:

https://www.youtube.com/watch?v=vVjdenF-UEs

Benefits of using state-of-the-art forecasting technology

  • Increased cash flow visibility: CashAnalytics allows for all sources of data to be centralised into a single and intuitive dashboard. This gives you everything that you need for increased cash visibility and cash flow planning in one place.
  • Reduced administration: Simplify the complexity of cash flow management across multi-entity companies with an inclusive solution. CashAnalytics allows you to reduce the time it takes to create forecasts from days to minutes which will free up more time for analysis.
  • Improved accuracy: Eliminate unreliable data entry and gain more confidence in the accuracy of your cash flow forecasts.
  • Multi-currency consolidation: This enables users to quickly understand cash requirements and risks across the entire business in all geographic locations.

Visit the TreasuryONE website to find out more about this service offering and the numerous other ways that TreasuryONE can help your business, including market risk management and other expertise.

China’s Malacca dilemma

Chris Gilmour
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China’s Malacca dilemma

US Speaker of the House of Representatives Nancy Pelosi caused something of a stir in international relations a few weeks ago when she visited Taiwan. Chris Gilmour gives us more context to the international importance of Taiwan.

Pelosi’s trip was the highest-ranking visit by a US Speaker since Newt Gingrich in 1997 and appears to have taken place without President Joe Biden’s express permission. The visit has caused major problems for US/China relations, which were already at a low ebb and in retrospect, it should probably not have happened. But it did, and the US and its allies in the far east will have to live with the economic and geopolitical consequences for quite some time. Already, China has sent a barrage of ballistic missiles over Taiwan, some of which landed in Japan’s territorial waters.

So, what’s the big deal about this little island, formerly known as Formosa? Why are the Chinese so obsessed about bringing it back into the fold?

The right to exist

China has never recognized Taiwan’s right to exist as a separate state, preferring to regard it as a renegade province that someday will be re-incorporated into China.

Taiwan has been ruled by various countries and dynasties over the centuries but its most recent history dates back to Japanese occupation in the late nineteenth century. In 1895, Japan won the First Sino-Japanese War and the incumbent Qing government had to cede Taiwan to Japan. After World War II and Japan’s unconditional surrender to the Americans, control of Taiwan and all territories it had taken from China were relinquished by Japan. The Republic of China (ROC) under the leadership of Chiang Kai-Shek and his Kuomintang began ruling Taiwan with the overt approval of the main western allies, the US and UK. However, a few years later, civil war broke out in China, and Chiang Kai-shek’s troops were defeated by Mao Zedong’s Communist army. Chiang, the remnants of his Kuomintang government and their supporters – about 1.5m people – fled to Taiwan in 1949.

Today, and for many decades, there has been confusion about what Taiwan is. Technically, it has its own constitution, democratically-elected leaders and about 300,000 active troops in its military. In 1971, the United Nations stopped recognizing the ROC as the legitimate Chinese power and instead recognised the People’s Republic of China (PRC), also known colloquially as “Red China” due to it being run by the Chinese Communist Party (CCP). Only around 15 countries formally recognize Taiwan today as a fully independent country.

China offered an olive branch to Taiwan some years ago in the form of a “one country, two systems” proposal, which would have allowed Taiwan significant autonomy but always under the ultimate control of Beijing. It would have been very similar to Hong Kong’s status.

Taiwan rejected this option.

Strategic ambiguity

America’s long-standing policy has been one of “strategic ambiguity” to the extent that it would intervene militarily if China were to invade Taiwan. Officially, it sticks to the “One-China” policy, which recognises only one Chinese government – in Beijing – and has formal ties with Beijing rather than Taipei. In the unlikely event that China and Taiwan were eventually to agree peacefully to re-unite in future, the US would likely endorse such a move. But it has also pledged to supply Taiwan with defensive weapons and stressed that any attack by China would cause “grave concern”

To the casual observer, China is a formidable player on the world stage. After all, it has risen to become the world’s second-largest economy after the US in a matter of a few decades. But that extremely swift ascent has disguised some major vulnerabilities. So although China is the 6th largest oil producer in the world, such is its insatiable appetite for energy that it imports 80% of its oil. On the food front, things are even worse, with the country importing 85% of its food.

Under the old pre-coronavirus conditions, when Pax American and unfettered globalization were still apparent, this wasn’t a problem. Most countries stuck to the rules and technology helped to drive down the prices of consumer goods around the world.

But things have changed in the new post-pandemic era. The levels of bellicose rhetoric surrounding many territorial issues such as Taiwan have risen significantly. Three years ago, who would have thought that the US would leave Afghanistan to the tender mercies of the Taliban once again or that Vladimir Putin would physically invade Ukraine?

