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The Foschini Group: local(isation) is lekker

The Finance Ghost
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The Foschini Group: local(isation) is lekker

The Foschini Group sadly stole my future listed company ticker, trading under JSE:TFG. I’ll forgive them for the shared acronym and focus on their business instead.

The share price is up 13% this year, a seriously impressive outcome considering the pain being felt in the rest of the market. The gain over the past twelve months is 17.7%.

The latest update is a trading update for the fourth quarter of FY22, which covers the three months to the end of March. It includes a trading statement for the full financial year which reflects expected growth in diluted headline earnings per share (HEPS) of between 403 % and 413%. The earnings range is 991.9 cents to 1,011.6 cents. At Friday’s closing price of R139.39 per share, the trailing Price/Earnings multiple is around 13.9x.

Momentum is strong, with sales up 23.7% year-on-year in the latest quarter. For the full year, sales increased by 31.6%. The result was supported by the localised supply chain that helped mitigate the impact of global supply chain issues.

This includes a record performance from TFG Africa, growing turnover by 16.1% overall and 11.5% on a like-for-like basis in Q4. Cash turnover in TFG Africa increased by 35.9% on a full year basis, now contributing 71.1% of total TFG Africa turnover. TFG “remains cautiously conservative” with its credit lending criteria. Provisioning levels have been maintained despite better than expected payments on the credit book.

Clothing contributes 75% of TFG Africa turnover and grew by 20.2% in Q4. The next biggest category is Homeware (7.4%) which grew by 17.4%. The other category I’ll touch on is Cosmetics, which grew by 4.5% in this quarter after two quarters of negative growth. This is probably the impact of people returning to work. Cosmetics contributes 3.2% of group turnover, less than Jewellery (4.8%) and Cellphones (9.5%).

TFG Australia posted retail turnover growth of 11.5% in local currency in the fourth quarter. Full year growth was 24% vs. a Covid-impacted base.

TFG London’s numbers are just silly, up 91.6% based on a totally different operating environment in terms of Covid restrictions. On a full year basis, turnover grew by 57.3%.

I found it interesting that group online turnover growth for the full year was 11.7%, well below total group turnover growth. Bricks and mortar has recovered quickly and online has lost momentum, though double-digit growth on such a large online base isn’t a bad result at all. Online now contributes 10.2% of group turnover vs. 12% in FY21. The split looks very different at country level, contributing 3.1% of total TFG Africa turnover vs. 9.3% in Australia and 45.2% in London.

In TFG London, online turnover via third party retail channels was purposely restricted and only grew by 0.1%. I would guess that this was to maximise margins in a time of difficult supply chains.

TFG is still growing strongly on an organic basis, opening 300 stores in FY22. Speaking of stores, by the end of March TFG had reopened 174 of the 198 stores that were damaged in the looting. SASRIA payments of R540 million have been received and the business interruption claim is hoped to be finalised by the end of 2022.

Things are far from easy out there, so TFG is focused on getting everything right that is within its control. This includes gross profit margins, expense control, working capital management and capital allocation. The top line growth momentum still looks strong though. In April, year on year growth was 17.1% in TFG Africa, 62.3% in TFG London and 10.9% in TFG Australia. The benefit of a recovery in malls is clear to see here.

Strategically, TFG has made a significant move with the acquisition of Tapestry Home Brands, which includes Coricraft, Dial-a-Bed and Volpes. The sale was led by private equity investor Westbrooke, which originally acquired Coricraft in 2005. This deal is in line with TFG’s strategy to bring its supply chain as close to home as possible, which makes a world of sense in the current environment. The R2.35 billion deal is going through regulatory approval.

When you read these numbers, TFG seems to be operating in a different world to everyone else. The strategy is paying off at the moment. As South African consumers come under increasing pressure with rising rates and shocking inflation in the likes of fuel costs, it will be interesting to track growth in TFG.

Messmart’s pink elephant in the room

The Finance Ghost
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Messmart’s pink elephant in the room

Every time you feel like your share portfolio is on fire and that you made bad mistakes with your money, just remember that Walmart bought 51% of Massmart shortly after FIFA had left our shores for R148 per share. At the time, the rand was trading between R7 and R8 to the US dollar.

Fast forward to 2022 and Massmart is below R38 per share with the rand having depreciated to around R16 to the US dollar. This ownership experience makes Nathi Mthethwa’s flagpole look like a genius-level investment.

Great businesses like Makro and Builders have been masked by the pink elephant in the room, Game. It truly is an awful business that I believe has little chance of a turnaround. I had the great misfortune of going into a Game recently and I lasted just a few minutes, assaulted by noise and colour and a completely incoherent product strategy.

It’s clearly not just me who feels this way, either. Sales growth has been tepid, with Massmart group sales from continuing operations up just 3.1% over the past two years. This excludes the cash and carry businesses that they somehow managed to convince Shoprite to acquire.

This is why I just cannot resist the name Messmart.

In the 19 weeks to 8th May, the retail group saw sales drop by 0.2%. This includes the impact of the unrest and the subsequent impact on group stores. With that stripped out to make numbers more comparable, sales were up 2.3%. Weighted average sales inflation across the business is around 3.6%, so that is negative real growth.

