Your daily market overview delivered in bite-sized bullets:
Mr Price kicked off the day on SENS by releasing its FY22 results. Frankly, they were excellent. Value fashion (aimed at cost-conscious consumers) has been a great place to play in the past year. Mr Price has executed two major acquisitions (Power Fashion and Yuppiechef) with the deal to buy Studio88 in progress. I decided to take a detailed look at the numbers and the share price chart, whilst making a final decision on whether to have a punt at Mr Price.
There was much excitement around Mediclinic, with the share price closing 4.7% higher. The catalyst was Remgro (owned of 44.6% of Mediclinic) releasing an announcement before the market opened, responding to press speculation that it would be making an offer alongside MSC Mediterranean Shipping Company for Mediclinic. Apart from much head-scratching about why a cruiseliner wants to own a hospital group, the focus was on the price of 463 pence per share (inclusive of the 3 pence per share final dividend) that was put forward to the board of Mediclinic on 26 May and rejected as being too low. I had to look up the ticker of the London listing (LON: MDC) to compare this to the current price. Mediclinic closed at 441.7 pence, well below the rejected price. There is no guarantee that a higher offer will be made, so be careful speculating in the stock. Considering the long-standing relationship between Remgro and Mediclinic, it’s quite odd to see things playing out like this in public. The press speculation must’ve triggered this outcome.
Steinhoff subsidiary Pepco Group has released interim results for the six months ended March 2022. Revenue grew 18.9% and profit before tax jumped by 28.5%. Like-for-like sales growth was 5.3% for the period and 12.1% in Q2, so the cadence is strong. With record store openings, the group is pushing hard for growth. The market does note that Western European markets are experiencing an “acute spike in inflation in a stagnant wage growth environment” which has “quickly resulted in absolute lower spending by consumers” – not good news. Overall, the group’s like-for-like sales have risen above pre-Covid levels. To access the full result, download it here on the Pepco website.
Vukile Property Fund has released results for the year ended March 2022. The share price was trading 6% higher in late afternoon trade, which tells you what the market thought. In South Africa, like-for-like normalised operating income grew 3.9%, retail vacancies reduced to 2.6% and the like-for-like retail valuation increased by 4.6%. In Castellana (Vukile’s investment vehicle in Spain), there were positive reversions of 3.12% which is big news. This means that new leases are being concluded at higher rates than the leases being replaced. With a loan-to-value (LTV) ratio of 43%, debt is still on the high side for my liking, but the underlying story looks solid and the company describes the debt as being “well hedged” which helps in a rising rate environment. Of total funds from operations this year of 136.3 cents, the dividend was 105.8 cents. The net asset value (NAV) per share is R17.92. Trading at R14.44 at time of writing, the discount to NAV is 19.4% and the trailing yield is 7.3%.
British American Tobacco has delivered a pre-close trading update dealing with the first half of the 2022 financial year. The group knows that it probably can’t sell cigarettes forever, so the plan is to build the “New Categories” business up to GBP5 billion revenue by 2025. Simultaneously, the group is cutting GBP1.5 billion in costs out of the “combustibles” business i.e. cigarettes. This is a value stock of note, with FY22 guidance of revenue growth of 2% to 4%, some operating leverage bringing mid-single figure adjusted diluted earnings per share growth and cash conversion of over 90% of adjusted profit from operations. The group invested GBP1 billion in the New Categories business in the first half of the year, a segment that is still loss-making and is expected to stay that way for a few more years. One of my particular joys about the modern world is that British American Tobacco is a shining light when it comes to ESG metrics. It’s clearly not about where you’ve come from or what you even do to generate profits, but rather the progress you are making in being less harmful to people. Repent, sinner, and you’ll be included in our ESG Index.
Motus traded at nearly R117 immediately after releasing a trading statement, before the share price fell away over the day to trade at around R112 by close of play. The update shows growth in attributable profit of between 45% and 55%, with HEPS increasing by between 50% and 60% for the year ended June 2021. Improved availability of vehicles helped drive passenger vehicle market share of 23.6% for the period. The imported brands performed well, which has a knock-on benefit for workshop activity and parts sales. An important and related point is that higher usage of cars by owners as they return to work also drives increased demand for the workshops. On the car rental side, vehicle utilisation increased to 72%. Motus expects inventory supplies to normalise in the second half of the FY23 calendar year i.e. first half of next year. The group is well within banking covenants with a net debt : forecasted EBITDA ratio of 1.2x. The share price is 3.9% higher this year and is up more than 15% in the past 12 months.
MultiChoice Group released results for the year ended March 2022. Group subscribers increased by 5% year-on-year, with Rest of Africa growing 7%. There are 21.8 million subscribers in total and the South African business has 9 million subscribers, so Rest of Africa is larger with 12.8 million subscribers. Growth in South Africa was hit by consumers “prioritising video entertainment” which is a nice way of saying that people are cancelling DSTV and streaming instead. Subscription revenue increased by 5% and advertising revenue rebounded strongly, up 37%. Irdeto experienced a 9% reduction in revenue. Trading profit grew by just 1% as content costs from the prior year were deferred into this year, driven by the return of major sporting events. Consolidated free cash flow of R5.5 million was 3% lower year-on-year. It’s interesting to note that 47% of entertainment spend is on local content, which is a sensible strategy to compete against the streaming platforms. The dividend for the year was R5.65 per share, so the share price around R130 is a dividend yield of 4.3%.
Anglo American has signed a $100 million 10-year loan agreement with the International Finance Corporation (IFC) linked to sustainability goals. This is IFC’s first such loan in the mining sector and is also believed to be a global first in the mining sector that focuses only on social development indicators. Examples of targets include schools in the local communities performing well vs. national peers and the creation of three offsite jobs for every onsite job at Anglo American’s operations by 2025. If Anglo falls short of targets, it has committed to contributing additional funds to agreed social causes. You see, this is the kind of ESG that I can get behind.
As noted yesterday, Southern Palladium has officially listed on the JSE. The bid-offer spread of R30.00 – R90.00 isn’t a great start, but I can’t say that I was expecting much liquidity here. I suspect that most of the (limited) trading will happen on the Australian Stock Exchange, at least for now. After raising $19 million in the IPO, the company has appointing a drilling contractor with a two-phase program scheduled to commence in coming weeks at its 70%-owned Bengwenyama project. The local community holds 30% in the project and 12.3% in Southern Palladium as well.
