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Ghost Bites Vol 51 (22)

Corporate finance corner (M&A / capital raises)

  • There’s news at Ascendis and it has nothing to do with Gary Shayne. He’s no longer on the board and his name is being utterly hammered by the investigative journalists at Daily Maverick, so Ascendis will be pleased to have seen the back of him. Instead, this update is about the potential sale of Ascendis Pharma to Austell Pharmaceuticals. As one of the many recent opportunistic lenders involved with Ascendis, Austell loaned R590 million to the company at JIBAR plus 4% plus another 3.5% for good measure. Another 2% gets added to this if shareholders approve the sale of Ascendis Pharma to a joint venture of Pharma-Q and Imperial Pharma, or if shareholders don’t approve a sale to Austell if that deal falls through. The price to Austell is R410 million, so that would get rid of most of the loan but not all of it. Ascendis Pharma made a net profit after tax for the six months to December 2021 of R22 million, so on an annualised basis this is a Price/Earnings multiple of 9.3x. The price for the Pharma-Q / Imperial Pharma deal is only R375 million, so shareholders would be leaving money on the table if they approved that deal. The corporate advisors look set to make money here, as two separate circulars will be sent to shareholders: one for the Pharma-Q / Imperial Pharma deal and one for Austell. Here’s a summary of the typical decision facing an Ascendis shareholder:
  • Tongaat Hulett is trying desperately to pull its balance sheet in the right direction and survive its current crisis. The company asked the JSE to suspend its shares from trading. The JSE has decided to suspend trade from 20th July but notes that this isn’t because the company asked it to do so. Instead, the suspension is because the company hasn’t released its provisional results. This may sound like kids fighting in the sandpit but these decisions set an important precedent. The suspension won’t be lifted until Tongaat has caught up on financials, which is unlikely to happen until there is certainty around the balance sheet. If you’re a Tongaat shareholder, you should make yourself comfortable (if that’s possible), as you’ll be one for a while whether you like it or not.
  • As part of PSG’s internal restructuring ahead of the much bigger deal that will see PSG leave the market, the group has sold down its Kaap Agri stake. It will hold 34.7% in the agriculture group at the time of the unbundling, assuming that transaction goes ahead. You can find the PSG circular at this link with all the information on the restructure.
  • Fortress has distributed the circular to shareholders dealing with the proposal to repurchase all the A shares in consideration for the issue of 3.01281 B shares per A share. In simple terms, this means the REIT is getting rid of A shares and issuing more B shares instead, assuming all goes ahead. If it doesn’t go ahead, Fortress is likely to lose REIT status. EY was hired as independent expert and has opined on the terms as being fair and reasonable. You’ll find the circular at this link and they managed to keep it under 100 pages, so it’s a light read by regulatory standards.
  • Astoria shareholders were reminded that the company is still in the process of finalising agreements for the intended acquisition of 25.1% in International Mining and Dredging Holdings for $5.5 million. The share price closed 14.7% higher, though a quick look at the share price chart makes it clear that the big move was a result of the bid-offer spread.
  • African Equity Empowerment Investments and AYO Technology have jointly announced that they have agreed to acquire a business called Italian Summer. The entity through which the deal is being done is called SGT Solutions, owned 40% by AYO and 60% by AEEI. Italian Summer supplies power management and backup solutions for commercial and industrial applications, adding some romantic flair to everyone’s Eskom problems. The price is around R73.6 million based on a price/earnings multiple of 5.5x. Half of the amount is subject to earn-out payments, which is the right way to acquire private companies. In these structures, the sellers only receive all the cash once warranted profit after tax numbers are achieved after the deal. If those levels aren’t achieved, the earn-out is adjusted downwards based on a formula.

Financial updates

  • Super Group has published a trading statement for the year ended June 2022, a period that was full of disruptions ranging from riots and the tail end of the pandemic through to load shedding. We all deserve a medal for getting through this. Super Group especially deserves a medal, with HEPS up between 29.6% and 43.7%. The guided range is 370 cents to 410 cents, which also compares favourably to the 373.8 cents achieved in 2019. Impressive stuff, all things considered!
  • There was a pretty weird announcement from MTN clarifying tax remittances by MTN Nigeria for the 2021 fiscal year. Using the words “MTN Nigeria” and “tax” in the same sentence sends a shiver down the spine of any MTN shareholder. I’m not going to pretend to understand the intricacies of what is going on here, but MTN notes that MTN Nigeria is one of the most tax compliant organisations in Nigeria for the year 2021. Separately, the company announced a N200 billion bond issuance programme. This is a follow-on to the 2021 programme in which MTN Nigeria issued N100 billion worth of 13.00% 2028 bonds and N90 billion in 12.75% 2031 bonds. This gives you an idea of what long-term funding in Nigeria costs.

Operational updates

  • BHP has released an operational review for the year ended June 2022. The update was headlined by the news of a fatality-free year and record sales volumes from Western Australia Iron Ore, allowing the group to fully capitalise on high prices. Full year guidance for iron ore and energy goal was achieved, along with revised guidance for copper and metallurgical coal. Nickel production missed guidance due to a smelter outage in the final quarter of the year. That quarter also saw the conclusion of major corporate actions, including the sale of 80% in BMC to Stanmore Resources for $1.1bn plus adjustments, as well as the merger of the oil and gas portfolio with Woodside Petroleum with a subsequent distribution of the shares to shareholders. Other than the usual operational matters, the executives are lying awake at night thinking about the Samarco dam disaster in 2015 which seems like it will play out in UK courts after a critical recent ruling against BHP. Of course, the company is appealing the ruling that allows a group action in the UK. Importantly, simply allowing an action to take place isn’t a ruling on the merits of the case.
  • I couldn’t quite decide if this is a financial or operating update, but eventually I chose the latter. Aveng has announced that Australian subsidiary McConnell Dowell has been awarded an AUD600 million contract by the Tasmanian Department of State Growth for Tasmania’s largest-ever transport infrastructure project: the New Bridgewater Bridge. One would’ve hoped for a better name for such a momentous occasion. This takes the company’s current work in hand to around AUD3 billion. The bridge will include a shared pathway for cyclists and pedestrians, which is guaranteed to cause fights among people in clothes that fit too tightly. The share price only rallied 2% in response, which is why I classified this as an operating update. When Aveng successfully banks this amount and finishes the bridge, we can move it up.