In Makro, historically one of the jewels in the crown, sales were up 6.7% overall and 9.7% on a comparable basis, as Makro in Pietermaritzburg has still not reopened. Notably, sales in general merchandise (the critical category for gross margin) fell year-on-year as consumers moved towards non-durable items. I would also once again argue that Takealot is eating Makro’s lunch, a point that Massmart seems to miss in each earnings release by blaming everything but online competition. Compared to the corresponding period in 2019, sales in Makro are up 6%.

In Builders, we’ve seen the DIY sales theme run out of steam completely. Sales fell 3.9% overall and 3.4% on a comparable basis, mainly due to the base effect, though sales are only 5.9% higher than pre-pandemic levels. The slow recovery in commercial construction and people returning to the office rather than investing in their homes is impacting sales.

This brings us to Game, which must have earned itself a spot in the corporate bar at Walmart where executives throw darts at the logo for fun. Total sales fell by 3.7% and comparable sales fell 0.9%. The group still talks about “positive sales performance trends”, whatever those might be. It’s even worse in Rest of Africa, where those Game stores experienced a 12% drop in sales based on stock availability issues during supply chain challenges. If you only work on the Game stores that Massmart actually wants to keep, sales increased by 1.9%. The rest of the Game stores experienced an 18.9% drop in sales.

Bottom line: the Game format is a failure and Massmart keeps throwing good money after bad.

The update also gives information on Cambridge, which Shoprite is buying. With sales down 18.6%, I cannot understand why Shoprite doesn’t just wait for the format to die instead. There’s no need to buy up the competition when the competition is gently going out of business.

In case I haven’t made it extremely obvious, I don’t own shares in Massmart.


                

            


        

            

            

                

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


                

                    

                    

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

                
                

                    

Marylou Greig





Exchange Listed Companies





Naspers, through its technology fund Naspers Foundry, has invested R40 million in agritech company Nile. The investment is part of an R83 million equity round. The B2B e-commerce platform, which services small and large-scale farmers, provides direct trade of fresh produce between producers and retailers, wholesalers and processors across the SADC region.





Nedbank, via its corporate and investment banking division, has made an equity investment into RapidDeploy, an integrated response platform transforming first responder communications centres into data-centric organisations.





Emira Property Fund has agreed to dispose of its entire 49.9% stake in Enyuka Property to joint venture partner One Property. The stake in the rural and lower LSM retail property joint venture will be sold for an aggregate R637 million, representing a small premium to book value. The proceeds will be temporarily used to reduce Emira’s gearing but will be available for other capital re-investment opportunities.





Shoprite Checkers, the local subsidiary of Shoprite has announced a plan to recognise its employees’ role in the success of the group by providing them with additional compensation over and above their salary and at the same time increasing its B-BBEE shareholding in the local subsidiary to 19.2% from 13,5%. In the announcement, the company states that 97% of local employees are black and 66% are female. The evergreen B-BBEE Employee Benefit Trust will hold 40 million shares in the local subsidiary and employees (in service for at least two years) will receive dividend entitlements but will not own the shares, so the transaction will not have an impact on the shares in issue in the listed holding company. Non-SA employees will also receive equivalent payment to that of its local employees.






Stefanutti Stocks has disposed of a property in Henville, Germiston to Badenoch Investments for R33 million. The disposal is in line with the company’s restructuring plan to put in place an optimal capital structure and access to liquidity.





Texton Property Fund has disposed of Woodmead Commercial Park to Benav Properties in a deal valued at R132,5 million. The proceeds of the sale will be utilised to repay debt and to further invest in its SME strategy.





Sirius Real Estate, the multi-tenanted business park, is to sell Bizspace Business Park in Camberwell, London for £16 million representing a net initial yield of c.2.0%.





Unlisted Companies





TooMuchWifi, a local internet service provider, has raised US$1 million in a pre-Series A round led by BLOC SA with participation from Connectivity Capital, Atreyu Investments and other existing investors. TooMuchWifi serves to bridge the connectivity gap by providing uncapped and affordable fibre-backed Internet to the underserved areas in South Africa. The funds will be used to scale operations in existing areas and expand into new communities.





Phatisa, a sub-Saharan African private equity fund manager, has sold a minority share in Continental Beverage Company, the Côte d’Ivoire bottler, to majority shareholder pan-African investment firm, Teyliom International, for an undisclosed sum.





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

                

            


        

            

            

                

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


                

                    

                    

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

                
                

                    






DealMakers AFRICA





Marylou Greig





Private equity firm SPE Capital, is to make an equity investment of c.US$33 million for the acquisition of a majority stake in Outsourcia, a Moroccan customer experience and business process outsourcing provider. The transaction represents an exit for AfricInvest.





Autochek Africa, the automotive technology company, has acquired KIFAL Auto, Morocco’s leading automotive technology startup for an undisclosed sum. The acquisition will represent the first major expansion of a West Africa-based startup into North Africa and will facilitate effective pan-African collaboration to drive innovation across the continent’s growing automotive market.





