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Ghost Bites Vol 50 (22)

The Finance Ghost
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5
Ghost Bites Vol 50 (22)

Corporate finance corner (M&A / capital raises)

  • Alexander Forbes has released the circular related to the partial offer by New Veld LLC, the investor that bought the 14.83% stake in the company from Mercer Africa. The ultimate parties behind New Veld are Prudential Financial (a global financial services giant) and LeapFrog Investments (an investor in Africa and Asia). The offer price is R5.05 per share (calculated at R5.25 less the 20 cents per share dividend) which is the same price paid to Mercer. Although there was no regulatory requirement for an independent expert, Alexander Forbes hired one anyway and the opinion is that the terms are both fair and reasonable to shareholders. ARC Financial Services holds a 41.47% stake in Alexander Forbes and will not be accepting the offer. The offer allows holders of up to 100 shares to sell all their shares and holders of more than 100 shares to sell the first 100 plus 45.2% of the rest of the shares. Excess tenders are allowed, which is a reference to selling more than the partial offer percentage (which helps make up for shareholders who may not choose to sell any shares) rather than the latest juicy government contracts. As a final important point, the offer is structured such that New Veld cannot end up with a stake of over 33% of the issued shares, putting it below the 35% threshold that would trigger a mandatory offer for all shares in the company. You can find the offer circular at this link. I just couldn’t resist replicating this wonderful bit of “lawyering” from the announcement:

“The Investor is extending the Partial Offer to Shareholders other than those to whom the offer is not being made.”

Alexander Forbes SENS, 18 July 2022
  • Industrials REIT has completed the sale of Rose Kiln Court in Reading for £5.88 million. This is a 2.2% discount to the 31 March 2022 valuation of the property. This is a single let asset that doesn’t fit the Industrals REIT strategy of multi-let industrial properties. A selling price below book value isn’t great, as the market may worry about some of the other valuations.
  • The disposal of the 49% interest in Al Tayer Stocks LLC by Stefanutti Stocks has now become unconditional (i.e. all conditions to the deal have been met and it has closed) and the payment of the final purchase consideration is expected in due course.

Financial updates

  • In a short and sweet trading update, Trencor updated the market on the expected financial performance for the six months ended June 2022. The headline loss per share is expected to be between -0.7 and -0.2 cents, which is much better than the headline loss of -9 cents per share in the comparable period. It’s still a loss, though. A bit of further digging reveals that Trencor is just a cash shell now, after unbundling its investment in Textainer and selling its container asset owning company. The cash can’t be distributed to shareholders yet as it is restricted by indemnities etc. related to the underlying asset sale.
  • Sebata Holdings has released results for the year ended March 2022. The company has lost over 80% of its value in the past 5 years and now has a market cap of just R230 million. In this financial year, revenue fell by 25% and HEPS collapsed quite spectacularly to -443.68 cents. For context, the share price is only R2.01! The group is trying to recover earn-out amounts from Inzalo Capital Holdings for a disposal of businesses back in 2020. Those who enjoy special situations punts (also known in some circles as gambling) could dig through the financials at this link.

Operational updates

  • Kore Potash has released an operational update for the quarter ended June. It was a busy period for the Kola Potash Project, including the signing of a memorandum of understanding with the summit Consortium in April and a heads of agreement for the construction of Kola in June. An Engineering, Procurement and Construction (EPC) contract proposal is expected in August, followed by a financing proposal. The metrics for the Kola Potash Project look strong, with the capital cost reduced by over 22% through recent work and the internal rate of return at 20% on an ungeared post tax basis (i.e. without debt). If potash prices stay where they are, IRR is estimated to be 49% on the same basis! At corporate level, new shares were issued to Sociedad Quimica y Minera de Chile S.A. in June in lieu of fees payable under a technical services agreement. By the end of the quarter, Kore Potash had $7.6 million in cash. There was no new information in this update but it does provide a useful reminder of the progress made in the past three months.

Share buybacks and dividends

  • Datatec announced the results of its scrip dividend alternative. The company ended up paying R64.76 million in cash dividends and capitalised R176 million in new shares. The scrip dividend was at a very attractive price because of the timing of the Analysys Mason disposal announcement, so I’m surprised that even more people didn’t take it.

Notable shuffling of (expensive) chairs

  • York Timber has appointed two non-executive directors. Alton Solomons joins the board after a career that included being CEO of Sanlam Private Equity from 2012 to 2019 and his current role as Head of Growth Catalyst and Listed Equities at the IDC. Adrian Zetler is a name that York shareholders already know well; he is one “A” in A2 Investment Partners, the shareholder activist investor that drove significant changes at York (and elsewhere).
  • There are yet more changes to the board at Luxe Holdings, a company that truly has a revolving door in the boardroom. Here is this year’s SENS history for this messy group:

Director dealings

  • The director of Kaap Agri who has been buying up shares is back at it, with a purchase worth nearly R119k.

Unusual things

  • For some reason, Lewis seems to have made it onto the radar of international investors. Dimensional Fund Advisors LP has taken a stake of 5.152% and LSV Asset Management now owns 5.28%. The company has a strong investment case thanks to its great capital discipline and highly successful share buyback strategy. Still, it’s quite odd that international investors are buying like this! I’m also not sure who the sellers are, as Lewis is a fairly illiquid stock and it takes a while to build positions of this size.
  • Zimbabwean company Hwange Colliery is still in administration and has no board of directors. Despite this, the underlying operations are still running and production volumes even increased by 74%! I couldn’t resist including this quote from the colourful update released by presumably the only warm body still standing in the Hwange boardroom:

“The administration team is still working on resuscitating the company”

Hwange Colliery SENS, 18 July 2022

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TreasuryONE webinar: Recession, depression, inflation, the petrol price and the rand

The Finance Ghost
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2
TreasuryONE webinar: Recession, depression, inflation, the petrol price and the rand

Last week, the team from TreasuryONE hosted a great webinar and Ghost Mail readers were invited. Those who took up the offer certainly didn’t regret it, as Andre Cilliers (Currency Strategist at TreasuryONE) led the way and dished out plenty of insights into the drivers of recent macroeconomic volatility.