But both of these events have occurred, less than a year apart.

Huff and puff

Once again, the casual observer might be forgiven for thinking that China might well up the ante and invade Taiwan. But although it has been huffing and puffing away furiously for the past few weeks since Pelosi’s visit, the chances of a near-term invasion of Taiwan are virtually nil, in my humble opinion.

The first point to note is that Putin and the Chinese leader Xi Jinping met at the opening of the Beijing Winter Olympics back in early February. It is inconceivable that the pair didn’t discuss Russia’s intended invasion of Ukraine, which at that time was only a few weeks away. Both men hold the west in contempt, believing liberal democracies to be fundamentally weak and ineffectual. And America’s hasty withdrawal from Afghanistan did nothing to dispel that notion. They must have thought, quite reasonably given what had happened in Afghanistan, that America and the west would not lift a finger to help Ukraine if a full-scale invasion was mounted.

After all, there was hardly a murmur from the west after Russia annexed Crimea and the Donbass region of Ukraine back in 2014. That being the case, Ukraine would be a blueprint for a Chinese invasion of Taiwan.

However, nobody could have foreseen either the degree of cohesion adopted by the west when it came to applying sanctions against Russia, or the catastrophic failure of the Russian army to overrun Ukraine. To date, over 1,000 western companies have left Russia, the majority of them being unlikely to ever return unless there is significant regime change in the country. While Putin had established a sizable war chest with which to sustain his offensive – some estimates go as high as $600 billion – much of that was frozen in foreign bank accounts near the start of the conflict. Six months into the conflict (which was supposed to have only taken three days!), Russia now finds itself bogged down in a grinding stalemate that has no end in sight.

Xi must have got a massive skrik, as they say in Afrikaans. The last thing any Chinese leader needs is comprehensive sanctioning from the west, either in terms of import or exports. China has been manifestly unable to convert from being a manufacturing, export-led economy to a consumer-oriented economy. It is vitally important that Chinese exports to the west remain free of sanctions and it is equally important that no blockades of oil or food occur.

The Malacca dilemma

This is where China’s relative geographic isolation becomes all too painfully apparent. In terms of oil reaching China, it has to navigate two “choke points” – the Straits of Hormuz in the middle east and the Malacca Strait (a 1.5 mile natural seaway) – that joins the Indian and Pacific Oceans. If China invaded Taiwan, the so-called QSD alliance countries of the US, Australia, India and Japan might well feel obliged to mount a naval blockade against China. Even if an oil tanker manages to get past a naval blockade of the Straits of Hormuz, the Malacca Strait is a really problematic choke point with no really viable alternative, apart from travelling in the notoriously treacherous Southern Ocean beyond Australia and New Zealand.

On the east side of Malacca Strait, notably in the South China Sea, China has been exerting huge influence in recent decades, even going to the extent of constructing artificial islands bristling with weaponry to let all other countries know that this is their bailiwick. China routinely objects to any action by the US military in this area. Other countries, such as the Philippines, Vietnam, Malaysia, Taiwan and Brunei, claim all or part of the South China Sea, through which approximately $5 trillion in goods are shipped every year.

China has also offered to cut a canal through the Isthmus of Kra in Thailand that would not only cut the time between the Indian and Pacific Oceans by much more than going through Malacca but it would then be under China’s control and would no longer be a dangerous choke point. However, this radical proposal has not met with approval from Thailand.

Source: Visual Capitalist

The risks associated with having to contend with a naval blockade of oil and food are probably too great for China to bear. It is thus highly unlikely that China will dare to invade Taiwan while it is still so vulnerable to having its lifelines literally cut off.

However, in typically Chinese long-term thinking ahead fashion, successive Chinese administrations have been exploring the possibilities of securing alternative non-maritime routes for import and export. The Belt & Road Initiative (BRI) is part and parcel of that and whilst it hasn’t been as successful as originally envisaged, it nevertheless has the potential to become a significant component of trade over time.  

The biggest single beneficiary of the BRI so far has been the port of Guadar in Pakistan, a long-time ally of China. If the Straits of Hormuz were ever to be blockaded for Chinese shipping, it is not inconceivable that ships carrying oil bound for China could offload onto road tankers at Guadar and make the long journey overland to China via the Karakoram Highway, that was conveniently financed by the Chinese some years ago.

But there is another, highly radical possibility opening up to China as the world’s oceans warm up thanks to climate change. The Northern Sea Route is slated to become ice-free as early as next decade, which will allow China to access vast quantities of liquefied natural gas (LNG) from Yamal in northern Russia. Currently, logistics make it costly and ineffective for China to access large quantities of LNG from Russia but if a new, permanently navigable sea route with no choke points were to open up, that would change the dynamic entirely.

