Cashbuild has released an update for the third quarter of the 2022 financial year. The market is keeping a close eye on the company, as sales have dipped vs. a strong base and Cashbuild has struggled to build momentum after the riots in mid-2021.
In the latest quarter, revenue fell 10%. Existing stores fell 11% and new stores contributed 1% growth. When combined with the prior two quarters (i.e. reflecting the first nine months of the current financial year), revenue is down 11%.
There were 305 stores in existence prior to July 2020 and the riots affected 36 stores, so their impact was substantial. Excluding this impact, revenue for the latest quarter was down 7% on the comparable period, so there has been a normalisation of demand for building supplies by South Africans. The year-to-date decrease is 5% excluding looted stores, so the latest quarter reflects a tougher base effect than in previous quarters.
Transaction volumes were down 17% this quarter and existing store volumes fell 19%. This means that price inflation was 8.1% (the difference between existing store volumes and existing store sales, with a small rounding difference). New stores contributed 2% volume growth.
The P&L Hardware business (8% of group sales and 17% of the store footprint) experienced a much better third quarter relative to the first half of the year, although sales still fell 14%. Aggressive pricing in this business helped drive revenue.
In the third quarter, the group opened two new Cashbuild stores, refurbished five Cashbuild stores, relocated one Cashbuild store and closed four stores – three looted Cashbuilds and one P&L Hardware. There are 312 stores currently trading and 5 looted stores being rebuilt for reopening.
The Cashbuild share price is up 9.6% this year and is down 9.4% in the past twelve months. I bought at around R246 per share, so I am currently around 15% in the green.
After nine years in the hot seat, Mark Cutifani has stepped down as the CEO of Anglo American. To mark the occasion, the company released the full transcript of the prepared remarks at the AGM. I felt it would be worthwhile to touch on some of the key points discussed.
As a starting point, it’s worth highlighting that the meeting took place in person. After two years of COVID-related restrictions forcing companies to have online meetings, there seems to be significant demand for in-person meetings. I believe this is in line with a hybrid working culture in general, with critical meetings held face-to-face and the rest taking place online.
COVID isn’t entirely over yet, of course. The first quarter of 2022 saw Anglo operating at 95% capacity due to heightened employee absenteeism from the outbreak of Omicron. The company expects to operate at 100% capacity in the second quarter.
Mining companies are (quite rightly) focused on the safety and wellbeing of employees, as mining is still a dangerous business and fatalities are common. Anglo American achieved its best-ever safety performance in 2021 but there was still loss of life, so there will always be more work to do. With a 93% reduction in fatalities since 2013, a great deal has already been achieved under Cutifani’s leadership.
Unsurprisingly, climate change was second on the list for the Chairman’s address. Anglo’s goals are to reduce Scope 1 and Scope 2 GHG emissions by 30% (measured in 2030 vs. a 2016 baseline) and to be carbon neutral across operations by 2040, with reduction of Scope 3 emissions by 50%. This is a substantial area of investment for all mining groups.
In positioning the business for the future, the portfolio is being tilted towards the metals and minerals that benefit from a lower carbon economy. This includes copper, platinum group metals (PGMs) and crop nutrients.
For example, Quellaveco (a copper mine in Peru) is Anglo American’s largest current project, expected to add 10% to group production. It is on schedule and on budget, expected to be commissioned this year. The Woodsmith fertiliser project in the UK is in progress. Anglo has completed its exit from thermal coal mining operations, for which Thungela shareholders who have banked huge returns are truly thankful.
Cutifani is leaving on a high note, with a record financial performance boasting underlying EBITDA of USD20.6 billion and attributable free cash flow of USD7.8 billion. Efficiency gains in the platinum, De Beers and Kumba Iron Ore operations contributed to a 5% volume increase, which helped drive a substantial improvement in EBITDA margin.
Return on capital employed was 43%, a great reminder of how profitable mining companies are at the right point in the cycle. The goal is a 15% through-the-cycle return, supported by Anglo making excellent progress on the cost curve over the past nine years.
The balance sheet is strong, with net debt of USD3.8 billion at the end of 2021. This is just 0.2x underlying EBITDA, which is a low level of gearing.
Duncan Wanblad is the incoming CEO, bringing 30 years of international mining experience with him. He has big shoes to fill.
There’s a new B-BBEE transaction on the horizon. Old Mutual has announced a R2.8 billion deal that will see the company’s Black shareholding increase by more than 400bps to take the ownership percentage to over 30%.