If you’ve been wondering why the rand has had it so tough, this will help.

Wichard Cilliers (Head of Market Risk at TreasuryONE) was also in attendance and responded to a number of questions in the Q&A session at the end of the presentation.

This was a lovely opportunity for Ghost Mail readers to hear directly from the professionals in this space. Thanks to the YouTube link below, you can catch up on the event or even watch it again to absorb as much as possible.

Remember to visit the TreasuryONE website to learn more about the service offering across market risk management, corporate treasury outsourcing and management, robotic process automation, cash management and forecasting and more.

Watch the webinar here:

Discretionary retailers on the JSE – part 3

Chris Gilmour
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1
Discretionary retailers on the JSE – part 3

Previously, Chris Gilmour has delved into the non-discretionary retailers on the JSE as well as the discretionary retailers in a series of articles. The first one focused on Woolworths and the second on Truworths. This week in part 3, Chris wraps up his summary on the discretionary retailers.

Mr Price

Mr Price is the new kid on the block, relatively speaking, among the major clothing retailing chains in South Africa and is arguably the best. It certainly has the best long-term track record of any local clothing retailer in terms of compound annual growth in earnings and dividends.

Its genesis was John Orrs department store, which Mr Price founders Laurie Chiappini and Stewart Cohen acquired in 1987. In those days, the two main trading entities were Milady’s and The Hub, both department stores.

Initially, it was listed on the JSE as Specialty Stores and it had reasonable performance. It wasn’t until the hugely capable and charismatic Alastair McArthur was appointed CEO in 1997 and the name was changed to Mr Price in 2001 that the earnings really took off. McArthur was a retailing genius and current CEO Mark Blair understudied him closely when he was CFO of the group. To this day, no satisfactory explanation has been given publicly for McArthur’s departure. He left abruptly in 2010 and was replaced by Stuart Bird, who himself retired in 2019. Mark Blair replaced Bird as CEO.

Watching recent Mr Price presentations, it is clear that Blair is a man on a mission. He has staked his future career on the group becoming the most valuable retailer in Africa, based on market capitalisation on the JSE. Although difficult, this vision is achievable in the longer term, but much of the growth required to get there will have to come from acquisitions.

Most of Mr Price’s growth up until now has been organic, a feature that most analysts love. However, Mr Price took the strategic decision in the depths of the recent coronavirus pandemic to expand into the weakness caused by the virus. The group bought Power Fashion, a low-end fashion business not too dissimilar to Mr Price apparel and then it also bought Yuppiechef, an upmarket kitchenware retailer. Both have turned out to be earnings accretive in a remarkably short time period. The latest acquisition is Studio 88, the largest independent “athleisure” retailer in southern Africa, with over 700 outlets selling well-known branded sports-oriented clothing and footwear.

The Foschini Group

Back in the day, TFG (or Foschini as it was then known) was the benchmark by which all clothing retailers were measured. It had the best metrics of any clothing retailer but it didn’t divulge much in its annual financial statements.

It was controlled by a holding company called Lewis Foschini Investment Corporation (Lefic) which in turn was controlled by Stanley Lewis, father of the current chairman Michael Lewis. The Lewis family maintained control of Foschini until the late 1980s, when they moved to London and sold most of their holdings in Foschini.

By the early 1990s, Foschini had lost its edge and began experiencing some earnings hiccups. Truworths took over the mantle of best clothing retailer and it wasn’t until the arrival of Doug Murray as CEO in 2007 that TFG/Foschini got back on track again. It can make a strong argument as SA’s best clothing retailer, with Mr Price as the other reasonable contender.

What really differentiates TFG from the rest is its commitment to quick response manufacturing. Long before the coronavirus pandemic, TFG had begun establishing Prestige Clothing in order to be able to offer quick response products without the unnecessary delay associated with sourcing from China or elsewhere in far east Asia. This strategy has paid off handsomely for TFG in the past few years as supply chain disruptions have become the norm.

Another big differentiator has been TFG’s ability to succeed in foreign markets, notably in Australia. Over the years, Australia has become  a graveyard for most South African retailers (think Pick n Pay / Franklins, Truworths / Sportsgirl and then of course the massive disaster of Woolworths / David Jones & Country Road). TFG’s acquisition of RAG a few years ago has proved to be earnings accretive and is a useful rand hedge. TFG London has gone through a torrid time during the pandemic but now appears to be coming right with a vengeance.

And TFG’s positioning in the market has also changed considerably over the years. Until fairly recently, it was predominantly a credit retailer. Now it’s mainly cash.

Right at the start of the pandemic, TFG bought Jet from Edcon’s liquidators for next to nothing including the stock. That has proven to be an inspired move. By expanding into the downturn, TFG and Mr Price have distinguished themselves as two discretionary retailers that will survive a prolonged period of low to negative economic growth in South Africa.   

Pepkor

The current Pepkor shouldn’t be confused with the highly focused clothing group that was delisted from the JSE in late 2003 at a price of R12 per share, with 37% of it eagerly gobbled up by Brait. The unlisted entity went from strength to strength and was eventually sold to the ill-fated Steinhoff group in 2015. Steinhoff reworked its African interests and a couple of other operations into Steinhoff Africa Retail Ltd (STAR) not long before its own near-demise in late 2017.

