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Ghost Bites Vol 59 (22)

The Finance Ghost
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Ghost Bites Vol 59 (22)

Corporate finance corner (M&A / capital raises)

  • Vukile Property Fund is acquiring the Pan Africa Shopping Centre in Wynberg, Johannesburg. The centre serves the market in Alexandra township and has Boxer as its anchor tenant among the 60 shops in the mall. The fund’s focus in South Africa is on mid- to low-LSM shopping centres, so this mall fits that description. The acquisition will be funded by existing resources, so this won’t impact the loan-to-value ratio of 43%. A phase 2 extension of the shopping centre is being planned and demand from new tenants is strong. The sellers include Atterbury Property, which holds a stake of nearly 51% in the property. The structure of the deal is interesting, with Vukile acquiring phase 1 for nearly R415 million now and phase 2 for just over R254 million only once completed, which is envisaged to be the case in April 2024. The price for phase 2 has been estimated based on a capitalisation rate of 9.25%, which means taking the annual net operating income (NOI) and dividing it by 9.25%. The price for phase 2 may differ based on actual NOI once the development is complete. This is a category 2 transaction under JSE rules, which means shareholders are made aware of the detailed terms but aren’t asked to vote on the deal.
  • DRA Global has agreed to sell its Australian maintenance and construction business (G&S) for $8 million. This unfortunately leads to an impairment (primarily to goodwill) of between $17 million and $20 million in DRA’s income statement. The company has also withdrawn its underlying EBIT guidance for FY22. G&S is currently loss-making and contributed 20% of group revenue for the year ended December 2021.
  • Orion Minerals is trying its best to raise capital to develop its portfolio of base metal assets in the Northern Cape. As market conditions have deteriorated this year, major investors asked for more time to make a final decision. In the world of dealmaking, “more time” is always the enemy as it increases the chances of cold feet. The company has also invited eligible shareholders to apply for parcels of shares with a minimum value of $2,000 and a maximum value of $30,000. Orion has announced an extension of the deadline for that capital raise by one week to 12 August. If you want more information, refer to the company booklet here.
  • Heriot REIT is in the process of making an offer to the shareholders of Safari Investments. The company has been engaging with Safari and the Takeover Regulation Panel (TRP) regarding the commercial terms of the offer. The TRP has given Heriot as extension until 12 August to post the offer circular.
  • Emira is in the process of making an offer for 100% of the shares in Transcend Residential Property Fund. The Takeover Regulation Panel (TRP) has granted an extension for the distribution of the circular until 6 September.
  • Capital & Counties Properties and Shaftesbury are in the process of merging and both companies have now achieved shareholder approval for the transaction. The parties hope to complete the deal by the end of 2022.
  • Kibo Energy received £1 million worth of shares from Mast Energy Developments (MED) in partial settlement of a shareholder loan owing to a subsidiary of Kibo. After this share issue, the remaining loan is £1.27 million. The shares were issued at the 5-day VWAP plus a premium of 20%. After receiving these shares, Kibo owns 61.27% in MED.

Financial updates

  • Industrials REIT has released a trading update for the first quarter of the 2023 financial year. This covers the three months to June 2022. The fund is focused on UK multi-let industrial properties, which are still enjoying strong levels of demand. Demand for space continues to exceed supply in the UK, which has supported a 27% average increase in rent on new lettings and renewals this quarter. The fund has a low loan-to-value ratio of 26%, which means there is plenty of flexibility on the balance sheet to take advantage of opportunities. Looking more closely at the leases themselves, the average lease signed during the quarter was for 4.6 years and 62% of completed leases were contracted through the fund’s short-form digital “Smart Leases” – up from 53% in the previous quarter. 76% of leases included at least a 3% annual uplift in rent throughout the term of the lease. Portfolio occupancy is stable at 93.7%. The fund also highlights its asset management track record at Hillfoot Industrial Estate, with various improvements driving an anticipated yield on cost of over 26%. The market is cautious though and Industrials REIT is also playing it safer, with only two acquisitions in this quarter and one recent disposal after the quarter. The share price is down 23% this year but has jumped 10.6% in the past month.
  • EOH is trading below R5 per share, so I’m very happy that I got out of the way in the mid-R7s. The problem is that the company couldn’t sell its assets quickly enough to deal with the debt, so too much of the value ended up going to interest rather than capital. The company has now released a pre-close update for the financial year ending 31 July 2022. After the disposals of Sybrin and Information Services Group, EOH has R1.33 billion in gross debt (a R500 million bullet facility maturing in April 2025 and a R832 million bridge facility maturing in April 2023) and R540 million in gross cash. With interest rates on the rise, this is still a major problem. The proceeds from the sale of Network Solutions and Hymax SA will reduce the debt by another R100 million. On top of this, there are still two legacy issues – one relating to the Department of Water and Sanitation and the other with SARS in relation to a PAYE dispute. At group level, gross profit and EBITDA margins are expected to be consistent with the first half of the year. Looking deeper, NEXTEC had a tough second half of the year in its Infrastructure Solutions Business, with a significant negative impact from supply chain issues and delays in large projects, mainly in the public sector. The iOCO segment had a decent second half of the year in line with the first half, which isn’t ideal as the second half is normally stronger than the first half. Again, the hardware business was hit by supply chain disruptions. Despite best efforts with the existing businesses and a plan to save R60 million in costs, the reality is that EOH is going to need to do something more to fix the balance sheet. Here’s a clue of what might be coming:

“The board and management continue to assess the group’s capital raising options and expect to announce its capital raising plans alongside the release of its year end results.”

EOH pre-close update, 29 July
  • Astoria Investments has released quarterly results for the three months to June 2022. Over the past 12 months, the net asset value (NAV) per share increased from $61.49 to $69.23, an increase of 12.6%. Because of the sharp change in the exchange rate, the rand increase over that period is 28.5% and the latest NAV per share is R11.31. The share price closed 6.5% higher on the day of results at R5.70, an approximately 50% discount to NAV that is typical of investment holding companies. Investments in the portfolio include Outdoor Investment Holdings (owner of Safari & Outdoor and related businesses), RECM and Calibre preference shares (giving exposure to Goldrush), Trans Hex Group (a diamonds business), Leatt Corporation (protective equipment for motorsport and leisure activities), ISA Carstens (a tertiary education business focused on health and wellness) and Vehicle Care Group (financial and related services in the used vehicle trade). The Afrimat holding was sold to fund the purchase of shares in Leatt Corporation. Astoria has also withdrawn its cautionary announcement and given details of an investment of $5.5 million for 25.1% of International Mining and Dredging Holdings, a group involved in marine and offshore mining and exploration, including vessels focused on marine diamond mining off the coast of South Africa and Namibia. There are important synergies here with the Trans Hex business.
  • MTN Nigeria, a critical investment in the MTN Group, released results for the six months to June 2022. Mobile subscribers increased by 7.6%, active data users increased by 13.2% and fintech subscribers skyrocketed 87.3%, admittedly off a much smaller base than the other categories. Service revenue increased by 19.9% and EBITDA grew by 22.1%, so there was further expansion in the EBITDA margin to 53.6%. The cash followed the earnings, with the interim dividend up 23.1%. Here’s the interesting thing though: capital expenditure is up 67.1% due to the rollout of the 4G network. Because of such extensive investment, free cash flow fell by 14.3%. MTN expects this scenario to normalise in the second half, benefitting free cash flow for the remainder of the year. With net debt to EBITDA of only 0.6x, the balance sheet is strong enough to cope with this. MTN is down 19% this year despite having strong operating momentum.
  • Ellies Holdings has released results for the year ended 30 April. Revenue fell by 10.8% and EBITDA plummeted by 148.8% into a nasty loss of R37.1 million vs. a profit of R76 million in the comparable period. The headline loss per share is -7.13 cents vs. headline earnings per share of 9.19 cents last year. Needless to say, there’s no dividend. The group was unable to deliver R119 million worth of orders due to unavailability of stock, which is a function of a weak balance sheet rather than major supply chain problems. To put even more pressure on working capital, Ellies is diversifying its revenue away from MultiChoice to solar, smart homes and water infrastructure. At this stage, Ellies hopes to rectify the balance sheet by “decreasing costs while simultaneously growing revenues” – certainly easier said than done.
  • Luxe Holdings is one of the most obscure companies on the JSE, with a market cap of just over R62 million and a portfolio of jewellery businesses. There have been many changes to directors and the company has now acknowledged that some transactions in the prior periods were not accounted for in accordance with IFRS. There’s never a dull moment at Luxe. Considering the latest trading statement is based on previously published numbers rather than correct numbers, I’m not sure how much weight can really be placed on them. For what it’s worth, headline earnings per share (HEPS) is expected to be between 31.49 cents and 39.52 cents, a swing into the green from the prior period’s headline loss per share of -80.3 cents.
  • Investec released its Basel III disclosures as at 30 June. This is the banking regulatory framework that measures the amount of equity a bank needs to retain on its balance sheet. It is a highly complicated assessment that requires intricate calculations of risk-weighted assets as the basis of the calculation. Investec’s balance sheet is healthy, with a 14.6% or 14.2% common equity tier 1 ratio depending how you treat unappropriated profits. Our banking system is world-class and remains in good health.