There are various elements to the deal, including participation by employees, the Black South African public and a broad-based community trust. The overall deal will be known as Old Mutual Bula Tsela, which is Sesotho for “open or pave the way” – an apt name.
Although there are parts to the deal that have learnt from some mistakes made by other listed companies, I must point out that the funding structures are an old-school B-BBEE approach and that isn’t a good thing. B-BBEE structures have been a mixed bag in South Africa, as share price growth often hasn’t been sufficient to generate real wealth for participants.
The deal will be implemented through the issuance of over 205 million new Old Mutual ordinary shares for cash. When all is said and done, employee share ownership trusts will hold 1.6%, Black members of the public will hold 1.29% (excluding existing holders) and a new community trust will hold around 1.29% of Old Mutual.
The funding for the deal will be provided by Old Mutual in the form of notional vendor funding to the employee trusts and the community trust, as well as actual funding to a special purpose vehicle called RetailCo to facilitate investment by the public.
Because of IFRS charges for the subsidized portion of the deal, diluted HEPS would decrease by 6.2% as a result of this transaction. The net asset value per share would decrease by 4.7%.
Employee scheme
Interestingly, all employees will participate in the employee scheme i.e. including non-Black and non-South African employees. A disproportionate allocation of awards will be made towards Black staff, especially at lower grade levels.
There is a 10-year lock-in period for any awards made to staff, which will vest after a certain period of service is complete. This is where I start to get concerned. The funding for the deal is based on a loan for 85% of the volume weighted average price of the shares, priced at 85% of prime and reduced over the period by 85% of the dividend that will be paid by Old Mutual on the shares. 85% was a popular number for the people structuring this deal! The remaining 15% of the dividend will be paid to the trust and presumably distributed to employees.
At the end of the lock-in period, Old Mutual effectively takes back enough shares to settle whatever the outstanding balance is on the notional funding. The employees are then left with the balance. These structures are full of dangers, ranging from disappointed staff members who didn’t understand the structure through to the possibility of a market crash after 10 years and a forced “sale” of the shares back to Old Mutual at a time that isn’t beneficial to staff.
As a tool to incentivise staff, it isn’t great in my view and can backfire on the company. This is the old-fashioned deal funding structure that I referenced earlier.
Offer to public investors
Moving on, the RetailCo structure will be an offer to the Black public to subscribe for shares. A prospectus will be issued as part of this. The final allocations in the offer will be tilted towards Black Women and any broad-based entities.
The shares will not be capable of transfer for at least five years, at which point Old Mutual plans to list the structure on an appropriate B-BBEE exchange to facilitate trade among Black investors.
The shares will be issued at their volume weighted average price, with only 15% needing to be funded by a cash subscription by investors. 15% is funded by Old Mutual with a cash contribution (i.e. a subsidy) and the remaining 70% is funded by a preference share at a rate of 85% of prime.
This is effectively a 15% discount on the issue price, which in my view is nowhere near enough to compensate investors for locking up their money for five years. For example, existing listed B-BBEE schemes in the market typically trade at a discount of 35% to 50% of the underlying fair value of the investment. This gives some idea of the types of liquidity discounts applied to these structures by market participants.
85% of dividends will be used to reduce the preference share funding, so only 15% of dividends will flow through to investors as a “trickle dividend” and only after settling the costs of RetailCo.
Upon expiry of the term of the preference shares, there’s a forced sale of shares back to Old Mutual to pay back the preference shares. Again, these structures can end very badly depending on market cycles. Forced sales are never a good idea.
Community trust
The community trust will be registered as a Public Benefit Organisation and will be funded at a rate of 68% of prime, so it gets the best funding deal out of the three groups. Again, the funding is set at 85% of the issue price, so there’s effectively a 15% subsidy. 85% of the dividends will be applied against this funding and at the end of a ten-year period, there’s a forced sale to settle the debt.
It gets more controversial here, as the forced sale structure also limits the participation of the trust to 150% of the initial price. I interpret this to mean that the maximum upside for the trust is 50% over a ten-year period.
Is the deal fair? We will wait and see.
PricewaterhouseCoopers will provide a fairness opinion on the deal. The fairness of B-BBEE deal economics is difficult to opine on, as they are highly subjective in nature.
Personally, I think this transaction structure fails to learn from the numerous examples of other such deals on the JSE. There are far superior ways to structure B-BBEE transactions. The deal requires various regulatory approvals, one of which I believe would be the B-BBEE Commission. I’m looking forward to seeing whether the deal in its current form is approved.