Imbalie Beauty has released results for the year ended February 2022. Revenue was almost identical to the prior year and the headline loss per share improved by 83% (but was still a loss). A loan to survive Covid was provided by Absa but resulted in the company selling most of its assets, a process that was finalised in January 2022. Imbalie is going to change its name to Buka Investments and will be repositioning itself in the fashion industry.
It looks like Silverbridge Holdings may be sticking around on the JSE. Although there is an offer underway by ROX Equity Partners for R2.00 per share, the offer condition of a delisting has been dropped. This means that the company will stay listed provided not all shareholders accept the offer (as it then wouldn’t meet the spread requirements for a listed company with a minimum number of shareholders.
Texton Property Fund has a 50% held joint venture called Inception Reading, which has agreed to sell Broad Street Mall for GBP57.5 million (around R1.1 billion). The deal should close in June. Texton hasn’t given an indication at this stage what it will use the cash for.
The Chairman of the Board of York Timbers has resigned after 15 years in the role. He would’ve seen many things over that period, including the recent shareholder activism. A successor will be announced in due course.
Mahube Infrastructure is restructuring its wholly-owned subsidiary Mahube Capital Fund. A Black Fund Manager (as defined) will be created, which will then attempt to raise up to R2 billion for Mahube by the end of 2025. There are many more details in the announcement, so you should read it on the Mahube website if you are a shareholder.
In May, a consortium comprising Remgro and MSC Mediterranean Shipping Company proposed to the Board of Mediclinic International a possible cash offer to acquire the Mediclinic shares not already held by Remgro at a price of 463 pence (R88,43) per share. The proposal was rejected by the Board of Directors as it believed that the offer significantly undervalued Mediclinic and its future prospects. Remgro, which currently holds a 44.6% stake in Mediclinic, released an announcement this week following press speculation saying that following the rejection of the proposal the Consortium was considering its position and may make a further offer but reserved the right to do so at a lower value or on less favourable terms.
AfroCentric Investment subsidiary, AfroCentric Health, has acquired the remaining 49% stake in AfroCentric Distribution Services from WAD. The decision to bring the specialised marketing and sales company in-house stems from the critical role it performs in the Group’s growth strategy for medical schemes and the new generation products. The stake will be acquired for an aggregate purchase consideration of R75 million.
Heriot Properties, a wholly owned subsidiary of Heriot REIT, together with concert parties Heriot Investments and Reya Gola Investments, have made a general offer to Safari Investment RSA shareholders to acquire Safari shares. Together the concert parties hold 33.1% stake in Safari and are offering shareholders R5.60 per share. The Takeover Regulation Panel has confirmed that should acceptance exceed the 35% threshold, as a result of the general offer, the parties are not required to make a mandatory offer to Safari shareholders.
Santam has acquired the remaining 49% stake in JaSure, an app-based insurance provider for an undisclosed sum. JaSure has a younger market reach which Santam intends to leverage with its efficiencies and wider distribution capability.
The announcement in April by ROX Equity Partners of its intention to acquire all the issued shares in Silverbridge at R2,00 per share, has been amended to waiver certain of the offer conditions following the release of the independent expert report which concluded that the offer was unfair but reasonable. Delisting of the company will not be pursued and following the implementation of the general offer, the shares will remain listed on the JSE.
The mandatory offer by MCC Contracts and African Phoenix to acquire the remaining 62.23% of the shares in enX at an offer consideration of R5.60 per share closed on June 3, 2022. Only 103,371 enX shares were tendered representing 0.06% of the issued share capital. Following the transaction, the offerors will collectively hold 37.83% of the listed company.
Unlisted Companies
Crossfin Technology, a South African fintech group, has acquired a significant stake in payments and technology company Vantage Africa for an undisclosed sum. Trading as VantagePay, the cloud-based platform provides payment solutions to address the massive latent demand for access to trusted financial services in Africa.
Sonnedix Power, a global independent power producer, has disposed of its South African solar business which owns a 60% interest in the 75MW solar farm known as the Prieska Project in the Northern Cape. Financial details of the disposal to pan-African BTE Renewables were not disclosed.
Franc, a local fintech app, has raised R8 million in a seed extension round led by 4DX Ventures and has announced a B2B offering Franc Business, a low cost and easy way to invest app. The funds will, in part, fund this initiative.
Cape Town venture capital firm HAVAÍC has invested US$400,000 in Nigerian multi-channel retail company ShopEX. The retailer mobilises a combination of traditional and digital channels to market, sell and distribute successful and global brands in Nigeria and other African markets. The capital injection will allow ShopEX to scale its presence into new markets.
MFS Africa, a pan-African digital payment company, headquartered in Johannesburg, has, for an undisclosed sum, acquired US Global Technology Partners (GTP) in a deal which will scale the business to the next growth stage; widening its offering to Africa’s gig economy, the business travel market and millions of individuals through card credentials linked to mobile money wallets for secure online purchases. In addition, the deal will be used by MFS to leverage off GTP’s presence in the US to expand its activities in North America.
Tongaat Hulett’s recapitalisation bid suffered a setback this week with the Takeover Regulation Panel (TRP) retracting the exemption given for Tongaat to make a mandatory offer to shareholders. In mid-January the company announced its intention to raise R4 billion via a rights issue to reduce its massive debt. The transaction was to be underwritten by major shareholder Magister Investments and would likely have pushed its stake above the 35% threshold, triggering a mandatory offer to minorities. The waiver of the mandatory offer was a condition precedent to the Magister deal. Following an investigation by the TRP after a complaint, the changed ruling means the company/Magister would need to be able to acquire the entire company.
Oasis Crescent has issued a total of 725,159 new units in terms of its scrip distribution alternative amounting to R18,1 million.
Another miner has announced its intention to take a secondary listing on A2X, with Impala Platinum set to list on June 13, 2022.
The JSE welcomed the inward bound listing of Southern Palladium on June 8, 2022, after an initial delay. The company, which has also listed on the ASX, raised A$19 million in an initial public offering (IPO) which closed on May 6. The company floated 89.75 million ordinary shares of which 39.63 million will move onto the SA register. The share price closed its first day of trade on the JSE at R25,00 per share. Towards the end of the month, June 27, CA Sales will list 461,432,502 ordinary shares on the Main Board in the Diversified Retailers sector. The company will delist from the CTSE on June 24.
Lewis has repurchased 4,326,696 of its own ordinary shares, being 6.6% of its issued share capital at the onset of the repurchase programme. The shares were repurchased as price ranging from R42.69 to R52.00 for an aggregate R215,8 million.
