Richemont is to dispose of a 50.7% stake in its loss-making online luxury and fashion retailer YOOX NET-A-PORTER (YNAP). Italian FARFETCH will acquire a 47.5% stake and Symphony Gold, Mohamed Alabbar’s investment vehicle a 3.2% stake, resulting in YNAP becoming a neutral distribution platform in a move to facilitate a shift towards a hybrid retail-marketplace model. Richemont announced it was impairing €2,7 billion (R45,6 billion) in its YNAP Investment. The deal will see Richemont holding an approximate 12% stake in FARFETCH and will, depending on profit targets met, receive an additional US$250 million worth of shares at the end of five years. In addition, FARFETCH may increase its ownership in YNAP shares to 100% through a put and call option mechanism.
Prosus has announced the acquisition of the remaining 33.3% stake in iFood, a platform business which includes grocery, quick commerce and fintech, from minority shareholder Just Eat. The cash consideration payable is €1,5bn (R25,5 billion), plus a contingent consideration of up to a maximum of €300 million in cash depending on a re-rating of the food delivery sector.
MiX Telematics, via its North American subsidiary, has acquired the Field Service Management (FSM) business from Trimble for a total minimum consideration of $6,7 million. The North American operations of FSM include the sale and support of telemetry and video solutions that enable back-office monitoring and visualisation for fleet services management in several industries.
SEM-listed Universal Partners, which has a secondary listing on the JSE’s AltX, has disposed of its entire shareholding in Dentex Healthcare, a consolidation platform focused on private dentistry in the UK. The acquiring party, Portman Dental Care, is the largest private dental consolidator in the UK, with a growing presence in Europe.
The general offer by Raubex to acquire the remaining 38.32% stake in Bauba Resources for a cash consideration of R0.42 per share, closed on August 19, 2022. The offer was accepted in respect of 99,64 million shares constituting 13.29% of the total issued share capital of the company. Raubex now holds 74.97% of the company which delisted from the exchange on August 23, 2022. Shareholders not accepting the offer now own shares in the unlisted company.
The R650 million deal struck between Afrimat and sellers Aquila Steel (Aquila Resources) and Rakana Consolidated Mines for the acquisition of the Gravenhage manganese mining right and associated assets in May 2021 will no longer take effect. Reasons given by Afrimat were that all conditions precedent were not fulfilled by end date August 20, 2022. In particular, the granting of the Water Use License Application was not fulfilled.
Unlisted Companies
Sango Capital, a local investment management firm, has made a minority investment in Sundry Markets, a Nigerian grocery retailer operating through the ‘market square’ brand. The investment was made alongside Africa-focused investment company Tana Africa Capital.
Mergence Investment Managers, through its infrastructure and development fund, has taken a controlling stake in the affordable rental housing group Live Easy.
The Cape Town Stock Exchange (CTSE) has raised R85 million in a funding round led by venture capital investment company founded by Capitec Bank and Empowerment Capital investment Partners, Imvelo Ventures. Also participating in the round were existing investors, Lebashe Investment, Pallidus Alternative Investments, Shaolin Investments and Gary Strobel. Proceeds of the capital raise will be used to fund ongoing growth and expansion.
South32 has declared a special dividend of $0.03 per share, returning $139 million to shareholders.
Ascendis Health has successfully raised R101,53 million in a fully underwritten, non-renounceable rights offer through an offer of 143 million new Ascendis shares at an issue price of 71 cents per share. The funds raised will be used, in part, to repay the Austell Facility with the remainder of the proceeds being used to fund the restorative and net working capital requirements of the Medical and Consumer businesses in the near-term.
Raven Property Group has received JSE approval to terminate its secondary listing, which will be removed on August 29, 2022.
The Stock Exchange of Mauritius has withdrawn the listing of New Frontier Properties shares after the market close on August 25, 2022, this as the company failed to comply with the provisions of the listing rules relating to the publication of its financial statements.
A number of companies announced the repurchase of shares
Prosus continued with its open-ended share repurchase programme. This week the company announced that during the period 15th to 19th August 2022, a total of 3,391,090 Prosus shares were acquired for an aggregate €217,4 million.
British American Tobacco repurchased a further 905,000 shares this week for a total of £31,2 million. Following the purchase of these shares, the company holds 206,464 of its shares in Treasury.
Three companies issued profit warnings. The companies were: Aveng, Cashbuild and Harmony Gold.
Six companies this week issued or withdrew cautionary notices. The companies were: MTN, Pembury Lifestyle, Telkom SA SOC, Sebata, African Equity Empowerment Investments and Ayo Technology.
South Africa’s B-BBEE Commission – the “enforcer” of BEE compliance – has, in recent months, found itself on the wrong side of the law. Separate rulings made by the High Court indicate that the Commission’s zealous and single-minded approach to fronting could well be at odds with its legislative mandate to function impartially, without fear, favour or prejudice.
The B-BBEE Commission (the Commission) was established to encourage and monitor the B-BBEE compliance of Corporate South Africa in order to drive strategic economic outcomes. It was designed to be restricted to exercising investigative powers only, approaching the courts for interdicts in the cases of identified fronting. The defining spirit of the Commission is the B-BBEE Act which, in turn, must be read together with the Promotion of Equality and Prevention of Unfair Discrimination Act (Equality Act).
The practice of fronting has been identified as a significant impediment to the spirit and development of B-BBEE, and alleged wrongdoers have been hotly pursued by the Commission under the leadership of Commissioner Zodwa Ntuli. More than 80% of complaints received by the Commission relate to this practice.
Over the last eight months, three cases of alleged fronting were brought before the High Court. In all three cases, the findings were almost entirely unfavourable towards the Commission.
In October last year, a case involving the Commission’s publication of a final report on alleged fronting by CRRC E Loco Supply (CRRC) was brought before the High Court in Pretoria. The company – a joint venture between Chinese-owned company CSR: Zhuzhou Electrical Locomotives and empowered entity, Matsete Basadi Consortium – had been investigated by the Commission following two separate complaints lodged by former directors of CRRC.
When the Commission’s final findings’ report duly indicated instances of fronting by CRRC, the company took the matter to the High Court in a bid to stop the report’s publication. While the court did not find grounds for the majority of the complaints made by CRRC, it did rule that the Commission could not publish its final findings’ report, pending the outcome of investigations by other regulatory bodies.
Following the CRRC matter, two further cases on alleged fronting identified by the Commission were heard before the High Court in January and July of this year. In both instances, the Commission’s reports were found to be substantially lacking in factual evidence.
The January court ruling was in favour of Cargo Carriers, a leading provider of supply chain and logistics solutions. It concluded a matter that had begun in 2015, when complaints were made to the Commission by owner-drivers contracted under the Cargo Carriers’ B-BBEE owner-driver initiative (ODI). The complainants alleged insufficient empowerment through the ODI, regarding access to funds, assets and management training. Following an investigation, the Commission concluded in April 2019 that Cargo Carriers had engaged in fronting and was thus in breach of the B-BBEE Act. In its rulings, the High Court found that “not a single jurisdictional fact for fronting was established by the Commission.” The Court had also noted that despite further documentation provided by Cargo Carriers in response to the Commission’s preliminary findings in June 2018, the final findings in April 2019 were “a copy and paste of the preliminary findings.”
