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Ghost Bites (Anglo Platinum | Barloworld | Motus | Truworths)

The Finance Ghost
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Ghost Bites (Anglo Platinum | Barloworld | Motus | Truworths)

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Anglo Platinum stretches the definition of ESG

Is an employee share ownership plan now ESG as well?

When you give people a fashionable label, they will try and stick it on everything. The very best example of this is ESG, which has become the most flexible term in the world.

The latest example is Anglo Platinum’s headline, which proudly screams: “Anglo American Platinum continues to lead in ESG with the introduction of a new employee share ownership plan (ESOP)” – yes, these days, just incentivising your staff to keep working is leadership in ESG.

This is where my irritation with the entire “ESG industry” comes in. Paying your people fairly is good social practice, yes. It’s also just a sensible business practice, otherwise you’ll end up with labour unrest and all kinds of other issues. In most cases, ESG is a label that has been placed on things that are common sense, especially when it comes to staff.

For me, ESG is an appropriate label for initiatives like reducing carbon emissions. This isn’t necessarily a capitalist pursuit, though saving money on Eskom by using renewables makes business sense too. ESG is where companies look beyond their profits for the greater good.

I’m sorry Amplats, but achieving 2% evergreen staff ownership of Rustenburg Platinum Mines is many things, but it’s not ESG. In case you’re curious, the day 1 value of this new staff scheme is R6.5 billion. This is the organisation’s third ESOP and I suspect that if you fish out the announcements for the first two, the term “ESG” won’t be highlighted.

Barloworld is seeing solid results in its operations

After trying to wriggle out of the Ingrain acquisition during the pandemic, it’s proven to be a winner

Barloworld released a voluntary update for the 11 months ended 31 August 2022. Right up front, the company reminds investors that growth in the order book means pressure on working capital and the balance sheet in general. This is why actively managing the group’s funding is so important.

Barloworld paid R1.97 billion to settle UK defined benefit obligations (retirement obligations) and paid a special dividend of R2.3 billion back in January. Even after these big moves, the balance sheet is well within debt covenants.

In the Equipment Southern Africa business, revenue was 19.6% higher and operating margin was maintained at 10.2%. The joint venture in the DRC is delivering positive income. Thanks to strong mining demand, the order book is up from R4.5 billion to R5.3 billion.

Bottlenecks at Chinese ports negatively impacted the business in Mongolia, with revenue down by 2.6% in USD terms at Equipment Eurasia. Operating profit for the segment was 5.3% lower despite a 6.3% increase from Russia.

As sanctions have hit, the Russian order book has shrunk to $30 million from $94 million. Barloworld faces huge challenges in trying to manage its exposure there, including an effort to look after its employees.

Ingrain appears to be a great acquisition, with revenue up 36.4% and operating profit 40% higher. This is despite a 120 basis point contraction in gross margin as a result of sales mix.

The car rental business is classified as a discontinued operation. It’s doing a lot better though as people are moving around again, with revenue up 7.3% and operating profit up 110%. Fleet utilisation was 80%! Barloworld hopes to unbundle and separately list Avis, though this is hardly a friendly market for new listings.

The leasing side of the business is also a discontinued operation. It fought its way back to be 1% higher in revenue. Operating profit was 10% higher though, despite the almost flat revenue performance.

In the logistics segment, the only remaining business is in warehousing and distribution. This is in the process of being sold, which would sign off on a full exit from the logistics industry.

There are director dealings, and then there’s Motus

Motus execs formed a stampede for the exit door in the past couple of weeks

This story stinks. Truly, it does.

Motus was trading under cautionary since 28th June, citing a potential deal to acquire an offshore aftermarket parts business. On 14th September, they withdrew the cautionary as they were ready to announce details of the transaction.

But here’s the thing: they hardly announced any details. They didn’t even tell us who they are buying. In fact, all they did was give a deal value range and not much else.

It all looks terribly suspicious in terms of timing. From 15th September, four directors hit the sell button in a big way. Here is just one example:

So, what do we notice here?

Firstly, why are director dealings from the 15th only announced on the 28th? I’ll tell you why. If such large sales were announced the day after they happened, the price would’ve started to fall. It’s far more favourable to the directors to announce the full tranche in one go.

Motus withdrew the cautionary without making a full acquisition announcement (which isn’t good) and the directors then got through enormous sales on the market before bothering to tell anyone about them.

We are talking about over R60 million sales by four directors.

Of course, you may choose to trust Motus after this. I’ve never owned shares in the company and after this little display of governance, I certainly never will.

Truworths: the corporate edition of Hunger Games

Announcing two deputy CEOs is never a good sign

Investors love seeing decisive, strong decisions around succession planning. The appointment of joint executive leaders is usually viewed with trepidation, as it sends a signal that the board can’t make a decision.

This is the problem when the group has had one CEO for a whopping 26 years. Michael Mark indicated that he would step down at the 2022 AGM. The board has now asked him to stick around, in a wonderful example of a corporate that just can’t let go.

In an attempt at succession planning, two deputy CEOs have now been appointed. Sarah Proudfoot comes with plenty of experience in store operations and procurement, so these are great skills in retail. Her competitor (even though the announcement would never bluntly say that) is Mannie Cristaudo, the current CFO of the group. This is clearly a financial skillset.

So not only is Truworths incapable of letting Michael Mark retire in peace, but the board also can’t decide whether the next CEO should be stronger at operations or finance.

The Truworths share price is trading at the same levels as in 2010. With zero value created since the 2010 World Cup other than dividends to shareholders, it’s perhaps not a surprise that the management transition looks like this.