In an attempt to distance itself from the taint of Steinhoff, STAR was renamed Pepkor in 2019 and relisted in largely its current form. Pepkor is now a very large retail conglomerate consisting of clothing & general merchandise, furniture, appliances & electronics, building materials and fintech. Clothing & general merchandising is still by far the largest component of the group, contributing 64% of revenue and 84% of operating profit. Brands in this segment include Pep, Ackermans, Tekkie Town, Dunns and Refinery. Furniture & appliances is essentially the old JD Group with the addition of Abacus Insurance. Building materials includes Tiletoria and fintech includes Capfin.

The group thus doesn’t as yet have a proper five-year track record and so comparisons with more established listed retailers are not so relevant. And although there are no more financial settlements outstanding due to its former association with Steinhoff, one is still left with the uneasy feeling that this whole exercise was cobbled together with the express purpose of removing it from the attention of Steinhoff-watchers. One must remember that Steinhoff still owns more than 50% of the issued equity in Pepkor.

But it’s predominantly a cash business and as such, should be relatively straightforward to manage in the current risk-averse environment. That doesn’t mean that it has limited ambitions. It recently acquired 87% of Brazilian retailer Grupo Avenida. This is a brave move, notwithstanding the observation that Pepkor has reserved 13% of the equity in the business for local management.

Brazil’s apparel sector, like its grocery sector, is highly fragmented and Brazilians tend to prefer buying local products, rather than those with a foreign label. They also like buying clothes on credit, so Pepkor and its associates will need to adapt to this. Although Pepkor would not divulge the exact amount of the transaction back in February this year when it was announced, it is widely believed to be around R3.5 billion or just under 5% of Pepkor’s market capitalisation.

Cashbuild

Cashbuild was founded by the late Albert Koopman in the late 1980s. Koopman and Cashbuild were way before their time, especially with regards to his vision for participative management in the business. He challenged the status quo and questioned why workers couldn’t also be entrepreneurs. As a result, Cashbuild had one of the lowest rates of industrial action anywhere in South Africa during the apartheid era. There was no room for prima donnas; whoever got to the office or branch first in the morning got the best parking, regardless of colour, creed or background. And his philosophies still resonate in the business, even though he physically left it many decades ago.

Cashbuild is the largest retailer of building materials and associated products, selling directly to cash-paying customers through its 319 stores in South Africa, Namibia, Lesotho, Botswana, Swaziland, Malawi and Zambia. It employs 6 238 people. Cashbuild shares have been listed on the JSE since 1986 and its main competitors are Builders (part of Massmart) and Buildit in the Spar group.

Despite having been around for 35 years, it is still relatively small, with a market capitalisation of only R6.3 billion and revenue of R12.6 billion. But it has been a relatively solid performer since listing with only very few surprises over the years. Its 5-year CAGR in HEPS is one of the best in the entire retail sector at 8.7%.

Lewis Group

Lewis is a real little gem. It is the only listed furniture retailer left on the JSE and still operates out of a very humble head office in Salt River in Cape Town. Unbundled from Great Universal Stores plc in 2004, It has survived while its two former much larger peers have either disappeared, as in the case of Ellerines or been swallowed up as with JD Group, which is now part of retail conglomerate Pepkor. 

Conventional wisdom suggest that Lewis should be on a downwards trajectory by now in the face of a deteriorating local economy, higher interest rates and soaring unemployment, as well as the fact that the so-called “homebody economy” caused by more people working from home during the coronavirus pandemic is now evaporating. But if anything, it is flourishing. Lewis has management that get just about everything right and the Lewis customers are exceptionally loyal.

Lewis used to be predominantly a credit-oriented retailer but these days it is around 50:50 cash vs. credit. The valuation of Lewis is truly fascinating. It is currently sitting on a PE ratio of 5.8x and yet its 5-year CAGR in HEPS of 16.2% is the best of all the listed retailers by far. It is significantly higher than the 12% CAGR in HEPS of 12% at Clicks which is currently on a 32x PE ratio.

We hope you have enjoyed this series on the local retailers. Let us know which ones you have invested in?

Ghost Bites Vol 49 (22)

The Finance Ghost
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0
Ghost Bites Vol 49 (22)

Corporate finance corner (M&A / capital raises)