Phatisa, a sub-Saharan African private equity fund manager, has sold a minority share in Continental Beverage Company, the Côte d’Ivoire bottler, to majority shareholder pan-African investment firm, Teyliom International, for an undisclosed sum.





Ramco Plexus, an East African company offering a variety of print and packaging solutions, has received regulatory approval to acquire the remaining 50% stake in Platinum Packaging from joint venture partner Carton Manufacturers. Financial details were undisclosed, but market sources estimate the value at Sh500 million.





Zuri Health a Kenya-based health-tech startup offering mobile-based healthcare to the mass-market, has raised US$1,3 million. The funds, raised from DOB Equity, Launch Africa and Founders Factory Africa, will be used to scale the service across Africa.





FlexPlay, a Kenyan online and offline payment gateway that allows merchants to offer interest-free targeted savings to their customers in Africa, has received an undisclosed investment from The Cairo Angels Syndicate Fund. The fund, a micro venture capital fund, invests in post-Seed and pre-Series A startups across the MENA.





Doxx, an Egyptian healthtech startup connecting medical professionals and the wide grouping of healthcare providers, has closed a US$1,5 million seed round led by venture capital firm Openner and Elevate. Funds will be used to increase value-added services.





Bamba, an enterprise software startup based in Nairobi, has secured US$3,2 million in a seed funding round led by 468 Capital with participation from Jigsaw VC and Presight Ventures among others. Fund will be used to scale its app and add capacity to its team.





Nigerian tech platform Topship has raised US$2,5 million in a round led by Flexport with participation from Soma Capital, Starling Ventures, Olive Tree Capital, Capital X and True Capital. The digital freight forwarding startup will use the funds to establish convenient ways for African businesses to globally export and import parcels and cargo for customers, suppliers and distributors.





TopUp Mama, a Kenyan B2B e-commerce startup, has raised US$1,7 million in seed funding to scale is business in the Kenyan and Nigerian markets. TopUp Mama empowers restaurant owners through access to affordable foodstuffs, financial services and data analytics. The round was led by Venture Platform and JAM Fund.





Nigerian fintech startup Bridgecard, has raised US$440,000 in pre-seed funding to expand its user base. The startup combines cards, accounts and fintech wallets into one card and an app, enabling users to conduct online transactions, pay bills and withdraw money from any one of the linked accounts. The funding was raised from ABV funds, Ingressive Capital and Voltron Capital among others.





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

                

            


        

            

            

                

                    
                        Weekly corporate finance activity by SA exchange-listed companies                    
                


                

                    

                    

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                            Weekly corporate finance activity by SA exchange-listed companies
                        
                    

                
                

                    

Marylou Greig





A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:





As part of the repurchase programme announced on March 24, 2022, Reinet Investments has repurchased a further 418,823 ordinary shares at an average price of R317.30 per share for a total consideration of R132,9 million (€7,9 million).





Glencore this week repurchased 2,434,011 shares for a total consideration of £11,3 million in terms of its existing buyback programme which is expected to end in August 2022.





South32 this week repurchased 2,493,858 for an aggregate cost of A$11,1m shares.





This week British American Tobacco repurchased 2,106,156 shares for a total of £72,3 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.





This week five companies issued profit warnings. The companies were: Finbond, Life Healthcare, Quantum Foods, Indluplace Properties and Stefanutti Stocks.





Three companies issued cautionary notices to shareholders this week. The companies were: Ascendis Health, African Equity Empowerment Investments and Premier Fishing and Brands.





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

                

            


        

            

            

                

                    
                        Afrimat crushes it again                    
                


                

                    

                    

                        The Finance Ghost
                        
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                            Afrimat crushes it again
                        
                    

                
                

                    

Mining businesses are usually cyclical beasts that are great in the good times and horrible in the bad times. Afrimat has managed to transcend this issue, building a business that smooths out its profits as much as possible. Of course, with underlying exposures like iron ore, there’s still a cyclical element to the group that is unavoidable.





Profit after tax achieved a compound annual growth rate (CAGR) of 22% from 2009 to 2021, an astonishing result given the South African economic context. This achievement is what Afrimat is best known for, achieved through intelligent acquisitions and solid underlying operational expertise.





Profit after tax decreased by 0.2% in 2022, which gives the impression of a poor result in the latest period. On a headline earnings per share (HEPS) basis though, earnings were up 22.9%. There’s clearly more digging required here, pun fully intended.





The biggest reason for the significant difference between HEPS growth and profit growth lies in the base year. In 2021, Afrimat recognised a R150 million bargain purchase gain (recognised when you acquire a business for a price below net identifiable assets) that is included in profits and stripped out in a HEPS calculation. An impairment of R13.3 million also negatively impacted profits in FY22, mainly linked to the attacks by armed groups in Mozambique and the subsequent write-off of operations there.





Moving back to the core financials, group revenue increased by 26.7% thanks to volume growth and favourable pricing in the iron ore market. Operating profit increased by 25.1% so there was a slight drop in margins.