Little Bites

  • Director dealings:
    • An associate of a non-executive director of PBT Group has sold R10.1 million worth of shares to Pulsent OH, the major B-BBEE investor in the group. The entity is linked to Pule Taukobong, a highly experienced venture capital investor.
    • An associate of a director of Kaap Agri has bought shares in the company worth over R102k.
    • The CEO of Sirius Real Estate has bought shares worth £11.3k. The share price came into 2022 on a ridiculous valuation and is down 58% this year.
    • An associate of a non-executive director of Capital & Counties bought shares worth £100k
  • In case you’re wondering what happened to the Distell deal, the company announced that the Competition Tribunal will consider the transaction at a hearing from 18 to 20 January 2023. Importantly, the Competition Commission has recommended that the Tribunal approve the deal with conditions.
  • Ascendis Health released results for the year ended June. In continuing operations, revenue increased by 15% and the normalised operating loss was R317 million. The real story is the balance sheet, with senior debt of R498 million vs. a spectacular R7.8 billion at 30 June 2021. The vote for the disposal of Ascendis Pharma is due in October.
  • Alviva released its results for the year ended June 2022 and they are great, with revenue up 57% and EBITDA up 62%. HEPS is up by a whopping 91%. The dividend per share is 90% higher at 55 cents. As a reminder, a non-binding expression of interest has been received by Alviva regarding a potential offer. At this stage, no firm offer has been made.
  • With its share price having lost half its value this year, Ellies needs to do something to make its business more viable over the long term. In a cautionary announcement, the company notes that it is in negotiations for potential acquisitions in the solar, uninterrupted power supply and renewable energy sectors. Load shedding is literally creating a new sector in the economy. Non-binding term sheets have been signed and a due diligence is underway, so a more detailed announcement can’t be too far away. Of course, there’s every chance that it falls through and no deal gets announced.
  • Tongaat Hulett has updated shareholders that its capital restructuring plan will be ready by 14 October, so investors need to be patient for a couple more weeks. Given the state of play at the company, it’s also notable that Louisa Stephens has been appointed as acting chair of the Audit and Compliance Committee following the resignation of Linda de Beer.
  • EPE Capital Partners (Ethos Capital) released results for the year ended June 2022. If you use Brait’s share price to calculate the net asset value (NAV) per share, that metric increased by 27% in the past year. If you use Brait’s NAV instead, EPE’s NAV per share grew by 16%.
  • Southern Palladium released its numbers for the year ended June 2022. This is a junior mining group, so an operating loss of A$2.5 million isn’t uncommon.
  • There’s finally some continuity at Oceana Group, with Zafar Mahomed appointed as CFO designate. He will take the top finance job with effect from 1 February 2023 after a handover process from the existing interim CFO, Ralph Buddle. He comes to Oceana having previously served as CFO of Cell C and McDonald’s South Africa, two businesses that have walked very different financial roads.
  • In an interesting move with its balance sheet, BHP is going to redeem and cancel £600 million worth of debt instruments that had been issued in 2015 and priced at 6.5%. They were due in 2077 – so I think we can all agree that this was a long-term debt instrument.

Ghost Global (Barclays | Man Utd | Ralph Lauren | Salesforce)

Kreeti Panday and Sinawo Bikitsha
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Ghost Global (Barclays | Man Utd | Ralph Lauren | Salesforce)

Banking, sport, fashion and software. Ghost Grads Kreeti Panday and Sinawo Bikitsha bring us a great selection of updates in this week’s edition of Ghost Global.

Barclays sued over paperwork errors

British bank Barclays Plc has been sued by its shareholders who claim that they were defrauded by the executives regarding the accidental total sale of $17.6 billion more debt than regulators had allowed. The argument is that this is such a breach of internal controls that it is “deliberately reckless” – ouch!

Described as “bizarre” by some analysts and “embarrassing” by others, this mistake by Barclays has led to two Florida pension funds filing a complaint in the US District Court in Manhattan.

It does seem extraordinary that a bank can issue $36 billion in securities after registering with US regulators to only sell up to $20.8 billion in August 2019. There was a subsequent issuance as well, just making the situation worse.

Barclays will be buying back the excess securities and will now need to defend claims in court as well. The last thing shareholders want is management to be distracted, as recent results really weren’t great and things are just getting worse in the UK market.

The share price is down 13.4% this year:

Manchester United plc: rather be a footballer than a shareholder

Harry Maguire’s performance isn’t the kind of performance we are focusing on here. Manchester United plc is a listed company and has released results for the year ended June 2022.

Despite record revenue of £583 million (helped along by record tour revenues in a post-pandemic recovery), the net loss for the year worsened by 25.3% to a record £116 million. One has to wonder how these sports teams ever make money, as these losses are against a backdrop of a season ticket waiting list of over 135,000 people. Interestingly, ticket demand for women’s matches increased by 55%.

In digital products and experiences, the club’s online store (United Direct) saw an increase in website traffic of 73%. eCommerce sales almost doubled from FY21.

So, with all this good news, why the net loss?

Operating expenses rose by 28.6% to £692.6 million. We all know that footballers are paid insane amounts of money. Employee benefit expenses (i.e. wages) increased by 19.1% to £384.2 million, attributed to the six acquisitions for the first team playing squad. This includes a contract signed with Portuguese footballer, Cristiano Ronaldo, which results an annual wage of approximately £25 million. Manchester United has a higher wage bill than any other Premier League club.

Clearly, it’s better to be a footballer than a shareholder in the club.

Manchester United’s net debt stands at £514.9 million, a 22.7% increase primarily attributed to the weakening of the pound against the dollar. Yes, to add to the challenges, there are dollar borrowings.

The club expects decreased spending in the next financial year.

Ralph Lauren has repositioned as a luxury brand

American fashion group, Ralph Lauren Corporation, used its 2022 Investor Day to declare its “reset” to be complete. This is based on a claim that 74% of consumers consider Ralph Lauren to be a luxury brand.

The group has added over 20 million customers to its direct-to-consumer channels over the last 4 years. These customers are believed to be younger and higher value consumers who are willing to buy more goods at full price, giving the group more pricing power. eCommerce operations now represent over a quarter of sales, which the group aims to grow by 400 basis points by FY25.

The group has exited two-thirds of its wholesale stores in North America and plans to open over 250 full price stores worldwide over the next three years, once again putting emphasis on full price consumers.

The group has noted that its greatest opportunity for market growth lies in women. Womenswear currently makes up 30% of the business, yet 56% of consumers are women. The group aims to focus on its product offering for women in order to grow this market, encouraging women to shop for their partners and children as well.