  • Telkom kicked us off on Friday with heavyweight independent director appointments. You’ll shortly see why this update sits in the corporate finance corner of Ghost Bites. Brian Kennedy (ex-Managing Executive of Nedbank CIB), Prudence Lebina (CEO of TriAlpha Investment Management and ex-CEO of Gaia Infrastructure Capital) and Mteto Nyati (ex-CEO of Altron) have joined the board, along with ESG and foreign market specialist Ipeleng Selele. Just a couple of hours later, the huge news broke that MTN is looking at acquiring all of Telkom’s shares in exchange for either shares in MTN or a combination of shares and cash. These are early discussions and there is no guarantee of a deal, which might explain why Telkom has suddenly beefed up its independent board in a big way. There’s also no indication of price at this stage. Telkom closed more than 26% higher on Friday and MTN closed over 5% higher. This announcement inspired one of my more popular recent tweets:
  • In March 2022, Renergen announced a strategic deal with Ivanhoe that would see the company move from a 4.35% shareholder in Renergen to a controlling shareholder over time if all conditions were met. Interestingly, not everyone in the market thought this was the best idea. The conditions needed to be met within 120 days (an ambitious timeline of note) and that didn’t happen, so the entire deal has fallen away. For a company that usually discloses what its CEO had for breakfast each day, it’s disappointing that the announcement didn’t disclose which conditions hadn’t been met. There’s a big difference between failing a due diligence and not meeting regulatory approvals. All is certainly not lost, as the Virginia Gas Project is close to completion and the equity funding for Phase Two is only needed in 2023. If Phase One goes well, it’s unlikely that funding will be a major struggle. Ivanhoe will still look to work with Renergen, as the company wants the liquefied natural gas for a cleaner energy solution at its Platreef mine. Renergen fell 2.7% on this news and is flat year-to-date.
  • Impala Platinum’s offer to Royal Bafokeng Platinum shareholders needs to be approved by the Competition Tribunal, which is a level higher than the Competition Commission. The Commission recommended an approval to the Tribunal back in April. Things were on track until Northam Platinum made an application to intervene in the Tribunal process. The Tribunal granted an order for certain limited rights to participate in the merger proceedings and set down a merger hearing date of 2 August 2022. That order has now been challenged in the Competition Appeal Court. The longstop date to fulfil all conditions has been extended to 26th September. Sensitive matters take a long time to achieve regulatory approval, especially when there’s a grumpy competitor in town.
  • We’ve been waiting to see which assets would land up in Buka Investments, previously known as Imbalie Beauty (and discussed by Ghost Grad Kreeti Panday in this article). I still can’t find a website for Buka, but at least we know that Socrati Group will be the first acquisition from B&B Media (the company that took over the cash shell) and Moltera Group. Buka is aspiring to be a “premium fashion company” with international and local procurement. Socrati has five stores in Gauteng and is planning another 5 stores in the next few months. The group also owns Caralli, a manufacturer of leather shoes in Johannesburg that supplies Socrati and other third party brands. The purchase price is R140 million, settled by the issuance of 70 million new shares at R2 per share. The net asset value is -R7 million and profit for the year ended February 2022 was R6.2 million. This seems to be a very high valuation multiple. As this is a related party transaction, a fairness opinion from an independent expert will be needed. This is also a reverse takeover under JSE rules, so a category 1 circular with revised listing particulars will also be needed. In other words, detailed disclosures related to the business will be coming.
  • Although no details have been given by Huge Group about the underlying potential deals (other than it being a “series of transactions” which would be a Category 2 transaction in aggregate), seeing this on SENS always gets me excited for what might be coming next from this self-styled investment holding company:
  • Investec has released a prospectus for the issuance of up to £2 billion under a Euro Medium Term Note Programme. If you’re having trouble sleeping, you’ll find this thrilling 124-page document at this link.
  • MC Mining announced the outcomes of the Extraordinary General Meeting held on Friday. Shareholders were asked to ratify a prior issue of shares and approved an acquisition of shares. The first resolution passed and the second failed, which means that Senosi Group will not be loaning further money to the company and that MC Mining needs to come up with R20 million to repay an existing loan to Senosi. This will be paid from the R60 million standby loan facility with Dendocept and existing cash resources. If coal prices continue, the company’s cash runway is expected to extend beyond November 2022. Alternative options to fund the Makhado Project are also been pursued.

Financial updates

  • Richemont has announced sales growth for the quarter ended June 2022 and it looks really strong. In constant currency, group sales are up 12%. Reported sales are even better, up 20%. The US was the largest market in the quarter, contributing 22% of group sales. Looking at different channels, Wholesale and Royalty Income only grew by 12% in reported currency vs. 26% in Retail, so a direct-to-consumer strategy is working really well. Online Retail grew by 12%, in line with the slowdown in eCommerce growth that I’ve seen in many companies. Jewellery Maisons grew 20% and Specialist Watchmakers grew 18%, so both critical divisions are doing well. The blemish in the result was Asia Pacific, which is down 15% in constant rates and 8% as reported.
  • Tongaat Hulett is in crisis mode and hasn’t been able to release a provisional report for the year ended March 2022. A longer-term liquidity facility is needed to finalise the financials, which suggests that auditors aren’t prepared to sign off on the company as a going concern unless that is in place. Although Tongaat is in “financial negotiations” with the South African lender group for such a facility, the company has requested that its listing be suspended by the JSE. This would mean no trading in the shares until the balance sheet issues can be sorted out and the financials signed off. The JSE is considering the request. The share price fell by over 17% in morning trade until staging a dramatic comeback to close 10.2% higher for the day! The rally from midday to close of trade was a spectacular 27%!
  • Adcock Ingram closed 4.3% higher after releasing a trading statement indicating an improvement in HEPS of at least 20% for the year ended June 2022. This has been driven by improved demand for OTC and consumer healthcare products relative to the base period that was impacted by Covid. This implies HEPS of at least 485.6 cents, which is a Price/Earnings multiple of 10x provided the company isn’t playing its cards close to its chest. Whenever a company announces an increase of “at least 20%” you have to be careful, as this is the minimum required disclosure under JSE rules. It’s possible for the final result to be materially better than this.
  • Unlike Coronation, Ninety One includes comparable numbers in its assets under management (AUM) update. AUM at 30 June 2022 was £134.9 billion, lower than the March 2022 number of £143.9 billion and the 30 June 2021 number of £139 billion. In a bear market, asset managers experience a drop in assets just like the rest of us. This directly affects income. Remember that the other impact on AUM is from net client flows, which give the best indication of whether an asset manager is on the right track or not.
  • Primeserv Group has released financial results for the year ended March 2022. HEPS jumped 52% to 20.86 cents and the final dividend is 6 cents per share.
  • Get your diary out – Glencore will release its half-year production report on 29th July and financial results on 4th August. Industrials REIT will release its next quarterly trading update on 29th July. MiX Telematics will report its first quarter results on 28th July.