A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:
This week British American Tobacco repurchased 2,110,000 shares for a total of £75,19 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 3,441,117 shares for a total consideration of £18,2 million in terms of its existing buyback programme which is expected to end in August 2022.
This week two companies issued profit warnings. The companies were: Multichoice and Nictus.
Three companies issued or withdrew cautionary notices to shareholders this week. The companies were: Hulamin, Safari Investments RSA and Nutritional Holdings.
Centum Investment Company has entered into a binding agreement with Access Bank for the proposed purchase by Access Bank of Centum’s entire 83.4% equity stake in Sidian Bank for KES4,3 billion. In due course, Sidian will be merged with Access Bank’s subsidiary in Kenya. The transaction is subject to regulatory approvals in Nigeria and Kenya.
Montage Gold, the Canadian precious metals exploration and development company, is to acquire 100% interest in the Mankono-Sissédougou Joint Venture Project in Côte d’Ivoire. The deal, with Barrick and Endeavour Mining, is for a total purchase consideration of C$30 million involving cash and shares.
Swiss-based Holcim’s subsidiary Associated International Cement is to dispose of its 76.45% stake in Lafarge Cement Zimbabwe to resources firm Fossil Mines for an undisclosed sum.
Kuvimba Mining House, Zimbabwe’s state mining vehicle, is to acquire the 50% shareholding in Great Dyke Investments from Afromet JSC. Financial details were undisclosed.
Proparco, a development finance institution and the private sector financing arm of French AFD Group, is to make an equity investment of US$10 million into MUA, the SEM-listed insurer. The investment backs the Mauritian insurer’s regional growth ambitions by further strengthening its financial capacity to improve insurance overage and increase market share. MUA has operations in Mauritius, Kenya, Uganda, Rwanda, Tanzania and Seychelles.
GOMYCODE, a Tunisia-based edtech startup, has raised US$8 million in a Series A round led by Proparco and AfricaInvest. The funds will be used to scale tech education across the MEA region.
Nigerian multi-channel retail company ShopEX has received a US$400,000 investment from South African venture capital firm HAVAÍC. The retailer mobilises a combination of traditional and digital channels to market, sell and distribute successful and global brands in Nigeria and other African markets. The capital injection will allow ShopEX to scale its presence into new markets.
SparePap, a Kenyan digital after sales marketplace, has secured funding from Mobility 54, Toyota Tsusho Corporation’s venture capital arm. The app provides automobile owners with vetted, competent, and trusted mechanics on demand and the ability to purchase replacement parts.
Egypt-based fintech platform ADVA has raised an undisclosed sum in a seed round from Sawari Ventures. The six figure investment will be used to expand its product offering which provides customers with services in health, education and insurance among others.
Insurtech startup Nice Deer has raised US$1 million in a pre-seed funding round led by DisrupTech Ventures. The platform has developed a comprehensive integrated digital ecosystem for the healthcare industry in Egypt, facilitating insurance and repayment of insurance claims between healthcare providers, health insurance companies and beneficiaries.
Klash, the Nigerian cross-border African commerce platform provider, has raised an additional US$2 million in a total seed fund round worth US$4,5 million. The proceeds will be used to expand into a further five African countries in 2022 and relaunch its consumer app – renamed KlashaCart, an app that allows consumers to shop from participating international merchants online and in African currencies.
Nigerian digital lending platform Indicina, has raised US$3 million in a round led by Target Global with participation from Greycroft and RV Ventures. Indicina uses data to determine the financial status and potential loan eligibility of potential borrowers. The funds will be used to accelerate expansion into other African markets and develop new products for consumer credit recommendations.
WafR, a Morocco-based fintech and rewards startup, has raised US$455,000 in a funding round supported by Launch Africa Ventures, First Circle Capital and WeLoveBuzz among others. The application enables retail brands to broadcast smart promotions to retailers. The funds will be used to increase its network of retailers and expand its current team.
Over the last few years, amendments to the Competition Act which introduce national security considerations for foreign acquisitions have been pending enactment. Although there is no exact indication of when these amendments will come into effect, we are likely to see some movement on this front in 2022.
South Africa receives the largest amount of foreign direct investment (FDI) on the continent, followed by Morocco and Nigeria. Although South Africa saw a decline on FDI in 2020 (in line with the decline of FDI in the broader continent), there was an uptick in 2021, led by the financial services, technology, online retail and healthcare industries. The increase is likely to be sustained in 2022, with additional potential opportunities in renewable energy, agriculture and education sectors.
In line with the growing global trend towards protectionism, South Africa plans to introduce the long-awaited national security provisions by way of amendment to the Competition Act (in terms of section 18A) (FDI Amendments). Although the exact timing remains unclear, there is an expectation that these amendments could be enacted in 2022, and that they will result in FDI mergers facing an additional regulatory hurdle. Here is what FDI investors will need to know…
At a high level, the FDI Amendments introduce a mandatory regime which will consider FDI mergers from a national security perspective. The national security interests will be considered by a committee to be established by the President of South Africa (President), comprising cabinet members and other public officials. The mandate of the committee will be to determine whether the implementation of a merger involving a foreign acquiring firm may have an adverse effect on the national security interests of South Africa. Due to its mandate, the committee is likely to include the Ministers of Defence; Health; Agriculture and Land Reform; and Trade, Industry and Competition. The committee will be empowered to prohibit or impose conditions on mergers which may have an adverse effect on South Africa’s identified national security interests.
Although the FDI Amendments will involve an additional review process for FDI mergers, they do not expand the scope or nature of FDI mergers to be scrutinised, as the committee will only consider those mergers that meet the same thresholds already applicable under the Competition Act. Therefore, the committee will only have jurisdiction to assess a merger if the acquiring firm is a foreign entity, the merger relates to one or more national security interests, and satisfies the applicable financial thresholds for notifiable mergers. Applications for FDI approvals will need to be filed at the same time as applications for competition approvals, and are likely to follow a similar timeframe (currently, the proposed review period for the committee is 60 business days – which is the same as the maximum review period for an intermediate merger). However, considering that the anticipated members of the committee are officials in other capacities, there is a concern around their capacity to reach decisions timeously.
National security and public interest considerations
The list of national security interests to be considered by the committee is yet to be published. However, the draft FDI Amendments list several factors that the President must consider in determining national security interests. These include South Africa’s defence capabilities and interests, the use of sensitive technology or know-how outside South Africa, the security of infrastructure, and the supply of critical goods and services. The President must also publish a list of the markets, industries, goods and services or regions in respect of which mergers involving foreign acquiring firms would require the approval of the committee.