The group also expects that by 2025, Gen Z and millennials will contribute approximately 70% of the luxury goods market. It has focused on gaining this market through increased activity on social media and gaming platforms. As a Gen Z’er herself, Kreeti reckons she will still be in the 30% by 2025!

If you want to learn more about luxury goods, the Magic Markets Premium library includes a report on luxury goods platform Farfetch.

Salesforce to integrate with WhatsApp

It’s been a month since Salesforce released Q2 earnings. For the three months to July, revenue was up 22% to $7.7 billion and operating margin dropped to 2.5%.

In that month, the share price has decreased by around 8%.

The latest news is that Meta CEO Mark Zuckerberg has announced that WhatsApp is partnering up with Salesforce, reflecting a consumer preference to communicate with businesses over text. Indeed, that’s got to be better than invasive phone calls.

L’Oréal Group and its brands have already considered being the pilot of this integration, by using WhatsApp to reconnect with customers to send them coupons, offers and reminders of items left in a shopping cart.

Salesforce plans to hit sales of $50 billion by 2025 with a 25% operating margin a year later. That will need more than just a WhatsApp integration to achieve.

Interested in global stocks? Not sure how to do your own research, or looking to supplement your own process? The Finance Ghost and Mohammed Nalla release a weekly podcast and report on global stocks, available for R99/month or R990/year in Magic Markets Premium. The full library is available, giving you over 45 reports to enjoy!

Ghost Bites (MC Mining | Oceana | Remgro | Stor-Age)

The Finance Ghost
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Ghost Bites (MC Mining | Oceana | Remgro | Stor-Age)

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 >>>

MC Mining taps the market

A fully underwritten A$40 million rights issue will fund the project in Limpopo

In addition to MC Mining’s underwritten equity raise, there are written commitments of A$26 million for the continued development of the Makhado Project (most of which is from the IDC). These are exciting times for the company, with construction at the hard coking coal project expected to start in early 2023.

The pricing is a 48% discount to the 30-day VWAP on the JSE. When a rights offer is heavily discounted, it’s because the company wants existing shareholders to follow their rights. When the discount is lower, it’s because the underwriter is hoping to mop up shares. The underwriters are Senosi Group Investment Holdings and the Dendocept Group.

The proceeds will also be used to settle the current standby facility from Dendocept, which is sitting on $5.09 million. Payment obligations for new shares will be offset against this facility and any remaining balance will be settled in cash.

There will be also be a working capital allowance of $3.8 million, so $31.11 million of the raise is expected to be used for the Makhado Project.

Here’s an interesting nugget: if any shareholder ends up with more than 20% in the company, it will need to enter into a “market standard relationship agreement” with the company to ensure that the company is run for the benefit of all shareholders, not just that shareholder. This is a rule on AIM, the development market of the London Stock Exchange.

It’s lovely to see capital raising activities like these. This is exactly why the market exists in the first place!

Holy Mackerel

Oceana Group’s voluntary update is a mixed bag – or even a mixed net

Let’s start with pilchards, with Oceana reporting a 16.2% increase in sales volumes for the 11 months to 27 August. A significant local catch helped mitigate some of the pressures from freight costs and the weaker rand against the dollar.

In African fishmeal and fish oil, production volumes were 24% higher in recent months. Sales volumes were only 5% higher for the 11-month period, with the weaker rand resulting in a 40% increase in the average rand selling price.

In the US, the weather has been favourable. There has been a 63% increase in landings this season, 28% above the long-term average. Strong dollar pricing has been great for results translated into rand.

As for hake and horse mackerel, high fuel and quota costs have made things tough alongside poor catch rates. Sales volumes for the 11-month period are 10% lower, mainly due to scheduled vessel maintenance in Namibia in the first half.

Commercial cold storage performance was impacted by a 5% decline in occupancy levels. This is due to lower imports in the Western Cape region and excess market capacity, which ties in with the news of strong local production.

For traders, there’s been plenty of volatility this year as the group has struggled with major executive changes under questionable circumstances:

Remgro jumps after releasing results

Intrinsic net asset value per share is 20.2% higher at R213.10

Remgro certainly can’t be accused of just sitting on its hands. There’s been a flurry of recent corporate activity: the deal to take Mediclinic private, the Distell transaction with Heineken, the investment in CIVH and the Rand Merchant Investment Holdings transaction. Three of those deals are still subject to various approvals.

I tend to ignore headline earnings in a group like this, as accounting rules differ considerably depending on the extent of the ownership stake in each portfolio company. Intrinsic net asset value (INAV) per share is what counts, as Remgro acts as an investment holding company.

With the share price closing 7.57% higher at R138.62, it is currently trading at a discount to INAV of 35%. This is in line with the usual discount that the market places on Remgro’s INAV.

In addition to the investments I mentioned in the opening paragraph, Remgro holds 80.3% in RCL, 2.5% in FirstRand, 100% in Siqalo Foods, 7.7% in Discovery, 50% in Air Products South Africa, 24.9% in TotalEnergies and 43.5% in KTH. In addition to Mediclinic, CIVH, Distell and RMIH, these investments contribute 84% in total to Remgro’s INAV.

The ordinary dividend per share of 150 cents means that Remgro is trading on a trailing yield of 1.1%.

As a final comment, regular readers will know that Remgro has announced the unbundling of its stake in Grindrod. This comes a few months after the stake in Grindrod Shipping was sold, bringing to an end Remgro’s investment in that stable. The timing of both exits has been great.

Stor-Age keeps doing the right things

For the five months to August, occupancies and rentals are higher

Stor-Age is a terrific business.

It tends to be priced like a terrific business though, so it hasn’t necessarily been an exciting investment. Investors buy it because of the rock solid dividend yield and the defensive business model. If you only looked at a share price chart though, you would be shaking your head on this one:

In South Africa, the average rental rate increased by 6.7% year-on-year and the average occupancy was 2.0% higher. In the UK, average rentals were up by a substantial 10.8% and occupancies were 1.3% higher. The UK is practically an emerging market these days!

