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Karooooo needs long-term belief

The Finance Ghost
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Karooooo needs long-term belief

I have a long position in Karooooo (i.e. I own the stock) that I initiated a couple of months before the big announcement came of a migration to the Nasdaq (back when it was called Cartrack).

Since then, the company has been growing revenue at solid rates but this hasn’t translated into profit growth, as the cost of acquiring a customer is high. It takes many months for Karooooo to achieve break-even on a new customer. In a period of high customer growth, this causes a decrease in profit margins.

The latest quarter does include a swearword in this economic model: churn. That’s not what I want to see. Customers need to come onto the platform and stay there for a few years, otherwise Karooooo loses money on new customers. The company attributes this to financial pressure on customers from the pandemic.

The latest financial update by the company is for the fourth quarter of the 2022 financial year. It includes the numbers for the full year as well.

By the end of February 2022, Karooooo had 1,525,872 subscribers vs. 1,306,000 a year prior. This is a 16.8% increase in subscriber numbers over 12 months. As noted above, the impact on margins is negative, with gross profit margin decreasing from 71% in FY21 to 68% in FY22. The company believes that gross margin can increase in FY23. I certainly hope it will!

For the year, operating profit in the Cartrack business increased by just 1% to R731 million. Growth initiatives Picup and Carzuka incurred operating losses of R3 million and R13 million respectively. The net result was a decrease in earnings per share of 3%. With once-offs removed, it would’ve increased by 1%.

In the last quarter of the year, total revenue increased by 20% year-on-year to R742 million. This is a similar growth rate to revenue for the full 2022 financial year.

The expectation for the 2023 financial year is subscriber numbers between 1.7 and 1.9 million, subscription revenue between R2.95 billion and R3.1 billion and adjusted EBITDA margin in Cartrack of between 45% and 50%.

The group has R718 million in cash after raising R349 million when it listed on the Nasdaq in April 2021. R70 million was used to acquire Picup in September 2021.

Free cash flow of R379 million in 2022 was down from R460 million in 2021. This puts the group on a lofty free cash flow multiple of around 40x, so growth needs to be maintained.

Disclaimer: The Finance Ghost holds shares in Karooooo

Netcare is the perfect example of operating leverage

The Finance Ghost
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Netcare is the perfect example of operating leverage

In a voluntary trading update for the six months to March 2022, Netcare announced that it achieved revenue growth of between 2% and 2.5%. You’ll probably agree that even the hospital food is more exciting than that.

The business was impacted by the Omicron variant in December and January. As I’ve written several times before, the pandemic was negative for hospital groups. As counterintuitive as it seems, the reason is that elective surgeries were impacted and this affected occupancy levels in the hospitals.

Despite this modest revenue growth, EBITDA margin still increased. This gives us insight into the extent of operating leverage in hospitals, as small improvements in utilisation can drive growth in profits. Occupancy in February and March averaged 62.4%. Another benefit to EBITDA margin was a drop in Covid-19 protective equipment expenditure.

Group EBITDA increased by between 8.5% and 9%, with normalised EBITDA margin improving by 100bps to 15.8%. If I understood the SENS correctly and if strategic project costs are excluded, the margin was 16.8%. At all times, I would treat normalised margins with suspicion as an investor. If strategic projects are required on a regular basis for the group to compete, then they shouldn’t be ignored by investors.

Net debt to EBITDA has improved over the past twelve months from 2x to 1.7x. The latest number is in line with the September 2021 (interim) level. In absolute terms, debt has declined from R6.1 billion to R5.4 billion in the past year. The group has cash resources and undrawn committed facilities of R3.4 billion.

I was saddened to note that March 2022 saw the highest mental health occupancy levels since the start of the pandemic. This is the true legacy of the virus and the response to it by governments around the world. We’ve really been through a lot.