As part of their substantive assessment of mergers, the South African competition authorities are already required to assess the impact of mergers on certain public interest factors. This involves an assessment of the effect a merger may have on (i) a particular industry or region, (ii) employment, (iii) the ability of small/black owned firms to compete, (iv) the ability of national industries to compete internationally, and (v) the promotion of a greater spread of ownership, in particular to increase the levels of ownership by historically disadvantaged persons (HDP) and/or workers.
Given the nature of the interests to be considered by the committee when assessing FDI mergers, there are likely to be overlaps with respect to the public interest factors currently considered by the competition authorities. A merger may be prohibited on public interest grounds, even if it does not have an anti-competitive effect in the relevant market. This has the impact of propelling the importance of public interest considerations in FDI mergers.
Transparency and accountability
The decisions of the committee may have serious consequences for FDI mergers across the board, as the FDI Amendments prohibit the South African competition authorities from approving a merger that has been prohibited by the committee.
It would, therefore, be important for parties to have an avenue of recourse against decisions made by the committee. However, the provisions relating to the committee are brief, and do not include any provisions that deal with the accountability of the committee. The only requirement is for the Minister of Trade, Industry and Competition to publish the committee’s decisions in the Government Gazette and inform the National Assembly of the decision (in appropriate detail, although not necessarily the committee’s reasons).
Notably, the FDI Amendments in their current proposed form also do not provide a dispute resolution mechanism. Arguably, a foreign investor could use the South African Promotion and Protection of Investments Act, which provides for a dispute resolution mechanism for foreign investors (essentially entailing international arbitration). This process could be used to challenge decisions of the committee (although this approach is yet to be tested). Unlike the South African competition authorities, the committee is not an independent body. The broad nature of the factors to be considered by the committee also leaves room for interpretation and disputes. Greater clarity in the drafting and accountability in decision making is critical if South Africa hopes to remain an attractive destination for FDI. In 2020, Nigeria passed investor friendly legislation and experienced an uptick in FDI deal activities, especially in the technology, financial technology, automotive and construction industries. As a continent, we need to ensure an investor friendly regulatory environment if we are to retain the continent’s already low share of FDI (at just 4% on a global scale), and even more so to attract greater FDI and increase the investor base beyond developmental financial institutions.
Considerations for merger parties
Public interest has been considered by many jurisdictions in the merger application process, including the United Kingdom, Russia and India and, therefore, should not be a foreign concept to FDI investors. While a global trend, the national security provisions will add another layer of regulation that an investor must contend with and creates a level of uncertainty across a large number of FDI mergers. In the current climate of stringent merger control regulation in South Africa, and even more so when the national security provisions come into effect, merger parties have to carefully assess the potential impact of transactions on public interest (e.g. employment, dilutions in HDP ownership), as well as the potential national security concerns. Depending on the nature of transactions and timing, merger parties may want to deal with these issues upfront as part of their application for merger approval. In global transactions with timing sensitivities, the South African competition authorities could also be consulted on whether ring-fencing arrangements are possible. Such arrangements are not specifically provided for and are generally considered by the competition authorities on a case-by-case basis.
It would also be prudent to anticipate the nature of conditions that may be imposed from a public interest (and going forward, national security) perspective, so that they are priced into transactions, and the economic rationale for transactions is assessed. As has been seen in recent merger approvals, the competition authorities often seek to impose conditions in pursuance of its public interest mandate. Conditions range from establishing employee ownership schemes, introducing HDP shareholders, to undertakings relating to local procurement and/or supply. In some transactions, it may even be preferable to negotiate conditions upfront, rather than to seek approval without conditions, particularly in transactions where onerous conditions are likely to be imposed. Although the right time to engage with the competition authorities depends on the circumstances of each case, parties may want to consider the possibility of more formal, proactive engagements early in the process. The South African competition authorities are generally receptive to such engagements with parties.
Ziyanda Ntshona and Burton Phillips are Partners and Lwazi Mthembu a Trainee Attorney | Webber Wentzel.
This article first appeared in DealMakers, SA’s quarterly M&A publication
Baker McKenzie’s newly launched Africa Competition Report provides a detailed analysis and overview of recent developments in competition law enforcement and competition policy in 32 African jurisdictions and regional bodies. The Report considers not only recent developments in competition law enforcement and competition policy in each of the highlighted jurisdictions, but also provides an overview of regulatory and legislative dynamics and challenges in selected markets.
According to the Report, 29 of the 32 surveyed African jurisdictions have national competition laws in place, while only two have no national competition laws, but are members of a regional competition law body. Countries where competition laws exist include Kenya, South Africa, Tunisia, Côte d’Ivoire, Tanzania, Egypt, Nigeria and Rwanda, while Ghana and Uganda do not have national competition law, although they are part of a regional competition body.
The Report outlines how competition authorities in Africa play an important role as champions, advocates and enforcers of competition policy across economies, and view competition policy as a key driver of economic growth. Although over the past two years, African competition regulators have actively engaged in efforts to address pandemic-related challenges, there has also been a general upward trend in competition policy enforcement across the continent. The upward trend in enforcement is highlighted by a number of significant recent developments in competition law regulation around the continent.
NOTABLE DEVELOPMENTS IN AFRICAN COMPETITION LAW
Algeria In Algeria, a new competition legislation is being considered. A first draft of the legislation is currently being reviewed by the Secretariat General of the Prime Ministry.
Angola The Competition Regulatory Authority in Angola conducted market inquiries in two sectors, namely telecommunications and petroleum products. Further merger filing fees were introduced by Executive Decree No. 32/21 of 1 February 2021.
Botswana During the 2020/21 financial year, the Botswana Competition and Consumer Authority carried out market inquiries (mainly focusing on cartelistic conduct) in the following sectors: abattoirs, construction, waste management, government supplies and animal feed. The Competition and Consumer Authority also expressed concerns in relation to pyramid schemes, with the Authority opening an investigation in collaboration with the Botswana Police Service. The price gouging of essential products during the pandemic was also on the agenda, with the Authority receiving numerous excessive pricing complaints in relation to basic food stuffs, healthcare products and hygiene products. The Authority cautioned suppliers and has maintained continuous price monitoring in relation to these products. Vehicle repair garages were also on the Authority’s radar in 2021. It handled 175 cases concerning the use of sub-standard parts or defective spare parts in vehicles brought in for repair and/or service, resistance of garages to effect warranty terms, and unclear pricing practices.