You may need a strong coffee to get through this update in one piece. If you feel like helping Tongaat out of its sticky situation, you may want to add sugar to it.
Tongaat primarily operates in KwaZulu-Natal, a province that is making a strong case to be the destination for the next Survivor series. The riots simply added to problems that Tongaat already had, with years of poor maintenance leading to lower production, higher costs and more capital expenditure. We will get to the floods later.
I often write about operating leverage, which refers to the proportion of fixed vs. variable costs. With high operating leverage (more fixed costs), the good times are great and the bad times are horrible. Manufacturing companies typically have high operating leverage and Tongaat is no different, so a 9% drop in sugar production caused havoc on profitability.
It didn’t help that the last quarter of the year saw a shift to low margin bulk sugar sales, while consumers turned to cheaper private label brands rather than “miller brands” in the sugar aisle.
Against this backdrop, it’s not surprising that the South African operations are expected to report a loss for the year ended March 2022. The resultant pressure on local cash flows is terrible news for Tongaat, as most of the group’s debt is carried by the South African operations. More on the balance sheet to come.
Things weren’t great in the Zimbabwe sugar operations, with the usual macroeconomic issues driving a higher proportion of sales in Zimbabwe Dollars rather than US Dollars. This made it more difficult to repatriate profits, which isn’t good news when a company is struggling with its balance sheet.
The narrative was positive in Mozambique at least, with higher domestic and export sales. The future looks good as well, with extensive cane root replanting with modern varieties completed and set to benefit the business over the next two years.
The Botswana sugar packing operation was negatively impacted by aggressive pricing by competitors. Cheaper sugar imports entering the country hampered this part of the business.
If you thought the sugar businesses sound difficult, you will be interested to know that Tongaat also has a property division based in KwaZulu-Natal. I think that getting people to pay their TV Licences is probably easier than trying to sell property in that province. Tongaat remains convinced that the intrinsic value of the portfolio is intact and that a sales pipeline is being built for the 2023 financial year.
Net borrowings at the end of March 2022 were R6.8 billion (up from R5.8 billion a year ago) of which R5.5 billion is owed to South African lenders. The balance is trade finance provided by the South African Sugar Association.
Based on how horrible the last few months have been, the envisaged rights offer has been increased to between R4 billion and R5 billion. This is a company with a market cap of just R500 million!
A trading statement covering the year to March 2022 confirms the extent of the pain, with Tongaat expected to suffer a drop of at least 120% in earnings per share. This implies a loss per share of at least -358 cents per share vs. a profit per share of 1,794 cents in the prior period (which did include results of businesses that have subsequently been sold).
But that’s not all, folks. Subsequent to this financial period, the province Tongaat calls home was hammered by terrible floods. Tongaat notes that production started looking stronger until the flooding caused the mills and refinery to stop production.
There has thankfully been no significant damage to the milling infrastructure, but mills were shut for the past 10 days and production can only resume once farmers can access waterlogged fields to harvest cane.
The refinery site was flooded and municipal services to the site have been “compromised” so resumption of normal operations may be delayed.
In summary, this really has been a horror story for investors.
JSE-listed property fund Equites has a partnership with Newlands Property Developments LLP in the UK. This partnership has a development pipeline of around GBP1 billion over the next five years, which is gigantic.
The money for these developments needs to come from somewhere. One of the sources of funding is to sell undeveloped land in the UK business if an attractive price can be achieved, thereby unlocking capital for the development of other land.
With that in mind, it will hopefully make more sense to you that the partnership has agreed to sell undeveloped land in England to Lidl Great Britain, the famous German retail chain that operates more than 900 stores and 13 regional distribution centres across Britain. The land will be developed into a modern distribution warehouse.
The land is priced at GBP81 million and the Equites partnership has been appointed to implement infrastructure, landscaping and other works on the property with a total value of GBP38 million. In other words, the partnership raises capital from this deal and achieves some development profits along the way.
Equites believes that all conditions will be met by the third quarter of 2022. The various conditions have to be met by 31 December 2022 and may be extended until December 2023 in a worst-case scenario. A deposit equal to 5% of the purchase price has already been paid by the purchaser and the remainder would be paid shortly after the transaction closes.
With respect to the development work, a progress payment of GBP19 million will become due once certain development milestones have been achieved.
This deal achieves post-tax profit attributable to Equites of GBP20.8 million, which will “contribute significantly” to Equites’ growth in net asset value per share in FY21. In addition, the loan-to-value will be reduced by around 250bps.
The Equites share price is up 7% over the past 12 months and down 8.4% year to date.