The group is still acquiring existing facilities (like Think Secure Self Storage in Parklands, Cape Town) and has a development pipeline in South Africa of ten properties with an approximate development cost of R900 million, most of which will be in a joint venture with Nedbank. This will add an estimated 60,800sqm to the local portfolio which currently measures 387,900sqm.

The UK development pipeline is four properties with a total development cost of £45 million. This will add around 21,180sqm to the portfolio of 129,600sqm. The new developments are in the Moorfield joint venture.

By all accounts, it looks like Stor-Age continues to do a great job of executing on its strategy. I just wish the share price was cheaper!

Little Bites

  • Director dealings:
    • An associate of a director of CA Sales Holdings has bought shares worth over R75k
    • An independent non-executive director of Stadio has bought shares worth R4.5k – not the most earth-shattering purchase around
  • In a pretty embarrassing situation for Ascendis Health and its reporting accountants for the Ascendis Pharma circular, the pro-forma financial effects have been restated. There’s a lot of detail for those interested. As a quick overview, the NAV will increase by 43.2% if shareholders approve a sale for Pharma-Q / Imperial and by 52% if the sale to Austell goes ahead. The difference is because the Austell offer is significantly higher.
  • Gemfields seems to have auctioned the polony-equivalent gemstones from the ruby mine in Mozambique. Sapphire, corundum and low-quality rubies were auctioned off with revenues of $4.2 million generated in the process. All lots were sold.
  • Datatec has completed the sale of Analysys Mason and proceeds received for the sale will be returned to shareholders as soon as possible. In other words, a large dividend is coming.
  • Putprop released a trading statement for the year ended June 2022. HEPS will increase by between 15.3% and 25.3%.
  • Wesizwe Platinum has released a trading statement for the year ended June 2022. The group has swung into the red, with a headline loss of between 2.59 cents and 5.59 cents per share vs. earnings of 15.02 cents in the comparable period.
  • Telemasters Holdings also jumped on the trading statement train, indicating a loss of between 3.64 cents and 3.73 cents for the year ended June 2022. The losses have approximately halved year-on-year.
  • If you are a junior mining enthusiast, you should note that Orion Minerals has released its annual report. I quite enjoyed the description in the announcement of the Prieska copper-zinc project being fully permitted and “shovel ready”!

Ghost Bites (Ascendis | Gemfields | Remgro | Tiger Brands)

The Finance Ghost
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Ghost Bites (Ascendis | Gemfields | Remgro | Tiger Brands)

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Ascendis can get more from Austell – if shareholders want it

The purchase price for Ascendis Pharma is up from R410 million to R432 million

Ascendis shareholders have a choice to make. They either need to sell Ascendis Pharma to Pharma-Q Holdings and Imperial Logistics, or to Austell Pharmaceuticals. The board has made it very clear that they want shareholders to vote in favour of the Austell deal.

To sweeten that option, the price has been increased from R410 million to R432 million.

In comparison, the Pharma-Q / Imperial base price is only R375 million. An additional important difference is that the Austell deal hasn’t been approved by the Competition Commission yet, whereas the Pharma-Q / Imperial deal has already been signed off by the regulators.

In a separate trading statement, Ascendis noted that the normalised headline loss per share from continuing operations will be between 98.5 cents and 120.4 cents. That’s a lot better than the comparable period but it’s still a loss.

The share price has been incredibly volatile this year. It is currently around 9.5% down since January.

A little gem

A trading statement gave Gemfields’ share price even more sparkle, now up over 26% this year

Have you ever wondered what a $2.2 million egg looks like? Well, wonder no more. Here is the Faberge X Game of Thrones egg that has been sold to an anonymous US buyer:

But how important was this absurd egg to Gemfields?

The group owns Faberge and the luxury jewellery manufacturer’s revenue for the six month period was $9.5 million, was of which the egg contributed $2.2 million. Still, that’s tiny in comparison to how Gemfields really makes its money. It just makes for a fascinating story.

Emeralds and rubies are what really matter, with the Kagem (emerald) and MRM (ruby) mines recording interim revenues of $85.2 million and $95.6 million respectively. This has driven a 50% increase in USD-based headline earnings per share (HEPS) from $0.02 to $0.03. In rand terms, the jump is much sharper thanks to the currency movement. Rand HEPS is 133% higher, up from R0.24 to R0.56.

The only blemish on this result was the shareholding in Sedibelo Resources which was written-down by $4.2 million to a value of $33 million. The HEPS numbers above include this fair value movement.

Remgro unbundles Grindrod and is ready for Mediclinic

The trend of unbundlings continues on the JSE – but not many saw this one coming

The JSE has historically had many examples of listed companies holding significant stakes in other listed companies. There have been several recent corporate actions that have unwound many of these stakes, including the likes of PSG unbundling most of its assets and leaving the JSE.

The latest example of an unbundling came as a surprise to the market, with Remgro announcing that it will unbundle its entire 25% shareholding in Grindrod.

Remgro has been invested in Grindrod since 2011 and believes that this is the “optimum time” to unbundle the stake. The Grindrod share price had more than doubled this year before the recent sell-off in the markets brought the year-to-date return to around 92%.

Optimum indeed.

In practice, this means that Remgro’s market cap should be lower (the group is literally becoming smaller) and that shareholders will be able to choose what to do with their Grindrod shares, rather than waiting to see what Remgro’s management does with them.

In a successful value unlock transaction, the market cap of Remgro wouldn’t drop by the value of the Grindrod stake. The thesis here is that the stake would’ve been valued by the market at a discount to its intrinsic value (the Grindrod share price multiplied by number of shares) because Remgro trades at a discount to the intrinsic value of its underlying investments. By unbundling the shares and setting them free, that discount disappears.

A great recent example is Rand Merchant Investment Holdings which I wrote about in this edition of Ghost Bites a few days ago.

In separate news relevant to Remgro, the shareholders of Mediclinic have approved the scheme of arrangement that would see Remgro and MSC Mediterranean Shipping Company join forces to take the hospital group private.

Crouching Tiger, hidden HEPS growth

Thanks in part to a weak comparative period, HEPS at Tiger Brands has increased by between 35% and 45%

The market celebrated this news, sending the share price 10.4% higher in a busy day of trade. Before you get too excited, this takes the performance for the year to -2%.

