Monday, March 10, 2025
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Unlock the Stock: Attacq and Capital Appreciation

The Finance Ghost
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Unlock the Stock: Attacq and Capital Appreciation

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Companies do a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

I co-host these events with Mark Tobin, a highly experienced markets analyst who combines an Irish accent with deep knowledge in the Australian market (I know, right?) and the team from Keyter Rech Investor Solutions.

You can find all the previous events on the YouTube channel at this link.

The latest event saw executives from Attacq (the property fund synonymous with the Waterfall precinct in Midrand) and Capital Appreciation Group (a fascinating local technology group) presenting their businesses and answering questions. To give you some further context, you can read this article on Attacq and this one on Capital Appreciation Group.

Sit back, relax and enjoy this video recording of our session:

Ghost Bites Vol 36 (22)

The Finance Ghost
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Ghost Bites Vol 36 (22)
  • Without doubt, the biggest story on the market on Monday was the Prosus / Naspers results announcement and associated buzz around strategies to unlock value. The share prices jumped by between 20% and 25%, depending on which company you look at. I have a contrarian view here, based on years of watching the group invest good money in bad business models. For a detailed look at why I feel this way, be sure to read this feature article.
  • Invicta managed to close flat for the day, despite releasing results for the year ended March 2022. Volumes are thin even for R3 billion market cap companies. In FY22, Invicta grew revenue by 15% and profit by a whopping 141%. If we focus on continuing operations, we find that headline earnings per share (HEPS) increased by 99.4% i.e. practically doubled. Cash is always important, so the dividend per share increasing by 50% to 90 cents per share is healthy. Notably, Invicta is now reporting its group results under six reporting segments, which is a lovely level of disclosure for investors.
  • KAP Industrial Holdings provided an operational update for the 11 months ended May 2022. There’s a full capital markets day being held on Tuesday 28th June, with the presentation due to be released on the company website. It’s been a mixed bag for KAP, with strong results in PG Bison and Safripol, whilst Restonic has struggled with retail demand and supply chain disruptions. Feltex has been hit by the floods at Toyota in Durban, a key local customer. Unitrans performed well in South Africa but had challenges in Rest of Africa. The group balance sheet is healthy. The capital markets day event should be interesting!
  • Kore Potash has released the outcomes of the Kola Project optimisation study. This is a potash project found in the Congo. In case you’re wondering, potash refers to minerals with potassium, an important ingredient in fertiliser. Optimisation is the word indeed, with the latest study suggesting a reduction in capital cost by $520 million to $1.83 billion. The construction period has decreased by 4 months to 40 months. The suggested internal rate of return is 20% on an ungeared, post-tax basis using the price per tonne from the earlier study. If that price is updated to be closer to current levels, the IRR jumps to 49%. This explains why higher prices drive increased investment in mining. The next steps are to finalise the construction proposal and the financing proposal from the Summit consortium.
  • Accelerate Property Fund has released a trading statement for the year ended March 2022. The property fund expects to pay a distribution per share of between 18 cents and 22 cents. This announcement was released after the market closed, so the share price of R1.11 doesn’t yet reflect this information. At the mid-point, that’s an 18% yield!
  • PPC has released its financials for the year ended March 2022. Revenue increased by R1 billion but EBITDA fell by R0.1 billion, so that’s an unhappy margin story. Importantly, cash generated from operations improved to R1.5 billion from R1.4 billion in the prior year, so PPC is clearly very focused on its bank accounts. Net debt was reduced in the period by R1.2 billion. The headline loss from continuing operations was -3 cents per share, a trip into the red after reporting HEPS of 3 cents in the prior year.
  • Rand Merchant Investment Holdings released a trading statement for the year ending June 2022. The group has been through significant changes, like selling the stake in Hastings and unbundling Discovery and Momentum Metropolitan. The focus now is on OUTsurance (in which RMI holds 89.3%), with the update noting exposure to the KZN floods of between R400 million and R450 million for the insurance company. This is covered by the catastrophe reinsurance programme, but there are certain amounts that still apply, like co-payments with your medical aid. For OUTsurance, this means net exposure of between R160 million and R200 million. The Youi business suffered natural disaster exposure in Australia, with the earthquake in Melbourne and floods elsewhere. The gross loss is the highest in Youi’s history at A$140 million. Youi has catastrophe reinsurance, but will suffer some losses based on retention levels (the minimum loss required to trigger the catastrophe reinsurance).
  • Ascendis Health and Apex Management Services have decided to terminate the sale of Ascendis Medical by mutual agreement. Sabvest Capital has a 44.8% stake in Apex and also made an announcement about this, noting that Ascendis had repaid all capital and interest to Apex. The separate deal to dispose of the Pharma business to Austell Pharmaceuticals is theoretically still underway.
  • Texton Property Fund has agreed to sell the Hermanstad Industrial Park in Pretoria. Texton has received an offer at a slight premium to the last disclosed book value. The fund has decided to exit its industrial assets to focus on repurposing office assets and pursuing its SME strategy. The price has been agreed as R133.5 million. The yield is around 6.5% based on annualised net rental income, so I’m not surprised that Texton sold it.
  • Adcorp isn’t the most liquid company around and I’ve been on the wrong end of the bid-offer spread, so it’s bittersweet seeing the company executing buybacks. Fewer shares in issue can only mean lower liquidity. During the past couple of weeks, Adcorp repurchased 1.281% of shares in issue for around R8.5 million, an average price of R6.20 per share.
  • Kibo Energy has released its results for the 12 months ended December 2021. The loss after tax of £23 million includes a £20.7 million impairment on the coal projects in the group. Kibo plans to dispose of its coal assets and focus on renewable energy. Through equity capital raisings of around £6.5 million, the group has adequate cash to continue as a going concern. Credit to Kibo – the company has been exceptionally busy operationally and has made some interesting announcements, like the deal with CellCube to deploy the energy storage solutions in Southern Africa.
  • The external auditor of Chrometco, Moore Cape Town, has resigned. The reason given is the existence of a self-interest threat and an engagement that is such high risk that the level of risk cannot be adequately addressed in the audit planning and approach. That’s not good.
  • Crookes Brothers is an agriculture business that we don’t often hear from on the JSE. The group has released a trading statement for the year ended March 2022, noting that HEPS has fallen from 272.2 cents to 229.6 cents.
  • I know that the CFO of Spear REIT is a keen Ghost Bites reader, so I must point out that his spouse bought shares in the property fund. It can only be interpreted as a positive signal if he’s willing to recommend the shares to his significant other!
  • A family trust associated with a director of Fairvest has purchased shares worth R4.9 million in the group. That’s a chunky trade.
  • I doubt anyone really cares to be honest, but Oando Plc has announced its 2020 financial results. The group is catching up quickly with its financial backlog.