Operational updates

  • Glencore released its production report for the first half of the financial year. The company notes that when the financial report comes out during the next week, it will reflect the benefit of “buoyant energy markets” – that’s obviously a great sign, especially as the production numbers themselves weren’t great. Five commodities improved year-on-year and five dropped. The big winners were cobalt (up 40%) and nickel (up 21%), with the losers being gold and silver (both down 21%). In terms of full year guidance, copper has been decreased by 5% based on geotechnical constraints at Katanga along with other operations challenges. The share price closed over 3.3% higher on the day.
  • MC Mining has released an update for the quarter ended June 2022. Although coal production at Uitkomst was 7% lower year-on-year, the important news is that around 22,170 tonnes of coal were at the Durban port at the end of June for export. This has been made possible by the sales and marketing agreement with Overlooked, announced by the company on 28 July. Total sales volumes were far lower than the comparable period, with high grade metallurgical coal and thermal coal volumes down by around 66%. The company notes that Uitkomst didn’t receive a single order this quarter from its largest customer. The shift to export is clearly a strategic necessity and could prove to be lucrative, as the export prices are much higher. This quarter also saw the appointment of a few new directors (excluding ex-finance minister Nhlanhla Nene) and the raising of equity and debt capital. The share price went parabolic recently, climbing over 170% in July before calming down from R3.80 per share to R2.88. That’s a drop of 24% in a casual reminder of the dangers of buying a parabolic chart (one that suddenly shoots to the moon).
  • Montauk Renewables has announced the filing of a provisional patent application for a new acid neutralisation technology. Before pregnant women with heartburn celebrate too quickly, I’m afraid that this relates to acidic condensate produced when wastewater is removed from the biogas conversion process. The company explains that the acid does expensive damage to processing facilities and equipment. The classic alternatives of two Rennies or some Gaviscon appear to be safe for now.
  • Mantengu Mining has been suspended from trading since July 2016. In the latest quarterly update, the company reminds the market that the acquisition of Langpan Mining Co has become unconditional and that the effective date was 27 July 2022. The company has applied to the JSE to have its suspension lifted.

Share buybacks and dividends

  • Adcorp Holdings repurchased 0.66% of its shares in issue between 15 July and 18 July for an aggregate value of nearly R4 million.

Notable shuffling of (expensive) chairs

  • Altron is looking for a new company secretary and has appointed a company (FluidRock Governance Group) to act as interim company secretary. The legislation makes it possible to appoint a company to this role rather than an individual, which is why there are companies that provide company secretarial services.
  • Similarly, York Timber has appointed Kilgetty Statutory Services as company secretary of the company. The difference is that this appointment isn’t on an interim basis.

Director dealings

  • Rudolf Fourie is retiring as the CEO of Raubex Group and has sold some shares as “part of his retirement planning” – nearly R72 million worth of shares! Some retirements are far more comfortable than others. He has retained a stake in the company worth over R62 million.

Unusual things

  • Marcel Golding has taken the executive reins at Rex Trueform at a time when the group is clearly planning more deals, with the most recent example being the acquisition of a property from Spear REIT. The latest news is that Geomer Managerial Services (GMS) has been appointed as an advisor to Rex Trueform. Golding is a director of and shareholder in Geomer, so this is a related party transaction. The agreement will run until either 1 July 2024 or the payment in aggregate of R14 million in advisory fees, whichever happens sooner. Valeo Capital has concluded that the terms of the agreement are fair. Of course, there’s a difference between “fair” and “acceptable to investors” in terms of governance.

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Ghost Bites Vol 58 (22)

The Finance Ghost
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0
Ghost Bites Vol 58 (22)

Corporate finance corner (M&A / capital raises)

  • Afrimat raised more money than expected, as R680 million is greater than the guidance given the prior day of a raise of 5% of the market cap. The company notes that there was strong demand for the shares, so it took advantage of this fact and gave its bank account a boost. The shares were issued at a 7.2% discount to the closing price the prior day, with investors suffering a 6.5% drop in the share price as a result. Remember, only institutional investors with deep pockets are approached to participate in an accelerated bookbuild.
  • Investec Property Fund announced in April that it had received unsolicited interest for its Pan-European Logistics platform. This kicked off a formal sales process which has now been stopped in its tracks by macroeconomic conditions. This is clearly not the best time to be selling anything in Europe. The good news is that the underlying portfolio has reduced vacancies and achieved positive reversions (lease renewals at a higher rate than the expired leases), so this is a pricing issue rather than a problem with the underlying business.
  • Castleview Property Fund has released the details of a reverse takeover and issue of shares for cash. This is a big transaction, including a number of Cape Town properties and a stake of over 50% in Emira Property Fund. This suddenly takes Castleview from an obscure fund with just two properties to being a mid-tier REIT with a net asset value of R5.5 billion. The seller of these assets is I Group Investments, which is effectively using the Castleview vehicle as a way to list these assets quickly.