Share buybacks and dividends

  • For a useful reminder of how huge Naspers and Prosus are, share repurchases last week came to R1.68 billion and €338 million respectively.
  • Omnia Holdings has obtained SARB approval for the chunky dividend of 525 cents per share (current share price R67.87). The last day to trade is Tuesday 26th July.
  • Similarly, Bytes Technology Group has received SARB approval for its proposed final (4.2 pence per share) and special (6.2 pence per share) dividends. The dividends will be proposed at the Annual General Meeting on 26th July.

Notable shuffling of (expensive) chairs

  • Following the sad passing of Meyer Kahn in June, Capital Appreciation Limited has appointed Kuseni Dlamini as Lead Independent Non-Executive Director. He has been on the company’s board since May 2018 and is currently the Chairman of Massmart and Aspen, having previously held the roles of CEO of Old Mutual South Africa and Head of Anglo American South Africa. Kahn’s shoes are big to fill and Dlamini looks more than capable of doing so.

Director dealings

  • Capitalworks is a long-standing partner of listed food business RFG Holdings. In recent weeks, the private equity investment house has bought shares worth nearly R460k. To add to that tally, there’s been another purchase of over R50k. This is announced on the market because two of the RFG Holdings directors are from Capitalworks.

Unusual things

  • Fund manager Bluebell Capital Partners is attempting to improve the corporate governance at Richemont. Before you panic, the company hasn’t done anything wrong, so the emphasis here is “improve” rather than “fix” it. Bluebell is pushing for the “A” shareholders (the listed shares that normal plebs can buy) to be able to appoint a representative to the board. The fund manager also wants Richemont to amend its articles of incorporation such that A and B shareholders have an equal number of representatives on the board. It’s an interesting attempt at levelling the playing field for shareholders. The board is “considering” the proposals.
  • Deutsche Konsum REIT is having a little fight with the German financial regulators. BaFin is upset about the treatment of loan agreements in the company’s separate financial statements. The investment of liquid funds with the main shareholder was fully disclosed according to the company and the auditors issued an unqualified audit opinion. It will be interesting to see how this develops.

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Ghost Global (PepsiCo | Delta | Morgan Stanley | Ericsson | Blackrock)

Ghost Global is a weekly segment brought to you by the Ghost Grads on a rotational basis. This week, Karel Zowitsky updates us on earnings from giants like PepsiCo, Delta, Morgan Stanley and more.

PepsiCo’s woes in Europe

PepsiCo has achieved revenue growth in each operating region except for Europe, which fell 5% for the six months to June 11th, 2022 to $4.8 billion. Over the same period, net revenue for the group grew 7% to $36.4 billion.

PepsiCo has been impacted by the conflict in Ukraine, which has impacted manufacturing and business activities in the region. This year, the company has recognized $1.6 billion in impairments as a result of the conflict.

If we split out the once-off gain associated with the sale of the Tropicana, Naked and other juice brands to PAI Partners in the first quarter for $3.5 billion, then year-to-date operating profit is just over $4 billion vs. $5.2 billion in the comparable period. Adding back the impairment gives us $5.6 billion vs. $5.2 billion, which tells a more accurate story of underlying profitability that is under the control of the management team.

Sadly, shareholders are also exposed to things beyond anyone’s control. For now at least, Europe is causing headaches for PepsiCo.

How high can Delta fly?

With restrictions easing across the world, people are taking to the skies once more. Domestic passenger revenue was 3% higher compared to the June 2019 quarter and international passenger revenue has seen an 81% recovery compared to the June 2019 quarter.

There is still room for improvement, specifically in the Pacific, with Australia and South Korea reopening and restrictions in Japan easing.

It is worth noting that Delta still has a long recovery ahead. Operating income is down 29% and net income is down 40% compared to the second quarter in 2019. This is due to a combination of factors, not least of all the average fuel price per gallon increasing from $2.08 USD to $3.74 – an increase of 79.8%!

This puts a lot of pressure on management to run at full capacity to avoid operating losses. This must be balanced against the need to keep the rights to fly certain routes. This is a tough balancing act between operational efficiency in the short-term and growth and longevity in the long-term.

Investment banking revenues take a dive

Banking has hit a slump. Morgan Stanley delivered decent results when viewed in isolation. On a comparable basis though, revenue went backwards across the board. Net income is down 11% from Q2’21 and investment banking revenues took the hardest knock, down 55%.

When corporate transactions dry up, so too do the advisory fees related to these deals. On the plus side, market volatility helped drive increases in equity and debt revenues on the trading desks, though not enough to offset the advisory fee issues.

Wealth management revenue also fell, which is to be expected when markets are down.

Ericsson is connected to the future

Ericsson provides 5G mobile infrastructure in North America and Europe. Revenue in the latest quarter was up 5% year-on-year and a gross margin of 42.1% was achieved, slightly down from 43.4% in Q2’21 due to the impact of component and logistics costs. Operating profit margin went the right way though, up from 10.6% to 11.7%.