Russia and China are neighbours. It makes sense from so many perspectives for the two countries to trade much more freely with each other. Russia is the world’s biggest supplier of energy, while China is the world’s biggest user of energy. But pipelines don’t just materialise overnight, especially not those in the permafrost of Siberia, where most Russian oil and gas is located. Russia desperately needs to keep pumping its oil, even if it does so at a steep discount to customers such as China and India, because if it stops pumping, the oil will freeze in the pipes and associated infrastructure of Siberia and there are no longer US oil engineers to keep that infrastructure maintained. There isn’t a convenient far eastern Russian port that can handle vast quantities of oil and gas and ship them quickly and efficiently to China, so the opening up of the North Sea Route would be extremely advantageous to both China and Russia.

Source: Wikipedia

So, the visit by Tannie Pelosi to Taiwan has set off all sorts of delicious possibilities for geopolitical analysts to consider.

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

Ghost Bites Vol 78 (22)

The Finance Ghost
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Ghost Bites Vol 78 (22)

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Corporate finance corner (M&A / capital raises)

  • Cognition Holdings wants to dispose of its majority stake (50.01%) in Private Property (Pty) Ltd. The buyers are BetterHome Group, ooba (the home loan company, not the similar-sounding way to get home after you’ve been drinking) and Fledge Capital. The Private Property business is planning to invest in its growth in both upstream and downstream markets and needs capital to do so, which Cognition doesn’t want to be responsible for providing. Cognition will sell the stake for a whopping R150 million in a Category 1 transaction under JSE listings requirements. The shareholder approval requirement is actually 75%, as this deal represents the “greater part of the assets and undertaking of the company” (i.e. the majority of Cognition’s assets) and thus falls within s112 of the Companies Act which requires a special resolution. In the last financial year, Private Property generated profit after tax of R10.2 million. With an implied valuation for the full business of R300 million, the buyers are really opening their wallets for this thing and must see significant potential. To put this into perspective, Cognition’s market cap is only R172 million and they are getting R150 million under this deal! Caxton looks set to receive a very juicy dividend from this (along with the other shareholders in Cognition).
  • Although African Bank’s equity isn’t listed on the JSE, it can’t be long until we see that name on the JSE once more. In addition to the deal to acquire Grindrod Bank, African Bank has also announced that it is the successful bidder for the majority of Ubank’s assets and liabilities. It will also take on Ubank’s employees on a going concern basis. The cash price for the deal is R80 million. Ubank has a strong presence across mining and rural communities and has been under curatorship since May 2022 (although it has continued operating). African Bank talks about building a “compelling listable proposition” – a clear nod to a future return to the JSE. The sooner the better!
  • Tongaat Hulett is still trying to figure out the next steps to sort out its balance sheet and recapitalise the company. The company has renewed its cautionary announcement accordingly. Shareholders can’t do anything anyway, as the company is suspended from trading on the JSE.
  • Impala Platinum has acknowledged that the decision by the Competition Tribunal regarding the offer to Royal Bafokeng Platinum shareholders will not be finalised by 29th August as was previously hoped. The current long stop date for the deal is 26th September and Implats believes that it can still be wrapped up before then, although there are no guarantees. Implats has the right to extend this date and I can’t see why they wouldn’t do so. In the meantime, the stake in Royal Bafokeng has reached 38.39%, as Implats has been acquiring shares from significant holders. It can do this because it hasn’t reached a controlling stake yet, so it doesn’t need the Competition Tribunal’s go-ahead for these smaller acquisitions.
  • Now that the dust has settled on Ascendis Health’s capital raise, the company has announced that Carl Neethling has an 11.7% stake in the group. Although he is also a director, I included it here as he is first and foremost a strategic investor.