Prosus: “Investing through the income statement”

The Finance Ghost
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Prosus: “Investing through the income statement”

Naspers and Prosus dominated SENS and the market on Monday, rocketing either 20% or 25%, depending on which member of the dynamic duo you looked at. That’s a gigantic move for a group this size. After an extended period of negative sentiment towards Chinese and growth assets, what changed?

There was plenty of news around Prosus and Naspers on Monday. Let’s kick off with the easy part: the sale of the shares in JD.com. It gets complicated from there, so enjoy the easy start.

Turning JD.com into cash

In December 2021, Tencent distributed most of the shares that it held in JD.com – a Chinese eCommerce giant. Prosus received a 4% effective interest in JD.com as part of the unbundling.

Prosus decided to sell this stake and took a while to do so, raising $3.67 billion in the process. The carrying value at 31 March 2022 in the Prosus financials was $3.94 billion, so the sales were concluded at a loss vs. that value.

Before you get excited about a special dividend to help close the discount to net asset value (NAV) that Naspers / Prosus is famous for, I must point out that Prosus will retain the cash for “general corporate and liquidity purposes” – in this environment, Prosus isn’t letting go of any excess cash.

Considering the approach being taken with the JD.com cash, the rest of this update and the market reaction is even more surprising.

Prosus results: not pretty

I don’t usually quote directly from corporate results announcements. In this case, there are some gems that are worth repeating.

Here’s the first one:

“Core headline earnings were US$3.7bn, a reduction of 23% which reflects ongoing investment in the eCommerce portfolio and a period of slower growth at Tencent as it adapted to regulatory changes in China.”

In summary: Prosus has been built by taking cash from Tencent and deploying it into all kinds of growth verticals in regions around the world. The share price was hammered in the past year by a souring of sentiment towards China, as this is the source of Prosus’ cash.

The rest of the group is a furnace that Prosus must keep pouring cash into.

Here’s another quote that I think is worthwhile:

“The discount to the group’s sum of the parts increased to an unacceptable level.”

Well now, you don’t say?

The discount to what Prosus believes the group is worth is always a hot topic for debate on the JSE. Nobody disputes that a contributor to the discount is the spectacular remuneration enjoyed by the top executives at Prosus. Another major contributor is the exceptionally complicated holding structure that was made even worse by recent corporate action to create a “cross-holding” of Naspers holding into Prosus and Prosus holding into Naspers: a web that any spider or Financial Accounting IV examiner at Wits would be extremely proud of.

Prosus talks about moving into a period of prudent balance sheet management. This isn’t a bad idea, after the company invested $6.2 billion during the latest financial year in its numerous assets. Prosus also talks about prioritising existing assets, which suggests that bold new acquisitions may not be on the menu.

The news that really drove the share price jump was found in the analyst presentation rather than the results announcement on SENS. If you’ve ever wondered what a gazillion-dollar slide looks like, here it is:

Simply, Prosus is going to gently sell down its stake over Tencent and drip the proceeds back to shareholders in the form of share buybacks. The market sentiment towards this management team’s ability to allocate capital is so negative that this seemingly innocuous update caused a celebration in the share price that would put the Stormers to shame.

I’m just not sure why Prosus can’t start with the JD.com cash, since returning cash to shareholders is now supposedly a priority?

“Investing through the income statement”

In case you’ve ever wanted an innovative way to say “we made losses,” Prosus is here to help you out:

“In the second half of the year, we invested heavily through our income statement.”

Investing “through your balance sheet” means deploying cash into assets. Investing “through your income statement” is a fancy way to say that you incurred a lot of expenses.

I’m going to summarise what this looks like in practice. Get ready.

The Prosus eCommerce businesses grew revenue from $6.2 billion to $9.8 billion in the past year, which sounds wonderful. The trading loss in that segment worsened spectacularly from -$429 million to -$1.1 billion.

Investing through the income statement indeed. I do that a lot when I fill my car up at the petrol station, for example.

I’m not shocked at all that Food Delivery was the major offender. It’s beyond me how that model will ever make money. I love it far too much as a consumer for the economics to make sense. If it always feels like a bargain to me to get someone else to bring my food, it means that it is a bargain and thus the service provider is making a loss.

The Prosus result gives a useful summary of capital allocation over the past six years. Of the approximately $50 billion that the group had at its disposal, 57% has gone into the business and new growth opportunities, 25% has been returned to shareholders through buybacks and dividends and 18% has been retained in cash.

Speaking of cash, there is less of it on the balance sheet than the amount of debt. This puts Prosus in a net debt position. The group has $13.6 billion in cash and $15.7 billion in interest-bearing debt.

The consolidated free cash outflow for the year was $562 million. After year-end, Prosus received a $565 million dividend from Tencent. You can be sure that much of that dividend will be invested through the income statement as well.

A quick note on Naspers

Naspers is basically Prosus plus some other local assets like Takealot and Media24. We’ve all shopped on Takealot before, so I’ll focus there. An honourable mention must go to Media24 for being strongly profitable again!

The economics here are just incredible. Takealot’s revenue in FY21 was $606 million and the trading loss was $7 million. In FY22, revenue was $827 million and the trading loss was still $7 million. In case you are wondering where Massmart’s economic profit pool was destroyed, now you know. Takealot has grown revenue and gone absolutely nowhere on profitability, funded by the endless cash machine known as Tencent.

Amazon is said to be coming to South Africa in 2023. If Takealot couldn’t make a profit during the pandemic and without Amazon operating in South Africa, what do you think its chances are in a post-pandemic, recessionary environment with Amazon as competition?

Perhaps I’m terribly wrong here, but I want to see Prosus and Naspers maintain these share price gains after the end of the quarter, when big institutional funds are finished with their window-dressing activities to help report better investment performance. The incentive at the end of a quarter is to buy and push prices up, resulting in a better-looking portfolio.