Financial updates

  • ArcelorMittal South Africa released financial results for the six months ended June 2022. Although sales volumes fell by 8% and crude steel production fell by a whopping 30%, an increase in the realised steel price in dollars by 23% (driven by constrained supply in the wake of the Russia-Ukraine conflict) led to a strong result. Revenue grew by 19.3% and Headline Earnings Per Share (HEPS) grew by 21.5%. Net finance charges fell by 44% thanks to a 61% reduction in net debt, which clearly contributed to the bottom line result. EBITDA is a measure of profitability before interest charges (and a few other things) and this line grew by 11.6%, lower than revenue growth and thus reflecting a deterioration in EBITDA margin. The company’s raw material basket (iron ore, coking coal and scrap – collectively 43% of the cash cost per tonne) increased by 41% compared to a 39% increase in the international raw material basket. There was emphasis on the company’s Value Plan Programme which resulted in improvements worth R577 million in commercial-related initiatives as well as cost-based initiatives. In cyclical businesses like these, cost containment is critical. The 30% drop in crude steel production was blamed on external factors ranging from rail service issues (which led to the month-long shutdown of a Vanderbijlpark blast furnace as well as intermittent stops due to insufficient inventory in other furnaces) to loadshedding and floods. On top of all this, there was a two-week labour strike! Average capacity utilisation fell from 59% to 42%, with the company expecting a recovery to 76% after the Newcastle blast furnace mid-life campaign restoration. With economic pressures clearly visible, ArcelorMittal is focused on preserving the gains made in recent years and managing cash carefully in a downward cycle. Of course, the company will intensify its efforts under the Value Plan Programme to further reduce costs.
  • Sticking with mining, Anglo American Plc also released results for the six months ended June 2022. The balance sheet is looking incredibly healthy, with a net debt : annualised EBITDA ratio of just 0.3x. This has allowed the group to maintain its 40% payout policy, with a dividend of $1.24 per share. Still, HEPS came under pressure with a drop from $4.22 to $3.02. With a mining EBITDA margin of 52%, this is still a strong period for mining even if the year-on-year result doesn’t look great because of declining commodity prices and some production issues. The Quellaveco copper operation is an important driver of growth going forward, with the mine commissioned on time and on budget in this period. The share price is down nearly 13% this year.
  • Pepkor Holdings released a voluntary trading update for its third quarter ended 30 June 2022. The non-payment of the Social Relief of Distress grant had a significant negative impact on May and June, with the flooding April as another challenge. Still, 5.1% revenue growth for the quarter is hardly a failure. Like-for-like sales were flat in Pep and Ackermans, which talks to the point around the grants and the damage to the distribution centre in April, which is currently only operating at 50% capacity. It is expected to operate at 80% capacity in the next month, although sales have already suffered due to this inefficiency. The R1 billion estimated damage from the floods (including disruption of operations) is fully insured and the group expects to receive an interim payment before the end of September 2022. Importantly, the local credit business is healthy and collections are at satisfactory levels. The Brazilian Grupo Avenida business is flying, with sales up 51.6% in constant currency. This acquisition will contribute 2% to group revenue this year and 4% next year. Looking beyond clothes, the furniture, appliances and electronics segment (mainly JD Group) grew by 3.7% and the building materials segment fell by 1.9% in line with what we’ve seen from other players in that market. The FinTech segment (Flash) changed its product mix and experienced a decrease in revenue. The group also received R517 million as a further interim payment from SASRIA for the July civil unrest, after R500 million was received in the previous financial year. An R80 million interim insurance payment for business interruption was also received by the group during this quarter, taking the total insurance payments for business interruption to R383 million. Although the group acknowledges the risks of rising inflation, it is pleased with the reinstatement of the Social Relief of Distress grant which will greatly assist its lower-income customers. Trading during July was strong and exceeded expectations.
  • The Foschini Group (TFG) released a trading update for the first quarter of FY23 and the numbers look good, with retail turnover growth of 16.3%. TFG Africa grew by 11.2% (and 7.1% on a like-for-like basis), with Clothing up 13.1% and Homeware up 17.4%, confirming market share gains in both categories. The strategy to localise the supply chain continues to pay dividends here (literally). TFG Australia grew revenue by 15.7% in constant currency. TFG London did even better (with the recent update from competitor Truworths as another indication of better trading in the UK), with turnover up a whopping 39.9% in constant currency. At group level, online turnover grew 13.2% and now contributes 9.7% of total turnover, down from 10.2% in the comparable period. Looking segmentally, online turnover contributes 3.2% of TFG Africa’s turnover, 38.4% of TFG London’s turnover and 6.5% of TFG Australia’s turnover. TFG also confirmed that the effective date for the acquisition of Tapestry Home Brands is 1 August 2022, as all conditions have been met. Trading momentum is strong into July, with some silly numbers due to Covid disruptions in the base (e.g. TFG Australia is up 72.8% for the first three weeks of July).
  • Karooooo Limited has released results for its first quarter ended May 2022. The company experienced Cartrack subscriber growth of 13%, with far fewer net additions in this quarter than the comparable quarter. The South African subscriber base was flat vs. the preceding quarter due to numerous external challenges in the local market. Cadence is strong though, with more net additions just in June than in the entire quarter ended May! There seems to be some traction in Southeast Asia at long last, though there is a long way to go. Total revenue increased by 28% year-on-year and subscription revenue (the one that really matters – R709 million out of R801 million total revenue) increased by 17%. Encouragingly, profit for the period increased by 44% and earnings per share increased by 42%. Cash generated from operations also headed in the right way (up 17%) although there were more payment defaults in South Africa due to inflationary pressures and the KwaZulu-Natal floods. The share price has clawed its way back to R405 and I still hold a stake in the business, albeit a smaller one than before as I trimmed it a few months back.
  • MiX Telematics operates as a competitor to Karooooo and released results for the quarter ended June 2022. Subscription revenue was down slightly as reported and up 6.3% on a constant currency basis. Subscription revenue is 88.3% of total revenue. Gross margin fell from 65.5% to 62.0%. An increase in sales and marketing costs really hit net margin though, which fell from 12.4% to 6.9%. Significant capital expenditure (mainly in vehicle tracking devices) led to negative free cash flow.
  • Anheuser-Busch InBev released results for the second quarter of 2022. Revenue increased by 11.3% and total volumes rose by 3.4%. Own beer volumes were up 2.7% and non-beer volumes were up 8.2%. There was a 9.7% increase in revenue of global brands (Corona, Stella Artois and Budweiser) beyond their home markets.  Around 55% of revenue is now coming from the company’s B2B (Business-to-business) channels. Normalised EBITDA increased by 7.2%, with EBITDA margin falling by 127 basis points. Underlying earnings per share decreased from $0.75 in the comparable period to $0.73. Net debt to EBITDA improved slightly from 3.96x at the end of 2021 to 3.86x at the end of June 2022. The company expects EBITDA to grow between 4%- 8% in the medium term and revenue to grow at a higher rate, which is a roundabout way of saying that more margin pressures are coming. For the first six months of the financial year, HEPS increased by 15% to $1.43.
  • Hammerson Plc closed 7.9% higher after releasing interim results. Adjusted earnings jumped by a rather spectacular 154%, with Covid impacts in the base period as an obvious contributor to this. There are other good news stories unrelated to the pandemic though, like a 20% decrease in gross administration costs and a 25% decrease in net finance costs. Net debt was reduced by 6% through asset disposals. Footfall at the retail properties reached 90% of 2019 levels and sales were ahead of 2019 levels in the second quarter. On a proportionally consolidated basis, loan to value improved from 39% at the end of 2021 to 37% by June 2022. An interim dividend of 0.2 pence per share has been declared and the board hopes to offer an enhanced scrip dividend of 2.0 pence per share, subject to shareholder approval.
  • Royal Bafokeng Platinum released a trading statement for the six months ended June 2022. Although production increased by 4.5%, the drop in PGM prices and impact of inflation on operations led to a drop in HEPS of 58.1%. The market knows these things already as the commodity prices are observable at all times, so the share price hardly budged.
  • Mpact Limited put out a trading statement for the six months ended June and the share price responded by closing 4.6% higher. Exports were reduced in the containerboard business, leading to a favourable mix effect. The paper business was driven by industrial and quick service restaurant customers, with fruit exporters lower due to supply chain issues. The plastics business was a mixed bag across the various products. Mpact is in discussions to exit the Versapak business. Net debt increased significantly, driven by capital expenditure and working capital outflows. HEPS from continuing operations is expected to be between 22.8% and 27.0% higher, as the company successfully managed a tricky period of inflationary pressures.
  • Mediclinic has released a trading update and has reiterated its guidance for the full year. The happy news for everyone is that Covid-related admissions have obviously decreased substantially. Switzerland is expected to deliver “modest growth” in FY23 and EBITDA margin improvement to 16%. Southern Africa is expected to achieve revenue growth in the mid-single digit percentage range and an EBITDA margin improvement to nearly 20%. The Middle East is expected to delivery revenue growth in the mid-single digit percentage range and EBITDA improvement to around 15.5%.
  • Montauk Renewables will be releasing its second quarter results on 9th August, in case you’re so excited that you want to diarise it.

Operational updates

  • Orion Minerals released an operating update for the quarter ended June 2022. It was a very busy period, with $87 million in funding secured from Canadian company Triple Flag and the commencement of a three-tranche capital raising exercise with a target of $20 million. The trouble is that many parties who were set to participate in the capital raise have asked for “additional time to consider their involvement” given the broader economic challenges. The team is also figuring out how to bring the Prieska Project development schedule forward, even on a reduced scale if needed. The group also made significant progress with a strategic partnership in the battery materials sector, a growth area of note.
  • MC Mining released an unusual announcement in which it cautioned shareholders about the uncertainty in the business in the wake of recent share price increases. The price closed 15.8% lower, so I guess it did the job of dampening enthusiasm. The group is working on funding for the Makhado hard coking coal project, expected to be a combination of debt and equity. There are also ongoing performance improvement initiatives at Uitkomst, including the announcement of a sales and marketing agreement that gives the company access to an export allocation at coal ports. This is a related party transaction as the counterparty to the agreement is owned by a non-executive director of MC Mining.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • Life Healthcare has appointed two new non-executive directors to the board who both come with extensive global experience. The group is focused on its offshore footprint and these appointments are clearly in line with that strategy.
  • Pembury Lifestyle Group (currently suspended from trading) has appointed three new non-executive directors and a new Designated Advisor (required by each company listed on the AltX) as part of the plan to achieve a lifting of the suspension.