Moving to segmentals, Hospitals and Emergency Services grew revenue by between 2% and 2.5% and EBITDA by between 7.7% and 8.2%. EBITDA margin of 15.5% was well up on the comparative interim period (14.7%) and FY21 at 15%.

In Primary Care (e.g. medical and dental clinics), revenue growth was between 5.2% and 5.7%. This drove a substantial increase in EBITDA of between 30% and 32%, with the effect of operating leverage clearly visible. EBITDA margin expanded from 18.4% to 23% year-on-year.

In terms of strategic projects, the 427-bed Netcare Alberton hospital opened in April and construction of the 36-bed Akeso Richards Bay facility is complete. Another project highlighted in the announcement is the CareOn electronic medical record project, with 20 hospitals on track to be completed by the end of 2022.

ESG enthusiasts will also be pleased to learn that Netcare is the only healthcare institution in the world to win Gold Medals in all four categories of environmental sustainability in the global Health Care Climate Challenge.

The share price is slightly lower this year and just 4% up in the past twelve months. It has traded in a range between R14 and R16 in the past 6 months.

South32 production on track but there are cost pressures

The Finance Ghost
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South32 production on track but there are cost pressures

It’s been a rough week or so for mining production numbers, so a quarterly report from South32 may have been met with some nervousness from the market. This is a good time to remind you that the JSE attracts mining companies with operations all over the world, so pressures in South African production don’t translate into pressures on businesses with offshore operations.

With that out the way, it may make more sense to you that South32 released unchanged production guidance for FY22, with operations delivering according to plan. The group operates in Australia, Southern Africa and South America. It’s a bit like the old days of Super Rugby.

With a pre-feasibility study completed for the zinc-lead-silver Taylor Deposit in Arizona, the group also looks set to expand in the northern hemisphere.

South32 has reported strong quarterly production results in aluminium, copper, zinc, nickel and coal. Manganese production fell due to planned maintenance at the South African mines. This is the first time the group has reported copper production, now that the Sierra Gorda investment has been completed.

Supply chain issues are in play here, particularly in the aluminium value chain where movement of inventory at operations has slowed down. The company is obviously mitigating this to the greatest extent possible.

With freight pressures, higher raw material input prices and major currency movements, guidance for operating costs per unit has been revised higher.

Capital expenditure guidance has been reduced by USD36 million to USD702 million, attributable to a deferral of spend at Worsley Alumina into FY23 among other things.

At the end of March, South32 had cash of USD52 million after acquiring a 45% interest in the Sierra Gorda copper mine for USD1.4 billion during the quarter. This was funded by USD600 million cash and USD800 million from a short-term acquisition bridge facility. The bridge was repaid after the end of this period through the company’s inaugural USD bond issuance, in which USD700 million in senior unsecured notes (due 2032) were issued. These carry an interest cost of 4.35% per annum.

A group like this is always busy with deals. For example, the sale of the Metalloys manganese alloy smelter is not proceeding and will remain on care and maintenance for now. In better news, the group received approval from the Brazilian Competition Authority for the acquisition of an additional 18.2% interest in the Mineracao Rio do Norte bauxite mine, taking the ownership stake to 33%.

Finally, South32 is no longer selling commodities to Russian entities. Exposure to the country has historically been limited and no new business relationships are planned.

Alphamin: the market loves tin

The Finance Ghost
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Alphamin: the market loves tin

Tin miner Alphamin has been one of the most interesting and exciting stories on the JSE in recent times. Over 12 months, the share price is up more than 130%. This year, it’s up around 32%.

The company produces around 4% of the world’s mined tin from its high-grade operation in the Democratic Republic of Congo. On a regular basis, it has been announcing drill results from the area. The bad news is that you need a geology degree to understand most of it.

For example, you’ll be thrilled to learn that subsequent drilling has “intersected visual cassiterite” – sounds exciting!

The Mpama South resource offers exciting growth prospects and is getting plenty of attention in the market. Mpama North is currently in operation and Mpama South is the next area of expansion for the company.