Whilst it is obviously true that share prices are driven by macroeconomic factors and sentiment, significant moves are often catalysed by the release of financial information.
The market can be a bewildering place if you don’t understand the basic framework around corporate reporting.
The basics: listed companies must report detailed financials
Listed companies (i.e. those that trade on a stock exchange like the JSE) are required to announce certain information to stakeholders. Note the careful use of the word “stakeholders” instead of “shareholders” because there are several groups that take a keen interest in a listed company’s performance, ranging from trade unions and environmental groups to industry bodies and governmental agencies.
Oh yes, competitors too. They love earnings announcements as much as anyone else does.
The framework for reporting: JSE rules + accounting rules
International Financial Reporting Standards (IFRS) govern the accounting decisions applied by the company. The JSE requires companies to apply IFRS in full and the auditors to sign off that this is being done correctly in all material respects.
The IFRS rules are incredibly complex unfortunately. They just one part of the broader regulatory framework that listed companies must operate within.
The Issuer Regulation department of the JSE develops and publishes the rules for listed companies. This “rulebook” is hundreds of pages long and is regularly updated. Experts in this field are known as JSE Approved Executives and they work for companies that are approved JSE Sponsors.
Companies must appoint a JSE Sponsor to assist with compliance with the rules and to be the liaison between the company and the JSE. The Sponsor also releases announcements on SENS and plays a critical role in implementation of corporate actions. Companies listed on the AltX (the development board of the JSE) must appoint a Designated Advisor rather than a Sponsor, a role that comes with even more responsibility.
Like most business models in the compliance field, it’s a tough way to make a living. The retainers are unbelievably low (many JSE companies are paying their Sponsors less than R20k per month) and so Sponsors only make money when companies undertake corporate actions (like a capital raise). The Sponsors are paid separate fees for the supporting documents behind corporate actions (like circulars to shareholders).
A financial love letter to shareholders every six months
JSE-listed companies are required to report twice a year. This is important, because otherwise investors would have to make decisions using information that could be a year out of date.
In the US, companies need to report every quarter i.e. 3 months. That’s why I write about “quarterly earnings” when I focus on US companies. It’s great in terms of keeping shareholders up to date with the fortunes of the company, but this rule gets criticised for incentivising short-term behaviour by executives. Personally, I love quarterly reporting and I can see the benefit in the work in do in Magic Markets Premium. Having fresh information really helps with decision-making.
A JSE-listed company will issue interim earnings (the first six months of the financial year) and full year earnings (the full twelve-month period). The earnings for the second six months are not separately reported but can be derived by subtracting the interim earnings from full year earnings.
Note: this only works for income and expenses. A balance sheet (assets and liabilities) is always a snapshot of a point in time (e.g. financial position at 30 June) rather than a period in time (e.g. the six months ended 30 June).
Trading statements
A company must issue a trading statement when there is a reasonable degree of certainty that financial results will differ by at least 20% from the results for the corresponding prior period. That’s a mouthful, so let’s work through an example.
Let’s assume that the company year-end is December and that it is currently June. The company will soon close off its interim period (the six months ended June).
Things have gone badly and results are likely to be around 30% down vs. the first six months of the prior year (the corresponding prior period). The company needs to release a trading statement alerting the market to this fact, even though results for the six months ended June will only be formally released sometime in August.
A trading statement is therefore an early warning system. It’s used for positive and negative updates e.g. a company that expects earnings to be more than 20% higher must also issue a trading statement. In the absence of a trading statement, shareholders must wait for a formal earnings release. Experienced investors and traders sometimes use the lack of a trading statement to form a view, as this means the results haven’t differed by more than 20%. This is risky though, as trading statements are sometimes issued just days before the formal result.
Voluntary updates
At any point in time, a company may issue an update to the market. Retailers frequently do this to give an update on sales performance, particularly where the results are either extremely positive or there is other news to announce e.g. a store renovation programme.
Companies going through a turnaround publish voluntary updates fairly regularly to keep shareholders appraised of progress.
I’m pleased to say that such announcements, including quarterly updates, are becoming more common on the JSE. Now if only the rules would change to force quarterly reporting…
Revenue vs. earnings vs. headline earnings
Revenue is a company’s turnover plus other sources of income like royalties or services.
Earnings is usually another word for profit after tax. This is a profit number that does not strip out any extraordinary or once-off items. It’s a true reflection of what happened in that period but isn’t necessarily the best way for investors to assess the underlying trends.