Afrimat is still investing in its business, with the net debt : equity ratio increasing as a result of the acquisition of Coza Mining, the Glenover transaction (phosphate stockpiles, rare earths and a vermiculite mining right) and capital funding for the Nkomati and Jenkins mining assets. The Gravenhage manganese project is expected to contribute to the 2024 financial year.





In the Bulk Commodities segment, consisting of iron ore and anthracite operations, a solid performance saw operating profit increase by 11.6%, with this division contributing 74% to group operating profit. The Nkomati anthracite mine contributed positively to profits this year in a great turnaround story for the business.





The Industrial Minerals business achieved pre-pandemic volumes and grew operating profit by 70.2%. Through an acquisition in this segment, Afrimat has moved deeper into the agricultural lime market.





The Construction Materials segment also returned to pre-Covid volumes, driving an 83.5% increase in operating profit. This is thanks to a recovery in internal volumes and efficiencies rather than an increase in general construction activity.





Total dividends for the year of 186 cents per share were declared. The final dividend is 146 cents per share. At a closing share price of R56.10, the full year dividend yield is 3.3%. This gives you an indication that the market doesn’t value Afrimat as a typical cyclical play, where the dividend yield would normally be higher at this point in the cycle.





If you want to learn more about the business, you can listen to CEO Andries van Heerden’s appearance on Magic Markets, where he shared Afrimat’s story with us and talked about the importance of the portfolio of diversified operations. You could also watch his presentation and subsequent Q&A session on Unlock the Stock, as Afrimat was one of the companies that joined our inaugural session.





Afrimat’s share price is down 2.8% in 2022 and up nearly 20% in the past twelve months.





Disclaimer: I own shares in Afrimat.

                

            


        

            

            

                

                    
                        Thorts: When crisis facilitates opportunities                    
                


                

                    

                    

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                            Thorts: When crisis facilitates opportunities
                        
                    

                
                

                    

Matthew Visser





When Russia invaded Ukraine on February 24th, it not only affected its Eastern European neighbours, but also created massive geopolitical ripple effects, causing global economic uncertainty to surface once again. The whole situation was further exacerbated by the Chinese government enforcing heavy lockdown measures in parts of its country.





The US is experiencing almost unprecedented rates of inflation due to the debasement of its currency and supply chain issues following the COVID-19 pandemic. The debasement of fiat currencies remains a huge source of nervousness for both institutional and retail investors, as countries are running large deficits, and the only way to make up the difference is by printing money (Quantitative Easing).





The US Federal Reserve is expected to increase interest rates seven times this year, which will, in theory, squeeze the capital markets (e.g. equities like tech stocks). However, with the current rate of inflation, investors will look to other assets to outgrow inflation. The question, therefore, is how do you diversify? In times of crisis, investors typically put their money in Gold and the USD, and into Bitcoin as of late.





While gold rose to a one-month high on April 18th – just shy of the US$2,000 an ounce level – on the back of rising fears around the Russia/Ukraine conflict, together with rising inflationary pressures, this was followed by a drop on the back of a benchmark 10 year U.S. Treasury yields and dollar gains, showing this to be a fickle market. The war in Ukraine, while appearing to favour the rise in crypto currencies, has also seen structural issues with credit, in many cases, drying up. Without this conflict, I think people would have been a lot more bullish about Bitcoin, and other crypto currencies in general, but it has yet to prove itself as a store of wealth or as a currency.





Impact on M&A Activity
Like similar historical events, the current crisis is temporary, affecting all industries. I feel that M&A activity will be vigorously revived and advisors will normalise company financial results in valuations, isolating the effect of the “temporary” disruption facilitating transactions at reasonable prices.





I expect the following industries to experience the most consolidation, disruption and change in the near future:
• Primary agriculture, including Agriprocessing and Agri-tech (as food security is increasingly becoming a cause for concern)
• Financial Services, including Fintech (as the value of fiat currencies continues to diminish and as the popularity of decentralised finance (“DEFI”) continues to grow)
• Energy, including Renewable Energy (as Europe is required to become less dependent on Russian oil and gas exports)
However, an accelerated wave of concentration is expected in most industries.





The first M&A transactions in a specific sector are usually made at higher multiples. Prices fall as concentration proceeds, as do the profits of those companies left out of the process. Because the appetite for buying will already be satiated at that stage, there will be fewer buyers, as size will no longer be a necessity for them. It is critical for business owners to move quickly, taking advantage of higher valuations during the first wave of accelerated concentration in the industries they operate in.
The driving forces behind this anticipated M&A activity are:





Private Equity
Globally, private capital fundraising remains at historically high levels. Private Equity funds have an urgency to invest this money, as they won’t be able to raise new capital until these funds are deployed. This will create a unique opportunity for business owners who appreciate the benefit of partnering with Private Equity funds and leading an industry consolidation.





Accelerated “de-risking” of investments
The recurrence of unexpected crises has forced many business owners to come to the realisation that it may be a wise decision to sell down some or all their shareholding in their businesses. Entrepreneurs tend to put cash generated by their business back into its operations to fund growth. As all the cash is tied up in their business, entrepreneurs have “all their eggs in one basket”. The risk of lack of diversification may have become intolerable for many entrepreneurs, especially those nearing retirement age.