Operational updates

  • Raven Property Group has exercised its put option to divest of its Russian business to a Cypriot company controlled by Raven’s Russian management team. Putin’s actions in Ukraine and the related sanctions literally wiped this listing out.
  • PSV Holdings is still in business rescue, a financial and operational concept because it affects the way the entire business is run. A recapitalisation is required for the audits for 2020, 2021 and 2022 to take place. On 6th July, the business rescue practitioners filed a notice with CIPC terminating the proceedings with the intention to place the company into liquidation. DNG Energy is a material shareholders in the company and has asked for an extension to raise the funds needed to recapitalise the company. A “short delay” has been agreed to. I couldn’t even find a website for the company!

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • In case you skipped the corporate finance corner, refer to the snippet on Telkom for details of the extensive board changes at the company.
  • Mercer’s sale of its stake in Alexander Forbes has been completed and its representative on the board of Alexander Forbes has tendered his resignation.

Director dealings

  • An associate of the CEO of Stefanutti Stocks has bought shares in the company worth R144k.
  • An associate of the Chairman of Pick n Pay has acquired shares worth nearly R145k.
  • Associates of a long-standing director of Invicta (Lance Sherrell) have bought shares in the company worth R715k.
  • I found it interesting that a director of Barloworld bought shares in the company worth just R12.5k. The announcement even split out the whole shares and fractional shares, as the trades were executed through EasyEquities!

Unusual things

  • In a surprising landmark ruling, the South Gauteng High Court believes that Old Mutual is liable for R1.7 billion to the Living Hands Trust for fraud committed in the Fidentia scandal that was all over the media a decade ago. Old Mutual says it is “deeply concerned” by the ruling and will be appealing it. Here’s an excerpt from the Old Mutual press release that explains why they feel so strongly:

“Quite apart from Old Mutual, the direct cause of the loss and pain suffered was the fraudulent actions of Fidentia well after Old Mutual had transferred funds following a formal client instruction to do so. In the circumstances and following our verification of the authenticity of the transfer of ownership, we were legally obligated and had no other option but to transfer the money.”

Old Mutual press release, 15 July 2022
  • Trustco’s fight with the JSE is ongoing. There is a battle underway over a technical application of IFRS, which is the kind of work you just can’t tell your mates about at the braai without their eyes glazing over in the first few seconds. The dispute has serious ramifications though, as the JSE believes that Trustco is in breach of listings requirements and the company disagrees. Both parties have been advised by IFRS experts who also don’t agree with each other, which tells you more about IFRS than anything else. Trustco has approached the High Court of South Africa for an urgent interdict against the JSE. I felt that this section from the colourful SENS was worth repeating:

“The JSE (and its advisory body FRIP) disagreed with Trustco’s accounting treatment and applied a substance over form treatment, without the JSE being able to point to a single accounting standard that has been breached by Trustco.”

Trustco SENS announcement, 15 July 2022

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Will you take the Brait?

Karel Zowitsky
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6
Will you take the Brait?

Brait’s net asset value per share is R8.30. The share price is R3.65. The market is trying to tell us something here and Ghost Grad Karel Zowitsky used the release of Brait’s integrated annual report as a good excuse to dig into the two major investments in the group.

It’s not unusual to see an investment holding company trading at a discount to net asset value (NAV) per share. It is unusual to see a large discount like over 55% at Brait. Either the market doesn’t believe the valuations or doesn’t like the prospects (or both).

Perhaps the market is just scared. After all, Brait has a wonderful example of how things can go terribly wrong:

For market enthusiasts, Brait has also a pretty good example of why timing is important, as that terrible chart hides the recent performance:

There’s clearly a story here that needs to be told.

Brait is an investment holding company that has a primary listing on the Luxembourg Stock Exchange and a secondary listing on the Johannesburg Stock Exchange (JSE), offering investors exposure to unlisted companies that operate in the broad consumer sector.

One of these businesses will be extremely familiar to you: Virgin Active. We’ve all had a contract at some time in our lives. The difference lies in whether we actually used it.

So, let’s start with the gym business.

Farewell, masks

Of all the businesses out there that took pain in the pandemic, gyms were among the worst hit. Nobody enjoys exercising with a mask on.

Total membership is currently at around 75% of December 2019 levels. The important question to ask is whether these numbers will increase to pre-lockdown levels or stagnate.

From January to May 2022, Virgin Active saw a 12% increase in members. With masks out the way, it seems logical that this growth trend can continue for a while at least. Before getting too carried away, we need to remember that there are many factors at play.

Many people are hesitant to sign a contract that locks them into paying for a gym membership for at least 12 months when they might be unable to utilise the facilities for a period of time. I know many people who attempted to cancel their gym memberships during lockdowns and their calls and emails simply went unanswered. This is bad practice that does not create goodwill with members.

Affordability is another major concern. In the high inflationary environment we currently find ourselves in, families are feeling the crunch in their budgets rather than their abdominal muscles. Fuel and food prices are taking their toll and many are cutting out luxuries and unnecessary expenditure. Sadly, for many people, a gym a contract is one of the first expenses to be cut from the monthly debit order list.

Brait also highlights the negative impact of working from home trends. It makes sense – many people used to rather go to gym than sit in traffic.

Brait originally paid R12.7 billion for a 78.2% stake in Virgin Active in July 2015.

Today, Brait holds 70.6% (due to the dilutionary effect of subsequent capital raises) with a total cost including the initial purchase of R15.3 billion.

The value of the stake plus proceeds received to date is less than R9.3 billion, so you can see how shareholder value was destroyed by the lockdowns.