For now, my money is staying very far away from Prosus and Naspers. I like to invest through the balance sheet, not the income statement.

JSE retailers – where is the value?

Chris Gilmour
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JSE retailers – where is the value?

Chris Gilmour takes a detailed look at the retail sector on the JSE, a vibrant part of our market that is filled with brands that we know and understand as consumers. Of course, there’s a big difference between choosing to shop somewhere and investing in that retailer.

The JSE-listed retail sector, effectively comprising the Food & Drug retailers and the General Retailers, presents a delicious conundrum for aspirant investors. On one hand, the companies contained in these sectors are almost all of a globally-high standard, operating in a largely consumer-driven economy. This tends to result in retailers being able to command a premium rating.

Having said that, South Africa is also at the beginning of an interest rate tightening cycle that probably has at least all of 2022 and most of 2023 to go before it is finished. With the best will in the world, that is bad news for consumer stocks generally.

So, which shares should investors be looking at in this environment?

In the normal course of events, one would intuitively pick non-discretionary fast-moving consumer goods (FMCG) shares, such as those found in the Food & Drug sector. Being non-discretionary, these companies should be more resilient to the economic cycle.

I have concentrated this week on non-discretionary retailers. Next week, we will look at the discretionary retailers. Take note: many of these non-discretionary stocks are sitting on Price/Earnings (P/E) ratios that are totally undeserved relative to their underlying earnings growth.

The investable universe for non-discretionary FMCG shares on the JSE consists of six companies: Pick n Pay, Shoprite, Spar, Massmart, Dis-Chem and Clicks.

There are many ways in which to measure retail efficiency, such as sales per square metre (also known as trading density) and then the usual suspects such as operating profit margin and the relationship between return on capital invested (ROCI) and the weighted average cost of capital (WACC). To make things trickier, not all retailers divulge this information!

The economic background

Private consumption expenditure (PCE) accounts for well over 60% of total South African GDP.

South Africa is well-known as a nation of shoppers and has one of the highest numbers of shopping malls per capita in the world. But with the economy hardly growing at all in the past few years (thanks to the COVID pandemic and Eskom’s continued rotational power cuts), consumer spending growth has been poor.

The recent upwards movement in interest rates combined with the massive inflationary impact of the war in Ukraine will make it even tougher for consumers to make ends meet. As interest rates rise, so retail sales growth falls.

The big three supermarket chains

Here is a five-year share price chart for some context:

Shoprite dominates this segment, with its market capitalisation of R130 billion being almost three times the combined market capitalisation of Pick n Pay and Spar.

In the mid-1980s, Pick n Pay was the undisputed leader in this space and was seeking growth in Australia in anticipation of local growth slowing. By 1986, it had constructed its first hypermarket in Brisbane and took Australian retailing by storm. This store was fully scanning-capable, a feature that no Australian retail operation had anywhere. Pick n Pay was midway through building its second Australian store when it was forced out of the country by a combination of Australian retailers such as Coles-Myer, the very powerful trade union movement in Australia and the Australian government. Although it attempted a comeback in Australia via the purchase of Franklin’s in 2001, this was not successful and just became a distraction to the main operation in South Africa and was disposed of ten years later.

Back in the late 1990s, I vividly remember talking to then-CFO Carel Goosen about why Shoprite didn’t use scanning in its supermarkets. He explained that Shoprite’s customers were at the low end of the social spectrum and only bought small baskets of goods, hence scanning would have been over-capitalising. Fast forward ten years and Shoprite was at the forefront of retail technology in South Africa, not just in scanning but also in logistics, with special reference to centralised distribution.

Fifteen years ago, Pick n Pay and Shoprite were of similar size and had similar operating profit margins, but today, Shoprite could be operating on a different planet the gulf between the two is so wide. Pick n Pay lost out in a big way as a result of the resignation of long-time, hugely charismatic CEO Sean Summers and it took many years to find a suitable replacement for him. During that time, Pick n Pay lost substantial market share and it was only with the arrival of Richard Brasher from Tesco that the rot stopped.

Shoprite meanwhile was going from strength to strength, cementing its first mover advantage into the rest of Africa and bolting on a variety of new ways of improving its operating margin. The CEO at the time was James Wellwood “Whitey” Basson, a larger-than-life character who never missed an opportunity to take a crack at his opposition peers during lively analyst presentations at the Michelangelo Hotel.

And now we’re in new territory, with both Basson and Brasher having left and been replaced by Pieter Engelbrecht at Shoprite and Pieter Boone at Pick n Pay.

Engelbrecht had massive shoes to fill but he has flourished in the role of CEO and has taken Shoprite to new heights. Checkers, the upmarket chain within the Shoprite group, is unashamedly taking Woolworths Food on at its own game – and winning! And at the lower end, Shoprite continues to take market share away from all-comers. All of the operations are enabled by world-class bespoke retail technology.

But what of Pick n Pay? Pieter Boone is a man on a mission and his lengthy strategy session recently underlines that determination. Pick n Pay’s strategy is threefold: firstly to rapidly roll out the hugely successful Boxer chain at the low end of the social spectrum, secondly to cement a sustainable relationship with Takealot.com for the efficient execution of its home delivery business and thirdly, Project Red, a type of “halfway-house” between a full line Pick n Pay and Boxer.

What is really strange when comparing Pick n Pay and Shoprite is the fact that their P/E ratios are almost identical, yet Shoprite has a far better track record than Pick n Pay over the short, medium and long terms. Liquidity used to be an issue with Pick n Pay but that has long ago been resolved with the removal of the controlling pyramid share, Pikwik.

The market seems to believe that Pick n Pay has greater upside potential than Shoprite from the current level and is giving Boone the benefit of the doubt.  Shoprite’s market share is also considerably higher than Pick n Pay’s and so there is perhaps a feeling that Shoprite may be nearing saturation in the local market. In recent times, Shoprite has deliberately reduced its exposure to the rest of Africa, only remaining in those jurisdictions in which it is comfortable.

This preference for Pick n Pay is understandable in that context, but this view conveniently ignores Shoprite’s ability to continually rise to new challenges. It also assumes that Boone’s strategies will work.  

Spar is very different to both Shoprite and Pick n Pay in the sense that it hardly owns any of the stores that trade under the Spar banner. Spar has been in South Africa since 1962 and was separately listed in 2005, having been unbundled from its parent, Tiger Brands. 