Financial updates

  • Grindrod has announced its interim results for the six months ended June 2022. This has been an incredible period for the group, with the share price up more than 134% in 2022. In the core businesses, revenue increased by 31% and EBITDA was 37% higher, driving headline earnings growth of 53%. The Port and Terminals side of the business was the runaway success, growing earnings by 164% as volumes at the ports in Mozambique and South Africa increased sharply. Grindrod Bank grew earnings by 63% and the credit loss ratio is running below 2021, with a deal currently underway to sell the banking business to African Bank for R1.5 billion. In the non-core businesses, the strong oil market has improved the situation at Marine Fuels, with Grindrod working with management and its co-shareholder to exit that business. There is only one remaining asset in the private equity portfolio, so that part of the value unlock is nearly complete. The KZN north coast property remains a headache that Grindrod needs to solve. At group level, headline earnings increased by – wait for it – 10,000%! Headline earnings per share was almost as dramatic, with growth of 8,557%. These are obviously nonsensical numbers, reflecting a base period that was highly impacted by operating conditions. HEPS is now 60.6 cents vs. 0.7 cents in the comparable period. An interim dividend of 17.20 cents has been declared.
  • After a rollercoaster ride of note, including a failed attempt to offload a huge portfolio of commercial property, Rebosis Property Fund is entering business rescue. The group’s financial situation is precarious, with exposure to a rising interest rate cycle and high operating costs for the properties. Over 50% of Rebosis’ revenue is sourced from national and provincial government tenants as well as municipalities, who are notorious late-payers. The company highlights this issue in the announcement, though some in the market believe that this is a distraction from the other strategic missteps that brought the company to this point. As a result of commencing voluntary business rescue proceedings, the board applied to the JSE for a suspension of trading in the company’s two classes of shares on the JSE. This is because the board effectively loses control of the company and cannot take responsibility for compliance with listings requirements, as the business rescue practitioner takes over from here. Unless that practitioner can magically find a buyer with billions available for commercial property, or knows how to collect debts from the government, I’m not sure what they can really do here. Part of management’s turnaround strategy was a “Going Green” strategy. It’s a pity they ended up almost going bankrupt instead.
  • Northam Platinum has released results for the year ended June 2022. Times have been good overall in mining, evidenced by a 48.3% EBITDA margin. The year wasn’t without its challenges though, with lost production shifts due to operational issues like Covid, regional community unrest and the tragic loss of two lives at Zondereinde. Unit cash costs per equivalent refined platinum ounce increased by 18.9%, with above-inflationary increases in input costs and more employees in service in preparation for an expanded production profile. Expansionary capex jumped from R1.8 billion to R3.1 billion and maintenance capex decreased slightly from R1.5 billion to R1.4 billion. Due to the cost pressures, a 4.4% increase in revenue wasn’t enough to drive growth in profits, with HEPS down by 2.9%. The group remains highly profitable and has been executing extensive share buybacks over the past couple of years, resulting in a 28.9% reduction in issued share capital. Northam describes itself as being at a “critical juncture” in its growth trajectory and has elected not to declare a final dividend despite such a profitable year. The share price is down more than 16% this year.

Operational updates

  • Things really aren’t looking good at Conduit Capital. Although the insurance subsidiaries had put in a good performance in the 12 months to June 2022 and in July as well, the regulatory decision to put one of the subsidiaries under provisional curatorship with a restriction on new business at the end of July threw a huge spanner in the works. Although the company has appealed this situation, the regulators (the Prudential Authority and the Financial Services Conduct Authority) are having none of it. The curator has been unsuccessful in lifting the restriction on new business. The company notes that “much uncertainty exists” and shareholders are advised to exercise caution. Conduit needs to find a new investor to recapitalise the business but had been looking for one for a long time with no success, so it’s not obvious that an investor will now be found.
  • Afristrat Investment Holdings has released an update on the situation at FirstCred Limited Botswana. An investigation commissioned by FirstCred and finalised in August 2022 has revealed “gross misuse” of the BWP120 million raised from investors by the former management of Getbucks Limited Botswana between 2017 and 2019. They may have gotten the bucks, but nobody else did. Afristrat lost BWP50 million through this process, so you can now see why the company has been interested in this investigation. Two other investors tried to liquidate FirstCred and the Botswana High Court denied the application, granting an order of Judicial Management instead to give the company an opportunity to resolve its debt position under current management. Afristrat notes that this at least provides a chance to recover some of the investment value, though it is rare for anything material to be recovered in these circumstances.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • In more Rebosis news, non-executive director Monica Khumalo has resigned due to “conflicting business opportunities and time constraints” – I can’t blame her, really. I would rather weed my garden than be involved in a business rescue, nevermind give up time with businesses that are potentially growing.
  • Alexforbes has announced three new director appointments. Marinda Dippenaar will join the board as a representative of African Rainbow Capital (and with many years of prior experience at Alexforbes), Pavin Dhamija joins the board from Prudential Financial and finally Gary Herbert also gets a board seat as a partner and co-founder of LeapFrog Investments.
  • Mike Aitken, chairman of the investment committee of Emira Property Fund and having served on the board since 2007, has given notice of his retirement. James Templeton has been appointed as the new chairman of that very important committee.
  • Clicks has announced the appointment of Nomgando Matyumza to the board, with extensive experience across many sectors. Her other existing directorships are Standard Bank, Sasol and Volkswagen SA.