There’s a change in reporting segments coming in the next quarter, with Digital Services and Managed Services being merged into a single segment called Cloud Software and Services. This is a response to customer demand for cloud technologies.

Blackrock revenues and margins drop

Asset management firms are exposed to the broader fortunes of the markets. Considering this has been a terrible first half of the year for practically all asset classes, Blackrock’s 6% drop in revenue in the latest quarter doesn’t seem too bad. Operating margins deteriorated, as one would expect when revenues decrease. Margin fell from 40.1% to 36.9%.

The company is executing extensive share buybacks, taking advantage of market conditions to mop up its own shares at a lower price. This has a positive long-term impact on earnings per share, as there are simply fewer shares in issue. The share price is down 34% this year.

For just R99/month or R990/year, you can have access to institutional-quality research that is guaranteed to expand your investment knowledge. Visit the Magic Markets website to subscribe.

Spread your assets for good and bad times

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At times when global markets are falling, inflation is rising, and there are no clear signals on whether to buy or sell – like now. A diversified portfolio that includes safe-haven assets offshore suddenly looks very appealing.

Diversification is a strategy to reduce the volatility in the returns from your portfolio, while still achieving growth. This is achieved by including different asset classes that are less correlated with equity and fixed interest markets. Examples of such assets, which are often called safe-haven assets, are commercial real estate with long leases or gold. Commercial real estate is regarded as a “safe haven” because they have traditionally retained value, or even appreciate, driven by escalating rentals and the increasing costs of construction when other assets are losing value.

Maybe cryptocurrency looked like a good diversifier because it appeared to exist outside traditional financial systems. What it is showing now is that cryptocurrency is highly correlated with the economic growth outlook – when people are nervous about the future or have geared their crypto and need to pay down debt as interest rates rise, they sell their crypto.

Property is not a uniform asset class

Although a “bricks and mortar” asset will probably lose less value than shares in a market downturn, not all property is the same. Residential property underpinned by floating-rate mortgages and eroding income is vulnerable when interest rates increase, because borrowers may start to default. Investing in a public REIT may be easy but is subject to market sentiment and often trade below the value of the underlying assets.

On the other hand, investing in a commercial building that is fully leased to medical tenants, conservatively geared at a fixed rate, with long-term leases that ensure the tenants are fully responsible for variable costs (called net leases), is less risky.

Medical real estate in the US (depending on how it is structured) is a resilient investment in the property sector because it offers a stable income stream and wealth preservation.
  • Medical tenants are reluctant to move, since they often have to install costly equipment in customized offices, so they enter into long-term leases. Consider an imaging centre, a pathology laboratory, or even your dentist, who cannot afford to move premises without significant cost and disruption. That means the property owner can depend on receiving a steady income stream.
  • Medical businesses in the US generally have escalation built into their leases, and the services that they provide are not discretionary, which makes them reliable tenants. With a net lease in place, a lot of the costs that tend to rise in inflationary times, such as municipal rates and maintenance, are passed through to the tenants.

Different strokes for different folks

There is obviously more risk in investing in a single building (particularly if it has only one tenant) than in a portfolio of several buildings. For a big-ticket investor, a single building might be the preferred option. You can visit it in person, analyse the pros and cons and keep an eye on how it performs.

If you don’t have the expertise and capital to build your own portfolio of medical commercial real estate, it is better to diversify within this sector to reduce your risk.

For example, OrbVest, the specialist in US medical real estate, has launched OrbVest Diversified Holdings (ODH), which spreads investors’ risk beyond a single tenant/single building. ODH holds shares in all the recent buildings that OrbVest has brought to the market. It’s current offering, ODH 5, contains about 80 tenants spread across more than 20 buildings. OrbVest has made it just as easy as investing in a single building because it still requires a single payment into a company, which is listed on the MERJ exchange in Seychelles. But you can sleep better at night, knowing that even if one tenant defaults for some reason, it has very little impact on your total return.

For South African investors, the minimum investment has been reduced to only $1 000 to allow investors to start small. Returns are paid in dollars, not rands, into your wallet in Seychelles and are completely offshore. The returns are gross of tax, so if you are an SA-resident taxpayer, you need to declare tax on your foreign earnings, as you do with crypto or any other offshore-based asset. While earning a return in dollars, you can pay the tax due in rands and keep your funds offshore.

If you want to find out more about OrbVest and investing in the US medical real estate market, click here to listen to a podcast with OrbVest’s COO, Justin Clarke.

💻 Visit our website to read more about OrbVest.*


*Past performance is no guarantee of future returns

OrbVest SA (Pty) Ltd is a registered FSP with registration Number 50483.

Ghost Bites Vol 50 (22)

Corporate finance corner (M&A / capital raises)

  • Alexander Forbes has released the circular related to the partial offer by New Veld LLC, the investor that bought the 14.83% stake in the company from Mercer Africa. The ultimate parties behind New Veld are Prudential Financial (a global financial services giant) and LeapFrog Investments (an investor in Africa and Asia). The offer price is R5.05 per share (calculated at R5.25 less the 20 cents per share dividend) which is the same price paid to Mercer. Although there was no regulatory requirement for an independent expert, Alexander Forbes hired one anyway and the opinion is that the terms are both fair and reasonable to shareholders. ARC Financial Services holds a 41.47% stake in Alexander Forbes and will not be accepting the offer. The offer allows holders of up to 100 shares to sell all their shares and holders of more than 100 shares to sell the first 100 plus 45.2% of the rest of the shares. Excess tenders are allowed, which is a reference to selling more than the partial offer percentage (which helps make up for shareholders who may not choose to sell any shares) rather than the latest juicy government contracts. As a final important point, the offer is structured such that New Veld cannot end up with a stake of over 33% of the issued shares, putting it below the 35% threshold that would trigger a mandatory offer for all shares in the company. You can find the offer circular at this link. I just couldn’t resist replicating this wonderful bit of “lawyering” from the announcement:

“The Investor is extending the Partial Offer to Shareholders other than those to whom the offer is not being made.”