Back in March, the company announced the results of 102 drillholes. The latest update covers the results from 12 drillholes, which have given the best intercepts received thus far at Mpama South.

After releasing strong numbers for the first quarter of the year, this is further good news for Alphamin shareholders. In the March update, the company noted that Mpama South would take Alphamin to 6.6% of the world’s tin production and that the operation would be expected to achieve first tin production by December 2023. No update to this guidance was given in the latest announcement.

PSG proposes an unbundling and delisting

The Finance Ghost
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PSG proposes an unbundling and delisting

There was a double-whammy of announcements from PSG. The company released results for the year ended February 2022 as well as a firm intention announcement for the value unlock transaction.

I’ll start with a brief overview of the results.

Net asset value per share was R127.49 as at 28 February 2022, representing an increase of 38.9% over the past 12 months.

PSG Konsult achieved a 32% increase in recurring HEPS, demonstrating once more the benefit of owning the client relationship rather than creating financial products. Curro could only manage an 8% increase in recurring HEPS. Zeder also contributed positively, with a meaty fair value gain and dividend income to sweeten the deal.

Moving into the smaller investments, PSG Alpha incubates new businesses (although its stake in Stadio can hardly be considered a startup) and recognised a gain in fair value for the year. Dipeo Capital is a B-BBEE investment holding company and suffered a drop to a negative equity value, which isn’t uncommon in these structures that are funded by preference shares with a high level of gearing i.e. very little equity value, like buying a house with a tiny deposit.

Of course, the market has been focusing on the unbundling rather than the underlying results. There is finally clarity on what the directors are planning here.

If the deal goes ahead, the following investments will be unbundled to shareholders: 60.8% in PSG Konsult, 63.6% in Curro, 34.9% in Kaap Agri, 47% in CA&S and 25.1% in Stadio. You probably aren’t familiar with the CA&S name. The FMCG company trades on the Cape Town Stock Exchange and will migrate its listing to the JSE before the unbundling.

PSG shares would then be acquired from shareholders at a price of R23 per share, which would reflect the assets that aren’t being unbundled (Zeder and PSG Alpha, including part of the stake in Stadio). The “Remaining Shareholders” (who currently hold 34.6% in PSG) would hold 100% of the vehicle once delisted.

This transaction is a direct result of the stubborn discount to net asset value that PSG has been trading at. The same is true for most investment holding companies in South Africa, so this is a structural issue in the market.

Of course, a deal like this requires shareholder approval. An independent expert is being appointed to provide an opinion to shareholders on whether the proposal is fair and reasonable.

Standard Bank flew the flag this quarter

The Finance Ghost
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Standard Bank flew the flag this quarter

Standard Bank provides quarterly information to the Industrial and Commercial Bank of China Limited (ICBC), which means the broader market gets a quarterly update as well. In this case, it covers the three months ended March 2022.

Group earnings were 28% higher this period than in the comparable period in 2021. Higher interest rates across many countries were a significant contributor here, as banks love it when rates go up. Of course, there’s a point at which the increases drive credit losses that offset the income benefit, but we are a long way off those levels in my view. The incredibly low rates during the pandemic haven’t been helpful to banks.

To complement the higher average interest rates, the bank achieved a larger average balance sheet i.e. there was growth in interest-earning assets. This is equivalent to a volume and pricing benefit in the same period, a great combination for earnings.

Transactional activity was higher, which supported all-important fee growth. The banks chase fees (vs. net interest income) as it improves Return on Equity (ROE), the primary driver of the valuation of a bank. Another contributor to this was trading revenue, which benefitted from volatile markets and higher commodity prices.

Unsurprisingly, operating expenses increased vs. the comparable period in this inflationary environment. The bank doesn’t give guidance as to the extent of the increase.

The credit performance was in line with expectations. There were lower impairment charges in most segments except Corporate and Investment Banking, which saw a net charge in this period due to loan book growth. This makes sense as the bank raises provisions as the book grows.