It is effectively a warehousing and distribution company, supplying Spar outlets in South Africa, Ireland, the south-west of England, Switzerland and Poland. Erroneously referred to as a franchise operation, it should more correctly be termed a banner group.

Spar doesn’t own most of the stores to which it delivers and so there is not a great deal of consistency in the Spar Group compared with Shoprite or Pick n Pay. Spar has never sought growth in the rest of Africa, preferring the developed world of Europe in which to expand.  Its latest growth vector, Poland, is proving to be difficult and that jurisdiction’s proximity to Ukraine isn’t helping matters. Nevertheless, Spar has demonstrated that it is a solid performer and that trend seems likely to continue. It currently trades at just over half the rating of Pick n Pay and Shoprite.

The other three

Superficially at least, Massmart had everything going for it when it was announced in September 2010 that Walmart, the world’s largest retailer, was buying control of the company. There was genuine fear and trepidation among many local retailers, who feared that Walmart might crowd them out over time. To be fair, Whitey Basson at Shoprite was relatively dismissive about the transaction from the start and was confident that Shoprite could match Massmart’s pricing in the stores on general merchandising and anything else. In the end, he turned out to be right.

Massmart was also tipped to be the largest retailer in Africa, marching through the continent offering discount prices on everything from food to electronics. As with a number of other SA retailers, Massmart is no longer expanding into the rest of Africa but is retreating from it.

The honeymoon period between Massmart and the market lasted about three years and the share price peaked at around R160 in 2013, since which it has been in secular decline, punctuated only by a dead-cat bounce in the past couple of years. Since 2010, the company has had four CEOs, beginning with the mercurial corporate entrepreneur Mark Lamberti, followed by his protégé Grant Pattison, then the former CFO Guy Hayward and the current CEO, a Walmart appointee Michell Slape, since 2019.

Slape was brought in by Walmart as a final attempt to turn the ailing retailing conglomerate around. Since his appointment, Slape has certainly streamlined the business and has all but retreated from the rest of Africa. But this seems to be a classic case of saving yourself into bankruptcy. The model is manifestly wrong for South Africa. What works for low-end America doesn’t necessarily work in SA.

Already initiatives such as selling fresh produce beside electronic goods have been scrapped, Dion Wired has been closed down and Cambridge Foods is being sold to Shoprite. And yet, Massmart still keeps losing money.

Slape is a very bright fellow, to be sure. An alumnus of Thunderbird University in Arizona, which specializes in international relations, Slape obviously knows how to play the political game. But he’s not a dyed in the wool retailer. Massmart hasn’t had one since Lamberti. So it’s unlikely that Slape is going to stumble across the magic formula that is going to allow it to change direction and start making super profits again.

Majority shareholder Walmart must be getting irritated by the length of time Massmart is taking to turn around. What began as a brave new adventure into Africa has turned into a reputation-damaging nightmare. To be fair though, Walmart has hardly been a raging success anywhere outside of North America. It persevered with Asda in the UK for over twenty years, eventually limping away from it after selling it to the Issa Brothers / TDR Capital last year for almost exactly what they paid for it in 1999.

The most likely outcome in my honest opinion is that Walmart will buy out the minorities in Massmart, delist it from the JSE and sell off the assets piecemeal.

To finish off the section on Massmart, here is the same five-year chart as before, with Massmart now included:

Clicks is a highly iconic South African brand, offering pharmaceuticals, toiletries, cosmetics and selected general merchandise through an extensive network of stores in southern Africa. It rarely (if ever) shoots the lights out but the market seems to like its relative predictability and has been prepared to apply an extremely high rating for this consistent performance.

Is a 34x P/E ratio really justified when the earnings growth is so relatively pedestrian? Probably not.

Having said that, Clicks’ five-year CAGR of 12% is easily the best in this investable universe, which may go some way towards explaining why its P/E ratio is so rarefied in relation to most of the other shares.

And the same applies to Dis-Chem, although I have to confess to being a real Dis-Chem junkie when it comes to their stores, Their range of merchandise is so compelling that I rarely enter a DisChem and come out with less than a full basket or trolley. From a consumer perspective, their choice is way better than Clicks in my honest opinion and their prices are exceptionally keen.

But from an investment perspective, it’s a different story.  The five-year compound annual growth rate (CAGR) in headline earnings per share at Dis-Chem is only 5.8% and most of that came in the 2022 financial year. The four-year CAGR between 2017 and 2021 was flat. So how on earth this share manages to command such a lofty P/E ratio, vying for the highest in the sector with Clicks, is beyond me. The market is probably expecting much higher growth out of Dis-Chem relative to Clicks in future as its market capitalisation is just over 1/3 of Clicks’ market cap. But in a moribund consumer economy, it’s not clear where that growth is coming from.

Here is a five-year chart of Clicks vs. Dis-Chem:

So, the non-discretionary retailers present a very confusing picture for the aspirant investor in this space. Foreign shareholders have tended to drive this market, with the local fund managers largely expressing a healthy scepticism regarding the outlook. One foreign fund manager gave a clue as to why foreigners like SA retailers. He said the combination of developed-market management and developing-market dynamics was unique. And in a sense, he was right. Nowhere else do you get such a compelling combination.

Another old-time emerging-market specialist gave me a different view when I asked him how SA stacked up against emerging market peers. He laughed loudly and stated quite categorically that SA is not an emerging market but rather a developed market with high unemployment. And that high unemployment mimics true emerging economy dynamics. I could also see the logic of that argument.

So the bottom line appears to be that Shoprite will probably continue growing its top line and defending/adding to its market share. It has two growth vectors: one at the top-end in the space currently dominated by Woolworths Foods and the other in the low-end, but that is going to get progressively tougher as Pick n Pay rolls out more and more Boxer stores. Bottom line growth at Shoprite will probably continue to be elusive.

Pick n Pay is embarking on another big hairy audacious goal (BHAG). It’s not the first for this group, nor will it be the last. Success will be measured by whether it can claw back profitable market share from Shoprite and the jury is out in this regard.  We need to monitor its progress very carefully.

Spar will be judged on how well or how badly its foreign ventures turn out to be, especially the currently troublesome Polish operation. Having said that, it’s on a fairly undemanding P/E ratio, so the risk of investing in Spar relative to both Pick n Pay and Shoprite is lower.