In June this year, a fronting case made by the Commission against Sasol Oil was declared invalid and set aside by the High Court. While the Commission had notified Sasol Oil in 2017 that it was commencing investigations following complaints made against it, the case had its roots in an empowerment transaction entered into in 2006. At the time, Sasol Limited and Sasol Oil entered into an agreement with empowered company, Tshwarisano LFB Investment Proprietary Limited (Tshwarisano), in which the latter acquired a 25% shareholding in Sasol Oil.
At the conclusion of the empowerment transaction in 2015, a complaint was made to Sasol Limited by one of Tshwarisano’s minority shareholders about what it deemed had been an unfair preference share agreement between itself and its funding partner at the time of its share acquisition. Sasol Limited was able to facilitate a settlement agreement between the minority shareholder, Awevest Investment Limited (Awevest), and its funding partner.
When the Commission approached Sasol Oil in 2017, it was to outline a complaint against Sasol Oil, stating that it had been responsible for the unfair terms set out in the original agreement between Awevest and its funding partner, and had thus knowingly engaged in and perpetuated a fronting practice by claiming black ownership points flowing from Awevest’s participation in Tshwarisano.
Upon notification by the Commission of its final findings of fronting and recommended remedial actions in 2019, Sasol Oil approached the High Court. The Commission’s report was invalidated by the High Court, which ruled that “the Commission’s decision was based on incorrect facts and not on admissible evidence. The Commission took irrelevant considerations into account and relevant considerations were not taken into account by the Commission.” Furthermore, the Court ruled that the Commission’s findings were “made arbitrarily or capriciously within the meaning of section 6(2)(e) of PAJA and were irrational within the meaning of the section 6(2)(f)(ii) of PAJA” and “unreasonable within the meaning of section (6)(2)(h) of PAJA”.
The actions of the Commission in all of the abovementioned cases raise concerns. In the case of CRRC, the Court’s rulings indicate, in part, that the Commission was not following due regulatory process; in other words, the Commission had not awaited the outcome of investigations by other regulatory bodies before intending to publish its final findings’ report. Those further investigations could well have had an impact on the Commission’s findings and subsequent recommendations. In the cases of Cargo Carriers and Sasol Oil, the Commission seemed intent on finding instances of fronting at all costs, neither considering additional documentation supplied to it by both companies following its initial findings, nor balking in the face of poor evidence.
It is doubtful that the Commission’s setbacks will dim government’s quest to rout out fronting. Earlier this year, Minister of Trade, Industry and Competition, Ebrahim Patel reiterated that resistance to B-BBEE impedes other related policies that the government has introduced, or plans to introduce, in order to broaden economic participation and combat inequality. He said, “Legal challenges against B-BBEE policies have sought to stall through litigation and aggressive posturing, the necessary journey of transforming the economy. It is a dangerous strategy that will fail. It will ultimately undermine the social stability that democracy rests upon.”
Fronting was criminalised in the BEE Amendment Act in 2013. Individuals deemed to have had actual knowledge of a fronting practice can face criminal sanctions that might include a fine and/or up to ten years’ imprisonment. Convicted individuals could be barred from doing business with organs of state for a period of ten years from the date of conviction. Companies could be given an administrative penalty of up to 10% of annual turnover, with awarded contracts with organs of state cancelled.
The Commission’s actions, found to be wanting according to South African law, could well undermine the confidence of companies to develop empowerment transactions without fear of prejudice at a later stage. Companies are, nonetheless and in good faith, obliged to seek out empowerment partners to contribute to South Africa’s transformation. In an environment where an organ of state appears, for all intents and purposes, to have gone somewhat rogue, yet remains firmly backed by the state, companies are advised to reach out to empowerment transaction experts so as to create robust, transparent and compliant transaction vehicles that will withstand any scrutiny.
Evon Jeewan is a Corporate Finance Principal | Bravura.
This article first appeared in DealMakers, SA’s quarterly M&A publication
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Corporate finance corner (M&A / capital raises)
Richemont has announced a major step forward in its direct-to-consumer online strategy. I find this fascinating, with many of the world’s largest consumer brands going this way so that they can lock in the full margin as the manufacturer and the retailer. I always wondered whether there are enough people willing to spend the price of a family hatchback on a timepiece or necklace without even seeing the product, but YOOX NET-A-PORTER (YNAP) claims to have 4 million customers! Admittedly, most of those customers will be buying costly shoes and handbags rather than exceptional timepieces, so the jury is still out for me from a Richemont perspective. Richemont’s vision has been to make YNAP a neutral platform with no controlling shareholder, thereby helping the entire luxury goods industry to digitalise. US-listed FARFETCH (another company that loves capital letters) will be acquiring 47.5% in YNAP and an entity linked to Mohamed Alabbar will be acquiring 3.2%, so there will be no outright controlling shareholder. Alabbar is the founder of the property company that built the Burj Khalifa – quite a claim to fame! The announcement is somewhat contradictory, noting a put and call option structure that would lead to FARFETCH acquiring the remaining shares in YNAP. This would break the whole “no controlling shareholder” argument but I think Richemont’s point is that no luxury goods manufacturer would then control the platform. FARFETCH already operates an online marketplace for luxury goods and part of this deal will see Richemont’s Maisons (the private school word for “manufacturers of very expensive things”) joining the FARFETCH marketplace. Richemont will hold a stake of around 12% – 13% in FARFETCH after this transaction and will receive a further $250 million worth of shares after five years. There is no debt in YNAP and Richemont has committed a credit facility of $450 million for up to 10 years. Alabbar’s investment will take the form of a share-swap, as Alabbar will sell its joint venture in the Gulf region with YNAP to that company in exchange for a 3.2% stake. Richemont is taking a nasty knock to its income statement here, with a write-down of €2.7 billion. FARFETCH’s share price has tanked by over 77% this year (though it was over 10% higher pre-market thanks to this announcement). Online retailing of luxury goods clearly isn’t easy.
In a transaction like Impala Platinum’s offer to Royal Bafokeng Platinum shareholders, there is considerable involvement from regulators and even government. The latest development is that Impala Platinum has concluded a Framework Agreement with the Minister of Trade, Industry and Competition. It deals with concepts like employment, support for small businesses and localisation. This is an important strategic step in the deal as the Competition Commission has already recommended an approval to the Competition Tribunal whose decision is pending. Northam Platinum is the sole party objecting to the Tribunal. As a reminder, the cash portion of the offer price is R90 and Impala Platinum has decided not to reduce the price by the amount of the dividend recently declared by Royal Bafokeng Platinum. The full offer is R90 plus 0.3 Impala Platinum shares for each Royal Bafokeng Platinum share.