In case you need further proof of how severe the lockdowns were for the business, revenue fell from £602 million in FY19 to just £296 million in FY20 – literally less than half of the pre-pandemic level!

With a high proportion of fixed costs (the clubs don’t stop costing money just because they are shut), the lockdowns were a catastrophe.

You should note that a further dilution to a 67.4% stake is expected if the deal to acquire Kauai and Nu from Real Foods Group gets regulatory approval.

Taming the Tiger?

Brait owns a business called Premier that would remind you of Tiger Brands in terms of its product line, but not its recent performance. Brait is planning to separately list Premier, which is tricky in terms of getting the market timing right.

“Premier has completed its IPO readiness plans and will potentially proceed with the listing, market conditions permitting.”

Brait Integrated Annual Report 2022

Brait originally acquired 49.9% in Premier in 2011 for R1.07 billion. After the subsequent exercise of options and the implementation of a management incentive scheme, the current stake is 96.5% and the carrying value is nearly R9.3 billion vs. a total cost of R4.8 billion. Proceeds of R1.9 billion have been received over the years, so the correct comparison is value of R11.2 billion vs. a cost of R4.8 billion – easily Brait’s best investment.

Premier enjoys South African market share of 26% in bread, 26% in flour, 17% in maize, 17% in confectionary sugar and 17% in feminine care. These numbers sound similar but there’s obviously some rounding off. Still, it’s odd to see such consistent share across categories!

Over the past two years, Premier grew its revenue from R11 billion to over R14.5 billion and improved adjusted EBITDA margin from 9.3% to 10.3%.

This means that adjusted EBITDA increased by 44% over the two years of the pandemic, a vastly different result to the pain at Virgin Active.

It’s worth noting that R11.9 billion of the R14.5 billion revenue came from the Millbake division. I now understand why “making dough” is slang for making money! This division produces bread, maize, wheat and baking products and has achieved a revenue CAGR of 15% over the past three years. A newly commissioned bakery in Pretoria is expected to drive further growth.

If you are a Brait shareholder and you want to support your team, then Blue Ribbon bread is the one to put in your trolley.

With inflation top of mind for all of us, you’ll be interested to know that wheat constitutes around 50% of the cost of a loaf and fuel is 6%. A R1/litre increase in the fuel cost adds around 3.5 cents to the cost of a loaf of bread.

Much of the market share in confectionary has come from the R419 million bolt-on acquisition of Mister Sweet. Despite only being included in this result for 10 months, it contributed R540 million of the R763 million confectionary revenue. This sweet deal makes Premier a major player in the South African market in this category.

Will you take the Brait?

Things are looking up at Virgin Active and there’s an argument to be made that momentum will be strong from here. Premier has certainly been a star performer throughout the pandemic.

An investment decision regarding Brait needs to go a lot deeper than just the two major investments, as Brait’s balance sheet has had a tough journey. For example, there was an issue of R3 billion in exchangeable bonds, with accounting rules recognising R624 million as equity and the rest as debt.

For those who enjoy digging in the rough for an opportunity, Brait offers an exciting place to look. Let us know if you hold a position in Brait and what your thoughts are!

Value your business and make a positive impact

The Finance Ghost
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Value your business and make a positive impact

As the founders of bizval, we are celebrating Mandela Day by inviting you to value your business between 18th and 31st July. Use coupon code 46664 on checkout and we will donate 50% of the fee to Gugulethu Chess College.

Chess is more than just a game. It teaches critical skills ranging from strategic planning through to dealing with failure. Anyone who has run a business will immediately recognise the benefits of those skills. Anyone who has lived in South Africa will know how badly we need them.

You don’t have to look far to find research that supports the use of chess in schools. It leads to growth in cognitive abilities and even IQ test results. Chess is recognised as being particularly powerful as a tool to improve mathematics, an area where we are falling terribly short as a country. Naturally, improved science marks are also linked to chess.

Surprisingly, studies also link chess to improved reading and comprehension skills. The visualisation skills required for a strategic sequence in chess are equally helpful in dealing with the written word.

“The game of chess is not merely an idle amusement. Several very valuable qualities of the mind, useful in the course of human life, are to be acquired or strengthened by it, so as to become habits, ready on all occasions.”

Benjamin Franklin

Perhaps the best thing about chess is that it is incredibly affordable. All you need is a chess board and the pieces! Of course, you also need a committed person to introduce children to the game and develop their skills.

Such a person isn’t easy to find.

Introducing the Gugulethu Chess College

This is where Babalwa Rubusana comes in. Babalwa founded the Gugulethu Chess College to make a difference in the community in which she lives. Gugulethu is riddled with crime and lack of infrastructure, yet she doesn’t let this stop her.

Just this month, Babalwa registered 20 kids for the SA open chess championship in Cape Town and managed to accommodate 12 players from Johannesburg at short notice.

Despite sending proposals to government departments for funding since 2016, Babalwa says that she has never received even a single chess board. Babalwa relies on private funding from individuals and corporates for basic needs like boards, food and transport costs. Remember, these kids don’t have the means to pay for any of this.

At bizval, we know that our country is in desperate need of more entrepreneurs. The links between chess and improved school results are clear and the likelihood of success for an entrepreneur increases at higher levels of education. The Gugulethu Chess College is run by a passionate community builder who can make a significant impact with modest levels of funding.

For these reasons, we chose to support the Gugulethu Chess College this Mandela Day. You can follow their Facebook page at this link.

Value your business and support chess in schools: everyone wins!

The bizval valuation tool offers entrepreneurs an affordable way to value their businesses. Your favourite purple ghost built the back-end model based on years of investment banking experience, so you can rest assured that this is the real deal and that the answer is based on market practice.