Industry consolidation
Large established companies with strong balance sheets and cash reserves will be able to weather the current storm and emerge from the crisis leaner and more focused as a result. These companies will be in a position to acquire their weaker competitors and increase their market share. Many mid-sized companies lack the economies of scale of large businesses, and lack the flexibility of their smaller peers, making them attractive targets for their competitors.





Company restructures and optimisation
Companies are reviewing their internal organisational structures and will start divesting non-core units. Companies are actively making cost adjustments and optimising their capacities, learning to work more flexibly and efficiently, increasing their attractiveness for potential buyers. They are also looking at how they can maximise growth, for example, M&A, strategic positioning opportunities, and global expansion.





Acceptance and increased use of disruptive technology
Online education, e-commerce, virtual communication and telemedicine services have become more widely used, also making them attractive targets for acquisitions.





Favourable valuations for distressed companies
Many companies that operate in industries hardest hit won’t have access to adequate funding to continue trading when demand for their goods and services returns to normal. Buying opportunities will arise in distressed industries such as retail, hospitality, leisure and tourism.





In times of conflict, there are always windows of opportunity. Those brave enough to grasp these will be called fortunate, and others – outside the windows looking in – will be safe but stationary.





Matthew Visser is a Partner – Corporate Finance | PKF Octagon










This article first appeared in DealMakers, SA’s quarterly M&A publication





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

                

            


        

            

            

                

                    
                        Ghost Bites: Vol 10 (22)                    
                


                

                    

                    

                        The Finance Ghost
                        
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  • Afrimat has released results for the year ended February 2022. Yet again, this group has managed to deliver an excellent performance. Revenue increased by 26.7%, headline earnings per share (HEPS) was up 22.9% and the return on net operating assets was 33%. The group achieved volume growth at a time of attractive iron ore pricing and the benefits are clear to see. It certainly helps that all three group segments contributed strongly to growth. The share price traded slightly lower today and is 2.8% down this year. Over the past 12 months, the share price is up nearly 20%. I covered the results in detail here.





  • Massmart fell 5.9% after releasing a sales update for the 19 week period ended 8th May 2022. After US retail stocks took a hammering this week, I’m quite surprised it didn’t drop further. Massmart has lost a whopping 39% of its value this year as the group struggles to compete in a difficult South African market. This sales update reflects like-for-like sales growth of just 2.3% vs. the same period last year. For continued operations only (i.e. excluding Cambridge, Rhino and Massfresh), comparable store sales growth was 3.9%. The growth on that metric is 3.1% vs, the same period in 2019 before the world broke, so even Massmart’s core businesses have largely traded sideways during the pandemic. I wrote about the results here and I didn’t hold back.





  • Investec delivered its year end results presentation on Thursday, with the key point being that adjusted earnings per share is now ahead of pre-pandemic levels. Return on equity still has some way to go, coming in at 11.4% in FY22 vs. 12% in FY19. The cost to income ratio for the latest financial year is 63.3%. The South African bank’s loan book was up just 3.9% in this period, reflecting limited credit demand from the bank’s wealthy clients. To give you a flavour of the group exposures, 56% of adjusted operating profit is from Southern Africa and the rest is in the UK and Other. 76% of adjusted operating profit is earned by the Specialist Bank division and 17% is earned by Wealth & Investment. The rest sits in Group Investments. Learn more about Investec by referring to the results presentation at this link.





  • BHP announced that the shareholders of Woodside Petroleum have approved the substantial deal that merges Woodside with BHP’s oil and gas portfolio. This is an all-stock merger but most South African shareholders of BHP will be paid out in cash when the Woodside shares are unbundled, as Woodside will sadly not be listing on the JSE.





  • UK community shopping centre REIT Capital & Regional held its AGM and used the opportunity to update the market on its operations. Footfall for the four months to April 2022 was 76% of the level seen in the equivalent period in 2019, so there’s still a long way to go. The group believes that market sentiment has improved towards non-discretionary community centres, which would typically offer a convenience grocery store as the anchor. Through a lease with the NHS for a community healthcare centre, the group is experimenting with new strategies around community property needs. Occupancy at the end of April was 93%. The share price is 9% lower year-to-date.





  • Netcare released a trading statement for the six months ended March, in which it guided that HEPS would be between 19% and 21% higher and adjusted HEPS would be 28% to 30% higher. Adjusted HEPS takes out impacts like hedge accounting, fair value gains on derivatives, loan impairments and tax rate changes.





  • Frontier Transport Holdings, formerly called Hosken Passenger Logistics and Rail, has released a strong trading statement for the year to March 2022. HEPS will be 21% to 36% higher, coming in at between 85 cents and 95 cents. At R5 per share, the Price/Earnings multiple is around 5.5x. The group owns various transport businesses including Golden Arrow Bus Services.