Headline Earnings is the most commonly quoted measure in South Africa. It has several pre-defined rules that strip out once-offs etc. to give shareholders a view of the maintainable profitability of the business.
Headline Earnings Per Share (HEPS) is perhaps the most important metric, as this takes the sustainable view of earnings and expresses it based on the amount attributable to each share issued by the company. This can be directly compared to the share price for calculating multiples like the Price/Earnings (P/E) multiple.
The best way to understand is always to read
There is no doubt that the best way to get your head around this is to read as much as possible. You’ll pick up on companies issuing trading statements and other news over SENS.
The investor relations section of corporate websites is where you’ll find results announcements, SENS announcements, integrated annual reports and analyst presentations. I highly recommend that you poke around a few investor relations sections to see the reporting infrastructure in action.
I’m sorry to disappoint you, but this article isn’t full of advice for your Tinder game. I can’t help you with that. All I can do is help you understand more of what you read about in the markets.
MAC stands for Material Adverse Change, a concept in dealmaking that gives the buyer of an asset a lifeboat in case the asset starts sinking before the deal is implemented.
Why do parties negotiate a MAC clause?
Whenever a new deal is announced, the assumption is always that it will go ahead unless there’s a nasty surprise from a regulator like the Competition Commission. Regulatory approvals are always a risk as they are outside of the control of the parties agreeing to the deal.
A MAC issue is different, as the buyer has the right to walk away from the deal if something goes badly wrong during the implementation phase. It can take many months to implement a deal due to the numerous regulatory approvals that may be required along the way. During that period, anything can happen.
The lawyers will have long and lively debates about the MAC clause while the deal is being negotiated, billing their respective clients along the way (often in 10-minute intervals, so don’t spend too much time chatting to them over a spring roll during the tea break).
It all seems pompous and unnecessary until something goes wrong and the MAC clause is needed. Nobody gets married with a plan to get divorced, yet it makes a lot of sense to put some agreements in place to regulate that unwanted outcome.
The Barloworld – Tongaat Hulett example
An excellent example of a MAC drama was found in our local market during the pandemic.
At the end of February 2020, just before the world went mad, Tongaat Hulett announced that it would sell its starch division to Barloworld for R5.35 billion.
The cash was desperately needed, as Tongaat was in a tough place even before news of an accounting scandal broke. As usual, thousands of employees lost their jobs during the financial disaster and the executives continued to enjoy their money while the wheels of justice turned slowly. The case against them is currently in the courts.
The Tongaat share price went on a rollercoaster ride in 2020, not least of all because the deal with Barloworld wasn’t as cemented as people thought. Although Tongaat shareholders were in support of the deal, it takes two to tango.
In May 2020, Barloworld tried to invoke the MAC clause based on an expectation of the EBITDA (a proxy for operating profit) for the year ended February 2021 being 82.5% or less of the prior year’s result. Barloworld was desperately trying to manage its own risks in a period of immense uncertainty, so doing such a large deal obviously felt scary for Barloworld’s board.
It took a few months to sort out, with independent expert Rothschild & Co eventually confirming that EBITDA had not fallen sufficiently to trigger the MAC. Of course, Barloworld was quick to issue an announcement gushing over the business and how great it is, even though they tried to wriggle out of buying it.
It’s just as well that the deal went ahead, as the business has been a great performer for Barloworld. In the 11 months that Barloworld owned the asset during the 2021 financial year, Ingrain generated an operating profit of R534 million vs. R452 million in the comparative period (before Barloworld owned it). It unleashed R768 million in cash flow as working capital efficiencies were realised.
Looking back, I can understand why Barloworld gave itself the option to walk away by invoking the MAC clause. Hindsight is perfect and there was no certainty at the time that things would work out so well.
This is the point of the MAC clause: optionality for the buyer. It’s a good reminder to deal executives to listen carefully to the lawyers, as the MAC clause in an agreement can end up being the most important section of all.
This was my most-read article in my early days as The Finance Ghost, shared on multiple WhatsApp groups and community platforms. It helped a lot of people with the decision to emigrate (or not) and is replicated here with just a few tweaks and updates where needed. The original publication date was July 26th, 2020.
Is there a more emotive topic for the South African middle class than emigration? With just enough money to contemplate the decision but nowhere near enough for the dream lifestyle of chasing the sun, these inbetweeners face a tough decision. Load shedding doesn’t make it any easier.
The damage to our economy from Covid was severe. It made the 2009 Global Financial Crisis look tame. A significant upswing in commodities in the aftermath of the pandemic has saved the currency and quite possibly our economy as well, although Eskom and numerous other problems constantly remind us that the pain is far from over.