Director dealings

  • A director of Omnia Holdings has sold shares in the company worth over R122k.

Unusual things

  • A long and arduous announcement came out on Friday morning about a censure imposed by the JSE on Ben La Grange, a member (CFO, no less) of the disgraced management team of Steinhoff that presided over the destruction of value for investors. The JSE’s announcement goes into great detail about La Grange generating an invoice at Markus Jooste’s instruction that did not have “any legitimate commercial reason” – and we aren’t talking small numbers here. That invoice helped a Steinhoff subsidiary show a profit of R376 million instead of a loss of R329 million. On this basis, La Grange is disqualified from being a director of a listed company for ten years and has been fined R2 million. In arriving at this decision, the JSE highlighted his “constructive and unwavering co-operation” and his “full and frank engagement” with the JSE. Investigations into other individuals who were at Steinhoff during that time are ongoing.
  • The business rescue practitioners of PSV Holdings are fighting with DNG Energy Limited, a material shareholder in the company. After a lot of expensive letters were exchanged during 2022, the practitioners eventually ran out of patience and took steps to liquidate the company. DNG needed to prove that it had funds available to save the company and had requested enough time to finalise the agreements with bankers. The situation is now rather awkward, as DNG has signed facility agreements with its funders but the motion to apply to court for a liquidation has been filed. DNG now has to fight legally for the right to keep the company alive. It all sounds like a mess. I’m no expert on these matters, but I’m not sure what purpose “business rescue” serves if not to rescue a company from liquidation. If DNG has the money, that should be all that matters.

TreasuryONE webinar: Inflation, rate hikes and recession

The Finance Ghost
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TreasuryONE webinar: Inflation, rate hikes and recession

The TreasuryONE team treats Ghost Mail readers to a webinar every few weeks. It’s been a rollercoaster ride of note in the markets in recent months, driven by key macroeconomic concepts.

You’ll recognise the TreasuryONE name from your daily edition of Ghost Mail, as the team provides the commentary that keeps us up to speed with currency movements, macroeconomic data and the strategies being used by central banks.

In these webinars, the team digs into the most important drivers of the market, accompanied by many excellent charts. Watch the recording below and make sure you register to attend the next event when we announce it!

Ghost Bites Vol 77 (22)

The Finance Ghost
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Ghost Bites Vol 77 (22)

If you enjoy Ghost Bites, then make sure you’re on the mailing list for a daily dose of market insights in Ghost Mail. It’s free! SIGN UP >>>

Corporate finance corner (M&A / capital raises)

  • Universal Partners has one of the most interesting portfolios of any JSE-listed investment holding company. There is news in the offshore portfolio, as the Dentex business in the UK looks set to be sold. Dentex will be merging with Portman, the largest private dental consolidator in the UK. Dentex has over 130 practices that administer pain to their victims on a daily basis. Just kidding, I love going to the dentist… moving on, the deal will create the largest privately focused dental group in the UK and one of the biggest in Europe. Universal Partners will sell its entire shareholding in Dentex for a combination of cash and shares in the merged entity, so shareholders can claw back some of their dental traumas by being invested in the industry. Competition regulators in the UK need to approve the deal and completion is expected in the first half of 2023. Universal Partners notes that the deal doesn’t have a material impact on the current value of Dentex, but that an increase in value is likely as the deal moves to completion. This rather cryptic comment implies that the current valuation on the books is similar to the basis for the office price, with the eventual price reflecting the ongoing growth in the business between now and completion.
  • MiX Telematics is acquiring Trimble Inc’s Field Service Management business in the US for between $6.7 million and $9.5 million. This business is involved in the sale and support of telemetry and video solutions for fleet services management across different industries, so the strategic fit with MiX Telematics looks pretty obvious. The business has more than 40,000 subscribers. A price of $300 per contract has been agreed where the remaining term is at least 18 months, with between $200 and $300 paid for other contracts. This is why the transaction price can vary so much. Operating profit was $3.2 million, so the earnings multiple looks incredibly low. The assumption is clearly that many contracts won’t be renewed. If they are, this could be a lucrative acquisition. This is a Category 2 Transaction under JSE Listings Requirements and so MiX shareholders won’t be asked for their opinions.
  • With all conditions to the restructure now met, PSG has announced that the unbundling of assets and delisting will be implemented on 26th September. This iconic holding company will disappear from the market soon!
  • Advanced Health has confirmed that the strategic review of the group is ongoing and that it has received inbound approaches from several parties interested in PresMed Australia. The company has noted that it is evaluating these approaches and that shareholders will be kept abreast of any developments. At this stage, there is no guarantee or even a likelihood of any transaction being proposed.
  • As you are no doubt aware by now, Impala Platinum is trying to get its offer to Royal Bafokeng Platinum shareholders across the line. The remaining hurdle is the Competition Tribunal. In the meantime, Impala is allowed to keep buying Royal Bafokeng shares in the market. The latest purchase is for a further 0.16% of shares in issue, taking the total stake to 38.1%.
  • AYO Technology and AEEI keep playing with our emotions. After planning to acquire the romantically-named Italian Summer business and that deal subsequently falling through, the companies have now removed their cautionary announcements related to a potential disposal of a business. We don’t know which business was on the chopping block and I guess we never will. AEEI remains under cautionary for a different reason though, namely the dispute related to the call option exercised by British Telecommunications South Africa (BTSA).
  • OneLogix has done the right thing and released a clarification regarding the disposal by NJB Investco and acquisition by Best-Krug Saco of around 34% in the company. As I suspected, the companies have the same ultimate shareholders. There has been no change in indirect beneficial ownership of OneLogix.
  • Jubilee Metals announced that two warrant holders notified the company that they will be exercising warrants to subscribe for shares at R1.22 each. The total value is R16 million. The current share price is R2.74, demonstrating the value of warrants to those who get them early in a company’s life. A warrant is just a share option issued by the company itself, giving the holder the right to subscribe for shares at a certain price.