Director dealings

  • A director of a major subsidiary of Stefanutti Stocks has bought shares in the holding company worth nearly R84k.
  • A non-executive director of British American Tobacco has bought shares in the company (on the US market) worth around $150k.

Unusual things

  • PSG Konsult’s credit rating has been affirmed by GCR with a stable outlook.

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

Marylou Greig
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0
Who’s doing what this week in the South African M&A space?

Exchange Listed Companies

Castleview Property Fund has announced a R5 billion deal with the acquisition of a number of real estate assets including the Willowbridge retail properties, the K346 development properties, iRes residential properties, the entire share capital of Tensai Property Services and more than 50% of the issued shares in Emira Property Fund. If implemented, Castleview will issue shares in excess of 100% of the existing Castleview shares in issue, resulting in a reverse take-over of the company. In addition to the acquisitions and as part of the transaction, the company has announced the issue for cash of a further 51,91 million shares to the Womens Soccer League (34,9m shares) and Streepperdjie (17m shares) at R5.97 per share for a total R309,9 million.

Investec Property Fund has advised shareholders that the current global macroeconomic volatility has resulted in placing on hold its planned sale of the Pan-European Logistics portfolio.

RCL FOODS has acquired KZN-based Sunshine Bakery, a company indirectly majority-owned by AFGRI Group for an undisclosed sum. The acquisition will increase bread volumes in the company’s baking network by 28%.

Equites Property Fund is to dispose of six logistics warehouses in Cape Town to investor consortium Mabel Black Knight Investments for R190 million. As part of the transaction Equites will provide training and facilitate the skills transfer process to Mabel which will enhance their property expertise.

Rex Trueform and Spear REIT have entered into a sale agreement whereby Rex Trueform will acquire the property 5 Fitzmaurice Avenue in Epping, Cape Town for a gross purchase consideration of R85 million. The acquisiton is seen by the company as a strategic opportunity to diversify and grow its existing property portfolio.

Unlisted Companies

Local startup Qwili, a platform providing hybrid hardware-software product to micro and small merchants in South Africa, has closed a seed funding round raising US$1,2 million. The round was led by E4E Africa with participation from Strat-Tech, Next Chymia, Untapped Global and Codec Ventures. The investment will be used for app development and hardware production.

The sale by BP Southern Africa of a 50% interest in the Cape Town Terminal to the Central Energy Fund’s Strategic Fuel Fund has received approval from the Competition Commission.

Impresa Capital, a Durban-based venture capital firm, has acquired Gumtree South Africa for an undisclosed sum from Norwegian company Adevinta. Impresa Capital is a majority shareholder of Ignition Group, one of Africa’s largest investors in technology, media, telecommunications and financial services.

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

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

Marylou Greig
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0
Who’s doing what in the African M&A space?

DealMakers AFRICA

Pangolin Diamonds, listed on the TSX.V exchange, is to acquire from Amulet Diamond Corporation, Amulet Diamond (Botswana) for a nominal consideration. The entity holds certain plant and equipment assets relating to the BK11 Mine located in Letlhakane, Botswana.

Kasada Hospitality Fund, a Qatari-backed private equity fund, has acquired the Crowne Plaza Hotel in Nairobi for c. US$38,8 million from Golden Jubilee.

In 2014 AfricInvest acquired a 30% stake in Abidjan-based financial holding company Bridge Group West Africa (BGWA), via its funds, AfricInvest II and AfricInvest Financial Sector Fund. In a deal, the value of which is undisclosed, the private equity firm has successful exited the investment in BGWA, to majority shareholder Teyliom Finance.

Caledonia Mining Corporation plc has signed an agreement to purchase Bilboes Gold, situated outside Bulawayo in Zimbabwe for US$53,28 million to be settled by the issue of 5,123,044 Caledonia shares representing c. 28.5% of Caledonia’s share capital.

Kazera Global plc has secured US$7,5 million in investment from Namibian-based Hebei Xinjian Construction. The investment which consists of a mixture of cash, machinery and services with a minimum of US$2,5 million payable in cash will give Hebei a 49% stake in a new SPV to be formed by Kazera’s marketing, sales and export subsidiary African Tantalum, which handles all lithium production from the wholly owned mine at Tantalite Valley in Namibia.

The Fashion Kingdom (TFK), an Egypt-based fashion marketplace which provides a platform for local and international brands, has raised US$2,6 million in a seed funding round. The round was co-led by Egypt’s venture capital firm CVentures, and A15, MENA’s leading early-stage venture capital firm. Proceeds will be used to accelerate growth, build scalable technology and strengthen the team.

Hashgreed, a Lagos-based non-fungible token (NFT) marketplace for creative, commerce and asset tokenisation, has raised US$1 million in funding. The platform which also hosts DeFi and WorkFi solutions, will use the funding to scale its presence across Nigeria and the region.

Cartona, a Cairo-based B2B platform digitising and empowering all stakeholders of Egypt’s traditional trade market, has closed a US$12 million Series A fundraise led by Silicon Badia with participation by Arab Bank Accelerator, Sunny Side Ventures, Global Ventures and Kepple Ventures. Proceeds will be used to scale Cartona’s expansion across Egypt, grow its product, technology and services.

Bizao, a Côte d’Ivoire fintech startup, facilitating payments for both local and international businesses operating in Africa by enabling clients to collect and issue payments online and in-stores via point-of-sale, has raised €8 million in Series A funding. The round was led by AfricInvest, Adelie and Seedstars Africa Ventures. The funds will be used to accelerate expansion across the continent and to scale its offering.

The International Development Finance Corporation, which partners with the private sector to finance solutions for challenges facing emerging markets, has committed US$280 million in financing for Nigeria’s Access Bank plc. The loan will assist in addressing the financing gap for small- and medium-sized enterprises and so advance financial inclusion in Nigeria.

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

Afrimat has closed an equity raise of R680 million representing 8.5% of its current market capitalisation. The equity raise was implemented through an accelerated bookbuild, placing 13,372,665 new shares at an issue price of R50.85, a 7.2% discount to the share price close on July 27. The primary intention of the equity raise is to support the company’s growth strategy, representing two long-life projects – the Gravenhage manganese mining right and the Glenover project. The equity raise was offered to qualifying investors.

Ascendis Health is to raise R101,5 million by way of a fully underwritten (by Calibre Investments) non-renounceable rights offer. 143 million Ascendis shares will be issued at a price of 71 cents per share in the ratio of 29.70633 Rights Offer shares for every 100 Ascendis shares held. The company says, “the issue will restore balance sheet stability and provide a solid foundation for the turnaround and future growth of Ascendis”.

A further 10,471,115 NEPI Rockcastle shares have been sold by Resilient REIT for an aggregate consideration of c. R993 million. Resilient has used the proceeds to further reduce its existing debt.

The Anglo American Platinum board has approved a special dividend of R40 per share equal to R10,6 billion, which together with the interim dividend of R41 per share brings the total pay-out to 80% of headline earnings.

Accelerate Property Fund has issued 252,827,108 new ordinary shares at 70 cents per share in terms of its scrip distribution alternative resulting in a capitalisation of distributable retain profits of R176,98 million.

Vivo Energy’s listing on the JSE will be cancelled with effect from July 29. Its trading on the LSE was terminated on July 26.

Naspers and Prosus continued with their open-ended share repurchase programmes. This week the companies announced that during the period 18th to 22nd July 2022, a total of 5,681,167 Prosus shares were acquired for an aggregate €384,78 million and 659,095 Naspers shares for R1,73 billion.

British American Tobacco repurchased a further 976,800 shares this week for a total of £33,7 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.

Three companies issued profit warnings. The companies were: Ellies, Cashbuild and Royal Bafokeng Platinum.

Four companies this week issued or withdrew cautionary notices. The companies were: Chrometco, Onelogix, MC Mining and Castleview Property Fund.