The base period (the year ended September 2021) included the canned vegetable product recall, though I would hesitate to call that an “unusual item” in the context of Tiger Brands. After all, the latest issue is in baby powder products, with an estimated recall cost of R20 million to R25 million.

The civil unrest in the base period is certainly worth highlighting as a once-off (we hope), with the cost in the prior year and the insurance recovery of R157 million in this financial period. That creates a major swing in earnings that doesn’t reflect underlying operations.

Load shedding thankfully didn’t impact supply, though it certainly impacted operating costs. The generators cost four times as much as the Eskom tariffs! Of course, the biggest irony of all is that Eskom is often using diesel itself to generate electricity, which it then sells to everyone at a loss. We face huge issues as a country here.

Tiger noted an improved performance in the underlying operations in the second half of the year, which seems to be what the market focused on. Tiger Brands had a better time in recent months in passing costs on to consumers, with basket inflation of 3% in the six months to March 2022 and 15% for the five months to August 2022.

I’ve been bearish on Tiger Brands this year and my view is unchanged by this result. They will need to maintain the price increases to allow for input price pressures and there are major swings in these numbers that will need to be unpacked properly once full results are released on 2 December.

Little Bites

  • Director dealings:
    • A non-executive director of NEPI Rockcastle has bought shares in the company worth nearly R2.5 million.
    • Although the SENS announcement doesn’t explicitly name the director in question, there aren’t many on the board of Richemont who can afford to acquire shares worth R910 million.
  • Grand Parade Investments released a trading statement for the year ended June that shows adjusted HEPS of between 10.36 cents and 11.62 cents, representing a return to profitability. If you include the once-off R61.7 million loss related to the liquidation process at Mac Brothers (i.e. look at HEPS instead of adjusted HEPS), there’s a small loss per share. With the food adventures almost behind this group, the focus is on the gaming assets.
  • Combined Motor Holdings has released a trading statement indicating HEPS growth of between 45% and 55% in the six months ended August.
  • Anglo American has commenced copper shipments from Quellavaco, the major new project in Peru that is expected to lift Anglo’s copper output by 10%. In a first for Peru, the mine features autonomous drilling and haulage fleets. It also draws its electricity supply entirely from renewables! Full ramp-up will be achieved over the next 9 – 12 months.
  • There’s more trouble at Ellies, with the company announcing a s189 process to “restructure certain functions” i.e. retrench some staff. The group notes “ongoing constrained trading conditions” and the share price fell by 17.7%. This means that Ellies has lost more than half its value this year.
  • The ongoing tension between Caxton and Mpact continues to dish up unusual issues. Caxton blocked a vote that would allow Mpact to pay its non-executive directors. To get around this ridiculous situation, Mpact has cleverly appointed those directors to the board of the major operating subsidiary where they can be remunerated.

Russia mobilises

Chris Gilmour
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Russia mobilises

Chris Gilmour gives us his views on the latest developments in the war in Ukraine, which comes against a backdrop of increasing global interest rates.

There were a number of big geopolitical and economic events last week that will have far-reaching effects on the global economy.

As anticipated, the US Federal Reserve (the Fed) raised its Fed Funds rate by a further 75 basis points to a target range of 3% to 3.25%. The expectation is for another 125 basis points of interest rate increases from the Fed by year end. This will put further upwards pressure on global central banks to act likewise.

In the UK, the new Chancellor of the Exchequer, Kwasi Kwarteng, attempted a somewhat radical approach to kick-start the moribund UK economy with an ambitious “trickle-down” plan.

And in Ukraine, Russia appeared to up the ante with respect to the ongoing grinding conflict.

The focus: Ukraine

Hot on the heels of the Shanghai Cooperation Organisation (SCO) meeting in Samarkand the previous week, where he was publicly admonished by China’s Xi Jinping and India’s Narendra Modi for his continued invasion of Ukraine, Russian leader Vladimir Putin ordered a “partial mobilisation” of reservists.

This is Russia’s first mobilisation since 1941, when the Nazis invaded the Soviet Union in Operation Barbarossa. Attempting to interpret this action is at once confusing and at the same time completely understandable, considering what has driven Putin in the past.

Most western analysts agree that this call-up is an act of desperation by Putin. Up until now, the Russian military operating inside Ukraine has mainly consisted of Ukrainian separatists, Wagner Group and Syrian mercenaries and ethnic minorities such as Chechens and Mongols. Again, the overwhelming consensus among these analysts is that this “special operation” has been a catastrophic failure insofar few if any tangible objectives have been achieved and the casualty toll has been immense.

Of course, the Russians and their denialist allies ignore the battlefield statistics and persist with smoke and mirrors, insisting that all of this is part of a grand plan.

Nothing could be further from the truth.

The reason Russia has resisted a mobilisation up until now is that under Russian law, reservists can only be conscripted in the event of war, not so-called “special operations”. By resorting to a call-up, partial or otherwise, the Russians are now admitting that this is war and no longer a limited special operation.

So what is the likely outcome of this call-up? Firstly, if media reports inside Russia are to be believed, this is a deeply unpopular mobilisation and many reservists are clamouring to leave the country, rather than fight in a war that they feel neither justified nor winnable. Russian airlines have been told to stop issuing any tickets to anyone wishing to fly out of the country for the foreseeable future. These are unlikely to be highly motivated troops. The people they are replacing in the battlefield are exhausted after seven months of fighting and desperately need to be replaced.

Secondly, even if they were motivated, these reservists have received little or no training in recent times and are not exactly battle-hardened troops. And the way in which these reservists are being selected appears to be quite random. Reports are circulating that police are literally handing out call-up papers to protestors and other “undesirables” in a form of retribution against them. Again, hardly the best way of ensuring that the best new troops are brought into the fray.

Finally, the Ukrainians are fighting for their very existence and remain totally motivated. They are focused on regaining all the territory taken from them earlier in the war. They are getting close to their target of having a million soldiers under arms and this compares more than favourably with the Russian army, even after the mobilization of a further 300,000 reservists. In total, the size of the Russian army in Ukraine post the call-up will be around 600 000 troops.