Etion Limited has distributed the circular for the proposed disposal of Etion Create to Reunert. You’ll find it at this link. The original firm intention announcement was missing some critical elements required by Takeover Law, specifically confirmation of Reunert’s available cash or a bank guarantee for the offer. This is such basic stuff for proper commercial lawyers, so I really don’t know why we are seeing all these Takeover Law issues lately. As a reminder, the Takeover Regulation Panel (TRP) is the regulator here and they do a great job. Reunert has now provided a bank guarantee and the other elements that were missing from the original announcement have also been addressed.
Encha Properties, the B-BBEE investor in Vukile Property Fund, has had to sell a portion of its shares to settle a loan with Investec. The remaining stake is around 6% in Vukile and Encha plans to remain a long-term shareholder.
Blue Label Telecoms is busy with the recapitalisation of Cell C, a process that has taken longer than initially anticipated. These things always take longer than people think. Binding agreements should be concluded soon and the transaction is expected to close by mid-September.
Onelogix has been on the “will they / won’t they” list for a potential buyout for months now. The board’s enthusiasm to take the company private was tempered by macroeconomic conditions and company-specific issues, like a storm that caused significant damage. The company announced that NJB Investco (Pty) Ltd has sold all its shares in the company and that Best-Krug Saco (Pty) Ltd now holds 34% of shares in issue. The announcement doesn’t give further information on the parties sitting behind these entities.
Financial updates
KAP Industrial released its results for the year ended June 2022. If we look at continuing operations, revenue increased by 17% and operating profit before capital items jumped by 40%, with operating margin expanding to 10.5%. The story gets even better further down the income statement, with headline earnings per share (HEPS) increasing by 73% to 74.4 cents. The share price is trading at around R4.40 so the Price/Earnings multiple is 5.9x based on those numbers. The numbers are slightly different with discontinued operations included, though the impact on HEPS is minimal (75.1 cents vs. 74.4 cents from continuing operations only). A dividend of 29 cents per share has been declared, nearly double the comparable dividend. The cash story isn’t quite as exciting as the earnings growth, with only a 17% increase in cash generated from operations due to working capital requirements. The segmental results vary considerably. PG Bison grew revenue by 16% and operating profit by 35%, with gross margins protected despite raw material cost escalations. Restonic was hammered by the riots in July 2021 and raw material cost increases at short notice, with revenue down 7% and operating profit down a nasty 73%. Automotive business Feltex also had a horrible year thanks to the riots and floods that had a significant impact on new vehicle assembly volumes. Feltex experienced a drop of 11% in revenue and 77% in operating profit. Polymer business Safripol (by far the most profitable division in KAP) had a wonderful year, with revenue up 35% and operating profit skyrocketing 227%. Although transport business Unitrans grew revenue 11%, operating profit dropped by 11%. The troubles came in the Unitrans Africa business, where profit collapsed by 77% despite revenue increasing by 7%. Finally, recently-acquired DriveRisk was included in this result for seven months and contributed R22 million operating profit at a margin of 9%, with KAP noting that performance was below expectations due to semiconductor chip shortages.
Bid Corporation operates in the lucrative food service industry in 35 countries. It is a truly global company and you can invest in it right here on the JSE. The results for the year ended June 2022 reflect a return to restaurants by consumers. As Zoom’s share price will confirm, it turns out that people didn’t want to remain locked in their houses as the pandemic abated. Group revenue growth was 28.2% as reported and over 33% on a constant currency basis, driven by 49% growth in Europe (the biggest market) and 55.1% in the UK as the second-largest market. Cash generated from operations before working capital changes was 41.4% higher. They are very clever in making that distinction, as the cash net of working capital changes was only 3.9% higher. The overall movement in cash was negative this year, with significant investment in the business. This is largely to be expected in a period of recovery, as you need the balance sheet to support the operations. Other than Australasia, which put in a disappointing result for the first six months of the year thanks to Covid and draconian government regulations, the group is looking strong across the board. A final dividend of 400 cents per share has been declared. Although there’s been plenty of volatility along the way, the share price is essentially flat year-to-date. The recovery has been priced in for a while now.
DRDGOLD has released results for the year ended June 2022. It’s been a tough period for the company, as the tailings model is all about volume throughput and squeezing out small margins. This makes DRDGOLD highly sensitive to the gold price, as small changes in price can have significant percentage impacts on the operating margin. An unsavoury situation is one in which the gold price is underperforming and inflationary cost pressures are coming through the system, which is exactly what has been happening. Revenue is down 3% and HEPS has fallen by 22%. Although the year-on-year comparison isn’t a great story, the company is profitable and has declared a dividend of 40 cents per share, identical to the comparable period despite the drop in earnings. The share price is down just over 20% this year.
Harmony Gold has released a trading statement for the year ended June 2022. The CEO commentary focuses on discipline in capital expenditure and reduction of overall risk, which sets the tone for the news that Harmony will be restructuring the Tshepong Operations. Tshepong North’s sub-75 project has been suspended and the life of mine has been reduced from 19 years to 7 years. This creates a smaller but immediately profitable operation. The capital that was earmarked for Tshepong North will instead be used for the Zaaiplaats project and the Kareerand tailings expansion in the Vaal River region, both of which offer higher returns. Here’s something that will shock you at first blush: Harmony has recorded a loss in this financial year. Impairment losses have taken the group into the red, with an expected loss per share of between 160 cents and 189 cents. HEPS excludes the impact of impairments and other non-recurring items, so it is still a positive range (461 cents to 549 cents). R3.6 billion of the R4.4 billion total impairment relates to Tshepong Operations. Ouch.
If you need to renew your ID card or passport at Home Affairs soon and you have several hours to kill, Redefine Properties just released the mother of all presentations. The capital markets day slide deck has 145 pages to keep you busy. Investors will care the most about the distributable income guidance, which was thankfully summarised in the SENS announcement. Distributable income for the year ended August 2022 is anticipated to be 52.6 cents per share, which is within previous guidance. For FY23, an increase of between 3% and 7.2% is expected. Between 80% and 90% of distributable income should be paid out as a dividend. Of course, these numbers depend on many factors like trading conditions in South Africa, the contribution from Eastern European subsidiary EPP and the inflation and macroeconomic outlook.
Exemplar REITail (that really is the name) has updated the market on its performance for the 5 months to July 2022 and has issued a trading statement. Vacancies are down from 3.26% at 1st March 2022 to 2.8% at the beginning of August. Like-for-like rental is up by 6.3%. Despite inflationary pressures, property operating costs as a percentage of revenue decreased vs. the prior financial year, although administrative costs increased. With such a significant impact from Covid and the riots in the base period, the company has guided that the distribution per share for the six months ending August will be between 36.7% and 50% higher. Speaking of the riots, the last remaining property being repaired in the portfolio is Edendale Mall. Phase 1 of the rebuild will be complete by the end of this month, representing 42.5% of rental for the centre. The next 40% or so will open in December 2022, with the rest in April 2023.