Financial updates

  • South32 released results for the year ended June 2022, capping off a year of record earnings and cash flow. Revenue from continuing operations was 69% higher and EBITDA margin expanded from 26.4% to 47.1%, so you can already guess that the result at net profit level is extraordinary. HEPS is over 6x higher than the prior year at $0.595 vs. $0.095. The final dividend is $0.14 per share and a special dividend of $0.03 per share has been added for good measure. The total dividend for the year (including special) was $0.257 per share, vastly higher than $0.069 in the prior period. In addition to strong results, this was a period of considerable corporate activity. South32 acquired 45% in the Sierra Gorda copper mine, an additional 16.5% in Mozal Aluminium and a further 18.2% in the MRN bauxite mine. Development work is focused on battery metals. Subsequent to year-end, South32 sold base metals royalties for up to $200 million and acquired 9.9% in the Altar copper project in Argentina. The share price is up around 60% this year.
  • Gold Fields has released results for the six months to June 2022. The group operates nine operating mines in Australia, Peru, South Africa and West Africa and has one project in Chile. The company is highly respected as an operator and the latest results show why, with HEPS up by nearly 29% to $0.58 per share. Normalised earnings increased by 16%. Net debt to adjusted EBITDA has dropped from 0.49x to 0.33x, so the balance sheet is stronger too. The interim dividend is quoted in rands and 300 cents per share has been declared. The group is being kept busy with the proposed acquisition of Yamana, a major global deal that spooked Gold Fields shareholders. The share price is down 13.5% this year. Gold miners tend to trade at higher multiples than other mining groups, resulting in a lower dividend yield. The interim dividend is a 2% yield.
  • Sibanye-Stillwater released results for the six months to June 2022 and the market was prepared for bad news after a previous update that showed the full extent of the financial damage from the floods in the US and the local gold strike. Although the share price closed higher on Thursday, all the platinum companies rallied. The good news is that although it was an ugly year, debt remains manageable and there is still an interim dividend. A three-year wage settlement was reached in the gold operations, so that problem shouldn’t come back for a while. It’s worth comparing headline earnings for this six-month period (R11.9 billion) to the immediately preceding six months (R12 billion) rather than just the comparable six months in the prior year (R24.8 billion). The year-on-year picture is terrible but the sequential story isn’t so bad. The worst problem was in gold, with production down 65% vs. the preceding six months at a time when the average gold price was 7.3% higher. Adjusted EBITDA collapsed to a loss of R3.1 billion vs. profit of R2.8 billion in the preceding six months. In the interests of finding a silver lining (not least of all because I’m a shareholder), this was the third highest interim profit performance since the group listed in 2013. An interim dividend of R1.38 is a yield of 3.3% on Thursday’s closing price, which is solid by most company standards but not terribly exciting by mining standards. The share price is down more than 15% this year.
  • Italtile’s share price remains in the red this year, but it enjoyed a 3.6% rally on Thursday off the back of a solid financial performance for the year ended June 2022. Although system-wide turnover fell by 2% as consumer spending shifted away from home improvement, trading profit was up 6% and HEPS increased by 9%. This is a classic example of grinding out a result under pressure. The dividend increased by 9% to maintain the payout ratio despite a substantial drop in the cash balance of 60%. Although one may be tempted to attribute this to strategic investment in stock and raw materials to mitigate supply and pricing volatility, the cash flow statement suggests otherwise. The biggest year-on-year difference in cash was the payment of dividends! Italtile is ultimately exposed to the mood of South Africans and especially wealthier homeowners, so the “widespread despondency” noted in the announcement is a concern.
  • Blue Label Telecoms announced that Cell C will release results in mid-September, followed by an investor roadshow over two days. The company acquired a 45% stake in Cell C in 2017 for R5.5 billion which has subsequently been impaired to zero, so that’s been a wonderful investment. Not. The relationship with Cell C is incredibly complicated, with a web of transactions and important dependencies, as Blue Label sells Cell C airtime. In fact, to help keep Cell C afloat, Blue Label has been pre-purchasing airtime. With all said and done, Cell C owes R2.6 billion to Blue Label on a gross basis and R1.75 billion if you offset the amount owed by Blue Label to Cell C. For context, Cell C lost R2.45 billion in the year ended May 2022. Blue Label also released results for the year ended May 2022, reflecting 10% growth in revenue on a consistent accounting basis. The reported number looks very different as a new accounting policy is being applied to sales of value-added services. Core HEPS from continuing operations increased by 18% to 96.56 cents, a measure that excludes non-recurring income in this year and the comparable year. The share price is up more than 41% this year, rewarding those who have taken a punt at a balance sheet that makes Prosus – Naspers look simple.