As far as Massmart is concerned, it appears to be all over bar the shouting. If it can’t come right in the current environment with the benefit of a favourable base of comparison from the Covid-depressed levels of 2020, It is unlikely to do so in a higher interest rate environment. At some point in time, parent Walmart must surely throw in the towel.

Both the Clicks and Dis-Chem share prices have a lot of risk attached to them, due to their extremely high ratings. They daren’t put a foot wrong now and are priced for perfection.

Chris Gilmour writes opinion pieces for Ghost Mail every Monday. He has previously written popular pieces on Russia and China if you fancy a geopolitical read. He has also written on inflation, interest rates and bear markets in this article.

Ghost Bites Vol 35 (22)

The Finance Ghost
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Ghost Bites Vol 35 (22)
  • PBT Group gained 12.5% after releasing a trading statement for the year ended March 2022. Revenue is expected to be 21.2% to 26.1% higher. There’s a great margin expansion story here, visible in EBITDA (a proxy for operating profit) growing by between 38.2% and 43.8%. Importantly, the profit turns into cash, evidenced by cash from operations increasing by between 44.5% and 50.4%. I’ll hit you with one more percentage range: normalised headline earnings per share (HEPS) is 60.6% – 67.2% higher. PBT is a company I’ve written about many times before, as this is an excellent example of how you can buy exposure to themes like “big data” right here on the JSE.
  • Etion Limited has released a trading statement for the year ended March 2022. Headline earnings per share (HEPS) is expected to be increase by between 26.9% and 47.3% to 11.8 cents – 13.7 cents. This includes discontinued operations. After LAWTrust was sold (for a R140.6 million gain), the remaining operations are Etion Create and Etion Connect. Etion is in the process of selling Etion Create to Reunert for around R200 million, with a circular due to be sent to shareholders on 1 August 2022. This would leave Etion with only the Etion Connect business, a network hardware business.
  • Steinhoff has released results for the six months to March 2022. Group net debt has increased sharply over the past six months from €8.1 billion to €10.2 billion, mainly due to a substantial decrease in the corporate cash balance. The operating company debt is nearly €1.5 billion. The critical point is that all litigation against Steinhoff has now been settled, so the group can finally focus on the balance sheet. There is one remaining legal headache, as the group is fighting with Tiso Blackstar and amaBhungane to avoid having to provide the investigative journalists with the PwC forensic report. The High Court already ruled against Steinhoff, with the latter filing a notice applying for leave to appeal on 23 May 2022. There’s still plenty of work for the group to do financially, with finance costs of R579 million vs. operating profit of R297 million. You don’t need your calculator to realise that the balance sheet isn’t sustainable. The share price has lost nearly 46% of its value this year, a nasty hangover after strong end to 2021.
  • Whenever a company needs to appoint a “Chief Restructuring Officer” you know that the proverbial has hit the fan. Even Tongaat can’t sugar-coat its issues any longer. Piers Marsden from Matuson and Associates has been appointed to that role. Tongaat isn’t officially in Business Rescue but that is Marsden’s specialty. His previous experience is in “implementing restructuring plans to deliver long-term sustainable growth and future value to all stakeholders” at economic powerhouses like Cell C, Ascendis Health and Edcon. Ahem. As you may have guessed by now, the other part of the announcement is that Magister Investments has walked away from what was supposed to be the opportunity to slide through 35% ownership without having to make a mandatory offer. The TRP threw that plan in the bin, ruling (based on a legal technicality) that the waiver of mandatory offer was not valid. Tongaat has lost nearly 98% of its value in 5 years and over 50% this year. Remember, a share price can always halve again (technically until it reaches 1 cent per share). Sometimes it makes sense to buy when there is blood on the streets. In other cases, it makes sense to find another street.
  • There’s big news in the value unlock journey of RMB Holdings Limited, which is now just a property investment company. This is a legacy vehicle that no longer has anything to do with the financial services group, having unbundled the shareholding in FirstRand in 2020. RMB Holdings has agreed to sell the shareholder loan claims and A ordinary shares in Atterbury Europe (representing a 37.5% stake in that company) to Brightbridge, an existing shareholder of the company. The parties shook hands on a price of R1.75 billion, to be settled by Brightbridge in cash if all goes to plan. Atterbury Europe’s net assets at the end of March were nearly R6 billion and profits were R1.4 billion. Remember, the selling price relates to a 37.5% stake. The net asset value per share of RMB Holdings is expected to decrease by 13.6% if this goes ahead, which suggests that Brightbridge is paying a price lower than RMB Holdings’ carrying value of the asset. The proceeds would be used for a special dividend, which is why the share price closed nearly 11% higher at R1.72 (vs. a pro-forma net asset value per share of R2.39 assuming the deal goes ahead).
  • Sibanye-Stillwater has given an update on the impact of regional flooding at its US platinum group metals (PGM) operation. The irony of this issue based on the company’s name is something I can’t get over, especially as the floods are at the Stillwater mine! Overall, the mine was largely unaffected, but repairs to surrounding infrastructure (e.g. bridges) will take 4 – 6 weeks and the mine will remain suspended over that period. This facility contributes 60% of Sibanye-Stillwaters’ US PGM production.
  • Redefine Properties has given the market more information on the contribution of EPP (the Eastern European part of the business) to the group’s distributable income guidance. For the year ending August 2022, Redefine has previously guided distributable income per share of between 50 and 55 cents per share and a payout ratio of around 90%, suggesting a dividend between 45 and 49.5 cents per share. Redefine owns 95.45% of EPP, as some minorities stubbornly stayed behind after EPP was delisted as part of the buyout by Redefine. EPP’s contribution is expected to be 7.5 cents in this financial year and between 8.5 and 9.5 cents in the following financial year. Of course, there are numerous assumptions behind this, so Redefine can only give a best estimate.
  • Tiger Brands has been taking advantage of recent share price weakness to execute share buybacks. Since the authority was given at the AGM in mid-February, Tiger has repurchased just over 3% of shares in issue at prices between R137.88 and R170.47 per share, which tells you a lot about the recent share price volatility. The average price paid was around R155.80 and the closing price on Friday was R145.61. Tiger Brands is down nearly 20% this year.
  • SA Corporate Real Estate released a pre-close presentation (you can find the full version here if you are interested). Net property income growth is flat in the industrial portfolio, slightly positive in retail and significantly negative in office (-24.1%). The affordable housing side of the business did well, up 14.2%. The vacancy rate in office is up from 18.9% to 22.8% and some of the areas will be repurposed for storage. The retention rate for office has deteriorated to 48.4% in this period and reversions have worsened to 24.6%, so it really is a mess in the office property sector. Luckily for SA Corporate Real Estate, office is a tiny part of the portfolio, so I’m mentioning these numbers to give insights into the challenges facing landlords in this sector. The share price is down nearly 15% this year.
  • Marshall Monteagle has released its results for the year ended March 2022. This is an unusual one, as the financial year-end was changed and so this period covers 18 months. Needless to say, that ruins comparability to the prior year, so it doesn’t help much to know that revenue over 18 months was 67% higher than the preceding 12-month period. In the interests of giving you something useful, this period saw around 56% of revenue generated in South Africa, with around 42% in Europe and the remainder in the United States.
  • Finbond released a cautionary announcement based on negotiations regarding a potential acquisition in Mexico. There’s hardly any liquidity in the stock, so a drop of nearly 24% on the day may not even reflect the reaction to this announcement.
  • There’s a slightly wobbly in the Irongate Group buyout, but hopefully nothing major. The property fund is being acquired by Charter Hall and the deal needs to go through various regulatory approvals. The Foreign Investment Review Board (FIRB) needs to approve the deal and has requested an extension of the deadline to 1 July, which means that the approval won’t be in place for the scheme meetings on 29 June. These are the meetings of shareholders at which the deal needs to be approved in order to go ahead. The company is not aware of any reasons why the FIRB approval wouldn’t be granted. This isn’t the end of the world by any means, as shareholders would simply need to give their approval based on the assumption that the FIRB will also say yes. If shareholders planned to vote against the deal, they would do so regardless of regulatory approvals!
  • Premier Fishing and Brands was slower on the draw with the update on its dispute with Nedbank over the bank wanting to close its accounts. AEEI (the controlling shareholder in Premier) had already announced that the Equality Court had granted an interim interdict preventing Nedbank from terminating the banking relationship. The same applies to Premier, which was the co-applicant in the matter.
  • The Company Secretary of Altron has resigned and will be heading off to Oceana Group, a company in need of stability in its leadership structures.
  • Afristrat has reminded investors to exercise caution when trading in the shares, as the company has defaulted on its issued notes. Afristrat needs to make an offer to the current holders of notes and preference shares to convert their holdings into ordinary shares. The company has lost almost its entire value over the past few years.