Globe Trade Centre (an obscure Eastern European property fund with a name that always sounds like a typo) has released results for the six months to June 2022. Rental income was up 5% and Funds From Operations or FFO – the key measure for property funds particularly with an offshore focus – was up 7%. The loan-to-value (LTV) ratio is 42%. The fund is heavily skewed towards office properties, with 39 of the 45 completed commercial buildings being office properties and the other 6 being retail properties.
Deneb Investments has finalised its Covid business interruption claim and will receive around R74 million (excluding VAT) from its insurers.
If you are a shareholder in Octodec, take note that the company will hold a pre-close webinar at 10am on Thursday 25th August. The presentation should be available on the company website after the webinar.
Operational updates
Spear REIT has announced the R74 million redevelopment of Blackheath Park for Bravo Brands, a group that includes brands you would recognise like King Koil, Sealy and Edblo. The company is using Cape Town as the growth node for its export business. Bravo was the tenant in a property in Parow owned by Spear and approached the property fund to find new, larger premises. This triggered the redevelopment of Blackheath Park, with Bravo Brands taking 16,000sqm initially on a 10-year lease. The plan is to increase this to 42,000sqm over the next five to seven years. The initial redevelopment yield will be 9.85% on completion. Bravo will take occupation on 1 February 2023. This is a feel-good story for local manufacturing as well as for Spear’s ability to respond to tenant demand in the Western Cape.
Share buybacks and dividends
Like a smoker who can’t kick the habit, British American Tobacco continues to repurchase shares on a daily basis.
Notable shuffling of (expensive) chairs
The appointment of heavy-hitting directors to the board of Telkom only just squeaked through at the AGM, with 53% approval for the likes of Brian Kennedy and Mteto Nyati to join the board. Although not specifically linked to director appointments, there were important special resolutions that didn’t pass, like share repurchase authorities or providing financial assistance. There is clearly unhappiness in the Telkom shareholder register and that’s not great news for a potential offer from MTN, though it really depends on what has driven this vote.
Not quite a shuffling of chairs, but rather an extension to the period that this chair will spend in one place – Oceana has received a dispensation from the JSE to extend interim CFO Ralph Buddle’s term until 31 January 2023. After complete upheaval in its executive structures, the company is looking for a permanent CFO.
Kibo Energy issued a notice of AGM and announced that the chairman (and one of the founding directors), Christian Schaffalitzky, will be retired from the board at the AGM as part of broader retirement planning. A new chairman is expected to be appointed by the end of 2022. It’s generally a good sign when founders feel confident enough to walk away from their babies.
Fairvest’s company secretary has resigned to “pursue other interests” – the company will announce a replacement in due course.
Luxe Holdings is saying goodbye to yet another director, with an independent director leaving the board. Two new directors have joined the board and a company secretary has also been appointed. Eventually, the revolving door at this company will calm down.
The chairperson of Buffalo Coal has resigned from his position on the board. A replacement hasn’t been announced yet.
Director dealings
At first blush, it looks like Kenneth Collins and associated entities sold shares in Tradehold worth nearly R6.5 million. If you read carefully, the buyer is also an entity associated with Collins, so this was really just a restructure of personal affairs.
An associate of a director of Pick n Pay has sold shares worth nearly R460k.
Sygnia CEO David Hufton exercised share options and sold almost half of the stake. This is standard practice in the market, with directors usually selling a portion of the shares to cover the taxes payable.
An associate of a director of Clicks has sold shares in the group worth R10.7 million.
More directors of SilverBridge Holdings have accepted the offer from ROX Equity Partners of R2.00 per share.
Unusual things
Because I read every single SENS announcement these days, I’ve now learnt that even South Africa goes into a closed period for investors! National Treasury will not have any investor meetings from 26 September to 26 October, the month before the Medium-Term Budget Policy Statement (MTBPS).
In a recent webinar, the founders of bizval (including your favourite ghost) explained why valuations are both an art and a science. We worked through some key principles and enjoyed a vibrant Q&A session at the end.
Ultimately, founders all want the same thing: a successful journey in creating an asset of value. A business only has value if the founder is able to step away one day and sell to someone new, cementing a legacy in the process.
Of course, the big question is this: what is the business really worth?
After an extremely successful inaugural webinar, we are looking forward to bringing you more insights on valuation methodologies and how founders can build more valuable companies. In the meantime, enjoy the recording below and head on over to bizval.co to learn more about the online valuation tool we have built.
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Corporate finance corner (M&A / capital raises)
PSG Group has updated the market on the progress with its group restructure. Interestingly, one of the shareholders who sent appraisal right notices has withdrawn the objection. This leaves one s164 process underway, a complicated legal procedure in which a dissenting shareholder fights to be paid out “fair value” – which of course is believed to be higher than the amount other shareholders would be getting, otherwise the dissenting shareholder wouldn’t bother. The dissenting shareholder only bought the shares after the initial announcement, so this is a classic case of the s164 loophole that has been exploited by a handful of people in the market, much to the annoyance of corporates trying to mop up shares at depressed prices. Interestingly, the remaining dissenting shareholder only has 2,000 PSG shares, a stake worth R174k at current prices. That’s nowhere near enough to make a s164 process commercially viable, as the legal fees are significant. PSG has (unsurprisingly) decided to waive the condition related to s164 demands and will move forward with the restructure accordingly. PSG believes that the last of the conditions will be met by 25th August and a further announcement will be released accordingly.
Momentum Metropolitan has released a voluntary announcement regarding the introduction of the Abu Dhabi Investment Authority as a shareholder in Aditya Birla Health Insurance. The sovereign wealth fund of the Emirate of Abu Dhabi will hold 9.99% in the health insurance company, with Momentum Metropolitan holding 44.1% and the rest held by Aditya Birla Capital Limited. This is a capital infusion of around R1.3 billion that will drive the company’s growth in India. The deal is too small to be categorised under JSE Listings Requirements, so details are limited and shareholders aren’t being asked to vote. You should also take note of the trading statement released by Momentum Metropolitan, which I deal with in the financial updates section.
Shareholders of RMB Holdings have given a resounding “yes” to the proposed sale of the shares and claims in Atterbury Europe to Brightbridge Real Estate for R1.75 billion. With that major hurdle out of the way, the company will focus on the remaining conditions precedent.
Tradehold is in the process of selling its entire stake in Moorgarth Holdings (Luxembourg) to Moorgath’s ultimate group holding company. The value of the deal is £102.5 million. The independent property valuations on all the properties are now available at this link and Valeo Capital (acting as independent expert on the transaction) has noted that its opinion on the terms of the deal remain unchanged after reviewing the valuations.
Sebata Holdings has renewed its cautionary announcement. The company is negotiating the potential disposal of one or more businesses.