When a ship is battling a terrible storm, the passengers look to the captain and leadership team for hope. Our leadership team isn’t inspiring confidence in anyone right now, forcing the passengers to at least consider whether the lifeboats might be a better option.
This isn’t an SA-bashing article
It’s too easy to just say “of course you should emigrate” – the decision deserves far more analysis than that.
South Africa has problems, but we are still one of the most important emerging markets in the world. There’s still an S in BRICS. We are still in the G20. By no means are we some obscure country that has no relevance to global trends, even if we are a “junk” economy these days.
There is unquestionably opportunity here. Although the overall economy has been stagnant in recent years, many have still made their fortunes here.
I’m going to take you through a decision process that looks at:
Mitigation of crime as the initial test
Separation of financial and physical emigration
How to make the physical emigration decision
Treating the views of SA expats with some caution
The most important caveat to objective analysis: crime
I want to explain the way I think about the emigration decision and the factors I consider, but I must first touch on the most difficult issue of all: crime.
It’s not about feeling safe, because very few countries are perfectly safe. It’s about feeling like you can successfully mitigate the risks.
I moved from Joburg to Cape Town partially because of how gorgeous Cape Town is, but also because I couldn’t handle the risk of violent crime happening to my family while driving between home and work. Cape Town has crime too, obviously, but the hijacking realities are a fraction of what they are in Joburg.
I felt that hijacking is a risk I cannot mitigate and so I semi-grated, along with thousands of other Joburg families.
Housebreakings, on the other hand, can be mitigated to a great extent by living in a secure complex. The risk is never zero, but it can be managed to an acceptable level in my opinion.
If you feel like you cannot mitigate the risks, or you cannot live a full life in South Africa because of crime, then you can stop reading. You should be on visa application sites instead, giving yourself a shot at happiness elsewhere. I totally get it and respect that decision.
Separating the financial and physical decisions
South Africans are allowed to take R1m offshore every year without jumping through hoops and another R10m per year with permission from the SARB and some other paperwork nightmares from SARS.
I raise this because the vast majority of South Africans will never be at risk of hitting this threshold and not getting their money out. The exception to this would be a Zimbabwe-style liquidity crisis where the Rand literally becomes worthless in a matter of weeks, but I believe we aren’t at that point.
If I believe that we are headed for Zimbabwe status in the next few years, then there are two things I should be doing:
Selling all my fixed assets (especially my house as soon as possible)
Shifting all my Rands into offshore investments as first prize or JSE-listed investments with offshore exposure (e.g. S&P 500 ETFs) as second prize
This is the decision to financially emigrate rather than physically emigrate. It is often (but not always) the precursor to physical emigration.
How do I make the physical decision?
Having already discussed the concepts of crime mitigation and financial emigration, we now need to look at the biggest decision of them all: physical emigration. This is the classic “packing for Perth” approach.
A four-quadrant decision matrix is a favourite tool for strategists. It allows you to assess four scenarios based on two variables. In this case, I believe the most important variables are:
Importance of proximity to family
Income prospects in South Africa
The decision needs to be based on your personal circumstances.
Let’s deal with the family point first. It’s easy: you either do or do not place high importance on being close to your family and close friends. This is especially difficult when you have kids. If you’re young and single and most of your friends have left anyway, then it’s much easier than when you are taking your kids away from their grandparents, for example.
The second point is trickier. Your ability to earn an income is a factor of your skills and your relationships. If you go overseas, your relationships start from scratch, so your skill set has to be fantastic and sought after in whichever country you go to. Please don’t underestimate this issue.
Let’s look at the four scenarios:
Quadrant 1: Upskill / change job
If you want to be close to family and friends but your income prospects aren’t looking good, then you have to do a bit of soul searching and figure out how to upskill yourself in a new direction.
Should you start a business? Do you need to study further? Is it time to do something completely different? It’s not a pleasant situation to be in, but the tough survive.
In some cases, there is little choice but to emigrate. This is the most emotional emigration of all, as it is based on push factors rather than pull factors and you leave your family behind. It hurts for everyone involved.
Quadrant 2: Do not emigrate
The decision to not emigrate is clear in only one quadrant. If you want to be close to family and your income prospects are strong in South Africa, then physical emigration makes no sense (unless you cannot mitigate the crime issue).
With the right crime and financial risk mitigants in place, you can keep lighting the braai. I am in this quadrant and I really hope to stay in it forever.