Alexander Forbes SENS, 18 July 2022
  • Industrials REIT has completed the sale of Rose Kiln Court in Reading for £5.88 million. This is a 2.2% discount to the 31 March 2022 valuation of the property. This is a single let asset that doesn’t fit the Industrals REIT strategy of multi-let industrial properties. A selling price below book value isn’t great, as the market may worry about some of the other valuations.
  • The disposal of the 49% interest in Al Tayer Stocks LLC by Stefanutti Stocks has now become unconditional (i.e. all conditions to the deal have been met and it has closed) and the payment of the final purchase consideration is expected in due course.

Financial updates

  • In a short and sweet trading update, Trencor updated the market on the expected financial performance for the six months ended June 2022. The headline loss per share is expected to be between -0.7 and -0.2 cents, which is much better than the headline loss of -9 cents per share in the comparable period. It’s still a loss, though. A bit of further digging reveals that Trencor is just a cash shell now, after unbundling its investment in Textainer and selling its container asset owning company. The cash can’t be distributed to shareholders yet as it is restricted by indemnities etc. related to the underlying asset sale.
  • Sebata Holdings has released results for the year ended March 2022. The company has lost over 80% of its value in the past 5 years and now has a market cap of just R230 million. In this financial year, revenue fell by 25% and HEPS collapsed quite spectacularly to -443.68 cents. For context, the share price is only R2.01! The group is trying to recover earn-out amounts from Inzalo Capital Holdings for a disposal of businesses back in 2020. Those who enjoy special situations punts (also known in some circles as gambling) could dig through the financials at this link.

Operational updates

  • Kore Potash has released an operational update for the quarter ended June. It was a busy period for the Kola Potash Project, including the signing of a memorandum of understanding with the summit Consortium in April and a heads of agreement for the construction of Kola in June. An Engineering, Procurement and Construction (EPC) contract proposal is expected in August, followed by a financing proposal. The metrics for the Kola Potash Project look strong, with the capital cost reduced by over 22% through recent work and the internal rate of return at 20% on an ungeared post tax basis (i.e. without debt). If potash prices stay where they are, IRR is estimated to be 49% on the same basis! At corporate level, new shares were issued to Sociedad Quimica y Minera de Chile S.A. in June in lieu of fees payable under a technical services agreement. By the end of the quarter, Kore Potash had $7.6 million in cash. There was no new information in this update but it does provide a useful reminder of the progress made in the past three months.

Share buybacks and dividends

  • Datatec announced the results of its scrip dividend alternative. The company ended up paying R64.76 million in cash dividends and capitalised R176 million in new shares. The scrip dividend was at a very attractive price because of the timing of the Analysys Mason disposal announcement, so I’m surprised that even more people didn’t take it.

Notable shuffling of (expensive) chairs

  • York Timber has appointed two non-executive directors. Alton Solomons joins the board after a career that included being CEO of Sanlam Private Equity from 2012 to 2019 and his current role as Head of Growth Catalyst and Listed Equities at the IDC. Adrian Zetler is a name that York shareholders already know well; he is one “A” in A2 Investment Partners, the shareholder activist investor that drove significant changes at York (and elsewhere).
  • There are yet more changes to the board at Luxe Holdings, a company that truly has a revolving door in the boardroom. Here is this year’s SENS history for this messy group:

Director dealings

  • The director of Kaap Agri who has been buying up shares is back at it, with a purchase worth nearly R119k.

Unusual things

  • For some reason, Lewis seems to have made it onto the radar of international investors. Dimensional Fund Advisors LP has taken a stake of 5.152% and LSV Asset Management now owns 5.28%. The company has a strong investment case thanks to its great capital discipline and highly successful share buyback strategy. Still, it’s quite odd that international investors are buying like this! I’m also not sure who the sellers are, as Lewis is a fairly illiquid stock and it takes a while to build positions of this size.
  • Zimbabwean company Hwange Colliery is still in administration and has no board of directors. Despite this, the underlying operations are still running and production volumes even increased by 74%! I couldn’t resist including this quote from the colourful update released by presumably the only warm body still standing in the Hwange boardroom:

“The administration team is still working on resuscitating the company”

Hwange Colliery SENS, 18 July 2022

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TreasuryONE webinar: Recession, depression, inflation, the petrol price and the rand

Last week, the team from TreasuryONE hosted a great webinar and Ghost Mail readers were invited. Those who took up the offer certainly didn’t regret it, as Andre Cilliers (Currency Strategist at TreasuryONE) led the way and dished out plenty of insights into the drivers of recent macroeconomic volatility.

If you’ve been wondering why the rand has had it so tough, this will help.

Wichard Cilliers (Head of Market Risk at TreasuryONE) was also in attendance and responded to a number of questions in the Q&A session at the end of the presentation.

This was a lovely opportunity for Ghost Mail readers to hear directly from the professionals in this space. Thanks to the YouTube link below, you can catch up on the event or even watch it again to absorb as much as possible.

Remember to visit the TreasuryONE website to learn more about the service offering across market risk management, corporate treasury outsourcing and management, robotic process automation, cash management and forecasting and more.