Financial updates
Sasol got all the early morning attention with a SENS announcement shortly after 7am that gave the market what it wanted: confirmation of the dividend. As we know, an environment of higher energy and chemicals prices has been bullish for Sasol, with the recent focus on cost and capital discipline helping to turn a favourable environment into a great set of results. For context, the average rand oil price per barrel was 68% higher in this period. Headline earnings per share (HEPS) increased by 20%. If you’re willing to work with management’s definition of core HEPS, then it has more than doubled year-on-year. The most important part is the dividend, which has been announced as R14.70. Net debt was slightly higher (R105.1 billion vs. R102.9 billion) despite repayments of R12 billion, attributable to a weaker rand. Net debt to EBITDA of 0.8x is well below the threshold level of 3.0x. I must highlight that a SOLBE1 share is identical to a Sasol share other than the restricted B-BBEE ownership. SOLBE1 trades at a much lower price than Sasol ordinary shares on the main board. At R180 per SOLBE1, this dividend is an 8.2% yield. The yield for Sasol ordinary shareholders is 4.3%. You can get all the details of the Sasol earnings announcement in this article that the company placed in Ghost Mail this morning.
Merafe Resources got plenty of attention on Twitter after releasing results for the six months to June. The share price tumbled by more than 10%, as some unfortunate souls were reminded of the risks of holding cyclical companies even on a low Price/Earnings multiple. The results themselves were strong, with a 15% increase in revenue, 68% increase in EBITDA and almost 60% jump in HEPS to 37 cents. The share price was trading at around R1.30 in late afternoon trade, so on an annualised basis the multiples look silly. The point is that you can’t just annualise these earnings, as the results can be highly volatile based on underlying commodity price movements. Although the interim dividend was 71% higher at 12 cents per share, the low payout ratio seems to be part of what spooked the market. The likeliest cause of the nasty drop was the CEO commentary throughout the SENS announcement, which warned of a drop in ferrochrome prices and cost pressures from inflation and other pressures. The company expects a tougher second half of the year and is focused on “cash preservation” – really bearish commentary indeed! In fact, I honestly don’t know when last I saw such negative commentary alongside great numbers. The share price is still up around 10% this year.
Momentum Metropolitan released a trading statement for the year ended June 2022. HEPS has skyrocketed – expected to be between 855% and 875% higher with a range of 295 cents to 301 cents. The base period was heavily impacted by Covid, with massive movements related to the mortality experience variance and additional Covid provisions. This situation changed in the latest financial year, with a small net mortality profit for the first time since the start of the pandemic and a positive impact on earnings from the partial release of Covid provisions. Earnings were also positively impacted by investment returns, as insurance companies are exposed to broader market returns. Full results will be released on 14th September.
Bidvest has released a trading statement for the year ended June 2022. HEPS is expected to be between 18% and 22% higher, suggesting a range of 1,414 cents to 1,462 cents. If we focus only on continuing operations (i.e. excluding Bidvest Car Rental), the increase is between 20% and 24%. Detailed results are expected on 5th September. The share price has rewarded shareholders with a 17% gain this year. Trading at around R223 per share, this is a Price/Earnings multiple of approximately 15.5x.
Cashbuild has also released a trading statement for the year ended June 2022 and it tells a far less appealing story than the Bidvest update. HEPS is down by between 30% and 35%, with a range of 1,867.2 cents to 2,010.8 cents. We’ve seen a significant shift in consumer spending in this period as the world reopened. Instead of renovating the bathroom, affluent homeowners are going on holiday instead.
Aveng released its annual financial statements for the year ended June 2022, allowing investors and interested parties to dig deeply into the numbers. It’s quite tricky to know where to look, as Aveng has had significant non-recurring items. The group generated R576 million in operating profit off R26.2 billion in revenue, a skinny margin of around 2.2%. Normalised earnings per share was 167 cents and HEPS was 252 cents. Thanks to an operating free cash inflow of R612 million, external debt was reduced over the year from R879 million to R481 million.
NEPI Rockcastle released a trading statement for the six months ended June 2022 and then released interim results just a few hours later. This is poor disclosure, as the point of a trading statement is to give shareholders early warning of a difference in earnings of more than 20% vs. the comparable period. Distributable earnings per share increased by 29.4% to 22.83 euro cents. Thanks to a strong balance sheet, every single one of those cents will be declared as a dividend once the company has redomiciled to the Netherlands, which is expected to be completed by 6th September.
Omnia Holdings has had its credit outlook upgraded from Stable to Positive by GCR Ratings. The issuer ratings have been retained at A(ZA) for the long-term rating and A1(ZA) for short-term. GCR sees the business as having strong competitiveness and diversification across geographies and customers. As a reminder, Omnia is a leading regional producer and supplier of nitrogen-based fertilizers in Africa, as well as one of the leading manufacturers of mining explosives in Africa for underground and surface applications.
One for the diaries – Aspen Pharmacare will release results for the year ended June 2022 on 31st August. The live presentation will be held at Investec’s offices, so there are no prizes for guessing who the corporate advisor to Aspen is.
Operational updates
South32 has decided not to go all out with an investment in the Dendrobium Next Domain project at Illawarra Metallurgical Coal in Australia. The expected return on the $700 million required investment isn’t compelling vs. alternatives for the complex. The group will focus on optimising the facility, including a $260 million investment that remains subject to board approval. This gives South32 capacity to direct capital towards other opportunities, like “green metals” in North America (those that are critical to a low carbon future).
BHP has confirmed the exchange rate for its dividend. South African shareholders will be paid R29.7094875 per share on 22nd September.
The company secretaries are at it again. This time, the company secretary of Datatec has sold shares worth over R2.5 million.
Prosus has repurchased shares over the past week or so for around $220 million.
Notable shuffling of (expensive) chairs
The chairs stayed put.
Director dealings
Des de Beer has acquired a further R963k worth of Lighthouse Properties shares. Regular readers will know that he has been investing chunks amounts in Lighthouse shares for a while now.
In the AGM notice that Stor-Age sent to shareholders at the end of July, the company proposed a fee of R3,000 per hour for non-executive directors doing work required by “extraordinary circumstances” – whatever those might be. Shareholders were less than enthralled by this proposal, so Stor-Age opted to amend the proposed resolution and remove the additional amount. Before you feel too sorry for the directors, I must note that the annual fee for a board member is R300,000 and they earn another amount of between R60,000 and R130,000 depending on which committee they serve on. That’s not exactly a pittance for staying awake during PowerPoint presentations while snacking on mini sausage rolls.
Sasol delivered a strong set of financial results against the backdrop of increased volatility resulting from ongoing geopolitical tensions, extended COVID-19 lockdowns and global supply chain disruptions. The company benefitted from higher energy and chemicals prices, as well as strong cost and capital discipline through the delivery of our Sasol 2.0 transformation programme.
Earnings before interest, tax, depreciation and amortisation (EBITDA) increased by more than 100% to R75,5 billion. This is predominantly due to a strong recovery in Brent crude oil and chemical prices, partly offset by hedging losses and lower chemical sales volumes.