More of the same?

The likely outcome in Ukraine is more of the same. Russian military hardware remains obsolete and suffers from a lack of proper maintenance. Russia’s lack of success is due more to those factors than to having dominance of infantry. The Ukrainians have been able to access high-tech US military hardware and have used it very effectively. That will continue and will continue to wreak havoc with Russian military infrastructure.

Source: Institute for the Study of War

As for Putin’s none-too-veiled threats of detonating a tactical or even a strategic nuclear device, that is all bluff in my honest opinion. He knows full well that exploding a tactical nuclear device on the battlefield will open Russia up to nuclear retaliation in one form or another, or even just greater conventional involvement by the west.

Moreover, this type of action would attract a degree of opprobrium from Russia’s Chinese and Indian allies that would be impossible to ignore.

A strategic strike as in a missile attack on London or Paris or Berlin for example would ensure swift nuclear retaliation from NATO, the end result of which would be mutually assured destruction and a global nuclear winter.

Nobody wins under that situation. Putin is bad, not mad and it’s highly improbable that he would risk taking the entire world down over Ukraine.

The clock keeps ticking

Putin will now be hoping for a quick resolution to this war. That’s unlikely to happen, for all the reasons mentioned previously. Russia is busy organising a series of sham referenda in the occupied territories that will only be recognised by Russia and its surrogates.

But time is not on Putin’s side. Sanctions are becoming more effective with every passing day. As the world enters recession, the price of energy drops, further damaging his oil and gas receipts. The only thing that can realistically help him now is for a crack to appear in NATO’s resolve. As the northern hemisphere winter really begins to bite, certain EU members may begin to cave.

But provided the bulk of them vasbyt, the sanctions policy will eventually force Putin out of Ukraine.

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

Ghost Bites (Harmony and Exor | Investec | Kibo | Massmart)

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Ghost Bites (Harmony and Exor | Investec | Kibo | Massmart)

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Ever heard of Exor? No? Ever heard of Ferrari?

Why are famous Italians buying shares in Harmony Gold?

Harmony Gold announced that an investor called Exor Capital LLP now holds 5.12% in the company. When it’s an institution that doesn’t ring a bell, it’s always worth Googling to find out more.

Exor Capital LLP is part of the much bigger Exor group, which is listed on Euronext Amsterdam. It has historically been listed on Euronext Milan, which is the first clue to the group’s background.

The next clue is the gorgeous red metal on the website. You are immediately hit with videos and images of Ferrari, because Exor holds 22.9% of the economic rights in the company and 36.1% of voting rights. There’s another very strong clue.

The founder of Exor is Giovanni Agnelli, who also happens to be the founder of FIAT. The CEO of Exor is John Elkann, who is also the Chairman of Ferrari and Stellantis, the automotive conglomerate that includes Fiat and various other brands.

Although John was born in the US, his grandfather is Giovanni Agnelli. Having an uncle in the supercar business is WAY more fun than an uncle in the furniture business.

In addition to the Ferrari stake, Exor holds 14.3% of the economic rights in Stellantis and 63.8% of economic rights in Juventus! There’s no shortage of passion going around here, complemented by some style in the form of a 24% stake in Christian Louboutin. In case that name doesn’t ring a bell, it’s because the shoes are so expensive that mere mortals (and ghosts) can’t afford them.

In the media space, Exort holds 43.4% of the economic rights in The Economist, as well as 89.6% in Italian media conglomerate GEDI Gruppo Editoriale. The list goes on.

Does Exor plan to add Harmony to this portfolio? No, probably not. Exor Capital LLP is a fund manager that happens to be part of the Exor group. This is the vehicle through which Exor gains exposure to a diversified portfolio of publicly traded companies.

And in case you want to learn more about Ferrari, we covered it in Magic Markets Premium last week!

Investec released a pre-close update

HEPS will be between 21% and 38% higher for the six months to September

Investec’s share price has been range-bound this year, trading between R75 and nearly R97 per share. For traders prepared to play that range, it’s big enough to be juicy. For buy-and-hold investors, there’s been no joy this year.

Although the “market facing businesses” have had a tough time in this macro environment, Investec has maintained its positive revenue trajectory overall. In the five months ended August 2022, the Wealth & Investment business experienced a 2.7% decline in Funds Under Management. There were net inflows though, so this is a market story rather than an underlying business story.

It’s worth reminding you that Investec distributed 15% of Ninety One at the end of May, retaining only a 10% interest in that business.

On the banking side, the Specialist Banking division grew core loans by 7.8%. Corporate lending was strong in the UK and South Africa. Mortgage growth was predominantly experienced in the UK.

Importantly, revenue growth was ahead of costs growth. This means that the cost-to-income ratio improved in this period, a key metric in any banking group. The credit loss ratio is also critical, with that metric normalising towards the through-the-cycle range.

For the six months to September, Investec expects Return on Equity (ROE) to be within the group’s target range of 12% to 16%. We will know the exact number when the bank reports interim results on 17 November.

Interested in renewable energy?

Kibo Energy is essentially a startup in the renewable space

Although Kibo has reported a loss of £1.9 million for the six months to June 2022, this is essentially a startup by listed company standards. The focus at the moment is on strategic progress rather than financial results.

The group is looking to dispose of coal assets and invest in various renewable energy opportunities. For example, Kibo has a 65% stake in a business that has entered into a 10-year take-or-pay agreement to generate base-load electricity from a 2.7 MW plastic-to-syngas plant. Kibo secured the exclusive rights to the CellCube products in SADC countries, which provide long duration energy storage solutions. Sticking with those types of solutions, Kibo also acquired 51% of National Broadband Solutions, which allows it to jointly assess and develop a portfolio of these energy storage projects.

The group is also busy with researching renewable energy fuel sources to convert existing energy projects in Tanzania, Botswana and Mozambique to clean or renewable energy projects.

To help fund these ambitions, there’s a bridging loan facility agreement with an institutional investor for up to £3 million with a term of up to 36 months. The initial drawdown of £1 million is available immediately.