  • Renergen has been a favourite of retail investors in recent times and has released its financial statements for the year ended February 2022. The value of the company sits in the future potential of the Virginia project, not in the current numbers. You can quickly see this by noting that this R4.5 billion market cap company recognised just R2.6 million in revenue in FY22! The share price is still 3.3% up year-to-date, holding up well amid the market chaos.





  • Vunani Limited released a trading statement for the year ended February 2022 that seems to tell a much better story for shareholders. HEPS will be between 34 cents and 35.4 cents, a massive increase on 7.2 cents in the prior period. The stock is highly illiquid and is down 12.8% this year.





  • Des de Beer (via entities linked to him) is buying up even more shares in Lighthouse Properties, with the latest acquisition being worth R6.6 million.





  • A non-executive director of Balwin Properties has bought just over R400k worth of shares in the company.





  • Value Capital Partners has acquired nearly R3.4 million worth of shares in education group ADvTECH.





  • If you are an Irongate Group shareholder, you should know that the Australian property fund is under offer from Charter Hall after attracting interest from a number of suitors. Deloitte has opined that the offer from Charter Hall is both fair and reasonable, so the board has recommended that shareholders vote in favour of the offer. The scheme meeting is scheduled for 29th June and the detailed scheme booklet (which we would call a circular to shareholders in South Africa) is available at this link.





  • AYO Technology has released a trading statement for the six months ended February 2022. The headline loss per share has worsened by between 34.4% and 54.4%. With the share price down 92% over the past 5 years, I’m sure the Public Investment Corporation (PIC) must be thrilled to see another loss. Not.





  • Chairman of Tongaat Hulett, Louis von Zeuner, will not be making himself available for re-election at the next AGM due to “personal circumstances” – he has also resigned from the board effective from 30 June 2022. Lead independent non-executive director David Noko has been appointed as interim chairman.





  • Globe Trade Centre, an Eastern European property fund listed in Warsaw and on the JSE, released a quarterly update. Rental revenue and Funds From Operations (FFO – the key measure for REITs) both increased year-on-year. The net loan-to-value ratio is 43% and a dividend has been declared thanks to a strong cash position. 





  • enX Group has confirmed that the closing date to accept the R5.60 per share mandatory offer is Friday 3 June at 12pm, just in case you were planning a last minute Friday afternoon decision. With the share price trading at R8.30, I’m not expecting a rush through the door to take it. 

                

            


        

            

            

                

                    
                        Transaction Capital: still my favourite                    
                


                

                    

                    

                        The Finance Ghost
                        
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                            Transaction Capital: still my favourite
                        
                    

                
                

                    

Transaction Capital is quite possibly my favourite company on the JSE. With a top-class management team and a strong portfolio of assets, I’m a very happy shareholder and I plan to hold the shares forever unless something goes badly wrong.





After a strong share price run in the aftermath of the WeBuyCars deal and subsequent transactions to increase the group’s shareholding in the business, the earnings have had to play catch-up. The share price is trading at the same levels as November 2021, with plenty of volatility inbetween. Over the past year, the share price is up over 33%.





The latest news is the release of interim results for the six months to March 2022. With core headline earnings per share (HEPS) up 28%, it’s another solid performance.





Return on equity has been 14% for the past two interim periods. Return on assets increased from 4% in the comparable period to 4.5% in this period. This means that the group is carrying less debt overall, as debt is what “leverages” up the return on assets into a return on equity. Put differently, this is a higher quality way to have achieved a 14% return on equity.





The interim dividend per share is up a whopping 74%.





The company believes that earnings and dividends can grow over the medium-term at rates in excess of pre-pandemic growth rates. This is a direct result of the relevance of the group’s businesses in the South African economy: WeBuyCars, SA Taxi and Transaction Capital Risk Services.





WeBuyCars has been an astonishing story, with core headline earnings up 58%. As Transaction Capital has been increasing its stake in the company, core headline earnings attributable to the group has increased by 122%. Unit sales increased by 41% and the F&I product penetration (finance and insurance sold as part of the deal) increased from 12.9% of units to 16.6% of units. This helped drive revenue growth. 





Interestingly, 29.5% of sales were online and of those sales, 17.6% were direct-to-consumers. A year ago, just 5% of online sales were direct-to-consumer. Watch this space, as friends in the UK tell me that buying a car online is a common practice there.





WeBuyCars has recently expanded into Morocco. The group is looking to take this business model to global markets and will do so in a measured manner.





SA Taxi is also a great business, though it has come under a lot of pressure in the past couple of years. Core headline earnings fell by 4% as commuter activity was suppressed by civil and taxi unrest. This impacts the ability of taxi operators to afford loan repayments, driving higher credit loss and provision coverage ratios.





In positive news, demand for new and quality renewed taxis (QRTs) has exceeded pre-pandemic levels, which drives growth in loans and advances. The insurance business grew its gross written premiums by 14% and claims have largely normalised to pre-pandemic levels except in the credit life book which remains elevated.





Transaction Capital Risk Services (TCRS) grew core headline earnings by 25% and had a far busier year buying debt books, with purchases up 94%. This puts local activity above pre-pandemic levels, with conditions in Australia subdued as fewer books of non-performing loans (NPLs) are being offered for sale.