Watch the webinar here:

Discretionary retailers on the JSE – part 3

Previously, Chris Gilmour has delved into the non-discretionary retailers on the JSE as well as the discretionary retailers in a series of articles. The first one focused on Woolworths and the second on Truworths. This week in part 3, Chris wraps up his summary on the discretionary retailers.

Mr Price

Mr Price is the new kid on the block, relatively speaking, among the major clothing retailing chains in South Africa and is arguably the best. It certainly has the best long-term track record of any local clothing retailer in terms of compound annual growth in earnings and dividends.

Its genesis was John Orrs department store, which Mr Price founders Laurie Chiappini and Stewart Cohen acquired in 1987. In those days, the two main trading entities were Milady’s and The Hub, both department stores.

Initially, it was listed on the JSE as Specialty Stores and it had reasonable performance. It wasn’t until the hugely capable and charismatic Alastair McArthur was appointed CEO in 1997 and the name was changed to Mr Price in 2001 that the earnings really took off. McArthur was a retailing genius and current CEO Mark Blair understudied him closely when he was CFO of the group. To this day, no satisfactory explanation has been given publicly for McArthur’s departure. He left abruptly in 2010 and was replaced by Stuart Bird, who himself retired in 2019. Mark Blair replaced Bird as CEO.

Watching recent Mr Price presentations, it is clear that Blair is a man on a mission. He has staked his future career on the group becoming the most valuable retailer in Africa, based on market capitalisation on the JSE. Although difficult, this vision is achievable in the longer term, but much of the growth required to get there will have to come from acquisitions.

Most of Mr Price’s growth up until now has been organic, a feature that most analysts love. However, Mr Price took the strategic decision in the depths of the recent coronavirus pandemic to expand into the weakness caused by the virus. The group bought Power Fashion, a low-end fashion business not too dissimilar to Mr Price apparel and then it also bought Yuppiechef, an upmarket kitchenware retailer. Both have turned out to be earnings accretive in a remarkably short time period. The latest acquisition is Studio 88, the largest independent “athleisure” retailer in southern Africa, with over 700 outlets selling well-known branded sports-oriented clothing and footwear.

The Foschini Group

Back in the day, TFG (or Foschini as it was then known) was the benchmark by which all clothing retailers were measured. It had the best metrics of any clothing retailer but it didn’t divulge much in its annual financial statements.

It was controlled by a holding company called Lewis Foschini Investment Corporation (Lefic) which in turn was controlled by Stanley Lewis, father of the current chairman Michael Lewis. The Lewis family maintained control of Foschini until the late 1980s, when they moved to London and sold most of their holdings in Foschini.

By the early 1990s, Foschini had lost its edge and began experiencing some earnings hiccups. Truworths took over the mantle of best clothing retailer and it wasn’t until the arrival of Doug Murray as CEO in 2007 that TFG/Foschini got back on track again. It can make a strong argument as SA’s best clothing retailer, with Mr Price as the other reasonable contender.

What really differentiates TFG from the rest is its commitment to quick response manufacturing. Long before the coronavirus pandemic, TFG had begun establishing Prestige Clothing in order to be able to offer quick response products without the unnecessary delay associated with sourcing from China or elsewhere in far east Asia. This strategy has paid off handsomely for TFG in the past few years as supply chain disruptions have become the norm.

Another big differentiator has been TFG’s ability to succeed in foreign markets, notably in Australia. Over the years, Australia has become  a graveyard for most South African retailers (think Pick n Pay / Franklins, Truworths / Sportsgirl and then of course the massive disaster of Woolworths / David Jones & Country Road). TFG’s acquisition of RAG a few years ago has proved to be earnings accretive and is a useful rand hedge. TFG London has gone through a torrid time during the pandemic but now appears to be coming right with a vengeance.

And TFG’s positioning in the market has also changed considerably over the years. Until fairly recently, it was predominantly a credit retailer. Now it’s mainly cash.

Right at the start of the pandemic, TFG bought Jet from Edcon’s liquidators for next to nothing including the stock. That has proven to be an inspired move. By expanding into the downturn, TFG and Mr Price have distinguished themselves as two discretionary retailers that will survive a prolonged period of low to negative economic growth in South Africa.   

Pepkor

The current Pepkor shouldn’t be confused with the highly focused clothing group that was delisted from the JSE in late 2003 at a price of R12 per share, with 37% of it eagerly gobbled up by Brait. The unlisted entity went from strength to strength and was eventually sold to the ill-fated Steinhoff group in 2015. Steinhoff reworked its African interests and a couple of other operations into Steinhoff Africa Retail Ltd (STAR) not long before its own near-demise in late 2017.

In an attempt to distance itself from the taint of Steinhoff, STAR was renamed Pepkor in 2019 and relisted in largely its current form. Pepkor is now a very large retail conglomerate consisting of clothing & general merchandise, furniture, appliances & electronics, building materials and fintech. Clothing & general merchandising is still by far the largest component of the group, contributing 64% of revenue and 84% of operating profit. Brands in this segment include Pep, Ackermans, Tekkie Town, Dunns and Refinery. Furniture & appliances is essentially the old JD Group with the addition of Abacus Insurance. Building materials includes Tiletoria and fintech includes Capfin.

The group thus doesn’t as yet have a proper five-year track record and so comparisons with more established listed retailers are not so relevant. And although there are no more financial settlements outstanding due to its former association with Steinhoff, one is still left with the uneasy feeling that this whole exercise was cobbled together with the express purpose of removing it from the attention of Steinhoff-watchers. One must remember that Steinhoff still owns more than 50% of the issued equity in Pepkor.