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

Rand rallies on stronger Euro but Fed could change that

TreasuryONE
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Rand rallies on stronger Euro but Fed could change that

The team at TreasuryONE notes that despite all the happenings currently in the market, the same recurring themes with inflation and interest rates are still red-hot topics. The currency market is still affected mostly by what the US dollar does. We have seen some of the risky assets that were on the back foot in the last couple of weeks, rally against the US dollar as the euro showed some grit last week.

The chief reason for euro strength has been the fact that the ECB hiked interest rates by 50 basis points at their meeting last week. This surprised the market a little as it was pricing in a 25-basis point hike. The guidance from the ECB is that they will look at the data with further rate changes and this was enough for the market to halt the rampant dollar a little. The market is pricing more rate hikes in 2022 for the ECB and is even expecting another 50-basis point hike come September.

However, PMI data out of Germany showed that the expectation is that the Eurozone economy (see below graph) will slow down due to soaring inflation, so expectations of further rate hikes could be difficult. With the Eurozone behind the curve, it could be a volatile space to trade in as Central Bank policy could shift quickly as economic impacts become clearer.

The ECB was not the only Central Bank to lift rates last week. The Monetary Policy Committee of the SARB hiked rates by 75-basis points in lieu of the higher-than-expected inflation out of South Africa. Looking at the graph below, inflation in South Africa came out at 7.4% for June, which is still below the US, UK and Eurozone. Food and energy inflation is the main contributors to the current higher inflation. Some relief might be on the cards with a fuel decrease coming in August.

The rand liked the higher-than-expected rise in interest rates but the outlook for the economy is not looking that great with growth continuing to lag, even if the SARB did revise growth upwards for 2022 to 2.0% from 1.7%. The rand also benefitted from one of the other emerging markets, Turkey, cutting interest rates by 100 basis points.

The rand moved from the R17.20 level and closed the week around the R16.80 level and looked to trade in those ranges for the early part of the week before the FOMC meeting on Wednesday. The main event of the week is this decision and the market is fairly comfortable that the Fed will hike by 75 basis points. The market will look to the press conference after the announcement as to what momentum the market will have.

Note: after this article was published, the Federal Reserve unanimously decided to hike interest rates by 75 basis points, taking the target rate to 2.25% and meeting market expectations. Jerome Powell said in early statements that it is “essential to lower inflation” and that further large increases are data dependent.

Ghost Bites Vol 57 (22)

The Finance Ghost
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Ghost Bites Vol 57 (22)

Corporate finance corner (M&A / capital raises)

  • In a really interesting move, Afrimat has announced an accelerated bookbuild equivalent to around 5% of current market capitalisation (a raise of around R420 million). In this process, capital is raised from institutional investors based on their willingness to take shares and at what price. The “book is closed” once the raise has been achieved at pricing that is acceptable to Afrimat. The proceeds will be used for the Gravenhage manganese mining right and the Glenover project. The Gravenhage acquisition was announced in May 2021 and these things take a long time to conclude. Total project peak funding is estimated at R1.5 billion and earnings from this investment should come through in the 2024 financial year. The Glenover mine transaction was announced in December 2021 and has a total deal value of R550 million. This is a phosphate, rare earths and vermiculite mining right. Again, peak funding is estimated at R1.5 billion. Afrimat is trading well in the rest of the business and has a strong balance sheet, which is why this equity raise just needs to supplement current cash resources rather than cover the full cost of the projects.
  • Onelogix Group has renewed the cautionary announcement related to a potential take-private of the company. This has been going on since December 2021 and initial price guidance was R3.30 per share. The KZN floods caused a wobbly in the process and the latest renewal announcement doesn’t give any indication of pricing.
  • Despite the independent board of Silverbridge not recommending the offer from ROX Equity Partners to shareholders, another executive director of Silverbridge isn’t hanging around. With the top executives having accepted the offer, I’m really not sure that shareholders can afford not to accept the offer. It may be “unfair” but it is reasonable and this is how life goes in microcaps – nobody pays you what the shares are actually worth.

Financial updates

  • AECI Limited has released results for the six months to June 2022. Although revenue jumped by 31%, Headline Earnings Per Share (HEPS) only increased by a modest 8% to 573 cents. The interim dividend is also 8% higher at 194 cents per share. Of the R748 million invested in capex, 59% is for growth capex. This group is clearly trying to stay on a growth path, with the latest result representing record revenue and earnings. As we’ve seen across the market, working capital is putting pressure on the balance sheet, having increased from 17% to 22% of revenue. This is cash tied up in inventory and debtors, offset to some extent by creditors. There’s also pressure on margins in general, with EBITDA margin down from 12% to 10%. Despite all of this, cash conversion actually improved, with cash generated from operations up 9%. The share price has lost more than 11% this year and is down nearly 10% over 5 years, so there hasn’t been much to get excited about here. As you’ll note further down, there’s also a change in CEO coming in the next 12 months.
  • Gemfields has released a brief financial update for the six months ended June 2022. This emerald, ruby and jewellery business is one that I find interesting, as the traded multiples are low and the risks of operating in Africa are significant. Just recently, the company noted that violence in Northern Mozambique was uncomfortably close to the ruby mine. The operations themselves are flying though, with auction revenue breaking records over the past six months and 12 months. The cash balance is $111.4 million and there’s another $81.1 million still to be received from one of the auctions. Debt is just $29.7 million. Jewellery business Faberge only needed $1.5 million in cash from Gemfields over the past 12 months and didn’t draw any cash at all in the six months to June. Cash capital expenditure in the six-month period was $14.1 million. Interim results will be released on 22 September and investors will examine them closely, as the net cash balance seems to be around R2.75 billion and the market cap is only R3.4 billion.
  • AVI Limited has released a trading statement for the year ended June 2022. In a difficult period, the consumer goods business grew revenue by 4.3%. Revenue growth was achieved across all categories except for I&J (due to lower fish volumes and a stronger rand for most of the period, which impacted exports). Personal Care grew revenue by 17.7% in the second half of the year and Footwear and Apparel grew by 14% in that period. AVI managed to protect gross margins to a large extent with price increases and hedging strategies, though there was still a small drop in gross margin for the year. AVI responded to a tough environment by being even tougher on costs, with selling and administration costs up just 1.5% this year. Again, I&J is the smelly fish in this story, with a substantially higher fuel cost for the fishing fleet hitting profitability at a time when revenue was also under pressure. Consolidated HEPS will increase by between 5% and 7%, coming in at between 524.8 cents and 534.8 cents. With a closing price of R71.00 the share is trading on a Price/Earnings multiple of 13.4x.
  • British American Tobacco has released a half-year report to June 2022. The focus is on New Categories, as the cigarette business is seen to be ex-growth (combustible revenue only increased by 0.6% in this period). New Categories grew revenue by 45% in this period after growing 51% in FY21. Non-combustibles are now 14.6% of revenue. The target is £5 billion revenue by 2025, which would result in profitability for this currently loss-making segment. At group level, adjusted operating margin improved by 90 basis points, assisted greatly by another £275 million in savings under the Quantum efficiencies project. The group is aiming for £1.5 billion in annualised savings under this project by the end of the year. Reported results are way down (earnings per share (EPS) has fallen 42.9%) due to impairments in Russia, a charge related to historic breach of sanctions and once-off costs related to Quantum, like the exit from Egypt and a factory closure in Singapore. “Adjusted constant currency EPS” is up 5.7%, with management wanting you to see this as a more sustainable view of earnings growth. Over the next five years, the company is aiming to generate £40 billion of free cash flow. To drive further value for shareholders, the company is busy with share buybacks (as regular Ghost Bites readers will know), with £1.3 billion already repurchased as part of the £2 billion programme for 2022. The company has reiterated its full year 2022 guidance, which means constant currency revenue growth of 2% – 4% and mid-single digit constant currency adjusted EPS growth.
  • Anglo American has announced rough diamond sales for De Beers’ sixth sales cycle of 2022. Sales came in at $630 million, down from $657 million in the fifth cycle but higher than $514 million in the fourth cycle. Although the management team talks about a “watchful approach” based on “macroeconomic challenges” it seems as though there are still plenty of people with money for expensive jewellery.
  • Transnet is a debt issuer on the JSE rather than an equity issuer. The results for the year ended March 2022 are still relevant though, as Transnet’s financial health has a considerable knock-on impact on other industries like mining. Things are looking vastly better, with revenue up 1.8%, EBITDA up 20.5% and net profit finally swinging into a the green (R5 billion vs. a loss of R8.7 billion in the prior year). Of course, it could’ve been even better if the freight rail business was performing properly. The company is currently negotiating new contracts with the Coal Export Parties. Transnet is still dealing with theft and vandalism but at least there now seems to be money in the kitty to help fix the problems. In a major step forward, the Auditor-General of South Africa issued an unqualified audit opinion. This means there were no major issues, unlike in the four previous years where qualified opinions were issued based on irregular expenditure. Is the tide finally turning in our beautiful country?