The balance sheet has been significantly strengthened with net debt of US$3,8 billion at 30 June 2022, well below the target of US$5 billion. Dividends were reinstated at R14,70 per share in line with the dividend policy.
“Financial year 2022 was characterised by a number of factors impacting our business, including geopolitical tensions, further COVID-19 lockdowns in China, weather-related events and global supply chain disruptions. These conditions dampened global demand and triggered fears of recession in both advanced and developing economies. Amidst this volatility, we demonstrated resilience, delivering a strong set of financial results for the year in a complex and difficult external environment,”
Fleetwood Grobler, President and Chief Executive Officer of Sasol.
He added, “The wellbeing of our people remains our number one priority, as we continue to pursue our ambition of zero harm. I am deeply saddened by the loss of five colleagues while on duty. To eliminate work-related safety incidents, and ensure our employees return home safely, we have rolled out additional safety remediation initiatives in response to these high severity incidents, with increased emphasis on behavioural culture.”
Earnings before interest and tax (EBIT) of R61,4 billion increased by more than 100% compared to the prior year, driven by higher crude oil prices, refining margins and chemical prices. This also resulted in a strong gross margin improvement compared to the prior year. Earnings were impacted by losses of R18,3 billion on the valuation of financial instruments and derivative contracts, higher labour and maintenance cost, as well as increased electricity purchases from Eskom arising from the diversion of gas from utility generation to production, offset by savings from Sasol 2.0 initiatives.
The Energy business further benefitted from a recovery in fuels demand post the COVID-19 impact. However, there was a slight decrease in retail sales in the last quarter due to record high fuel prices. This was offset by lower volumes in Mining, Secunda and Sasolburg downstream value chains following the feedstock and operational challenges which impacted the South African value chain.
The Chemicals business delivered a strong financial performance, benefitting from a stronger average sales basket price (US$/t), which was 39% higher than the prior year. Sales volumes were 12% lower than the prior year largely due to the divestment of the US Base Chemicals assets concluded in December 2020 and lower Secunda and Sasolburg production from Chemicals Africa.
Plans for meeting its greenhouse gas (GHG) target to have a 30% reduced emissions profile by 2030, are progressing well, as a foundation to meeting Sasol’s ambition of Net Zero emissions by 2050.
In South Africa, it is progressing the procurement of over 600MW of solar and wind renewable power with the first projects starting to come online from 2025 onwards.
In Europe, Sasol has entered into several Power Purchase Agreements for its German and Italian operations and have concluded a supply agreement for the provision of Carbon dioxide (CO2)-neutral biomass-based steam to the Brunsbüttel site in northern Germany.
Sasol invested R743,3 million globally in socioeconomic development, which contributed towards funding small to large enterprises, bursaries, education and learnership programmes, health and investment in community service infrastructure. It also invested R1,2 billion in skills development.
Sasol has continued to make major strides on its commitments to sustainable transformation and broad-based black economic empowerment (B-BBEE). The company has recorded exponential growth in spend with black-owned businesses achieving R33,6 billion in 2022 compared to R23,8 billion in 2021.
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Corporate finance corner (M&A / capital raises)
MTN and Telkom have renewed their respective cautionary announcements. Discussions regarding a potential offer by MTN for all the shares in Telkom are still underway. The announcement notes that the potential offer would be to acquire all the issued share capital of Telkom in exchange for shares in MTN or a combination of cash and shares.
Afrimat updated the market on the Glenover phosphate and Gravenhage manganese projects. The Glenover deal was announced in December 2021 with a total deal value of R550 million. The implementation of the initial phases has progressed well and feasibility studies of follow-up phases have yielded “pleasing results” – so that’s clearly good news. The payments for inventory stockpiles (a total of R250 million) have been made to the sellers. The option to acquire the Glenover shares remains at Afrimat’s sole discretion and is valid until November 2022. The news on the Gravenhage project isn’t good I’m afraid, with the water use licence granted by the Department of Water and Sanitation deviating materially from the application that was made. This means that conditions precedent weren’t met and the deal has fallen over as far as Afrimat is concerned. The counterparty disagrees, with a formal dispute now underway that may end up in arbitration. If you’ve ever read a proper sales agreement, you’ll know that there are many clauses that are legal in nature rather than commercial. They exist for scenarios just like these.
Ascendis Health announced the results of its rights offer. The company aimed to raise around R101.5 million and the rights offer was fully underwritten, so there was no chance of that amount not being raised. The debate was simply around where the money would come from. 32.6% of the rights offer shares were subscribed for and all the remaining shares were issued under excess applications, which refers to existing shareholders who put in an application for more shares than they would otherwise be entitled to. The underwriter didn’t need to spend a cent as all the shares were allotted to existing holders, so the underwriting fee was a great deal in the end. A few directors participated in the equity raise with Carl Neethling as the largest by far (over R22.3 million across various associated entities).
Raubex and Bauba Resources announced the results of Raubex’s general offer to shareholders of Bauba. The offer was accepted by holders of 13.29% of shares in issue. The delisting will now take place, so anyone who didn’t accept the offer will be the proud owner of an unlisted share, an asset that is usually as rewarding and valuable as one-ply toiletpaper.
Corporate finance advisors are impacted by the way in which JSE listings requirements are applied to listed companies (the same applies to other exchanges – though they are still in their infancy in South Africa). For that reason, I’m including the JSE’s response paper in this section, which was issued after consulting with the industry about potential changes to the the listings requirements and the strategy going forward. Something that jumped out at me was a proposal to move from two market segments (Main Board and AltX) into three segments, effectively carving out a set of rules for “mid-caps” that create a greater regulatory burden than on the AltX board but not as severe as for the largest companies on the JSE. This is a bit like Pick n Pay’s long overdue recognition of the need for a store format that caters for the middle market. Here’s the relevant excerpt from the JSE response paper:
Financial updates
Motus Holdings has released an updated trading statement approximately a month after the initial trading statement was issued. For the year to June 2022, HEPS increased by between 68% and 73%. The actual range is between 1,980 cents and 2,040 cents per share. On a share price of nearly R118, this puts the group on a trailing Price/Earnings multiple of below 5.9x. Detailed results will be published on 31st August.
Sun International Limited has released a trading statement for the six months to June 2022. When companies talk about a “strong recovery in revenue and EBITDA and a significant reduction in group debt” then you know it’s been a much happier time than before. Both HEPS and adjusted HEPS have swung massively into the green after losses in the comparable period. HEPS is between 83 cents and 101 cents for the interim period. Adjusted HEPS relates to a change in the estimated redemption value of the Tsogo Sun put option. If you’re happy to go with management’s view on that, you’ll focus on the adjusted HEPS range of between 167 cents and 185 cents. The share price traded nearly 3% higher after the announcement at almost R30 per share.