Quadrant 3: Emigrate
The decision to get out is also only clear in one quadrant. With weak income prospects and your family already somewhere else, why would you logically stay here?
Quadrant 4: Enter the global job market
This quadrant is typically where professionals with global mobility find themselves. They are specialists in specific fields and can work in many different countries.
If family isn’t an issue, then these people must logically continuously seek the best possible job market for their skills.
Treat the views of expats with some caution
Ask 10 South African expats whether you should emigrate and I guarantee 8 will give you a resounding yes. Of those 8, maybe half are genuinely happy.
South African expats don’t have it easy. Whether they are willing to admit it or not, their hearts still feel something when they think about braais, biltong and Springbok world cup victories.
Many will tell you that “leaving is the best thing they ever did” and “life is so perfect here” – which, in some cases, it is. In many cases though, it isn’t.
With the greatest of respect to expats and recognition of how hard it is, many suffer from confirmation bias and few are willing to admit it. I have enormous respect for those who are capable of giving a balanced answer.
They so desperately NEED emigration to have been the right decision that they only look for positives in the country they’ve moved to and they only focus on the negatives in their place of birth. This falls away when the Springboks win of course, at which time the expat population is the first to break out the green jerseys.
Once you’ve packed up your family and sold everything to move to a foreign land, you will seek confirmation all the time that you did the right thing. This is human nature. These cognitive biases make our lives (and the markets) so interesting.
Final thought: this is a fluid process
I don’t make this assessment once every 5 years. I do it almost continuously in my mind. The facts in front of us are always changing. Our country seems great one day and terrible the next.
Whatever you do, just do everything possible to take emotion out of the decision. Consider your options objectively and calmly and you stand a much better chance of making the right decision.
And if you are reading this as an expat who made the big decision, then please do your best to deliver a balanced view to those left behind. We all know how broken South Africa is, but I have yet to come across a perfect country.
This article is an adaptation of pieces I wrote in the weekly Ghost Mail publication during the peak of IPOs in 2021.It was uploaded a couple of weeks before we launched the new Ghost Mail so the share price CAGRs below are slightly outdated, but it’s the principle that matters.
My long-standing readers and followers on Twitter will be aware that I avoid Initial Public Offerings (IPOs) like the plague. Hype may be great for boxing matches and championship-deciding Formula 1 races, but it is highly dangerous in the world of investing. Nothing gets more hype in the market than a new listing.
An IPO is the process of a company listing on a stock exchange and raising capital. In addition to the company issuing new shares to investors and putting the proceeds in the bank account, the pre-IPO holders will often make a portion of their shares available for sale. This is to create “liquidity” and “shareholder spread” which simply means that there will be enough different shareholders to create a market for the shares and drive trade.
The most important thing to remember about IPOs (especially in the United States) is that the public markets are frequently used to facilitate an exit for previous investors like private equity funds or even the founders.
Now, they aren’t going to sell you the shares at what they perceive to be a bargain, are they?
Trust me, the bankers and venture capital (VC) firms know more than you do about the company. They are only willing to cash out or even dilute their holdings once the best days are over. The super-profits have been made by the time a company comes to market, so paying a valuation as though the company can keep growing like a startup is an almost guaranteed way to blow up your portfolio.
An IPO that only facilitates trade rather than the raising of fresh capital is known as a “direct listing” – examples include Coinbase, Roblox, Palantir, Slack and Spotify. Here’s a quick look at the compound annual growth rate (CAGR) at time of writing this article and the listing date of each of these companies:
Spotify -1.3% (3rd April 2018)
Slack +7.8% (20th June 2019)
Palantir +19.1% (29th September 2020)
Coinbase -55.1% (14th April 2021)
Roblox -36.4% (10th March 2021)
This is a small sample size of course, but there’s a clear trend here and it won’t look any different with more examples: new listings generally suck for investors and the listings in 2021 were the most dangerous.
Buying IPOs at a time when the market is clearly expensive is a very painful mistake that you need to avoid.
IPOs ARE FAIR-WEATHER FRIENDS
If you draw a long-term chart of the number of IPOs each year in the United States, you’ll notice that they tend to peak at the end of a bull market. This isn’t by accident and isn’t a coincidence.
If you are bringing a company to market and hoping to attract investors, wouldn’t you want to do it when the market is hot and investors are itching for the next opportunity? Trying to sell something new to battered investors is much tougher than just taking advantage of hype around a specific sector or concept.
This is why you tend to see a flurry of IPOs in specific sectors at different times. For example, electric vehicles have been all the rage. The tech sector in general was flying throughout the pandemic. In 2022, things have cooled off considerably. The downstream impact on venture capital is becoming visible now, with a definite risk-off approach coming through from tech investors.