Operational updates

  • RECM and Calibre (RAC) released the prepared comments from its AGM over SENS. The main asset is alternative gaming business Goldrush, which the group notes is trading well and has achieved rolling 12-month EBITDA of over R380 million. The removal of mask mandates has been a win for the bingo operations, as nobody wants to sit there all night with a mask on. Limited Pay-Out machines are still being rolled out and retail sports betting continues to grow both in-store and online. RAC has distributed all the Astoria shares it still owned to shareholders, removing the cross-holding between the two investment holding companies. The group has also renegotiated its banking arrangements to reduce the cost of funding and achieve more flexibility with the balance sheet.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • AECI Limited’s CEO Mark Dytor is retiring from the top job with effect from 31 July 2023, having been with the company for a whopping 39 years. He has been the CEO since 2013. That kind of institutional knowledge is tough to replace, with no successor named as yet. This would explain why a year’s notice has been given.
  • Rex Trueform has announced an interesting change of CEO. Catherine Lloyd is resigning as CEO and will still be involved as a legal and strategic advisor. Marcel Golding is moving from the Chairman role to the CEO role, thereby taking on executive responsibility for the group. Patrick Naylor has been appointed as Chairman.

Director dealings

  • An associate of the CEO of Invicta has bought shares in the company worth around R307.5k. The share price has been trading at 52-week lows, so this example of “buying the dip” by the CEO will send a welcome message to the market.

Unusual things

  • Sea Harvest Group wants to wind up the Viking Staff Share Scheme which matured in March 2022. To do this, there would need to be a specific repurchase of shares under JSE rules. A circular has been distributed to shareholders to meet the regulatory requirements for this transaction.
  • Vukile Property Fund’s credit rating has been upgraded by GCR. The upgrade is based on Vukile’s geographically diversified portfolio (Spain and South Africa), the anchor tenants being grocery or essential services businesses and the “commitment to maintaining balance sheet and liquidity strength” that GCR is happy with.

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The arbitrage advantage: low risk returns from Bitcoin

Sponsored Content
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The arbitrage advantage: low risk returns from Bitcoin

The words “crypto” and “volatility” are synonymous. As these assets aren’t supported by underlying cash flows or a widely accepted valuation methodology, they tend to trade based on sentiment. Sentiment is just a function of human emotions, perhaps the most volatile natural phenomenon of all!

Note from The Finance Ghost:

Regular listeners to the Magic Markets podcast will recognise the Future Forex name. We’ve welcomed them to the show on a few occasions to explain the arbitrage process and how it works. You must always do your own research and always make your own decision. If it helps though, I know a number of people who have signed up with Future Forex and have smiles on their faces, particularly regarding the level of service.

Here’s the latest podcast with great information in addition to this sponsored article:

Future Forex’s crypto arbitrage offering typically delivers a net profit of 1% to 1.5% per trade regardless of whether crypto is in a bull market or a bear market, or even in a “crypto winter” as some have referred to the recent market troubles.

Earning 1% to 1.5% per trade isn’t exciting until you realise that due to the cyclical nature of the process allowing for multiple trades, you can earn between R100,000 and R150,000 per year with a starting capital of only R200,000. Using a realistic mid-point and based on many client examples, Future Forex clients are achieving annualised returns of 70% to 80% on initial capital.

Importantly, these indicative returns are net of all costs.

So how is it possible that such a volatile asset can be used to generate smooth, dependable returns that carry low risk?

The arbitrage advantage

An arbitrage is a strategy that takes advantage of pricing differences across markets. The idea is to simultaneously buy an asset where it is cheaper and sell it where it is more expensive. Such opportunities exist because of market inefficiencies that are often structural in nature.

In South Africa, these inefficiencies are caused by capital controls which result in a demand/supply imbalance in the local crypto market. These capital controls take the form of an R11 million Foreign Exchange Allowance which limits the amount of crypto you can purchase abroad and sell in South Africa each year. In an efficient market, higher returns come with higher risk. In this case, high returns are achieved with low risk. This is because returns are limited by your R11 million Foreign Exchange Allowance.

Don’t let your option expire worthless

Each year, you can take R11 million offshore. The first R1 million is a single discretionary allowance and the remaining R10 million is a foreign investment allowance. The R10 million can be unlocked through an application process that Future Forex’s in-house tax team and partner tax practitioner assist their clients with as a complimentary service.

You don’t need R11 million to take advantage of the full allowance. Future Forex recommend at least R200,000 starting capital to achieve the profit target. By performing the arbitrage 55 times, they achieve the return based on the full allowance rather than the starting capital.

If you don’t use this allowance, it expires at the end of the year and resets for the following year. This is effectively an annual option to earn a return on your allowance, one which expires worthless if you don’t take advantage of it.

The implicit usage of this asset which otherwise expires worthless, in combination with the inefficiencies of the local crypto market, is why the returns through arbitrage can be so lucrative despite the investment being exceptionally low risk.

There’s no such thing as “zero risk”

Future Forex are risk management experts. CEO Harry Scherzer’s background as a qualified actuary has allowed the team to hedge out the market risks and actively manage other risks through processes like detailed due diligence on counterparties. It’s also worth highlighting that Future Forex Arbitrage Services (Pty) Ltd is an authorised Financial Services Provider (FSP 51884) for currency remittance services.

The core market risks are crypto price fluctuation risk and forex risk, both of which are automatically hedged out by proprietary systems and use of floats. This locks in the arbitrage profit at the initiation of the trade, so they simply don’t trade on behalf of clients if the profit isn’t there. As a result, they never lose money on a trade.

The other critical risk is counterparty risk, as the very nature of a trade is that somebody needs to be on the other side of each step in the arbitrage process. It is impossible to hedge out this risk, as this is a business risk rather than a financial risk. Instead, Future Forex mitigate this risk to the greatest extent possible by only working with trusted partners that they have performed extensive due diligence on. In literally tens of thousands of trades, they have never suffered a default event on any obligation in the process.

Taking the pain out of the process

To take full advantage of the annual allowances, Future Forex has built systems that make the process as painless as possible, while hedging all of the market risks. Their relationship managers are highly trained and always contactable for clients to have peace of mind and a high-quality experience. To start your journey, complete a registration form at this link.

Alternatively, get in touch with Future Forex so that they can give you a call to answer any further questions you may have.

This article has been sponsored by Future Forex and reflects their views. This is not a recommendation from The Finance Ghost to engage in crypto arbitrage. At all times, you must do your own research and you are responsible for your own decisions.

Defensive stocks? Be careful.

The Finance Ghost
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Defensive stocks? Be careful.

The concept of a “defensive stock” comes up often, doesn’t it? What does it actually mean? Most importantly, can companies really be considered defensive when faced with such uncertain macroeconomic times?

Let’s go straight to the heart of the matter – defensive stocks tend to trade at high valuation multiples based on an assumption that the operations are bulletproof. This is dangerous for two reasons. Firstly, high valuation multiples create the risk of a nasty multiple unwind. Secondly, operations are never bulletproof.

“Consumers will always need xyz” is the frequent argument and there’s a great deal of truth in it when “xyz” means pharmaceuticals or basic groceries. This argument unfortunately misses some critical elements of the business models of these companies, leading to hard lessons for investors.

Defensive, in parts

It is absolutely correct that some products are defensive. It is absolutely false that an entire business model is defensive.