SABC News interview: patience in a bear market

The Finance Ghost
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SABC News interview: patience in a bear market

Approximately once a month, I join the team on SABC News for an interview on key themes in the market.

I always enjoy the live TV interviews, as they tend to be a great way to discuss many interesting points in a short space of time!

In this discussion, we covered the following questions:

With recession risks rising in the US, how concerned are you about global or even local markets?

Given the current environment, is there a right time for share buybacks?

What is your assessment of local food retailers compared to global peers?

When choosing which sectors to gain exposure to, what should one be paying close attention to or perhaps even ignore?

Are you selling anything in this environment?

Use the video player below to watch the interview:

Ghost Bites Vol 34 (22)

The Finance Ghost
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Ghost Bites Vol 34 (22)
  • Fortress REIT released a webinar hosted by Bruce Whitfield, in which the directors and the company’s corporate advisor tried to deal with the issues (including the prickly ones) around Fortress’ proposal to collapse the dual-share structure into a single class. To save you the time of watching the webinar, I wrote on the key points and some of the controversial issues in this feature article.
  • RECM and Calibre (RAC) shareholders will be receiving shares in Astoria, as RAC has resolved to unbundle 5,115,000 Astoria shares to RAC shareholders in the ratio of one Astoria share for every 10 RAC participating preference shares or ordinary shares. This eliminates the cross-holding between the companies and is a far better solution than a sale of Astoria in the open market, as the company is trading at a significant discount to net asset value. Separately, RAC released its results for the year ended March 2022. Although the net asset value fell by 32%, this can almost entirely be attributed to the previous unbundling of Astoria shares. RAC’s key investment is alternative gaming group Goldrush, which contributes 92.3% of RAC’s assets. Goldrush managed to achieve record EBITDA despite the challenges of Covid-related restrictions.
  • Sephaku Holdings has released financials results for the year ended March 2022. Revenue and EBITDA increased at Metier, including EBITDA margin improving from 8.7% to 9.5%. At SepCem, EBITDA margin fell from 15.9% to 14.6%, offsetting the benefit of higher revenue. Metier is a wholly-owned subsidiary and contributed R30 million in profit after tax. SepCem is an associate of Sephaku (i.e. the listed company has a large minority stake) and equity-accounted profit attributable to Sephaku was R29 million.
  • Just as Oando Plc started to catch up on outstanding financials, it seems as though the company may be leaving the market. Based on a court ruling driven by a petition from minority shareholders, Oando will need to make an offer to all minority shareholders (representing 42.63% of the shares in issue). Nigerian law was too niche for even the cruellest of examiners at Wits where I studied accounting, so I’m afraid that I can’t give you much more information on this.
  • There seem to be some interesting governance changes at Eastern Platinum, the platinum group on the JSE that has strong Chinese shareholder influences. After some reshuffling of directors, the board is now completely independent from the executive management team. This is a good thing, provided you believe in prevailing corporate governance frameworks.
  • African Equity Empowerment Investments (AEEI) has been in dispute with its bankers, Nedbank, over the bank’s intention to terminate the banking relationship. AEEI was granted an interim interdict in the Equality Court to prevent Nedbank from doing so. This is subject to final proceedings at the court, which AEEI notes will take a long time to conclude. In the meantime, the company has saved its bank accounts.
  • Trustco has renewed its cautionary announcement based on the negotiation of a management services contract being entered into with Next Capital. Considering Trustco is late with its interim financial statements with no valid excuse given, I would just exercise caution in general when thinking about them.
  • The CEO of Santova has bought shares in the company worth around R132k. This is lunch money as far as director dealings usually go on the JSE, but it’s still worth a mention to see a purchase coming from the man holding the steering wheel.
  • It is common to see listed company directors exercising share options and then selling a portion of the shares to cover taxes, so I don’t bother mentioning these scenarios. I do want to highlight that the CFO of Industrials REIT exercised options and then sold the whole lot. The share price is down nearly 23% this year.
  • A director of EPP, a subsidiary of Redefine, has bought shares in the company worth nearly R162k. This is the second recent purchase of shares by a director of the Eastern European subsidiary.