In this video, I show you exactly how the tool works with the example of a chain of pizzerias:

To take advantage of this win-win situation of valuing your business and supporting the Gugulethu Chess College, head over to bizval.co and make sure you use coupon code 46664 on checkout to trigger the donation to Gugulethu Chess College.

At bizval, we value your company.

Ghost Bites Vol 48 (22)

The Finance Ghost
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Ghost Bites Vol 48 (22)

Corporate finance corner (M&A / capital raises)

  • We’ve had such a busy run of deals on the JSE recently that I was surprised to see no announcements that fall into this category.

Financial updates

  • Pan African Resources has been the shiniest of the local gold miners, with the latest update being record production for the year ended June 2022. This has helped the company significantly reduce its debt. I dedicated a feature article to this update that you can read here.
  • Coronation Fund Managers has updated the market on total assets under management (AUM) as at 30 June 2022. Irritatingly, the announcements never give the comparative AUM, so I always have to go digging. The bear market has really hurt Coronation this year. AUM at 31 December 2021 was R662 billion. By the end of March it had dropped to R625 billion and now it sits at R580 billion.
  • Steinhoff’s pan-European discount retail subsidiary Pepco Group has released an update for the third quarter ended 30 June 2022. Like-for-like revenue growth was 4.9% vs. Q3’21 and total revenue growth in constant currency was 17.1%. On a year-to-date basis, revenue is up 17.4% in constant currency. This has been driven by a decent like-for-like growth and a rapid increase in the store footprint. In a time of high inflation, the group says that it is committed to maintaining its price leadership in the market. Here’s a nugget that I felt was worth repeating in full:

“Furthermore, against this backdrop, we are encouraged that the discount market across Europe is now much larger than at the time of the previous financial crisis in 2007-08 which means that a much larger customer base is more familiar with and more frequently shops across this channel.”

Pepco Group Q3 trading announcement
  • Schroder European REIT has announced an update on the independent valuation of the property portfolio and rent collection as at 30 June 2022. The portfolio valuation of €218.4 million is a -0.4% decrease vs. the preceding quarter. Negative drivers were increased vacancy assumptions in an office investment in Paris and higher capital expenditure provisions for upgrading of heating, aircon and renewable energy at an industrial investment in the Netherlands. There was good news in Germany, with a five-year lease extension for a Stuttgart office offsetting some of the negative impact. Schroder has reminded the market that 100% of the portfolio leases are subject to indexation, so rising inflation is starting to contribute to rental growth.
  • It’s interesting to note that Metrofile has appointed BDO South Africa as its next auditor, after the mandatory audit firm rotation that will see Deloitte bid goodbye to Metrofile. We are firmly in a “Big 5” audit firm environment these days, not just Big 4.
  • Sebata Holdings still hasn’t released results for the year ended March 2022 and has had to announce another delay, with results now expected on 18th July.

Operational updates

  • Anglo American has partnered with Nippon Steel Corporation to work together towards lower carbon steelmaking. This relationship is based on the premium physical qualities of Anglo’s iron ore and it helps that the companies have a working relationship spanning over five decades. Most of Anglo’s Scope 3 emissions are linked to materials sold to the steelmaking industry. By developing high-quality products and more carbon-efficient steelmaking methods with Nippon Steel, there are clear benefits to both companies (and all of us).
  • Kibo Energy’s 10-year take-or-pay power purchase agreement for a 2.7MW plastic-to-syngas power plant in Gauteng has been extended to 20 years. This project is the company’s first under its Sustineri Energy joint venture, in which Kibo Energy holds 65% and Industrial Green Energy Solutions (Pty) Ltd holds the other 35%. This improves the projected internal rate of return (IRR) range from 11% – 14% to 15% – 18%. Construction is scheduled to begin in Q1 2023 and project commissioning should be 11 to 14 months thereafter.
  • African Equity Empowerment Investments (AEEI) is still in dispute with British Telecommunications South Africa regarding whether the call option was validly exercised. The company has renewed its cautionary announcement in this regard.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • Jubilee Metals has announced an impressive board appointment. Tracey Kerr has been appointed as an independent non-executive director. Ms Kerr was previously the Group Head of Sustainable Development at Anglo American Plc, so this is yet another example of positive momentum at Jubilee.
  • Interestingly, Dis-Chem co-founder Lynette Saltzman has resigned as a director so that she can focus on her operational role within the beauty category in the business. Dealing with governance matters really isn’t fun, particularly when you built a business from the ground up. I think it’s great to see Ms Saltzman focusing on where the real business is done. Hint: that’s not the boardroom.

Director dealings

  • Nothing to report today!

Unusual things

  • Trustco is one of those companies that is never far away from drama. The company has been fighting with the JSE over its listing. Trustco doesn’t like being listed on the JSE (and has made that fact known to anyone willing to listen), yet the company is also fighting in court to avoid suspension. In February this year, Trustco applied to the Financial Services Tribunal for a reconsideration of the JSE’s suspension decision. Also in February, Trustco launched an urgent application in the High Court for an interim interdict against the suspension. On 13 July, the Tribunal dismissed Trustco’s application, leaving the company with one week to take any steps it deems necessary. This now sits with the court as an urgent application, with the JSE agreeing to postpone the suspension until the court has ruled. Trustco has lost nearly 90% of its value in the past three years, so I won’t cry any tears if this one disappears from the market.

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

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

DealMakers AFRICA

Developer, owner and operator of commercial and industrial renewable energy systems in Africa, CrossBoundary Energy (CBE), has received a US$40 million equity investment from KLP Norfund Investments. The funds will be used by CBE to scale its investments in renewable energy solutions across Africa.