But it’s predominantly a cash business and as such, should be relatively straightforward to manage in the current risk-averse environment. That doesn’t mean that it has limited ambitions. It recently acquired 87% of Brazilian retailer Grupo Avenida. This is a brave move, notwithstanding the observation that Pepkor has reserved 13% of the equity in the business for local management.

Brazil’s apparel sector, like its grocery sector, is highly fragmented and Brazilians tend to prefer buying local products, rather than those with a foreign label. They also like buying clothes on credit, so Pepkor and its associates will need to adapt to this. Although Pepkor would not divulge the exact amount of the transaction back in February this year when it was announced, it is widely believed to be around R3.5 billion or just under 5% of Pepkor’s market capitalisation.

Cashbuild

Cashbuild was founded by the late Albert Koopman in the late 1980s. Koopman and Cashbuild were way before their time, especially with regards to his vision for participative management in the business. He challenged the status quo and questioned why workers couldn’t also be entrepreneurs. As a result, Cashbuild had one of the lowest rates of industrial action anywhere in South Africa during the apartheid era. There was no room for prima donnas; whoever got to the office or branch first in the morning got the best parking, regardless of colour, creed or background. And his philosophies still resonate in the business, even though he physically left it many decades ago.

Cashbuild is the largest retailer of building materials and associated products, selling directly to cash-paying customers through its 319 stores in South Africa, Namibia, Lesotho, Botswana, Swaziland, Malawi and Zambia. It employs 6 238 people. Cashbuild shares have been listed on the JSE since 1986 and its main competitors are Builders (part of Massmart) and Buildit in the Spar group.

Despite having been around for 35 years, it is still relatively small, with a market capitalisation of only R6.3 billion and revenue of R12.6 billion. But it has been a relatively solid performer since listing with only very few surprises over the years. Its 5-year CAGR in HEPS is one of the best in the entire retail sector at 8.7%.

Lewis Group

Lewis is a real little gem. It is the only listed furniture retailer left on the JSE and still operates out of a very humble head office in Salt River in Cape Town. Unbundled from Great Universal Stores plc in 2004, It has survived while its two former much larger peers have either disappeared, as in the case of Ellerines or been swallowed up as with JD Group, which is now part of retail conglomerate Pepkor. 

Conventional wisdom suggest that Lewis should be on a downwards trajectory by now in the face of a deteriorating local economy, higher interest rates and soaring unemployment, as well as the fact that the so-called “homebody economy” caused by more people working from home during the coronavirus pandemic is now evaporating. But if anything, it is flourishing. Lewis has management that get just about everything right and the Lewis customers are exceptionally loyal.

Lewis used to be predominantly a credit-oriented retailer but these days it is around 50:50 cash vs. credit. The valuation of Lewis is truly fascinating. It is currently sitting on a PE ratio of 5.8x and yet its 5-year CAGR in HEPS of 16.2% is the best of all the listed retailers by far. It is significantly higher than the 12% CAGR in HEPS of 12% at Clicks which is currently on a 32x PE ratio.

We hope you have enjoyed this series on the local retailers. Let us know which ones you have invested in?

Ghost Bites Vol 49 (22)

Corporate finance corner (M&A / capital raises)

  • Telkom kicked us off on Friday with heavyweight independent director appointments. You’ll shortly see why this update sits in the corporate finance corner of Ghost Bites. Brian Kennedy (ex-Managing Executive of Nedbank CIB), Prudence Lebina (CEO of TriAlpha Investment Management and ex-CEO of Gaia Infrastructure Capital) and Mteto Nyati (ex-CEO of Altron) have joined the board, along with ESG and foreign market specialist Ipeleng Selele. Just a couple of hours later, the huge news broke that MTN is looking at acquiring all of Telkom’s shares in exchange for either shares in MTN or a combination of shares and cash. These are early discussions and there is no guarantee of a deal, which might explain why Telkom has suddenly beefed up its independent board in a big way. There’s also no indication of price at this stage. Telkom closed more than 26% higher on Friday and MTN closed over 5% higher. This announcement inspired one of my more popular recent tweets:
  • In March 2022, Renergen announced a strategic deal with Ivanhoe that would see the company move from a 4.35% shareholder in Renergen to a controlling shareholder over time if all conditions were met. Interestingly, not everyone in the market thought this was the best idea. The conditions needed to be met within 120 days (an ambitious timeline of note) and that didn’t happen, so the entire deal has fallen away. For a company that usually discloses what its CEO had for breakfast each day, it’s disappointing that the announcement didn’t disclose which conditions hadn’t been met. There’s a big difference between failing a due diligence and not meeting regulatory approvals. All is certainly not lost, as the Virginia Gas Project is close to completion and the equity funding for Phase Two is only needed in 2023. If Phase One goes well, it’s unlikely that funding will be a major struggle. Ivanhoe will still look to work with Renergen, as the company wants the liquefied natural gas for a cleaner energy solution at its Platreef mine. Renergen fell 2.7% on this news and is flat year-to-date.
  • Impala Platinum’s offer to Royal Bafokeng Platinum shareholders needs to be approved by the Competition Tribunal, which is a level higher than the Competition Commission. The Commission recommended an approval to the Tribunal back in April. Things were on track until Northam Platinum made an application to intervene in the Tribunal process. The Tribunal granted an order for certain limited rights to participate in the merger proceedings and set down a merger hearing date of 2 August 2022. That order has now been challenged in the Competition Appeal Court. The longstop date to fulfil all conditions has been extended to 26th September. Sensitive matters take a long time to achieve regulatory approval, especially when there’s a grumpy competitor in town.
  • We’ve been waiting to see which assets would land up in Buka Investments, previously known as Imbalie Beauty (and discussed by Ghost Grad Kreeti Panday in this article). I still can’t find a website for Buka, but at least we know that Socrati Group will be the first acquisition from B&B Media (the company that took over the cash shell) and Moltera Group. Buka is aspiring to be a “premium fashion company” with international and local procurement. Socrati has five stores in Gauteng and is planning another 5 stores in the next few months. The group also owns Caralli, a manufacturer of leather shoes in Johannesburg that supplies Socrati and other third party brands. The purchase price is R140 million, settled by the issuance of 70 million new shares at R2 per share. The net asset value is -R7 million and profit for the year ended February 2022 was R6.2 million. This seems to be a very high valuation multiple. As this is a related party transaction, a fairness opinion from an independent expert will be needed. This is also a reverse takeover under JSE rules, so a category 1 circular with revised listing particulars will also be needed. In other words, detailed disclosures related to the business will be coming.
  • Although no details have been given by Huge Group about the underlying potential deals (other than it being a “series of transactions” which would be a Category 2 transaction in aggregate), seeing this on SENS always gets me excited for what might be coming next from this self-styled investment holding company:
  • Investec has released a prospectus for the issuance of up to £2 billion under a Euro Medium Term Note Programme. If you’re having trouble sleeping, you’ll find this thrilling 124-page document at this link.
  • MC Mining announced the outcomes of the Extraordinary General Meeting held on Friday. Shareholders were asked to ratify a prior issue of shares and approved an acquisition of shares. The first resolution passed and the second failed, which means that Senosi Group will not be loaning further money to the company and that MC Mining needs to come up with R20 million to repay an existing loan to Senosi. This will be paid from the R60 million standby loan facility with Dendocept and existing cash resources. If coal prices continue, the company’s cash runway is expected to extend beyond November 2022. Alternative options to fund the Makhado Project are also been pursued.