There are various other commercial agreements that Kibo has achieved since the end of June. If you are an investor who is interested in renewable energy, then you should spend time researching Kibo and learning about the business. Just be warned that the share price has low levels of liquidity and can sometimes do crazy things like this:

Important correction: Massmart

In Friday’s edition of Ghost Bites, I noted that the standby general offer from Walmart would be a way to mop up shares if the scheme of arrangement fails. This is the standard market practice with these offers.

It was pointed out to me that this offer is different, so I’m including an important correction here after I went and dug through the finer details of the offer.

This is a conditional general offer that is only effective if the delisting is approved and if at least 90% of shareholders accept the offer. This would be an odd situation, as the scheme requires 75% shareholder approval, so that would’ve presumably been successful first.

The 90% threshold is so that Walmart would be able to use a “squeeze-out” that forces the remaining shareholders to sell.

Importantly, Walmart can waive the 90% requirement. My reading is that if the delisting is approved and only e.g. 70% of shareholders accept the offer (which wouldn’t be enough for the scheme to have been successful), Walmart is giving itself the flexibility to go ahead with the deal and take 30% of shareholders into a private environment.

The critical point is that Walmart is not looking to mop up a few shares here.

Little Bites

  • Director dealings
    • A non-executive director of Salungano Group has bought shares in the company worth R157k.
    • One of Dr. Christo Wiese’s investment entities has bought R3.1 million worth of shares in Invicta.
    • Des de Beer’s entities are still piling into Lighthouse Properties, this time for nearly R3.1 million.
  • Alviva Holdings has been trading under cautionary since 30 June 2022 regarding a potential offer for all the shares in the company. It is still negotiating with the consortium looking to make an offer. At this stage, there is only a non-binding expression of interest. This means that there is absolutely no guarantee of a formal offer being made.
  • Texton Property Fund released results for the year ended June 2022. The direct portfolio is worth R2.6 billion and the international portfolio (where Texton invests in other funds) is worth R485 million. The core South African portfolio is facing serious challenges, with vacancies up to 22.3% from 10.5%. The loan-to-value ratio is ok at 37.6%, so the vacancies are the focus. The net asset value (NAV) per share is 587.28 cents and the share price closed at R3.33, so that’s a discount of 43% to NAV.
  • There’s a final interesting twist in the tale with PSG. The dissenting shareholder under section 164 has withdrawn its written demand to the company in respect of its appraisal rights. This is a court process that follows a scheme of arrangement, in which a shareholders argues to be paid out “fair value” – which only makes sense if fair value is higher than the scheme payment. This is bigger news than you think, as the market has seen several examples of “opportunistic” section 164 processes, in which the dissenting shareholder buys the shares after the scheme price was announced and then argues that it is too low. It will be interesting to track developments in this space going forward.
  • There’s more movement at Ascendis Health, with CFO Cheryl-Jane Kujenga stepping down from her role.

Ghost Bites (Blue Label Telecoms | Massmart | RMI | Santova)

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Ghost Bites (Blue Label Telecoms | Massmart | RMI | Santova)

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Cell C lives to fight another day

The “umbrella restructure” of the balance sheet has become unconditional

Blue Label Telecoms has announced that Cell C’s turnaround strategy is now supported by a restructured balance sheet. The balance sheet has been “deleveraged” (has less debt) and it has “liquidity” (enough cash) to support the operations.

They use the words “achieve long term success” – I’m sure such words have been used many times in Cell C’s unfortunate history. The telecoms business has just never managed to successfully and sustainably compete against the major players, much to the detriment of overall competition in the sector.

Blue Label also says that this recapitalisation will “enhance the value of its investment” and “restore its shareholder value” – more fighting words I tell you!

How is this happening? Cell C owed its lenders R7.3 billon and is going to pay them R1.03 billion as a compromise offer, funded by a subsidiary of Blue Label Telecoms lending that amount to Cell C. In addition, Blue Label will purchase pre-paid airtime for R1.2 billion and will make additional purchases of R300 million every quarter for a year. This will inject enough capital into Cell C to keep it going.

Of course, the actual structure gets vastly more complicated than that.

It’s worth noting that directors of that Blue Label Telecoms subsidiary have recently been selling their shares in the holding company. I wouldn’t ignore that fact.

Massmart has released the Walmart circular

Shareholders are being asked to vote on the R62 per share takeout offer

Well, to be completely accurate, Massmart shareholders are first being asked to vote on a scheme of arrangement at R62 per share. If for any reason that fails, there’s a standby general offer of R62 per share. This would allow those who voted in favour of the scheme to still accept the offer and walk away.

I find this structure interesting. A standby general offer is usually only used when the offeror is happy to acquire an unspecified number of shares. In this case though, this is a conditional general offer that is only effective if the delisting is approved and if at least 90% of shareholders accept the offer. This would be an odd situation, as the scheme requires 75% shareholder approval, so that would’ve presumably been successful first.

PwC was appointed as the independent expert and opined that the fair value range is between R52 and R62 per share. The offer is thus at the top of the range, as Walmart wants people to accept it and get out of the way so that Massmart can be fixed in private.

If you would like to see what one of these circulars looks like, Massmart has placed it in Ghost Mail this morning. Find it at this link>>>

Rand Merchant Investment Holdings becomes OUTsurance Group

Will investors get something out?

Rand Merchant Investment Holdings (RMI) released its results for the year ended June 2022 and there isn’t much that you can really take from them. Let me explain.

This was a year of restructuring for the group, taking the massive steps of unbundling its investments in Discovery and Momentum Metropolitan and selling its 30% stake in Hastings Group.

To give you an idea of the value creation here, the market cap at June 2021 was R48 billion. RMI then unbundled R34.6 billion worth of shares and paid dividends of R3.2 billion. At 30 June 2022, the market cap was only slightly lower at R42.6 billion!

How is this possible? Because the discount to intrinsic net asset value (the underlying investments) closes once those investments are no longer there. This is why these structures (like PSG) have either been collapsed or simplifed, with the latter being the case for RMI.