Covid breached this Fortress

The Finance Ghost
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Covid breached this Fortress

In a flashy webinar hosted by Bruce Whitfield, Fortress REIT tried to address some of the most pressing questions around the proposal to collapse the two share classes into one.

I must be honest, I would’ve just preferred a basic SENS announcement. Bruce is great, but 27 minutes of watching the well-dressed team in a fancy setting was a bit much. Here’s the link in case you want to watch it yourself.

To save you time, I’ll deal with some of the key points below.

First, a trip down memory lane.

Why do dual-share structures exist?

Back in the day (but not quite when Chappies cost one cent), there was a “growth mindset” in the market. I know, I know, that’s hard to believe. To respond to this, the dual-share structures offered a yield-focused investment instrument and a residual profit sharing instrument which did well in the good times and poorly in the bad times. This was done to make property more appealing to a broader base of investors.

These were typically structured as a debenture and a share, which gave holders of the debenture (a debt instrument) a genuine right to receive an income yield. That’s not the same thing as a distribution, which is seen as a dividend by the Companies Act. When the debentures were converted into shares, this nuance was perhaps missed by some.

Andrew Brooking is a founding director of Java Capital, the corporate advisory house that has absolutely dominated in the property sector. He was on the webinar and he is familiar with all these structures because he was intimately involved in creating them. He talked a bit about how the market conditions have changed, leading to a major problem for dual-share structures.

What is Fortress proposing?

Fortress now wants to collapse the A share and B share structure into a single share class. A dual-share structure is risky in a slower growth environment and creates significant challenges for the company in trying to retain its REIT status.

The CFO talks about how the issue impacts both classes of shareholders. Earnings need to reach a certain benchmark before a distribution can go to A shareholders. Until the A shareholders are paid, the B shareholders can’t receive a distribution. As Fortress needs to declare distributions to retain REIT status and the current benchmark isn’t being met, this puts everyone in a tight spot.

After making short-term amendments to the Memorandum of Incorporation in the past couple of years (the founding documents of the company), Fortress needs a sustainable solution. The directors talk about being tired of putting “patches” on.

After making short-term amendments to the Memorandum of Incorporation in the past couple of years (the founding documents of the company), Fortress needs a sustainable solution. The directors talk about being tired of putting “patches” on.

The Fortress Chairman noted that the company was aware of the risks of growth in distributions overtaking growth in property values, which led to a board sub-committee being established just before Covid. Naturally, everyone’s favourite virus accelerated a problem that was already there.

I’m also going to point out that there have been vocal critics on Twitter of the approach taken by Fortress. Although one never has to look far to find a conspiracy theorist, there are seemingly valid questions being asked by analysts around (1) what Fortress could’ve done to avoid this and (2) whether there are conflicts of interest at play here given the holdings of management in each class of shares.

The management team highlights that the independent board is making the proposal, not the management team. The Chairman pointed out that management is incentivised under long-term schemes with an equal number of A and B shares. Finally, the Chairman also noted that management is overweight A shares based on value, which will be disclosed in the circular.

Why is REIT status so important?

Recognition as a Real Estate Investment Trust (REIT) is critical because of tax reasons. REITs pay almost no tax, as distributions are tax deductible. Simply, this means that they serve as a conduit between investors and underlying property investors.

For tax-exempt investors like pension funds, this means that no tax leakage is experienced between the properties and the eventual pensioners. For non-exempt investors, REIT distributions are taxed at income tax rates rather than dividend tax rates. This is important to remember, as a yield on a REIT is subject to higher tax for most investors than the yield on a non-property company.

Brooking pointed out that the loss of REIT status technically isn’t a death blow to Fortress. He’s right on a very technical reading of things. The management team is far more concerned as they understand what would happen to the share price. If REIT status is lost, the shareholder register will probably be thrown into disarray. Pension funds would likely run for the hills, leading to a dumping of shares in the market.

The Fortress team pointed out that the loss of REIT status would also impact the ability to raise capital, which means fortress would have to retain capital to grow. The reality is that the JSE hasn’t been kind to non-REIT property funds, so it really would be a poor outcome.

How do the economics work?

This is where the problems start, you see.

Everyone agrees that the company needs to retain REIT status. I don’t think anyone believes that a dual-share structure is better than a simple structure. That’s where the agreement ends, though.

The way in which the structures are collapsed has a significant impact on the relative values of the A and B shares. Fortress is proposing a 3.01 ratio in favour of the A shareholders.

Brooking defends this methodology by noting that they engaged with a wide range of shareholders and considered the distribution rights going forward. The base assumption behind the ratio is that the company would lose REIT status after failing to declare a distribution in October, something that has never happened before on the JSE.

The Chairman correctly notes that the concept of a fair and reasonable ratio would always be a range and that the challenge is whether the scheme is palatable for shareholders. In this case, if everyone is unhappy, they’ve probably hit the right number.

If the scheme passes, there will be a dividend by the end of October.

Brooking also points out that there are two financial years’ worth of dividends that the company is trying to release to shareholders, as they couldn’t be paid because the benchmark wasn’t reached.

We are in new territory here. Some shareholders feel like they are being held hostage, whilst others see this as a necessity in the long-term story of the company. I don’t have a position in either class of shares.

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

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

Exchange Listed Companies

Fortress REIT is to collapse the company’s dual share structure into a single ordinary share. Fortress will offer to repurchase all issued Fortress A shares (excluding the 26,86 million shares held as treasury shares) in exchange for Fortress B shares at an exchange ratio of 3.01 Fortress B shares per Fortress A share.

The results of the mandatory offer made by private equity funds Glenrock Lux PE No 1 and Glenrock Lux PE No 2 to Universal Partners shareholders of R18,63 per share, closed with just 809,545 shares tendered representing 1.12% of the company’s shares in issue. Following the closure of the offer, the offerors collectively own a 35.3% stake in Universal Partners.