Let’s use a typical pharmacy business as an example. Behind the counter, the pharmacists are ready to sell you medicine that you probably can’t go without. Clearly, that’s a defensive product category. Inevitably, products that are “needs” rather than “wants” tend to achieve a much lower gross margin. A retailer makes far less by selling you bread or pills than by selling you an exciting pink kettle (a Mrs Ghost favourite).

If we move on to a supermarket example, then we see margin mix really come into play. Fresh foods and staple groceries achieve low margins and supermarkets compete viciously on price to attract customers to the store. The higher margins are achieved by seducing consumers with unusual or interesting products, or luxuries in the checkout aisle that tempt you into adding something to your basket.

Ever wondered why supermarkets sell things like toiletries, garden and pool products and even clothes? It all comes down to margin mix.

Margin isn’t defensive

We now arrive at the inconvenient truth in this honeymoon story about defensive stocks that somehow withstand any economic pain: margin mix.

The high valuation multiple is based on all the earnings, not just the earnings from defensive categories. If you’re paying a Price/Earnings multiple of 30x for a retailer, you’re also paying 30x for the net profit earned by selling organic yoghurt, not just bread and milk.

What happens when the organic yoghurt is no longer in the trolley? Even worse, how do you feel about paying 30x when the gross margin is a sitting duck in an economic downturn as consumers change their habits and stick to just the basics?

Walmart is down 14.6% this year. The share price was smashed in May after releasing results for the fourth quarter of the 2022 financial year. People bought the dip and those who sold soon thereafter made good money. Those who bought and held in the hopes of a steady recovery are back where they were in May.

Why is Walmart hurting investors? Because the mix isn’t defensive. Simple as that. In the latest quarter, sales grew by 2.4% and operating income fell by 23%. Walmart irritatingly doesn’t disclose gross profit as a separate line on the income statement, so we have to calculate it from this section of the financials:

Gross profit in the latest quarter is $33,441 (in millions, as per the excerpt above), a margin of 23.84% if we ignore membership and other income which doesn’t carry a “cost of sales” when being earned. In the comparable quarter, gross profit was $33,887 and gross margin was 24.7%.

A deterioration of 86 basis points at gross margin level is a disaster for a retailer. Remember, the margins are really thin by the time we reach net income. In the latest quarter, consolidated net income of $2,103 is a net margin of just 1.49%. Now you can see why a seemingly small change in gross margin has such a significant impact on net income.

This is what we do in Magic Markets Premium

In every report and podcast that we produce on a global listed company, Mohammed Nalla and I focus on the major drivers of value and the key issues facing each company. We always prepare a Bull Box and a Bear Box, so we give a balanced view that deals with the pros and cons of each company. For example, here’s the Bear Box from Walmart back in May (take special note of the second bullet point):

These insights are available to you for R99/month or R990/year, so you pay for 10 months and get 12. I am beyond proud of what we do in Magic Markets Premium, as I firmly believe that we are bringing institutional-quality insights to retail investors at a price that they can afford.

If you are ready to accelerate your investment knowledge and your ability to unpack a business model and value a company, then subscribe and get stuck in on the library of over 35 reports – plus a new one every week!

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Ghost Bites Vol 56 (22)

The Finance Ghost
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Ghost Bites Vol 56 (22)

Corporate finance corner (M&A / capital raises)

  • Ascendis Health has announced a fully underwritten non-renounceable rights offer to raise around R101.5 million. This means that shareholders cannot sell their rights, but they can apply for excess shares if they want to take up more than their allocation. The underwriter is Calibre Investment Holdings, with a fee of 2% (around R2 million) payable to that entity. Ascendis currently owes around R498 million to Austell Pharmaceuticals in a facility that expires in November 2022. Depending on which potential suitor the shareholders vote to dispose of the Ascendis Pharma business to, the outstanding debt with Austell will be between R129 million and R149 million. The proceeds of this rights offer will be used to fully settle that debt and recapitlise the business so that it can move forward with Ascendis Medical and the Consumer side of the business. The rights offer price is R0.71 per share and the current share price is around R0.64.
  • RCL Foods has made a voluntary announcement regarding the acquisition of Sunshine Bakery from AFGRI Group Holdings. This business is based in KZN and is one of the country’s largest independent bakeries. The deal will increase bread volumes in the RCL Foods’ baking network by 28%, so this is an important transaction as part of the ongoing strategy to focus on higher margin foods. When the business was originally built around poultry, anything has better margins – even bread!
  • Spear REIT has announced the disposal of 5 Fitzmaurice Avenue to Rex Trueform Group for R85 million. This price is a 2.4% premium to the latest book value, which is another good example of the group recycling capital at the valuations put forward in the financials. This was a non-core asset and the proceeds will be used to settle shorter term variable debt while the fund negotiates new opportunities that are in line with the stated strategy of investing in industrial and convenience retail assets. The loan-to-value will reduce by 118 basis points to 38.29% based on this disposal. Despite interest rate increases in South Africa, Spear has reiterated its guidance of 5% to 7% growth in distributable income per share. For Rex Trueform, this is part of a strategy to diversify and grow the existing property portfolio. The purchase price will be funded by R20 million of equity from Rex Trueform and R65 million of debt. The yield for the acquisition is 9.6%.
  • Jubilee Metals announced that two warrant holders have exercised their rights to subscribe for shares in the company at a price of R1.23 per share (vs. the current market price of around R2.80). This is an injection of R1.8 million into the company and represents a holding of 0.06% of the shares in issue post the exercise of the warrants.
  • Mantengu Mining’s acquisition of Langpan Mining Co has become unconditional, which means that all conditions precedent have been met. In other words, the transactions will now close. Mantengu will now send a request to the JSE to have its suspension on trading lifted.

Financial updates

  • Pick n Pay released a trading update for the 18 weeks ended 3rd July. There is renewed interest in the group, particularly with the new CEO making all the right noises about adapting the stores to suit customer preferences. 10 stores have been updated under the Ekuseni Strategic Plan and sales in the first five stores are already up 18% since launch. The idea is to upgrade 40 stores by the end of the interim period and 150 by February 2023. I’m also very pleased to see that Boxer will be disclosed as a separate segment in the next result, as Pick n Pay got away with poor segmental disclosure for years. In this 18-week period, sales increased 10.7% year-on-year with selling price inflation of just 5%, which is well below 7.1% CPI Food. Importantly, the base period included 18 days of trading restrictions on liquor, so it’s not a perfect comparison. Pick n Pay Clothing is still flying, with sales up 17.1% as that business continues to take market share. Impressively, Pick n Pay’s online sales across the various channels grew by 97.3%! As part of ongoing cost saving initiatives under Project Future, Pick n Pay will close its Johannesburg office and move to a more flexible support office structure. Later on in the announcement, the company sounds the alarm about inflationary pressures. It’s great to have strong sales growth but profits are what count. Sadly, the group expects an acceleration in CPI Food, which is frightening news for consumers. With inflationary pressures from rates, electricity, utility and fuel costs, Project Future’s cost savings are critical and Pick n Pay will need to operate as tightly as possible. Although the new strategic direction couldn’t have come at a better time, this excerpt from the announcement tells the story of what is really going on out there:

“Taking into account the FY23 operating cost pressures mentioned above, we reiterate our guidance that we expect Ekuseni to drive meaningful earnings growth from FY24 only (vs. the FY22 Pro forma Headline Earnings base).”