It’s interesting to see corporates borrowing again, something I’ve highlighted in my recent writing as a likely outcome of inflation and working capital pressures. This is good news for banks, particularly as rates increase.

Liberty is being 100% consolidated by Standard Bank as of 1 February 2022. There have been various accounting adjustments linked to this, resulting in a negative contribution from Liberty. Investors will likely ignore the accounting and be far more interested in how successfully the businesses can work together now that the acquisition has been completed.

Standard Bank holds a 40% stake in ICBC Standard Bank Plc, an emerging markets and commodities business that had exposure to entities impacted by the war in Ukraine. The business did a great job of reducing counterparty positions and reducing risk, eventually recording a small operating profit for the quarter excluding the receipt of a USD200 million insurance recovery back in January.

In terms of outlook, Standard Bank remains committed to delivering positive JAWS and an improving ROE in 2022. JAWS is the difference between growth in income and growth in expenses, with positive JAWS implying improvement in margins as income growth is the faster of the two.

Standard Bank is up around 18% this year.

MAS plans to deepen exposure to Romania

The Finance Ghost
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MAS plans to deepen exposure to Romania

Property company MAS has a chunky R15.6 billion market cap and is up around 2.7% in 2022, a modest increase. Over the past 12 months, the share price is up around 26.5%. The fund is focused on Central and Eastern Europe, with properties in countries like Romania and Bulgaria.

The company has announced the acquisition of six subsidiaries (and thus six retail centres) of PKM Development Limited in Romania. MAS already owns a 40% stake in PKM, so this is an acquisition from a related party.

Along with this deal, MAS plans to execute certain amendments to the joint venture agreement in place with PKM. PKM is part of the Prime Kapital Holdings group. That group and its associates (including the former CEO of MAS) holds around 21.5% of MAS’ ordinary shares.

As you can see, there are lots of cross-holdings here. To protect minority shareholders, related party rules make these deals more onerous from a compliance perspective and require an independent expert to opine on whether the deal is fair.

These proposed deals are part of MAS’ strategic objectives to achieve annual like-for-like net rental growth of at least 4% on the Central and Eastern Europe retail assets from a normalised post-Covid base.

Other goals to be achieved by the 2026 financial year include the completion of commercial developments at a cost of around EUR600 million by the joint venture. The expected weighted initial net yield on these developments is at least 9%. In addition, the joint venture is aiming for residential sales and deliveries of at least EUR200 million per annum at net after tax margins of 20%.

In commercial property (i.e. offices), MAS plans to acquire high quality assets worth at least EUR150 million during the 2022 financial year and another EUR50 million in 2023.

Shareholders should keep a watchful eye on MAS’ announcements, as further details on the transactions will be announced in due course.

Kaap Agri is on track with targets

The Finance Ghost
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Kaap Agri is on track with targets

The Kaap Agri share price has been trending down recently, having shed nearly 11.5% of its value thus far in 2022. Although agriculture is a tough industry, the listed companies in this sector have interesting businesses. Kaap Agri is the type of company that the market forgets about until the share price pops after an earnings update.

One of the business units in the group has been a retail fuel operation that owned the forecourt properties. Recently, Kaap Agri restructured this exposure to sell off the properties and retain the operations. These types of deals are typically aimed at optimising return on capital for shareholders.

This deal has now closed, so Kaap Agri has sold off the properties for a price of just over R444 million. R380 million has already been received and the balance should be received in May 2022.

In January, Kaap Agri announced the acquisition of the PEG Retail Holdings group, which will add 41 service stations to the portfolio. Most of these are national highway sites, so you can allow the image of the classic South African roadtrip to enter your mind. I was never shy of an early morning Wimpy milkshake when the opportunity presented itself.

As part of this deal, the fuel operations in Kaap Agri will have 50.98% direct Black Ownership as defined in the B-BBEE Codes. The management team in PEG will also be sticking around for the next phase of growth.