I noticed a SENS announcement for “SuperDrive” and decided to dig further. It turns out to be part of BMW Financial Services, so I couldn’t wait to dig in and see what I could find. There are some great stats to remind you that most people in flashy cars can’t afford them. The weighted average balloon payment is 23.16% and used vehicles are 47.22% of the portfolio, so many people have bought used cars with balloon payments. The weighted average margin is prime + 0.74%, so it’s not cheap to finance these cars. The geographical split is also interesting: Gauteng 57.51%, KZN 16.96% and Western Cape 10.68% of the total portfolio. If you’re wondering whether BMW Financial Services is a listed company, I’m sorry to disappoint you that it isn’t. The company issues debt through the JSE, hence the need for a SENS announcement.
Workforce Holdings has announced results for the six months to June 2022. The staffing, outsourcing, recruitment and training group (amongst other services) grew its revenue by 21% and EBITDA by 19%, so EBITDA margin fell slightly. Those margins are already tiny, with only R68.7 million in EBITDA off R1.9 billion in revenue. HEPS improved by 30% to 14.6 cents. No interim dividend was declared.
One for the diaries – Spear REIT is hosting a pre-close investor presentation at 11am on 31st August. You’ll be able to watch at this link.
Operational updates
Transnet is in the process of upgrading two key ports and plans to structure this as a partnership with the private sector. The idea is to create a special purpose vehicle between Transnet Port Terminals and the winning bidders, with ownership reverting to Transnet after 25 years. In others words, Transnet is looking for an operational partner for the next 25 years and that partner needs to extract enough value in that period to make it worthwhile. The ports in question are DCT2 in Durban and NCT in the Port of Ngqura in the Eastern Cape. The goals are different: DCT2 needs to achieve better commercial performance and throughput, whereas NCT has been loss-making for years and needs additional shipment volumes. After running a process since 2021, there are ten shortlisted partners for DCT2 and four for NCT. Within the DCT list, I recognised names like DP World (the new owner of Imperial), Grindrod Freight and an entity working in conjunction with Remgro. The Remgro bidder also made the shortlist for NCT. Preferred bidders are expected to be appointed by February 2023.
Schroder Real Estate has announced the exchange rate applicable to its dividends. The third interim dividend will be R0.3157950 per share and the special dividend will be R1.707 per share.
Notable shuffling of (expensive) chairs
Buffalo Coal has announced the resignation of CFO Willie Bezuidenhout and has appointed CEO Emma Oosthuizen to act as interim CFO as well.
Bowler Metcalf has appointed Ms Debbie van Duyn to the board. This is notable because she is also the Chairman of the Plastic Converters Association of SA and plays a role in other industry bodies. Bowler Metcalf is a classic example of a JSE small cap that many people have never heard of. Now you have!
Balwin Properties has appointed Ms Keneilwe Moloko to the board. Her academic background is really interesting, qualifying as both a quantity surveyor and a CA(SA)! Ms Moloko also served on the boards of Attacq, Fairvest and Long4Life.
Director dealings
A director of Kumba Iron Ore has sold shares in the company worth R206k.
A trust related to the chairman of BHP has bought shares worth around R2.95 million.
The CEO of Mondi’s South African business has sold shares in the group holding company worth nearly R1.6 million.
A director of a subsidiary of Nu-World has sold shares in the company worth around R52.5k.
Unusual things
The sad tale of Pembury Lifestyle Group continues, with the company receiving letters of demand from various parties since the passing of the CEO. The company is in so much trouble that it can’t even pay historical debts to its previous auditors. Moore has put in a proposal to be reappointed and Abacus just wants to get paid for old work. Pembury needs to raise money to settle old debts and finalise audits. In positive news, the Northriding property is being let out profitably to commercial tenants, with the proceeds ensuring that monthly obligations to Abacus can be met. This is like watching a cricket team trying to save an innings after losing 8 wickets in the first 10 overs.
Ghost Grad Sinawo Bikitsha couldn’t resist the appeal of dedicating this week’s Ghost Global to the infamous meme stocks – companies that experience sharp moves due to the collective efforts of traders on Reddit.
Meme stock millions
Bed Bath & Beyond suffered a wild week as its shares dropped by over 40%, after one of its largest shareholders (billionaire Ryan Cohen) sold his stake in the company.
For those who aren’t aware, Bed Bath & Beyond is a New Jersey homeware retailer founded in 1971 and currently operating more than 900 stores (after closing more than 200 during the pandemic) across the US as well as outside its borders in Canada, Columbia and Puerto Rico.
The company is listed on the NASDAQ stock exchange and has subsidiaries including Harmon Stores and Buy Buy Baby.
The homeware retailer has been experiencing problems for a while. Ryan Cohen is an entrepreneur and activist investor who co-founded eCommerce pet supplies company Chewy. He is also the chairman of GameStop, another famous meme stock. Spotting an opportunity, he became involved in Bed Bath & Beyond this year.
Earlier this year, Cohen and his affiliates acquired a stake of around 9.8% in the company. A letter to the board was made public in March 2022, in which the activist investors complained about the lack of financial delivery and the extent of executive compensation. This table was included in the letter and it clearly indicates the problem:
The letter even noted that the “strategy looks far better in a PowerPoint deck than it does in practice” – ouch! This didn’t stop Cohen acquiring more shares, reportedly taking the stake to nearly 12%.
Bed Bath & Beyond replaced CEO Mark Tritton in June and named Sue Gove as his interim successor, a restructuring expert. The pressure was clear. Fast forward another couple of months and Cohen shocked the market by filing an intention to sell his stake (this is required when shareholders of US companies hold more than 10%). To the disappointment of some on Reddit, he got the job done quickly by selling his shares and call options.
Cohen’s bank account certainly wasn’t disappointed, with profit of $68 million from selling directly into the meme stock resurgence. There is no reason at all for the correlation of Bed Bath & Beyond, GameStop and AMC Entertainment, other than the meme stock phenomenon:
Before Cohen feels too clever, 20-year-old US university student Jake Freeman made a one-month bet on Bed Bath & Beyond and banked a profit of $110 million. Of course, it’s useful that his family was able to put $25 million on the table to start with. The world we currently live in hey…
These meme stocks are extraordinary and rather problematic from a regulatory perspective, with many putting forward allegations of market manipulation. After all, large groups of people are effectively acting together via social media platforms to move share prices! Cohen is no stranger to these stocks, having invested in GameStop in 2020.
Moving away from the shareholder antics for a moment, Bed Bath & Beyond reported a 25% decline in net sales to $1.5 billion and an adjusted net loss of $225 million in results for the quarter ended 28 May 2022. The company has hit pause on store remodels and new store openings for the rest of the financial year. In line with many other companies, Bed Bath & Beyond reported that its operations were heavily affected by global supply chain disruptions, political conflicts and rising inflation.
Even Tom Cruise couldn’t save Cineworld
With media reports suggesting that box office takings this year are down by around 32% vs. 2019, cinema chains are struggling despite Tom Cruise’s best efforts.