Pick n Pay Trading Update, 26 July 2022
  • Woolworths released a trading update for the 52 weeks ended 26th June. This can’t be compared to Pick n Pay, as the period is much longer and the base period is also very different, with Covid-related disruptions playing havoc on comparability. Turnover only increased by 1.4% as reported or 2.6% in constant currency terms. Online sales were a highlight, up by 16.4% and now contributing 12.4% to group turnover. The second half (H2) of the financial year was far better than the first half, with sales up 5.6% in constant currency. In the Fashion Beauty Home segment, H2 sales were up 6.5% and full-price sales were up 8.8%, which is supportive of gross margin. Despite trading space declining by 4.5% this year, sales grew by 5.4% and prices increased by 6%, so there was a small drop in volumes. Online sales contributed 4.4% of total sales, having grown by 13.2%. In Woolworths Food, sales in H2 could only manage 4.6% growth and prices only increased by just 3.5% despite underlying product inflation of 3.9%, so Woolworths isn’t managing to pass the full inflationary increases on to its affluent consumers who are clearly finding value in shopping at competitors. Full year growth was 4.2% and comparable stores were up 3.1% with price increases of 3.5%, suggesting a drop in volumes! Online was the highlight at Woolworths Food, up 45.4% and contributing 3.2% of sales. In David Jones, full year sales fell by 2.6% despite growth of 4.3% in H2. Trading space fell by 2.6%. Online sales were up 28.7% and contributed 22.8% to total sales, a reminder of how much higher online penetration is in markets like Australia. Country Road Group achieved a positive full-year sales number of 3.1% after knocking out 9% growth in H2, despite an 8.1% drop in trading space. Online grew by 4.6% and contributed 31.6% to total sales. It looks like the clothing businesses are making a comeback while the food business is really feeling the heat from competitors.
  • Shoprite Holdings also joined the frenzy of retailer announcements with an update for the 52 weeks ended 3rd July 2022. This makes it directly comparable to the Woolworths update. Total sales were up 11.9% on a 52-week comparable basis (the base period had an extra trading week) and they don’t bother with adjustments based on the civil unrest, a bit of a flex from a management team that is riding a wave of success at the moment. The Furniture segment lagged the rest, with growth of just 0.7% due to a poor first half that was hit badly by civil unrest. Supermarkets RSA achieved like-for-like growth of 8.5% with selling price inflation of 3.9%, an exceptionally strong result even if there was some benefit from fewer days of restrictions on liquor trading in this period. Full results will be released on 6th September. Shoprite has hammered Woolworths in the higher LSM market but it will need to watch its back with the strategic thrust we are seeing at Pick n Pay.
  • Truworths didn’t let the grocery retailers have all the limelight on Tuesday, with an update for the 53-week period ended 3rd July 2022. Again, because of the way retailers report (based on weeks rather than months), every few years sees a 53-week period. On a 52-week basis (which is correct when comparing to the prior year), sales were up 6.6%. The second half of the year saw a healthy acceleration in sales growth, up 12.7%. Account (i.e. credit) sales represent just over half of group sales and grew by 8.7% vs. 9.3% growth in cash sales. The South African business grew by 5% on a 52-week basis and credit sales contributed 69% of total sales, so the local business is highly dependent on customers buying on account. Product deflation was 0.6% (yes, you read that correctly) so there was significant volume growth here. The debtors book is noted as being in a “healthy position” based on management’s key metrics. The UK-based Office segment grew sales by 14.2% in GBP on a 52-week basis. The second half saw an acceleration like in South Africa, with growth of 23.1%. The contribution from online sales to Office’s turnover was 45% in this period, well down from 63% in the Covid-impacted base period. Truworths planned to reduce Office’s trading space by around 12% but the end result was a decrease of only 4.4% as trading was stronger than expected and negotiations with landlords went well. In the prior year, Office reduced trading space by 22%! Results will be released on 1st September and after a rally of over 9% based on this update, shareholders will be hoping for an enjoyable Spring Day once the full income statement is revealed.
  • After releasing an operational update earlier in the week, Cashbuild released a trading statement that confirms a drop in HEPS of at least 30% for the year ended 26th June 2022. A clearer range will be given once Cashbuild has a handle on what the final numbers might be. For now, all we know is that HEPS will be a maximum of R20.108 for the period. The share price fell by around 3.3% soon after the announcement to trade at R266 per share. Although the share price is largely flat over the past 12 months, the 52-week range of R223.55 to R311.89 gives an idea of the volatility along the way.
  • Merafe has released a production report and trading statement for the six months ended June 2022. Attributable ferrochrome production from the Glencore Merafe Chrome Venture increased by a modest 1.7% year-on-year. That’s a lot better than many of the other mining companies on the JSE recently achieved with their production numbers. Thanks to a consistent production result and strong chrome prices, headline earnings per share (HEPS) is expected to be between 49.5% and 69.5% higher, coming in at between 34.7 cents and 39.3 cents. Although there is no debt on the balance sheet, R194 million out of the current R1 billion in cash has been ring-fenced for rehabilitation obligations. Merafe continues to trade at a very low Price/Earnings ratio as the market remains nervous of how sustainable these commodity prices are.
  • Kumba Iron Ore released its interim results covering the six months to June 2022. Revenue fell by 32% in a strong reminder of how cyclical these mining businesses are. Basic HEPS fell by 50% in an even stronger reminder of how much operating leverage we find in these mines. In other words, the impact of a change in revenue is always amplified by the time we reach HEPS, due to the level of fixed costs in the business. Kumba’s production fell by 13%, with Sishen down 7% and Kolomela down 25%. Significantly higher seasonal rainfall played a role in the significant decrease at Kolomela. In terms of positives, the average realised FOB export price is 15% above the benchmark because of the quality of Kumba’s product. Importantly, EBITDA margin was still a meaty 54%. The business is sitting on net cash of R17.6 billion. If you would like to read the full report, you’ll find it here.
  • Alphamin has announced record quarterly tin production and a Q2’22 EBITDA result of $67 million. Ore processed increased by 7% vs. the preceding quarter but tin production only increased by 4%, so this was a less efficient quarter than Q1’22. Sales volume dropped by 3% and the average price achieved fell by 19% in a volatile environment for commodity prices, so the net impact was a 32% drop in EBITDA. The net cash position improved by 6% to $138 million. An interim dividend of around $30 million in total has been declared. The share price is down around 20% this year.
  • Curro has released a trading statement for the six months ended June 2022. Recurring HEPS, which is management’s way of giving the market a view on sustainable earnings, is expected to be 22.2% to 39.7% higher. The difference between recurring HEPS and HEPS is the subsidy income that was finally received by Curro Meridian from provincial government. Get your school diary out: results will be published on 18th August. The share price has recovered sharply in recent weeks to trade at around R11. That’s good news for me, as my in-price is R12.22 and it would be nice to see a green tick rather than a red cross next to Curro in my portfolio.
  • Reinet released a financial update for the quarter ended 30 June 2022. Although the net asset value (NAV) is down 3.1% since March, the company reminds the market that the NAV’s compound annual growth rate (CAGR) since March 2009 has been 9.3% (measured in euros). In the quarter, Reinet utilised €46 million for share buybacks and made commitments of €40 million for new and existing investments. The NAV per share at 30 June 2022 is €31.38 (R538) which means the share is trading at a discount of around 45%. This is typical for an investment holding company.

Operational updates

  • Bytes Technology Group held its AGM and released a (very) brief update with some operational commentary. It has made a “positive start” to the current year, with growth across key income lines in the double digits for the first four months of the year. Customer demand has “remained robust” and the group has seen growth from corporates and the public sector.

Share buybacks and dividends

  • From 18th to 22nd July, Naspers repurchased shares worth R1.74 billion and Prosus repurchased shares worth $393 million.

Notable shuffling of (expensive) chairs

  • Old Mutual announced the retirement from the board of Mr Marshall Rapiya, who has been with the group for more than four decades. An innings of that length deserves a mention!

Director dealings

  • To make us all feel poor today, Accelerate Property Fund announced that its CEO received shares worth over R64 million from the dividend reinvestment alternative that the company recently offered. Right, back to work we go.

Unusual things

  • DRA Global has reached a settlement with Fraser Alexander regarding the Elikhulu Gold Tailings Retreat Project. DRA will pay nearly R118.5 million vs. an original claim by Fraser Alexander of R502 million. This reduces litigation risk for DRA and the costs of an arbitration process, so the company considers this to be a favourable outcome. A R153 million provision was raised in the FY21 financial statements, so there will be a positive impact on this year’s financials as the eventually settlement is lower than the provision that was raised.
  • Go Life International obtained the approval of the Stock Exchange of Mauritius for a delay in the release of results for the year ended February 2022 and the quarter ended May 2022. Both will be released by the end of September.
  • The publication of the business rescue plan for Black Chrome Mine, a material subsidiary of suspended company Chrometco, has been extended to 31 August 2022.

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