Proparco, the Development Finance Institution partly owned by the French Development Agency, together with the East African private equity fund Ascent Rift Valley Fund II, has acquired a majority stake in Kenyan healthcare facility Diani Beach Hospital. Financial details were undisclosed.

Nigerian full-service fintech and banking infrastructure provider Bloc, has acquired Orchestrate (Getwallets), a provider of multipayment options. The undisclosed cash and equity deal will boost Bloc’s capacity to offer fintech infrastructure such as online payment, subscription management, virtual wallets, bill payments and invoicing.

Spedag Interfreight, an African focused international freight forwarding expert in East Africa, has been acquired by CEVA Logistics for an undisclosed sum.

Investissuers & Partenaires (I&P) through its fund IPAE 2 has invested in DELTA SA, a Senegalese company specialising in the sanitation and construction. The support will strengthen the company’s governance, organisational and technical capacities plus its regional expansion objectives.

Swvl, a tech-enabled mass transit solutions provider founded in Egypt, has announced the acquisition of Mexico-based Urbvan Mobility.

Solar Panda, a Kenyan manufacturer and retailer of pay-as-you-go solar household systems, has secured US$8 million in series A funding to be used to scale activities across the country. The funding round was led by Oikocredit and EDFI ElectriFI.

SolarTaxi, a Ghanaian e-mobility company, has raised undisclosed funding from Persistent Energy, an investor in the off-grid and e-mobility sector in sub-Saharan Africa. Funds will be used as working capital to expand the business.

Creditchek has raised US$240,000 in a funding round led by Atom Capital with participation from Aidi Ventures and others. The investment will be used to build the credit data infrastructure to assess and verify creditworthiness of customers.

Nigerian decentralised finance platform Stakefair (formerly BetDemand) has raised US$670,000 in pre-seed funding from investors which include Adaverse, Nestcoin, Kepple Africa Ventures, Canza Finance and Voltron Capital among others. The startup which has launched a no-loss staking platform will now expand its services to include a business-2-business API service.

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

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

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

Exchange Listed Companies

Glencore has disposed of its stake in BaseCore Metals (a base metal streams and royalties joint venture with Ontario Pension Plan Board) to NYSE- and TSX-listed Sandstorm Gold in a cash and equity deal valued at US$525 million.

In a similar deal, South32 is to sell a package of four non-core base metals royalties to LSE-listed Anglo Pacific Group for US$185 million plus contingent payments of up to $15 million. Of this $103 million will be paid in cash and $82 million in Anglo Pacific shares resulting in South32 holding a 16.9% stake in Anglo Pacific.

The Board of Transcend Residential Property Fund has received a firm intention offer from Emira Property Fund to make a general offer to acquire up to 100% of the ordinary shares in the company for a cash consideration of R5.38 per share on an ex-distribution basis. Currently Emira holds 40.69% of Transcends’ issued shares.

Capital & Regional has disposed of the residential development project in Walthamstow to specialist residential developer Long Harbour for c.£21,65 million. Proceeds will be used to reduce debt.

Old Mutual Africa (Old Mutual) has taken a significant stake in UAP Old Mutual Life Assurance Uganda following an injection of funds in a move to recapitalise the company. The life insurer’s compliance was threatened as it fell short of its solvency margins. UAP which has a 53% stake in the Ugandan business is owned by Old Mutual.

Unlisted Companies

Hyperclear, a Mauritian headquartered technology investment company, has acquired from Apex Partners, Principa, a local African and analytics software firm with operations in SA, the UK and Middle East. Principa provides data-driven solutions to the retail credit industry. Financial details were undisclosed.

DigsConnect.com, a local digital student accommodation platform which matches landlords with students seeking accommodation, has closed a pre-Series A extension round. The undisclosed investment was secured from Launch Africa, Goodwater Capital, Five35 Ventures and Delta Ventures. Funds will be used to drive international growth.

Juta and Company has acquired MedicalBrief, a weekly digest of local and global medical matters.

Infra Impact Mid-Market Infrastructure Fund 1, has acquired a minority stake in Cybersmart, a local internet service provider and fibre network operator. The funding will be used by Cybersmart to solidify its brand and accelerate the rollout of connectivity solutions.

Imperial, acquired in 2021 by DP World, has expanded its African presence with the purchase, via its Market Access business, of a controlling stake in Africa FMCG Distribution (AFMCG). Part of the Chanrai Group of Companies, Nigerian-based AFMCG is a multi-faceted business offering nationwide and route-to-market solutions across multiple channels.

California-based seller of fresh strawberries and other berries Driscoll’s is to purchase Haygrove Africa Trading, a local supplier of blueberries in sub-Saharan Africa. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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

As part of its update to the market on its Yamana Gold deal, Gold Fields announced it will list on the Toronto Stock Exchange. This announcement together with the promise of higher dividends should sweeten its proposed takeover.

Naspers and Prosus continued with their open-ended share repurchase programmes. This week the companies announced that during the period 4th to 8th July 2022, a total of 6,240,339 Prosus shares were acquired for an aggregate €418,95 million and 659,095 Naspers shares for R1,75 billion.

British American Tobacco repurchased a further 960,000 shares this week for a total of £32,56 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.

Glencore this week repurchased 7,529,983 shares for a total consideration of £31,92 million in terms of its existing buyback programme which is expected to end in August 2022.

One company issued a profit warning. The company was: Sebata,

Four companies this week issued or withdrew a cautionary notice. The companies were: Sebata, Pembury Lifestyle, African Equity Empowerment and Ascendis Health.

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

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