Overall, WeBuyCars is leading the way and TCRS is performing well. SA Taxi has had to deal with all kinds of challenges. As those hopefully go away, the strength of the business will position it for growth.





I really do love Transaction Capital. Did I say that already?

                

            


        

            

            

                

                    
                        Ghost Bites: Vol 9 (22)                    
                


                

                    

                    

                        The Finance Ghost
                        
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  • Transaction Capital has released interim results for the six months to March 2022. Core headline earnings per share (HEPS) is up 28% and WeBuyCars continues to shine a light on the group’s prospects. I love this company and hold it in my portfolio. I’ve written a feature article here to give more details.





  • Santova has been riding the wave of supply chain shortages and pricing increases in the aftermath of the pandemic. In the year ended February 2022, HEPS increased by a massive 169.4% to 126.81 cents. No dividend has been declared as the group is focused on reinvesting in the business, a strong sign of the opportunities it is seeing. Santova also bought back 4 million shares in this period, contributing 19.9% to the increase in HEPS. Offshore operations contributed 82.6% of earnings in this period, significantly lower than 91% in the prior period as the local operations recovered. Santova’s share price has rallied over 42% this year, a really strong showing for this interesting company.





  • RFG Holdings (Rhodes Food Group) took a 19% knock on the market after releasing a trading statement for the six months to March (well, technically the 3rd of April). At first blush, it’s not clear why as HEPS was 30% to 35% higher. Normalised HEPS strips out restructuring costs and (more importantly) the insurance settlement for lost profits in lockdown. Normalised diluted HEPS only inched upwards by between 1% and 6% as input cost pressures hit the business. Cans, raw materials and logistics costs are increasing sharply and the group was unable to fully recover this impact through price increases to customers.





  • Indluplace Properties closed 11.9% lower after releasing results for the six months to March 2022. The residential-focused REIT reported a 4% drop in revenue and 18.2% drop in HEPS. Net asset value (NAV) per share fell by 10.8% to 698.51 cents, so the closing price of 275 cents is a discount of around 60% to the NAV. The positive element of the result is that the interim dividend has made a return, with 13.16350 cents per share declared. This puts the group on an annualised yield of 9.6% at the current share price, which should immediately tell you why there is such a large discount to the NAV. If it traded at NAV, the yield would be unacceptably low.





  • Shoprite has announced a B-BBEE employee trust transaction that will increase effective Black Ownership in Shoprite Checkers from 13.5% to 19.2%. There’s an important nuance here that you may have noticed: the group is talking about ownership in Shoprite Checkers (the SA subsidiary), not Shoprite Holdings (the listed group). This is typical in such empowerment structures, as there is usually no value to the group in effectively subsidising Black Ownership as defined in its businesses outside of SA’s borders. Interestingly though, employees in the group outside of SA will receive a cash bonus payment equivalent to that received by local staff under this scheme and based on similar rules. Distributions to beneficiaries will be based on minimum years of service and the position held. As 97% of employees are Black and 66% are Black Women, it seems as though all employees will qualify i.e. not just Black employees as defined in the Codes. The only exclusion is employees who receive share-based compensation as part of their packages.  This deal comes at a significant cost, estimated to be 2.7% of group headline earnings on an annual basis. Although this is pitched as a B-BBEE deal, that is a function of the staff demographics rather than the structuring of the deal.





  • Nampak’s share price had a rollercoaster day where it traded as high as R3.22 in the morning and eventually closed at R2.76, flat for the day. An early-morning trading statement drove the activity, with an expectation of HEPS growth of between 88% and 107% to between 33.0 cents and 36.5 cents for the six months ended March 2022. This is an annualised Price/Earnings multiple of around 4x but I would tread very carefully here, as you need to do deep digging into the balance sheet and the debt covenants before having a punt at Nampak. The share price is down 28% year-to-date and is flat over the past 12 months.





  • Ninety One fell 3.7% after releasing results for the year ended March 2022. Although the asset management firm achieved record earnings and assets under management (AUM), the announcement noted that conditions worsened in the final quarter. When global markets are taking pain, asset managers take pain along with them as fees are based on AUM and those assets are worth what the market says they are worth. Net inflows of GBP5 million were achieved in this period, which is a key measure of how clients perceive Ninety One and how the funds are performing vs. the relevant benchmarks. HEPS increased by 27% and the dividend per share increased by 16%. The share price is down 20% this year.





  • Furniture retail group Lewis has released a trading statement for the year ended March 2022 that tells a good story. HEPS is expected to be between 30% and 40% higher, demonstrating the value creation potential of a share buyback programme when a company has traded at low multiples. Effectively, the company buys its own shares back at a great price and creates value for remaining shareholders by turbocharging earnings growth. Operating profit before impairments and capital items was only 2% – 6% higher.





  • Diamonds could be an investor’s best friend this year, with Anglo American announcing Cycle 4 diamond sales by De Beers of $604 million. This compares favourably to Cycle 3 at $566 million and is much higher than Cycle 4 in 2021 at $385 million. 