Capital & Counties Properties (Capco) will, in a reverse takeover, acquire the remaining 74.8% stake in Shaftesbury plc in a deal valued at c.£1,47 billion. In terms of the deal Shaftesbury shareholders will receive 3,356 new Capco shares for each Shaftesbury share held. Shaftesbury shareholders will own 53% of the combined group and Capco shareholders 47%.

Last week the results of the mandatory offer by concert parties Raubex and Pelagic to Bauba Resources minorities secured just 10.59% of the company’s total issued share capital resulting in Raubex holding 61.68% in the company. This week Raubex, who wants to take full control has made a general offer to shareholders at the same price as the mandatory offer or 42 cents per share.

Oando plc has released the outcome of a court ruling following a petition filed in March 2021 at the Federal High Court in Lagos by 14 shareholders holding an aggregate 42,63% stake. The court has ruled in favour of the request by the petitioners that it order the buyout of their entire shareholding by the company.

Unlisted Companies

PAPE Fund 3, a local mid-market private equity fund, has acquired an equity stake in Entersekt, a global leader in device identity and payment authentication.

Avacare Global, a South African integrated holistic provider of healthcare products, services and solutions, is to receive an equity investment of US$28,6 million from the International Finance Corporation (IFC). The funding will be used to expand its manufacturing and distribution of various pharmaceutical (including generic) and healthcare consumable products in Africa.

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

Global multi-energy company TotalEnergies has acquired a 49% stake in integrated forest products company Compagnie des Bois du Gabon (CGG) following the exit of private equity firm Criterion Africa Partners. Financial details were undisclosed.

AIM-listed Kazera Global plc is to acquire a 71% stake in Great Lakes Graphite which owns three exploration licenses covering the Homa Bay and Buru Hill Rare Earth Elements projects in Kenya. The acquisition is for an aggregate £750,000, payable in three tranches. As part of the transaction, an option to acquire a 20% stake (of the 71%) will be granted to Caracal Investments for US$1 million. If within 18 months this is not exercised, current shareholders may take up the option.

EFG Hermes subsidiary valU, a BNPL lifestyle enabling fintech platform based in Egypt, has sold a minority (4.99%) stake to the Saudi Alhokair family for US$12,4 million.

Nairobi-headquartered SunFunder, a private debt management firm financing renewable energy projects in Africa and Asia, has been acquired by European impact investor Mirova. The deal will expand Mirova’s investment platform in emerging markets and drive its strategy to finance the environmental and energy transition.

EFG Hermes’ microfinance solutions Egypt-based subsidiary Tanmeyah has acquired Fatura, a provider of B2B e-commerce marketplace and digital financing services. The value of the stock and cash transaction was undisclosed.

Land Degradation Neutrality (LDN), an investment fund managed by Mirova, has acquired a minority stake in Moroccan Atlas Fruits Company. The new partnership will enable Atlas Fruits to accelerate is development by increasing its orchard cultivation area and thereby creating more jobs.

Thepeer, a Nigerian tech infrastructure startup has raised US$2,1 million in a seed round led by the Raba Partnership. The platform creates the technology infrastructure for businesses to easily integrate and enable them to support fast, direct and efficient transactions across businesses.

Lagos-based health tech Healthtracka with its at-home lab testing platform has raised US$1,5 million in seed funding from Hustle Fund and Ingressive Capital. Other participants in the round include Flying Doctors and Alumni Angels. The startup aims to fill the gap where infrastructure is lacking and, where due to the poor doctor-to-patient ratio regular checkups are an afterthought.

Ugandan fintech platform Tugende has closed a pre-series B investment round which will enable it to expand its asset financing and digital services to small businesses. The round was led by Partech Africa with other existing investors.

Fido, the Ghanaian fintech company, has raised US$30 million in a round led by private equity fund Fortissimo Capital with participation from Yard Ventures. In addition, the startup which extends credit via mobile phones, raised undisclosed debt funding in a series A round. Funds will be used to roll out new products and position it to scale its presence in Africa.

Egyptian AI tech startup Synapse Analytics has raised US$2 million in a pre-series A funding round. The startup aims at building trust between AI and the businesses trying to adopt machine learning in their operations through its automation platform Konan. The round was led by Egypt Ventures.

Greenage Technologies Power Systems, a Nigerian startup driving energy inclusion by manufacturing and distributing locally made solar energy equipment, has received a US$500,000 investment by Shell-funded impact investment company All On. The investment, a mix of equity and convertible debt, will be used to scale its manufacturing business enabling it to meet increasing demand.

VeendHQ, a Nigerian embedded fintech firm, has secured US$330,000 in a pre-seed investment round from participants Magic Fund, The Oak Capital, Future Africa, Berrywood Capital among others. The startup enables microlenders, banks and merchants to embed credit into multiple ecosystems. The investment will be used to expand the products offered and scale operations.

Egyptian digital logistics startup Khazenly, has raised US$2,5 million in seed funding in a round co-led by Arzan Venture Capital and Shorooq Partners. Proceeds will be used to develop Khazenly’s products and services and scale its existing facilities.

CrossBoundary Energy Access (CBEA), a financing facility for mini grids based in Kenya, has raised US$25 million in new funding from ARCH Emerging Market Partners, the Bank of America and the Microsoft Climate Innovation Fund.

Construction tech platform Jumba has secured US$1 million in a pre-seed funding round led by Enza Capital with participation from Seedstars International Ventures, Chandaria Capital, Future Africa, Logos Ventures, First Check Africa and several angel investors. The startup allows operators of hardware stores to restock in a seamless manner by connecting retailers with manufacturers. The funds will be used to scale the business to other cities in Kenya.

Boyot, a startup offering an end-to-end operating system for payments and financial services exclusively for the real estate market, has raised an undisclosed six-figure funding in a pre-seed round. The Egypt-based startup will use the fund, raised from a Kuwait-based real estate firm, to scale the business by expanding its client base, open an office in Kuwait and invest in its product technology.

Jodop, a Morocco-based on demand temporary staffing platform, has raised US$1 million in a funding round led by Azur Innovation Fund. Other participants include Plug and Play and several business angels. The startup will use the funding to scale its presence into new countries including Egypt and further improve its tech product.

Energy company Sodigaz has received a financing package from the International Finance Corporation (IFC) to boost access to cleaner and more reliable energy in Burkina Faso.

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

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