IPOs LOVE ASSET PRICE BUBBLES
When you hear stories of pimply kids from Harvard raising gazillions of dollars with little more than a one-page term sheet and a promotional video to explain the idea, you need to be afraid. In that environment, people might even start buying JPEGs of monkeys for enormous amounts of money. Oh, wait…
For me, NFTs must be the single best example of what happened to the market during the pandemic. The NFT market is collapsing and it’s going to get worse. Crypto is looking very shaky right now.
Unprecedented levels of economic stimulus (money printer go brrrrrr…) by the Fed created a spectacular asset price bubble. In those scenarios, there is plenty of money to be made provided you recognise the risks and realise that you are in a game of musical chairs. When the music stops, you need to have already cashed out.
In such a market, there are several IPOs every week.
For context, Statista tells me that there were a total of 685 IPOs in the US from 2016 to 2019. There were 431 just in 2020 and a whopping 951 in 2021, far more than in any prior year.
Another sign of trouble was the number of Special Purpose Acquisition Companies (SPACs) that listed. These are “blank cheque” companies that raise money based on a loose plan to go off and do deals. We have a similar mechanism on the JSE, though we haven’t seen a SPAC listing in a long time. Capital Appreciation Limited was the first SPAC on the JSE and has worked out very well, with a market cap at time of writing of nearly R2.4 billion and an exciting strategy in various FinTech verticals.
LOOKING BACK: COINBASE
In the process of migrating my work to the new Ghost Mail platform, I worked through many of my earlier blog posts in my life as a ghost.
In April 2021, I wrote about crypto exchange Coinbase. I specifically wrote about how I felt the company was a gigantic bubble, with IPO pricing that would hurt investors while maximising returns for those leaving the building.
Since then, Coinbase’s share price has more than halved.
Many investors made the argument at the time that Coinbase is the shovel in the gold rush. This is a great analogy that reminds us of the power of being a platform business. When selling the shovels, you don’t care if the buyer finds gold or not. That is the buyer’s risk, while your profits from the shovel sit safely in your bank account.
Of course, if nobody ever finds gold, then your shovel business is in serious trouble. That’s a longer-term problem.
Coinbase takes a percentage of the value of crypto traded on the exchange. In other words, the profits fluctuate with the pricing of crypto tokens. This isn’t the shovel in a gold rush; this is a share of the gold itself. As I wrote at the time, the analogy was being applied incorrectly.
A careful read of the prospectus (the detailed document that accompanies any listing) would’ve revealed that the company’s goal is to operate at break-even (!) for the time being. They were looking for investors who believed in the mission and would hold through cycles.
Sure. We all want that, along with a Ferrari for our next birthday present. Who wouldn’t want investors that don’t care about making a profit?
At the time of the IPO, Coinbase was priced at a forward Price/Sales multiple of around 9x. The Nasdaq (itself a listed company) was trading on a revenue multiple of 4.7x and makes a profit. The JSE was trading at a revenue multiple of around 4x.
So here was Coinbase, priced at double the revenue multiple of the traditional equity exchanges and aiming to simply operate at break-even. That wasn’t a story I was going to invest in.
I’m really glad I didn’t, as this chart will demonstrate:
IPOs are best avoided. Be careful out there, Ghosties.
Mediclinichas provided a trading update for the year ended March 2022. With full results scheduled for release on 25 May, this gives the market a taste of what happened in that period.
As I’ve written many times before on this platform, the hospital groups were not beneficiaries of the pandemic. The cancellation of elective procedures caused havoc with operating margins. The latest results demonstrate that a recovery from that tough period is well underway.
Revenue grew by 8% and group EBITDA margin came in at around 16%, a 180bps improvement from the 14.2% result in the prior year. Revenue is now ahead of the FY20 period (GBP3.2 billion vs. GBP3 billion) but EBITDA margin hasn’t fully recovered yet, running 150bps below the FY20 margin of 17.5%.
Investors will appreciate the improvements in the balance sheet. After a tough period in FY21 with low cash conversion of profit into cash generated from operations (just 77%), a 125% conversion rate in FY22 reflects a period in which working capital swung positively.
Thanks to strong cash conversion, the group net debt / EBITDA ratio has improved from 5.1x to 4.0x. Importantly, this is better than the 4.3x reported in FY20.
Mediclinic’s share price is trading only slightly below pre-pandemic levels and is up around 7% this year.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