Financial updates

  • Richemont has announced sales growth for the quarter ended June 2022 and it looks really strong. In constant currency, group sales are up 12%. Reported sales are even better, up 20%. The US was the largest market in the quarter, contributing 22% of group sales. Looking at different channels, Wholesale and Royalty Income only grew by 12% in reported currency vs. 26% in Retail, so a direct-to-consumer strategy is working really well. Online Retail grew by 12%, in line with the slowdown in eCommerce growth that I’ve seen in many companies. Jewellery Maisons grew 20% and Specialist Watchmakers grew 18%, so both critical divisions are doing well. The blemish in the result was Asia Pacific, which is down 15% in constant rates and 8% as reported.
  • Tongaat Hulett is in crisis mode and hasn’t been able to release a provisional report for the year ended March 2022. A longer-term liquidity facility is needed to finalise the financials, which suggests that auditors aren’t prepared to sign off on the company as a going concern unless that is in place. Although Tongaat is in “financial negotiations” with the South African lender group for such a facility, the company has requested that its listing be suspended by the JSE. This would mean no trading in the shares until the balance sheet issues can be sorted out and the financials signed off. The JSE is considering the request. The share price fell by over 17% in morning trade until staging a dramatic comeback to close 10.2% higher for the day! The rally from midday to close of trade was a spectacular 27%!
  • Adcock Ingram closed 4.3% higher after releasing a trading statement indicating an improvement in HEPS of at least 20% for the year ended June 2022. This has been driven by improved demand for OTC and consumer healthcare products relative to the base period that was impacted by Covid. This implies HEPS of at least 485.6 cents, which is a Price/Earnings multiple of 10x provided the company isn’t playing its cards close to its chest. Whenever a company announces an increase of “at least 20%” you have to be careful, as this is the minimum required disclosure under JSE rules. It’s possible for the final result to be materially better than this.
  • Unlike Coronation, Ninety One includes comparable numbers in its assets under management (AUM) update. AUM at 30 June 2022 was £134.9 billion, lower than the March 2022 number of £143.9 billion and the 30 June 2021 number of £139 billion. In a bear market, asset managers experience a drop in assets just like the rest of us. This directly affects income. Remember that the other impact on AUM is from net client flows, which give the best indication of whether an asset manager is on the right track or not.
  • Primeserv Group has released financial results for the year ended March 2022. HEPS jumped 52% to 20.86 cents and the final dividend is 6 cents per share.
  • Get your diary out – Glencore will release its half-year production report on 29th July and financial results on 4th August. Industrials REIT will release its next quarterly trading update on 29th July. MiX Telematics will report its first quarter results on 28th July.

Operational updates

  • Raven Property Group has exercised its put option to divest of its Russian business to a Cypriot company controlled by Raven’s Russian management team. Putin’s actions in Ukraine and the related sanctions literally wiped this listing out.
  • PSV Holdings is still in business rescue, a financial and operational concept because it affects the way the entire business is run. A recapitalisation is required for the audits for 2020, 2021 and 2022 to take place. On 6th July, the business rescue practitioners filed a notice with CIPC terminating the proceedings with the intention to place the company into liquidation. DNG Energy is a material shareholders in the company and has asked for an extension to raise the funds needed to recapitalise the company. A “short delay” has been agreed to. I couldn’t even find a website for the company!

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • In case you skipped the corporate finance corner, refer to the snippet on Telkom for details of the extensive board changes at the company.
  • Mercer’s sale of its stake in Alexander Forbes has been completed and its representative on the board of Alexander Forbes has tendered his resignation.

Director dealings

  • An associate of the CEO of Stefanutti Stocks has bought shares in the company worth R144k.
  • An associate of the Chairman of Pick n Pay has acquired shares worth nearly R145k.
  • Associates of a long-standing director of Invicta (Lance Sherrell) have bought shares in the company worth R715k.
  • I found it interesting that a director of Barloworld bought shares in the company worth just R12.5k. The announcement even split out the whole shares and fractional shares, as the trades were executed through EasyEquities!