Furthermore, the Authority, in collaboration with the Organisation for Economic Cooperation and Development (OECD), is currently undertaking an impact assessment analysis of the legislative framework in the agricultural grains sector to determine the effectiveness of the legislative framework, focusing on pricing and import restrictions.
Cameroon Cameroon recently signed a Memorandum of Understanding with the United Kingdom, which sets out the arrangements for applying the effects of the economic partnership agreement from 1 January 2021.
Cape Verde In Cape Verde, it has been noted that competence on competition matters will be vested in the Ministry of Finance in the short to medium term, as there is currently no effective competition regulatory body.
COMESA There were various developments with regards to the COMESA in 2021. In February 2021, the COMESA Competition Commission issued a Practice Note in which it amended the interpretation of the term “operate”. Prior to this, a party “operated” in a COMESA Member State if it had turnover or assets in that Member State in excess of USD 5 million. This requirement has now been removed, effective 11 February 2021, and a party will “operate” in a COMESA Member State merely if it is active in it (without a minimum turnover or asset threshold). The impact of this will be to make it easier for a transaction to fall within the scope of the COMESA merger control regime.
The COMESA Commission has also recently issued Draft Guidelines on Fines and Penalties, Draft Guidelines on Settlement Procedures, and Draft Guidelines on Hearing Procedures.
In September 2021, the COMESA Commission issued its first penalty for failure to notify a transaction within the prescribed time periods, which penalty amounted to 0,05% of the parties’ combined turnover in the Common Market in the 2020 financial year. This was imposed in relation to the proposed acquisition by Helios Towers Limited of the shares of Madagascar Towers SA and Malawi Towers Limited.
In December 2021, the COMESA Commission imposed a fine for failure to comply with a commitment contained in a merger clearance decision.
The COMESA Commission also conducted eight investigations into restrictive business practices in 2021.
Egypt There were numerous recent developments in Egypt, including in November 2020, when the Competition Authority announced that the Egyptian Prime Ministry had approved the Prime Minister’s draft law amending certain provisions of the Egyptian Competition Law 3/2005. In February 2021, the Egyptian parliament’s Economic Affairs Committee started the discussions on the new amendments. The Competition Authority has also recently initiated market inquiries in relation to multiple sectors including healthcare, food, electronic and electrical appliances, as well as the automotive, real estate, media and petroleum sectors.
In April 2021, the Economic Court of Cairo issued a ruling in a criminal case brought against five individual poultry brokers by the Competition Authority in March 2020, for colluding to fix the price of chicken to the detriment of consumers and chicken breeders. The court fined each broker 30 million Egyptian pounds (approx. US$1,6 million) for agreeing to fix the price of a kilogram of chicken.
In July 2021, the Competition Authority initiated a criminal case against two companies who agreed to submit identical offers in one of the practices of the General Authority for Veterinary Services, in violation of Egyptian competition law.
The head of the Competition Authority announced plans for the creation of an Arab Competition Network to enhance cross-border cooperation between antitrust enforcers in the Middle East. The ACN would be the first to provide Arab competition authorities with an official platform to meet and discuss prominent issues and impending changes to antitrust law. The network would be run by the 22 members of the League of Arab States, which includes Egypt, Syria, Lebanon, Iraq, Jordan and Saudi Arabia, among others.
Eswatini In Eswatini, the Competition Commission published a Draft Competition Bill, 2020, which is intended to be presented to the Minister of Commerce, Industry and Trade. The object of the Draft Bill is to increase effectiveness, consistency, predictability and transparency in the enforcement and administration of competition law in Eswatini. It also aims to give effect to regional frameworks, such as COMESA Competition Regulations and international best practices. The Draft Bill has yet to be signed into law. In April 2021, the Competition Commission published guidelines on market definition, which adopt international best practices.
Ethiopia In Ethiopia, the Trade Competition and Consumer Protection Authority is working on regulations to provide guidance on the application of the Trade Competition and Consumer Protection Proclamation (No 813/2013). Proclamation No. 1263/2021, which is expected to be enacted and come into force in 2022, transfers the powers of the Trade Competition and Consumer Protection Authority to the Ministry of Trade and Regional Integration.
The Gambia The Ministry of Information in The Gambia is currently reviewing a Merger Commission, which will be effective in maintaining and encouraging competition in markets, to promote and ensure fair and free competition, and to protect the welfare and interests of consumers. The Competition Commission has initiated the following market studies: Hajj Market Study; Rice and Sugar Market Study; Liquefied Petroleum Gas Market Study; Cement Market Study; Tourism Market Study; Banking Market Study; and Vehicle Procurement Market Study.
Ghana In Ghana, a draft Competition and Fair Trade Practices Bill is before parliament for consideration.
Kenya The Competition of Authority in Kenya finalised its study into the regulated and unregulated credit markets in the country and issued its report in May 2021. The Authority further developed the Retail Trade Code of Practice 2021, in consultation with stakeholders in the retail sector, to address the abuse of buyer power issues arising from the sector. Also in 2021, the Competition Authority conducted a dawn raid in the steel industry and issued draft joint venture guidelines, to clarify the rules and filing requirements of joint venture arrangements.
Malawi Notable developments in Malawi include amendments to the Competition and Fair Trading Act, with the regulations having been proposed and submitted to the Ministry of Justice. Furthermore, the Competition and Fair Trading Commission has drafted new guidelines on various topics, including abuse of dominance and collusive conduct, exclusive dealing arrangements and resale price maintenance, market definition, discriminatory and tying conduct, and public interest, amongst others. These guidelines have been circulated to various stakeholders for comment, but have yet to be published. The Competition and Fair Trading Commission recently concluded a market inquiry into the funeral services market, and is currently conducting a market study on digital markets.
Mauritius The Competition Commission in Mauritius concluded a market study in the pharmaceutical sector on 8 June 2021.
Mozambique There were numerous developments in competition law in Mozambique in 2021, including that the Competition Regulatory Authority became operational in January 2021. Regulations on Merger Notification Forms were enacted by means of Resolution No. 1/2021 of 22 April 2021. The Regulations prescribe the different forms to be completed for merger notifications, as well as the details of the information and documentation required. Regulations on Filing Fees were enacted by means of Ministerial Diploma No. 77/2021 of 16 August 2021. Filing fees are currently set at 0.11% of the turnover of the parties in the previous year, up to a maximum of MZN 2,250,000 (approx. US$35,000). Amendments to the Competition Regulations were enacted by means of Decree No. 101/2021 of 31 December 2021.
Namibia A Competition Bill is in progress in Namibia, and the Competition Commission expects to submit the final version of the Competition Bill to the Ministry of Industrialisation and Trade by the end of June 2022.