Operating these sites is a scale play and Kaap Agri is certainly taking that route. In contrast, agriculture group TWK (listed on the Cape Town Stock Exchange) is selling its fuel retail sites and focusing on car dealerships and tyres instead in its motoring-related division.

Kaap Agri expects the PEG deal to contribute four months’ worth of earnings to the year ended September. In other words, the deal should close by the end of May.

As a final comment on the fuel business, it’s unsurprising to hear that high fuel prices are causing a drop in demand. Kaap Agri seems to be managing this very well, with volumes down only 1% thanks to the group finding alternative customers.

Looking at the broader group, Kaap Agri highlights an encouraging medium-term outlook. Fruit sector expectations are positive, which is a positive read-through for a company like Mpact (and hence Caxton) which manufactures packaging for this sector. Other good news is that record wheat, barley and canola harvests are currently in storage.

Challenges include wine grape producer cashflow pressures and volatile weather patterns this year. The retail channel is only achieving moderate growth and the quick service restaurant sector is recovering slowly.

Overall, the company expects performance for the 2022 financial year to be in line with the upper end of medium-term growth targets.

Unlock the Stock: Mpact Limited and TWK Investments

The Finance Ghost
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Unlock the Stock: Mpact Limited and TWK Investments

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.

In this Unlock the Stock event on 14th April 2022, we hosted Mpact Limited and TWK Investments. Both of these groups are involved in the heartland of our economy, with Mpact focused on the “circular economy” (recycled products) and TWK servicing the agriculture industry.

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

A red day for Anglo

The Finance Ghost
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A red day for Anglo

In a classic case of commentator’s curse, I wrote yesterday about how outgoing CEO Mark Cutifani is bidding farewell to Anglo American on a high note. The last financial year was a winner of note, with great results across key metrics.

Not a day later, Anglo and its related companies traded deep in the red based on an update for the first quarter of 2022 that left the market shaking its head.

I’ll start with Kumba Iron Ore, which closed a whopping 12.6% lower. Average realised prices may have been 38.5% above benchmark prices but that only gets you so far when production and sales volumes fell by 21% and 8% respectively year-on-year. The company blamed the weather and equipment reliability constraints (a global shortage of certain spares), which I’m afraid sounds horribly like an Eskom “we are going to Level 4” press release. Of course, participants in the broad energy sector face similar external conditions at any point in time.

Full year production and sales guidance have been lowered, which means unit cost guidance has been increased. To add insult to the production issue injuries, inflationary pressures in diesel and explosives are evident. The announcement even noted the negative impact on rail lines of the plague of locusts in the Northern Cape region. Operating in South Africa is no joke whatsoever and being in the mining industry is even harder.

Moving on from the locusts, we arrive at Anglo American Platinum which closed 6.4% lower yesterday. In a production report for the first quarter, the company noted a 6% drop in production. Again, heavy rainfall and COVID-19 impacts on equipment and related parts were to blame. Refined production dropped by a substantial 26% and sales volumes dropped by the same percentage.

As with Kumba, Anglo American Platinum’s production guidance for the year has been lowered and unit costs per ounce have been increased. The company is planning significant maintenance this year, which is contributing to the production pressures.

We now move to the mothership: Anglo American. It closed 6.6% lower yesterday.

At Anglo American level, production in this quarter was down 10% year-on-year. Naturally, the commentary around the decrease reflects the challenges faced by other group companies i.e. rainfall and COVID-related supply chain issues.

On the plus side, rough diamond production by De Beers increased by 25%, mainly attributed to lower rainfall in Botswana. This really is the only sparkling part of the update, with production decreases across all other metals (including a 32% drop in metallurgical coal production). With exceptionally strong coal prices in the market, this really wasn’t a good time for a production drop.

The net impact is a 9% increase in full year cost guidance.

If you are a shareholder in one or more of these companies, you deserve to knock off early today to recover.

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