  • Adcock Ingram released results for the year ended June 2022. The benefits of operating leverage are clear to see, with revenue up 12% and trading profit up 22%. HEPS increased by 24% and the dividend is 25% higher, so it all checks out. The next year is all about managing margin, with a significantly weaker rand and high fuel prices. Looking into the segmentals reveals that the Consumer segment brought the magic with a 23% increase in revenue and 49% increase in trading profit as the world normalised after Covid. I was surprised to note that the hospital segment only grew revenue by 6% despite the base period being significantly impacted by a lack of elective procedures. The full report notes that there was price deflation of 3.8% in this segment, which would help explain this. Despite that revenue pressure, gross margin was in line with the prior year. The share price is down around 3% this year and is now trading on a Price/Earnings multiple of 9.9x.
  • Distell Group has released results for the year ended June 2022. Group revenue climbed by 20.8%, driven primarily by volume growth of 17.6% as the world normalised and people returned to pre-Zoom life. As South Africa was particularly strict on alcohol restrictions, international revenue growth of 7.9% is probably a more realistic view on growth. Interestingly, volumes were 9.4% higher internationally which means pricing must’ve decreased. Group EBITDA increased by 20.8% and HEPS was 36.8% higher. Due to the Heineken transaction, there is no dividend.
  • Balwin Properties released a trading statement for the six months to August 2022. HEPS is expected to increase by between 40% and 50% vs. the comparable period, which means a range of 34.93 cents to 37.43 cents. The share price has lost 23.5% of its value this year and is flat over 3 years, which means you were probably better off investing in a Balwin property itself rather than the shares.
  • Hulamin released a trading statement for the six months to June 2022. HEPS has jumped by between 137% and 153%, with an expected range of 45 cents to 48 cents. The company also reports “normalised HEPS” which excludes metal price lag and non-trading items. If you are happy to work with that number, the range is only 35.75 cents to 36.75 cents and the increase is a rather daft range of 815% to 835% as the comparable period was loss-making on a normalised basis. The share price chart this year looks like the side of a mountain, with a precipitous drop at the start of June that led to the current position of being down more than 40% year-to-date. That drop was caused by the withdrawal of a cautionary announcement after discussions with a potential offeror fell over despite the completion of a successful due diligence. It isn’t a deal until binding documents have been signed! If the counterparty is Elon Musk, it still might not be a deal at that stage.
  • Murray & Roberts has released a trading statement for the year ended June 2022. Terms like “record-high order book” and “strong project pipeline” inject happiness straight into the veins of investors. If we include the full group, HEPS has swung from a loss of 14 cents to a profit of 30 – 32 cents. If we only look at continuing operations, HEPS has moved from positive 16 cents to between 59 cents and 61 cents. The share price was down 4.5% by afternoon trade to around R11.30, which strikes me as a lofty earnings multiple. I’m no expert in this space though and I would imagine that the valuation reflects the pipeline rather than the earnings over the past year. Still, the share price is down nearly 20% this year.
  • Octodec had a strong day on the market, closing nearly 14% higher based on a trading statement for the year ended August 2022. Distributable income per share is expected to be between 17% and 37% higher, coming in at between 158 cents and 185 cents. The distribution is expected to be between 117 cents and 140 cents for the full year, of which 50 cents has already been paid out. Even after the rally, the closing price of R9.39 is a trailing dividend yield of around 13.7% at the midpoint of guidance.
  • OneLogix has released results for the year ended May 2022. As we know from previous announcements, the company had a very tough year. Other than the obvious stuff like civil unrest, OneLogix also suffered damage from a hailstorm during September 2021 that nailed large shipments of passenger cars being processed by the company. The group carried the risk of minor repairs and the end result wasn’t minor when so many cars were damaged – the cost net of insurance was R25 million. For context, trading profit for this period was R178.8 million. Although revenue increased by 24% and EBITDA by 12%, things went badly wrong further down the income statement. Headline earnings per share (HEPS) fell by 69%. Even “Core HEPS” took a 60% knock. No dividend has been declared. Although the board has been considering a take-private of the company with a R3.30 per share offer, recent performance put those plans on ice. It’s unclear whether an offer will be forthcoming. The share price is trading at just above R2.90.