British company Cineworld Group is preparing to file for bankruptcy in the US after operating for more than 25 years. The world’s second largest cinema chain (surpassed by AMC Entertainment) has been struggling to rebuild movie-theatre attendance from the pandemic drops and can no longer keep up with its debt.
Cineworld reported a loss after tax of $565.8 million, net debt (excluding lease liabilities) of $4.8 billion and lease liabilities of $4 billion in the December 2021 results. After an article by the Wall Street Journal highlighted the problems, the share price collapsed by around 85%.
Cineworld also owes $1 billion in damages to Canadian group Cineplex due to a fumbled acquisition back in 2020. Of course, whether there will be any cash available to pay those damages is highly debatable.
I find it necessary to mention that this isn’t the first time Cineworld has prepared to file for bankruptcy. Back in 2020, the company was in negotiations about debt restructuring with their lenders. Cineworld managed to score a favourable deal by having lenders agree to providing a $450 million rescue loan that would help the company in the short-term, saving the company from filing for bankruptcy.
The pandemic and especially its associated lockdowns went on longer than anyone could’ve anticipated. In the end, that loan just kicked the can down the road.
Planet of the APEs
Things are also tough for the leading cinema group AMC Entertainment. It was also hit hard by the pandemic and was arguably saved by the meme stock movement, raising equity capital as its share price rallied for no fundamental reason. The company remained loss-making in Q2 and doesn’t anticipate a great Q3, though the final quarter of the year holds much promise with the release of blockbuster films.
In an attempt to keep tapping into the meme stock movement, AMC announced a stock split that creates “AMC Preferred Equity” or APE units, a direct nod to the Reddit users who refer to themselves fondly as apes. This is a result of prior attempts to raise more capital through the issuance of ordinary shares, a move that shareholders eventually blocked after growing tired of dilution.
The preference shares are issued free of chargeas a dividend and give the company an instrument for raising capital in the future. Here’s the trick though: an APE unit is convertible in future to an ordinary share, so this is just like a stock split.
Ultimately, this solution is all about the optics rather than the fundamentals. But after all, isn’t that exactly what meme stock trading is about?
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Chris Gilmour takes a closer look at StatsSA retail sales figures and the numbers put forward by listed grocery retails that indicate the size of the market.
It’s important to monitor the retail sales figures from Statistics SA (StatsSA).
Firstly, the trends in the overall and component parts of the time series give valuable clues as to the direction of spending in the economy. It’s certainly not perfect and the various categories that StatsSA employs in compiling these stats don’t necessarily align with what the JSE-listed retailers are seeing, but it’s a reasonable proxy.
Secondly, it can help in having a stab at estimating which companies are gaining and which companies are losing market share in the various categories of spending. It is possible to buy market share and other information from market research organisations such as AC Nielsen with their Retailer Liaison Committee stats, but these are expensive and not really for the general public.
The informal sector cannot be ignored
The other big factor that must also be borne in mind when using these stats is the fact that not all data is captured in the formal retailing market. As a rough guess, it has been estimated over the years that the informal retail sector probably accounts for around 40% of total retail grocery sales in SA, but nobody really knows how accurate that figure is. Informal traders, such as spaza shops, service the great majority of South Africa’s population and although they are not always the cheapest option, they are certainly the most convenient from a township perspective. In the rest of Africa, that figure is substantially higher, as formal retailing is still in its infancy on the rest of the continent.
Additionally, not all formal retailing is carried out by JSE-listed retailers. There are many cash and carry / wholesalers in South Africa, especially in the rural areas, many of which offer exceptionally keen pricing for their customers.
So, market share among the large JSE-listed companies has to be seen in the context of being only a proportion of total retail sales. Over time, under “normal” economic conditions, one would expect to see the formal JSE-listed retail component growing. However, in a languid economy characterised by low growth and high interest rates, we should expect the informal sector to do relatively better.
Lack of clarity in the numbers
Up until about 15 years ago, when grocery market shares were more openly discussed in the industry, it was generally acknowledged that Shoprite enjoyed a market share of around 35% of the formal market, with Pick n Pay on about 28%, Spar on 23% and Woolies Food in mid to high single digits. But then it was discovered that Shoprite’s market share figure didn’t include VAT, whilst Pick n Pay and Spar’s did, resulting in a massive distortion of the figures. At that point, Pick n Pay stopped supplying market share information and the figures have been treated with a deal of circumspection ever since.
However, in the past couple of years, Pick n Pay has provided a remarkably good segmentation of its sales, as shown in the graphic below:
Source: Pick n Pay AFS 2022
For 2021, Pick n Pay estimated the size of the formal grocery market to be R628 billion, of which it had a 16% share. That was split into 23% of the more affluent market, 27% of the middle market and only 11% of the less affluent market. Using the same methodology would result in Shoprite having a 26% market share.
Woolies Foods estimates its grocery universe to be between R350 million and R400 million, of which it has a 10% share. If the Pick n Pay universe was used instead, Woolies’ market share would be closer to 6%.
In the latest Stats SA retail sales figures to June 2022, total retail sales in SA for 2021 were estimated at R1.166 trillion. Of course, this includes all categories of retailing, not just grocery, but if the Pick n Pay estimate of total grocery sales is correct, then grocery accounted for 628/1 166*100 = 54%, which sounds about right.
Retail growth trends by category
In the June StatsSA figures, overall retail sales declined by 2.5%, which was something of a shock, as most analysts were looking for a positive print. The main culprit was the continuing reduction in Hardware, Paint & Glass category, which continued its dismal decline. But the other big surprise was a decline in sales at General Dealers, which went backwards by 5.7%. This is highly unusual, as General Dealers is predominantly food, which is non-discretionary. This decline may be explained by the sharp rise in clothing, footwear, textile & leather (CFTL) sales, which rose by 5.3% in June, following a sharp reduction of 4.3% in May. The rise in CFTL sales is perhaps explained by the continuing drift back from home to office work and the need to replenish wardrobes. It is just possible that consumers decided to forego some food shopping in June in preference to CFTL shopping. We may get a clearer picture of this phenomenon as the year progresses and the drift back to the office has fully run its course.
The so-called “homebody economy” phenomenon, whereby huge numbers of people worked from home during the coronavirus pandemic and spent a lot of money making their homes comfortable and efficient, appears to be well and truly over. A good proxy for that economy is the Hardware, Paint & Glass category of retail sales, which recorded a -8.6% contraction in June. This category has recorded six successive negative prints since January 2022.
Recent trading updates
Woolies, Truworths and Shoprite have all published trading updates in recent days, as they all have June year ends. Woolies Foods and their Clothing divisions both appear to have lost market share, while Shoprite appears to have gained significant market share. After a pretty dreadful first half, Truworths has bounced back and although it seems to have lost market share overall, its second half performance appears to be much better than the first half. Truworths will no doubt claim that they have gained share of the credit apparel market market, a market that most other participants are actively leaving in favour of cash retailing.
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