Nigeria On 2 August 2021, Nigeria adopted the Merger Review (Amended) Regulations 2021, which set out new fees applicable for merger filings. The Federal Competition and Consumer Protection Commission launched and publicised an investigation into the alleged anticompetitive conduct of five companies in the shipping and freight forwarding industry in October 2021.
South Africa There were various developments in South Africa in 2021, including in May 2021, when the Competition Commission launched the Online Intermediation Platforms Market Inquiry, focusing on four broad online intermediation platforms and market dynamics that specifically affect business users – eCommerce marketplaces, online classified marketplaces, software app stores and intermediated services (such as accommodation, travel, transport and food delivery). The inquiry is ongoing, with a provisional report scheduled for release on 10 June 2022, and the final report scheduled for release in November 2022.
In April 2021, the Commission released its market inquiry reports on Land Based Public Transport. Furthermore, in April 2021, the Commission published its final report on an impact assessment study it conducted in relation to COVID-19. The report sets out the findings of the Competition Commission regarding the impact of the COVID-19 block exemptions and the enforcement work done by the Competition Commission during the pandemic. The Competition Commission’s fifth Essential Food Pricing Monitoring Report, which is released quarterly, focused on tracking the impact of the COVID-19 pandemic and consequent economic crisis on food markets.
In May 2021, the Commission issued, for comment, draft guidelines on Small Merger Notifications, which contain specific guidance applicable to the assessment of digital mergers.
Notably, 2021 was the year that the Commission prohibited a merger solely on public interest grounds, making it the first transaction to be prohibited on non-competitive grounds. Ultimately, however, the merger was conditionally approved before the Competition Tribunal.
In November 2021, the Commission released its Economic Concentration Report, which highlighted patterns of concentration and participation in the South African economy. The report includes details on the Commission’s power to launch market inquiries into highly concentrated industries, as well as its increased authority to impose structural remedies on businesses in these sectors.
In March 2022, the Commission issued Guidelines on Collaboration between Competitors on Localisation Initiatives, which are aimed at providing guidance to industry and government on how industry players may collaborate in identifying opportunities for localisation and implementing commitments related to localisation initiatives in a manner that does not raise competition concerns.
In March 2022, the Commission launched a market inquiry into the South African fresh produce market, which will examine whether there are any features in the fresh produce value chain which lessen, prevent or distort the competitiveness of the market.
The Commission concluded various settlement agreements with market players (e.g., grocery retailers and laboratories) to reduce the prices of goods and services.
Zimbabwe In March 2021, the Competition and Tariff Commission in Zimbabwe published draft guidelines on Horizontal Agreements for comment.
Lerisha Naidu is a Partner, Angelo Tzarevski an Associate Director and Sphesihle Nxumalo and Zareenah Rasool are Associates in the Competition & Antitrust Practice | Baker McKenzie Johannesburg
This article first appeared in DealMakers, SA’s quarterly M&A publication
Mr Price has released its results for the 52 weeks ended 2 April 2022. I know that this is an odd-sounding reporting period, but with retailers you need to remember that most of them report based on trading weeks rather than calendar years.
There’s another important nuance that you need to be aware of: because of the reporting calendar being based on weeks rather than calendar years, those retailers need to report a 53-week period every few years. Mr Price did this in FY21, which means you need to be careful when comparing FY22 to FY21 because the prior period has an extra week of trading.
To make it possible to do meaningful year-on-year comparison, retailers typically give commentary on a “comparable basis” where they only focus on the first 52 weeks of the comparable year.
I appreciate that these aren’t the most exciting concepts in the world, but you can’t properly understand retail results without knowing about this. Onward to the numbers!
Mr Price is a proper business
On a comparable basis (and now you know what that means), headline earnings per share (HEPS) grew by 25.9%. If you don’t adjust for the extra trading week, the growth rate is 20.1%. This is why it is so important to understand these periods.
One of the things you want to see in a retailer is growing market share, which Mr Price achieved with 140 basis points growth. Another important metric to look out for is operating margin, which has increased to 17.7%.
It’s worth highlighting that online sales grew by 48.2% and contributed 2.9% of total sales. This is much lower than we see in markets like the UK, which creates a strong argument that South Africa’s online shopping channel still has plenty of runway.
Mr Price has been on the acquisition trail, with Power Fashion (1 April 2021) and Yuppiechef (1 August 2021) both included in this result and described as being “earnings accretive” – there’s a difference between being earnings accretive and offering attractive returns on capital though. Investors will be keeping an eye on these acquisitions, as Mr Price did pay top dollar for them. Or top rand, even.
Mr Price is retaining a portion of earnings for future growth, as is common in listed companies. The final dividend is up 25.9% and the pay-out ratio of 63% has been maintained.
A closer look at the numbers
Revenue increased by 25.9% on a comparable basis and 14.1% using comparable stores, which is strong like-for-like growth. Other income grew by 37.5% but this included a once-off SASRIA claim of R296.1 million related to the civil unrest. A business interruption claim is still under assessment and should be finalised in the new financial year.
Here’s the most important metric for me: on a two-year basis and excluding acquisitions, sales grew by 12.5%. Consumers have shifted to value clothing in a time of economic pressure and Mr Price has been waiting with open arms.
Cash sales are 86.1% of the group total but it should be noted that Power Fashion and Yuppiechef are entirely cash based. If you exclude them, cash sales grew 14.3% and credit sales grew 23.6%, with account applications up by 54%. Mr Price notes that the account approval rate of 33.1% remains well within risk tolerance.
Selling price inflation was 5.5% excluding Power Fashion. Including that acquisition totally breaks the internal inflation number as the items are at a much lower average price point. Volumes were up 10% excluding acquisitions.
Moving on to margins, gross profit margin decreased by 150bps to 41%. There were some once-offs in the numbers, with Mr Price noting that on a comparable basis gross margin was in line with the previous period at 42.4%.
Total expenses grew 16.4%, a number well in excess of inflation. That is to be expected when a footprint is growing, as it includes new stores and inflationary costs on the old cost base. The important point is that sales growth is higher than expenses growth, so operating margins have expanded.
This is called “operating leverage” – the joy of revenues growing faster than inflation on fixed store costs.
When it comes to working capital, inventory increased by 6.1% excluding acquisitions and higher goods in transit. This is reasonable in the context of group growth and global pressures.
Capital expenditure was R734 million this year and is expected to be R900 million next year, including 180 – 200 new stores. With return on equity of 28.9% and return on assets of 23.2%, shareholders won’t complain about the group investing capital in growth.