Operational updates

  • Kibo Energy has initiated a process for Requests for Proposals (RFPs) to investigate feasibility of replacing coal with renewable biofuel. The company hopes to fuel existing utility scale power projects with biomass on a sustainable basis, which means a full assessment across economic, environmental and social metrics. The biomass would need to fuel a 300 MW power plant over a 20- to 25-year power purchase agreement period. Work completed by the company thus far has been encouraging, so this is to take it to the next level with the appointment of an international expert. Sit down for this one: Kibo’s share price has increased 4x over the past month from R0.05 to R0.20 per share!
  • Equites Property Fund released a pre-close investor presentation that includes numerous important insights. For example, UK logistics had a wider base of tenants in this period, with online retailers dropping from 35% of take-up in 2021 to 18% in the first half of 2022. In South Africa, warehouse footprints are being expanded by national retailers and third-party logistics companies, with market rental growth of between 10% and 20% at the top-end of the market. I had to include the below table from the presentation, which shows the impact on property valuations of market rental growth vs. yields used to value the properties. The base yield is 4.25%, so this means that 17.5% rental growth is needed to offset +75 basis points in yield. Over the next 24 months, Equites expects a marginal decrease in property valuations. Although the asset class is thought of as an inflation hedge, this is only on an income basis. The impact on valuations can be flat or negative, as inflation is often accompanied by higher rates.

Share buybacks and dividends

  • I’m running out of creative ways to tell you that British American Tobacco is still repurchasing shares on a daily basis.
  • FirstRand’s shareholders overwhelmingly approved the transaction to repurchase the bank’s preference shares. We’ve seen extensive repurchases of bank preference shares in the market as this has become a less desirable source of capital under new banking capital regulations.

Notable shuffling of (expensive) chairs

  • Buffalo Coal has appointed Tushar Agrawal as the chairperson of the board. He is the ultimate beneficial owner of Belvedere Resources, the largest shareholder in Buffalo Coal.

Director dealings

  • Barloworld had some pretty bad errors in recent announcements for director dealings. The worst is a mistake related to a director who was announced as having acquired over R4 million in shares – in reality, he sold that value of shares! The recent purchases by a trust related to the CEO were also incorrectly disclosed as being for 26,180 shares vs. the correct number of 22,580 shares. They at least got the direction right on that one.
  • The CEO of Sirius Real Estate has bought some shares in the company to add to his self-invested pension. This was a small purchase (£15k) which takes his total stake in the group to 0.83% of shares in issue.
  • A director of Kaap Agri has purchased shares worth just over R51k.
  • A director of a major subsidiary of Nu-World has sold shares in the holding company worth over R65k.

Unusual things

  • New Frontier Properties has been booted off the Stock Exchange of Mauritius (SEM) for failing to publish outstanding financial statements for the year ended August 2020. It’s quite spectacular to note that this company won a PwC award for corporate reporting in 2017. Talk about hero to zero.
  • Mr Price’s shareholders are less than enamoured with the company’s remuneration policies, with 48% of shareholders voting against the remuneration implementation report in a non-binding advisory vote. There will now be a process of engagement with shareholders. Although I must point out that many companies are experiencing this issue (like MultiChoice with a 31.7% vote against the report), a 48% “no” vote is rather high and especially after Mr Price engaged with major shareholders before the meeting. To put both of those into perspective, over 60% of Naspers shareholders were unhappy with the remuneration policy and 89% voted against putting unissued shares under the control of directors. Ouch.
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