The historical financial information becomes somewhat meaningless. The group is looking to the future and so should you. The future is primarily in OUTsurance, which is now sitting on R2.5 billion in cash to fund an international expansion.

The OUTsurance investment is valued at R40.5 billion and the other remaining assets (RMI Investment Managers and AlphaCode) are valued at R1.9 billion.

To fully understand the transition to OUTsurance, RMI has placed the full text of the announcement in Ghost Mail this morning. You can find more details on OUTsurance at this link>>>

California dreamin’

Santova is acquiring 100% of A-Link Freight in California for $2.35 million

Santova has been one of the clear winners of the pandemic, with a share price that has risen approximately 330% over the past three years. That’s not a typo. The market cap of this popular JSE company is just under R1 billion.

A-Link has been operating for over 20 years, focusing specifically on exports from Los Angeles airport (LAX – the fifth busiest airport globally). The niche is daily consolidations to the Far East, which has nothing to do with accountants and everything to do with logistics experts.

Santova has taken its time in entering the US, as valuation multiples have historically been high. Although the announcement doesn’t give the profits of A-Link over the past year, it does note that the warranty conditions require the company to produce cumulative EBITDA of $1.2 million for the two years after the effective date.

It sounds as though there is no debt in the company, so the forward EBITDA multiple is less than 4x if we simply halve the warranted EBITDA. I’m not sure why Santova didn’t just disclose the trailing multiple!

They did at least disclose the net asset value of $750,000 which means that this is a price/book multiple of 3.13x.

The deal value is less than 5% of Santova’s market cap, so this is a voluntary announcement as it falls well below the JSE Categorisation thresholds. This is why disclosure is a bit patchy.

This is a big step for this homegrown hero. It would be lovely to see this US expansion be successful!

Little Bites

  • Director dealings:
    • Here’s an interesting one for you: the remuneration policy at Growthpoint requires directors to hold 100% of their fixed remuneration in shares. The have five years to reach this level. The CFO was sitting at 94% and has now acquired more shares worth R758k. I must say, this feels like a proper alignment tool!
    • A director of Discovery has bought shares in the company worth over R2.7 million.
    • The CEO of Sirius Real Estate and an associate bought shares in the company worth £10.7k. Not much let’s face it, but they could’ve spent it on a small family hatchback instead I guess.
  • Investec Property Fund announced the resignation of its joint CEO, Darryl Mayers. He has been with Investec Property for 10 years and with the fund since 2018. Andrew Wooler is taking over as the sole CEO. In a pre-close update, the company noted that distributable income per share growth is in line with guidance of low single-digit growth. The loan-to-value (LTV) ratio is stable at around 38%.
  • Heriot REIT’s property portfolio has been valued at over R5 billion for the first time since the company listed in July 2017. I think that gives a good idea of how tough things have been in the property sector since the excitement in the middle of the “lost decade” (which has subsequently become a lost decade and a bit). Heriot’s NAV per share increased by 12.4% in the year ended June 2022 and the dividend per share was 102.05 cents, a trailing yield of 8.9%.
  • Eastern Platinum has signed a finance facility agreement with Investec Bank. This is a 12-month revolving commodity finance facility priced at 3-month JIBAR + 150 basis points. The maximum size of the facility is R150 million and there is a fixed-price swap hedge on platinum, palladium, rhodium and gold. This is why you don’t obtain such facilities by walking into your friendly local branch.
  • Ascendis Health is changing its JSE sponsor, marking yet another significant shift at the company.

Massmart has posted the Walmart circular

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Massmart has posted the Walmart circular

After the joint firm intention announcement was released on 1 September, the circular has now been released to shareholders and interested parties.

Walmart’s public adventures with Massmart look set to come to an end. An offer of R62 per share is likely to bring this chapter to a close.

If approved by shareholders, Massmart would become a private company and Walmart will spend its time fixing a business that has struggled to compete in the current retail environment.

In case the scheme of arrangement doesn’t reach the necessary approval threshold, there’s a standby general offer.

For a great example of the exciting world of corporate finance and M&A, you’ll find the entire circular at this link and the summary announcement below.

massmart-circular

Transition of RMI to OUTsurance Group Limited

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Transition of RMI to OUTsurance Group Limited

This announcement marks the end of an era for RMI as an active investor in a portfolio of financial services businesses, with the final step being the process of transitioning and rebranding from RMI to “OUTsurance Group Limited” (the OUTsurance Listing).

Note from The Finance Ghost:

This has been a textbook value unlock story. RMI unbundled its investments in Discovery and Momentum Metropolitan and sold the stake in Hastings. The primary asset is now OUTsurance, a business that is ready to fly.

A detailed circular will be released on 11 October. In the meantime, we know that the soon-to-be renamed group is the proud owner of 89.3% in OUTsurance, with the rest held by management. The idea is to flip management to the top of the structure once the proposed transactions are completed.

This is a massive business, with gross written premium of R23.5 billion and normalised earnings of R2.3 billion. Let’s face it: everyone knows the OUTsurance brand.

This is exciting news for the local market, as it will effectively bring another pure-play opportunity (well, almost – there are other small assets in the group) to the insurance sector.

Here are the full details:

rmi-transition-announcement

Building a more valuable business (part 1) – bizval webinar recording

The Finance Ghost
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Building a more valuable business (part 1) – bizval webinar recording

In the second bizval webinar, the founding team tackled a topic that matters to every single entrepreneur: how to build a more valuable business!

In this recording, you can look forward to:

  • Insights from co-founder Howard Blake on the many startups he has built in his life and what he learned from the experience, ultimately leading to the creation of bizval
  • A critical section on the importance of the business being independent from its founder in order to truly create value
  • Revenue quality and resilience and why this is a major driver of valuations
  • A vibrant Q&A session tackling topics ranging from the use of traditional valuation methodologies for tech companies through to dealing with client revenue that isn’t contractual

This is real-world stuff, I’ll tell you that much!

I’m extremely proud of what we have built in bizval. Visit the website and see for yourself.

Here’s the recording of our second webinar:

This is an excellent follow-up discussion to our first webinar – you can watch us demystify the art and science of valuations here

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