Segments
The Apparel segment achieved record market share and saw operating profit increase by 33.7%, with operating margin up 40bps to 18.9%.
The Homeware segment achieved sales growth of 15.6% which is really impressive vs. a strong base. Operating margin did come under some pressure, down from a record 21.3% to 20.6%, a decrease of 70bps.
The Telecoms segment grew revenue by 34.4% to R1.2 billion. This is still a small contributor (Apparel is R19.5 billion for example) but growth prospects are exciting.
The Financial Services segment grew revenue by 6.2%, including insurance premium income up by 6.4%. The impairment provision adequately covers net bad debts.
Growth prospects
Mr Price is on a rampage. It opened 130 new stores this year, a much higher rate of growth than the 5-year average of 80 new stores a year. Power Fashion has increased its footprint by 20.6% since being acquired, which is quite something considering most people had never even heard of the group before Mr Price bought it.
Surprisingly, openings were lower than Mr Price had hoped, as the group had to direct a lot of its energy towards reopening looted stores.
Beyond bricks and mortar, Mr Price is doing very well in the online space. Online traffic market share is second only to Takealot among pure-play retailers and social media followers grew by double digits. The Mr Price mobile app is the highest ranked South African fashion app on Google Play, with usage up 27.3%.
Of the R4.6 billion available in cash, R3.3 billion is needed for the Studio 88 acquisition once regulatory approvals have been achieved. This will cap off a strong period of acquisitive growth for Mr Price, so the management team will need to focus on integrating the businesses and delivering the strategies.
The important thing is that there isn’t any debt on the balance sheet, so Mr Price isn’t under pressure to service payments to banks.
Am I trading it?
The share price is down around 2.5% this year and is trading at similar levels to May 2021. As great at these numbers look, it all comes down to what was priced into the stock. I must say, I’m tempted to punt at a move from R200 to R220.
There is an important point in the results presentation that gives some balance to all the good news: “May 2022 sales growth below expectations – details to follow at next trading update” – this means that inflation is starting to bite.
Decisions, decisions.
As always, you need to do your own research and arrive at your own conclusion!
Your daily market overview delivered in bite-sized bullets:
Spar Group released interim earnings for the six months to March 2022. This is the one I’ve been waiting for, as I took a rather speculative position in the company in the hopes of a strong result. In some places, I got it right. There were some negative surprises though. At group level, turnover was up 5.2%, operating profit increased by 7.1% and diluted headline earnings per share (HEPS) was uninspiring with 3.7% growth. I’ve written a feature article on this result, including details on why I took the long position and how it performed in relation to that. Spoiler alert: the trade didn’t work out.
Sanlam has released an operational update for the four months to April 2022 that includes some rather scary numbers. The floods have caused great pain in the insurance business, causing a drop in headline earnings for this short period of 31%! I cover this in more detail in this feature article.
Etion Limited intends to sell 100% of the shares in Etion Create to Reunert, a listed electronics business. This is such a large deal for Etion that it triggers the need for a special resolution (75% approval), as it is the “greater part of the assets or undertaking of the company” – simply, this is triggered under s112 of the Companies Act when over 50% of the group’s assets are being sold. Etion Create specialises in customised electronic subsystems, so the fit with Reunert is clear. Etion is following a value unlock strategy with great success, as it has historically traded at a significant discount to the underlying intrinsic value. The purchase price is around R197 million and isn’t allowed to exceed R210 million after all adjustments. The net assets of Etion Create as at 30 September 2021 were R159.4 million. Etion intends to distribute the net proceeds to shareholders. There are many steps to be completed in this deal and Etion shareholders can expect to receive a circular on approximately 1 August 2022 with full details.
Afrocentric holds a 71.3% stake in AfroCentric Health. That subsidiary has entered into an agreement to acquire the remaining 49% in AfroCentric Distribution Services for R75 million. This is a small related party transaction under the JSE listings requirements. This is part of AfroCentric’s strategy to build distribution capability to market the new generation products of AfroCentric and its other partners. In the six months to December 2021, this business generated profit before tax of R11.6 million. As this is a small related party deal, shareholders don’t need to vote on it but an independent expert does need to sign off that the deal is fair and reasonable. Mazars Corporate Finance has been appointed to provide an opinion.
The JSE probably had to take a lot of dust off the podium and screens for a new listing event, but today Southern Palladium celebrated its dual listing on the Australian Stock Exchange (ASX) and the JSE. With a successful initial public offering (IPO) that raised $19 million, the company will focus on developing its Bengwenyama PGM project in the Bushveld Complex. Southern Palladium holds a 70% stake in the project.
If you are a shareholder in MAS Real Estate, you should note that the company has released the circular for its proposed acquisition of six commercial retail centres in Romania. The counterparty happens to be the fund’s joint venture partner in the country, so this is a related party deal which means there are special JSE rules. The circular also deals with an extension to the joint venture. You can find the circular at this link.
I don’t pay a lot of attention to shareholding changes related to local funds, as they trim and increase their positions regularly and are often restricted to the South African market. Global investment giant BlackRock has no such restrictions, so it is notable that the fund has increased its stake in The Foschini Group to 5.375%.
If you are interested in Orion Minerals, then you can listen to a presentation at an investor conference in Australia at this link.
If you’ve always wondered how bank balance sheets are managed, or if you simply feel the desire to stare at many numbers on your screen, you could check out Sasfin’s Pillar III Risk Management Report.
Spar’s slogan these days is “Under the Tree” – I had to Google it to check. Gone are the days of “Good for You”, which may be apt considering recent share price performance.
Spar has traded in a channel for years. Check out this chart and take note of how the stock has swung up and down in a clearly visible range:
This means that Spar has been a poor choice in a buy and hold strategy. Before you get carried away in thinking Shoprite and Pick n Pay were any different, here’s a 5-year relative performance chart of all three of them:
Clearly, this isn’t a sector where you can buy and forget. For fans of swing trading and pairs trading (long one and short the other), the grocery retail sector does offer plenty of fun. I think part of the reason is that this sector is hyper-competitive, so success at one retailer is often at the expense of another.
I took a punt on Spar ahead of the latest earnings. The stock sold off sharply at the end of 2021 based on issues in integrating the acquired business in Poland and the guidance given to the market that the dividend would be significantly lower for the next couple of years. This is to give the balance sheet breathing room for a large SAP implementation project.
To be fair to Spar, substantial investment in IT infrastructure is part of what drove Shoprite’s recent run of form. The process is painful but it should be worth it.