  • In case you’ve always wondered what big ships cost, Grindrod Shipping announced the sale of Matuku (a 2016-built medium range product tanker) for $30 million. In a neat little trade, Grindrod will first exercise the option to buy the tanker for $25.4 million under the existing lease. The company is also buying 2015-built supramax bulk carrier IVS Pinehurst for $18 million. The charter on 2014-built supramax bulk carrier IVS Crimson Creek has been extended at a rate of $26,276 per day. So there we have it – now you know what they cost!





  • Deneb Investments released a trading statement for the year ended March 2022. HEPS is expected to be 30% to 50% higher, coming in at between 30.22 cents and 34.86 cents. The stock closed 25% higher at R2.50 per share, a Price/Earnings multiple of around 7.7x at the mid-point of the earnings guidance.





  • eMedia Holdings, the owner of e.tv, eNCA, Openview and YFM amongst other assets, has reported a strong result that saw increased share of the prime time market and 29% growth in television advertising revenue in the year ended March 2022. All those Anaconda reruns are clearly paying off, with HEPS from continuing operations  approximately tripling to between 63 cents and 67 cents. The share price closed more than 15% higher on the back of this update.





  • NEPI Rockcastle released a business update covering the recent months of operations. The group will invest EUR37 million in solar PV at 30 shopping centres, reducing the carbon footprint and stabilising energy costs. Although the fund operates in Central and Eastern Europe, the war in Ukraine hasn’t impacted operations as there are no properties in the fund in either Ukraine or Russia.  Sales in malls in February and March exceeded pre-pandemic levels and net operating income in the three months to March was up 32% year-on-year. Of concern is property operating expenses which jumped 47% as a result of much higher energy costs, necessitating the investment in solar. Liquidity is strong and the loan-to-value ratio was 32.5% at the end of March. Previous earnings guidance for 2022 has been maintained. 





  • Investec Property Fund has released results for the year ended March 2022. Distributable income per share increased by 10.8% and the final dividend is up 10%. Loan-to-value has improved from 40.5% to 38.2%. Net asset value per share is up by a modest 2% and values of SA properties have stabilised. The fund expects low-to-mid-single-digit growth in distributable income per share in FY23. Notably, the CFO is leaving the group to spend more time with her family and the previous CFO as been appointed as interim CFO while a successor is found.





  • Newpark REIT is a small property fund that owns four buildings, including the JSE Building and 24 Central, an adjacent mixed-use property in Sandton where I spent many a Friday evening after work in my banking days. In the year ended February 2022, revenue fell 1.6%, funds from operations increased 16.8% and the dividend increased by 17.63%. The loan-to-value ratio is 33.6% which is healthy. The share price of R3.79 is a discount of 55% to the net asset value per share of R8.45. As the portfolio has considerable office exposure, the value went the wrong way in the current environment. The total dividend for the year was 46.91 cents, so Newpark is trading on a yield of 12.4%.





  • Emira has agreed to dispose of its 49.9% stake in Enyuka Prop Holdings for R638.6 million. This is a joint venture that owns 24 retail centres in lower-LSM (i.e. lower income) areas in South Africa. To help facilitate the deal, Emira will provide a R100 million vendor loan that bears interest at prime plus 3% for 36 months. The rate goes up if the debt isn’t repaid by then. The asset was carried in Emira’s books at a value of R624.15 million at the end of December 2021. The deal is too small to trigger shareholder approval.





  • Master Drilling deferred its dividend declaration in March based on uncertainty around the impact of the war in Ukraine. Clearly feeling more confident, the company has declared a dividend of 32.5 cents per share. 





  • Mining group Tharisa has exercised its farm-in option to acquire a controlling interest in Karo Mining Holdings. As this is a small related party deal, an independent expert needed to opine on it. Mazars Corporate Finance has given its view that the deal is fair to shareholders of Tharisa.





  • Property mogul and Lighthouse Properties director Des de Beer has bought more shares in the company via one of his associated entities. The total value of the purchase was R728k.





  • Stefanutti Stocks is implementing a restructuring plan in a fight for its survival. The construction company is disposing of certain operations and is hoping to conclude the sales in the next 12 months. For the year ended February 2022, the headline loss per share for continuing operations was between -60 and -90 cents i.e. related to the businesses it plans to keep. The group headline loss per share is between -80 and -110 cents. In the civil claim by City of Cape Town related to Green Point Stadium, each construction party has agreed to make an annual payment of R10.5 million for the next three years, along with a commitment to social investment projects in the Cape Town district. This group’s share price collapsed shortly before the pandemic and has been clawing back a recovery since then. 





  • Premier Fishing and Brands Limited as well as African Equity Empowerment Investments Limited are fighting to keep their bank accounts open with Nedbank. With Sekunjalo (Iqbal Surve) as the common link, the companies had to go to the Equality Court to try and stop Nedbank from cutting ties with them. I’ve never heard of an interim-interim interdict before, but that is what the companies have achieved to keep the accounts open pending the outcome of the interdict hearing that took place on 19th April 2022. For now at least, the bank accounts are still open.

                

            


        

    
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