I bought after the big sell-off and my long thesis was based on the following expectations for this result:
Poland to be doing better, not least of all with so many Ukrainians to feed (sad but true)
The food service businesses in Ireland and England to perform well as restaurants have recovered
Local grocery retail to lose further ground to Shoprite and Pick n Pay but nothing major
TOPS to put in a huge recovery performance as people were allowed to buy alcohol and have braais
Build it to experience slightly negative turnover growth in line with the broader pressures in DIY and building materials vs. a really strong base year
I didn’t have a firm view on Switzerland but didn’t expect it to cause fireworks in either direction (sigh)
So, what happened?
I’ll start with Poland, where turnover was +6.5% in local currency (a good result). Retailer loyalty (the percentage of goods that franchisees acquire from Spar group as the wholesaler) only increased marginally to 31%, which isn’t great. The issue seems to be in the south of the country. Expenses were -3.3% which is really good as corporate stores were closed and the footprint rationalised. There’s still a loss of R187.5 million but it’s a lot better than it used to be. So, expectations partially met.
Moving on to Ireland and Southwest England, turnover +8.3% in local currency so that ties in with what I hoped to see. Here’s the bad news: operating expenses jumped by +16.9%, driven by labour shortages and distribution costs. This caused a nasty impact on margins that I didn’t see coming.
I’ll deal with Switzerland before bringing it home. Turnover was -1.6% in local currency and operating expenses increased by 10% in local currency, so this business’ margins also got hammered as operating profit fell by 13.7%. Ouch.
The improvements in Poland were effectively offset by the pressures in the other businesses. This is a major disappointment.
Within South Africa, TOPS shot the lights out with turnover +41.6%. TOPS revenue of R5.5 billion in this period is much higher than R4 billion in the six months to March 2019 before the world became a less enjoyable place.
Build it did well I think to achieve turnover growth of +1.4%. Inflation was +5.8% so volume growth was approximately -4.4% (assuming no major change to the footprint).
Core grocery turnover was +4.6%. Price inflation for the SA business as a whole was 5%, so it is likely that volumes dropped slightly in grocery. As a wholesaler, Spar runs at much tighter margins than Shoprite and Pick n Pay, so the impact of fuel cost increases etc. have to be passed on to franchisees. It’s worth noting that whilst employee costs only increased by 3%, fuel jumped by 40% and the period ended March only includes a few weeks of the petrol price jumps we have suffered with. Watch out for this in the next period.
Spar’s private label turnover was only +4.1%, with riots severely impacting major suppliers and thus Spar’s range of house brands. This is an important source of gross margin uplift and I would hope to see this tracking ahead of revenue growth in future.
My idea hasn’t worked out
By the time you roll this up to group level, turnover was +5.2% and operating profit was +7.1%. An unfavourable tax contributed to profit after tax +4.1% and headline earnings per share (HEPS) +3.5%.
It’s also very important to note that HEPS of 642.6 cents is much higher than the interim dividend of 175 cents per share. Spar is retaining cash for the R1.8 billion SAP implementation. The interim dividend is 37.5% lower than the prior year.
If we simply double the interim dividend for the purposes of working out a forward yield, we have a yield of around 2.4% at the current share price. The risk for investors is the share price dropping to around R125, which is where support is found at a share price level going back to 2015!
The worry for me is that there’s also a fundamental argument that the share price could get to R125. Investors in a rising yield environment may not have the patience required to sit on the stock at this dividend yield and the share price may drift lower as a result.
I bought Spar with a swing trading outlook and swings don’t always go in the direction you want them to. If they did, everyone would be a stock market millionaire!
The share price jumped in the opening auction and then traded down rather quickly, eventually closing 0.8% lower for the day.
Having considered the reasons why I bought the stock and what the outlook is from here, including critical macroeconomic considerations like inflation, I’m now looking to exit my position.
Around a week ago, Santam released an operational update for the four months to April 2022, which I wrote a feature article on. Sanlam has now done the same, giving us insights into the mothership.
Sanlam is a genuinely impressive business. If you have a look at the dividend history of the company, this is a very good example of a business that you can buy and forget about. The share price isn’t going to shoot the lights out, but it should give decent returns over an extended period with a significant dividend yield. Having said that, the last few months have been really challenging for the group.
Sanlam is taking a big step in Africa with the Allianz deal. I wrote about the deal in detail in early May, which you can find here. As a quick synopsis, Sanlam wants to combine its African operations with those of Allianz, creating a vast footprint on the continent. Sanlam would hold 60% of the joint venture, which means it would effectively be taking control of Allianz’s assets. This is a significant deal.
The group has positioned itself firmly as an emerging markets business, with only a focused international asset management business remaining in the UK.
Strategically, the story is great. The latest earnings are an unfortunate reminder of the risks faces by insurance groups.
As a sign of the times, Sanlam has significantly increased its buffer of discretionary capital. This means that more money is being kept in reserve, a direct result of ongoing market pressures and uncertainties. Discretionary capital increased from R2.9 billion on 31 December 2021 to R6.5 billion on 30 April 2022, including GBP153 million in proceeds from the UK asset sales.
The downside of the increased buffer is that it negatively impacts returns to shareholders. The nature of a buffer is that it would be invested conservatively, which doesn’t provide equity-level returns to Sanlam investors.
The net result from financial services has decreased by 7%. Digging deeper into this, we find that the Life Insurance business performed well, up 14% thanks to lower Covid-related mortality claims. The Investment Management business enjoyed higher average assets under management than a year ago, as inflows throughout 2021 were strong.
Earnings in the General Insurance business fell by a whopping 62%, a direct result of the catastrophe claims and lower returns on insurance funds. As insurance reserves are invested in the market, buying a business like Sanlam means you are taking exposure to the rest of the equity market as well.
In terms of new business volumes, Life Insurance was a solid contributor with volumes up 8%. General Insurance volumes were up 4%. Investment flows were down by 8% though, with Sanlam pointing out the high 2021 base. The net margin on new business declined from 2.82% in 2021 to 2.34%, mainly due to product mix changes.
Group net cash inflows of R26.7 billion were down by 5% because of the lower investment flows.
The effect on net earnings of a weak result from financial services was magnified by group project expenses. It’s never pretty when overheads are growing quickly and the underlying business has had a tough time. The impact on headline earnings is substantial, with a decrease of 31%!
With a drop in the share price of around 1.5% by late afternoon trading, it seems to have been mostly priced in. This year, the share price is slightly up.
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