Unusual things

  • In a surprising landmark ruling, the South Gauteng High Court believes that Old Mutual is liable for R1.7 billion to the Living Hands Trust for fraud committed in the Fidentia scandal that was all over the media a decade ago. Old Mutual says it is “deeply concerned” by the ruling and will be appealing it. Here’s an excerpt from the Old Mutual press release that explains why they feel so strongly:

“Quite apart from Old Mutual, the direct cause of the loss and pain suffered was the fraudulent actions of Fidentia well after Old Mutual had transferred funds following a formal client instruction to do so. In the circumstances and following our verification of the authenticity of the transfer of ownership, we were legally obligated and had no other option but to transfer the money.”

Old Mutual press release, 15 July 2022
  • Trustco’s fight with the JSE is ongoing. There is a battle underway over a technical application of IFRS, which is the kind of work you just can’t tell your mates about at the braai without their eyes glazing over in the first few seconds. The dispute has serious ramifications though, as the JSE believes that Trustco is in breach of listings requirements and the company disagrees. Both parties have been advised by IFRS experts who also don’t agree with each other, which tells you more about IFRS than anything else. Trustco has approached the High Court of South Africa for an urgent interdict against the JSE. I felt that this section from the colourful SENS was worth repeating:

“The JSE (and its advisory body FRIP) disagreed with Trustco’s accounting treatment and applied a substance over form treatment, without the JSE being able to point to a single accounting standard that has been breached by Trustco.”

Trustco SENS announcement, 15 July 2022

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Will you take the Brait?

Brait’s net asset value per share is R8.30. The share price is R3.65. The market is trying to tell us something here and Ghost Grad Karel Zowitsky used the release of Brait’s integrated annual report as a good excuse to dig into the two major investments in the group.

It’s not unusual to see an investment holding company trading at a discount to net asset value (NAV) per share. It is unusual to see a large discount like over 55% at Brait. Either the market doesn’t believe the valuations or doesn’t like the prospects (or both).

Perhaps the market is just scared. After all, Brait has a wonderful example of how things can go terribly wrong:

For market enthusiasts, Brait has also a pretty good example of why timing is important, as that terrible chart hides the recent performance:

There’s clearly a story here that needs to be told.

Brait is an investment holding company that has a primary listing on the Luxembourg Stock Exchange and a secondary listing on the Johannesburg Stock Exchange (JSE), offering investors exposure to unlisted companies that operate in the broad consumer sector.

One of these businesses will be extremely familiar to you: Virgin Active. We’ve all had a contract at some time in our lives. The difference lies in whether we actually used it.

So, let’s start with the gym business.

Farewell, masks

Of all the businesses out there that took pain in the pandemic, gyms were among the worst hit. Nobody enjoys exercising with a mask on.

Total membership is currently at around 75% of December 2019 levels. The important question to ask is whether these numbers will increase to pre-lockdown levels or stagnate.

From January to May 2022, Virgin Active saw a 12% increase in members. With masks out the way, it seems logical that this growth trend can continue for a while at least. Before getting too carried away, we need to remember that there are many factors at play.

Many people are hesitant to sign a contract that locks them into paying for a gym membership for at least 12 months when they might be unable to utilise the facilities for a period of time. I know many people who attempted to cancel their gym memberships during lockdowns and their calls and emails simply went unanswered. This is bad practice that does not create goodwill with members.

Affordability is another major concern. In the high inflationary environment we currently find ourselves in, families are feeling the crunch in their budgets rather than their abdominal muscles. Fuel and food prices are taking their toll and many are cutting out luxuries and unnecessary expenditure. Sadly, for many people, a gym a contract is one of the first expenses to be cut from the monthly debit order list.

Brait also highlights the negative impact of working from home trends. It makes sense – many people used to rather go to gym than sit in traffic.

Brait originally paid R12.7 billion for a 78.2% stake in Virgin Active in July 2015.

Today, Brait holds 70.6% (due to the dilutionary effect of subsequent capital raises) with a total cost including the initial purchase of R15.3 billion.

The value of the stake plus proceeds received to date is less than R9.3 billion, so you can see how shareholder value was destroyed by the lockdowns.

In case you need further proof of how severe the lockdowns were for the business, revenue fell from £602 million in FY19 to just £296 million in FY20 – literally less than half of the pre-pandemic level!

With a high proportion of fixed costs (the clubs don’t stop costing money just because they are shut), the lockdowns were a catastrophe.

You should note that a further dilution to a 67.4% stake is expected if the deal to acquire Kauai and Nu from Real Foods Group gets regulatory approval.

Taming the Tiger?

Brait owns a business called Premier that would remind you of Tiger Brands in terms of its product line, but not its recent performance. Brait is planning to separately list Premier, which is tricky in terms of getting the market timing right.

“Premier has completed its IPO readiness plans and will potentially proceed with the listing, market conditions permitting.”

Brait Integrated Annual Report 2022

Brait originally acquired 49.9% in Premier in 2011 for R1.07 billion. After the subsequent exercise of options and the implementation of a management incentive scheme, the current stake is 96.5% and the carrying value is nearly R9.3 billion vs. a total cost of R4.8 billion. Proceeds of R1.9 billion have been received over the years, so the correct comparison is value of R11.2 billion vs. a cost of R4.8 billion – easily Brait’s best investment.

Premier enjoys South African market share of 26% in bread, 26% in flour, 17% in maize, 17% in confectionary sugar and 17% in feminine care. These numbers sound similar but there’s obviously some rounding off. Still, it’s odd to see such consistent share across categories!

Over the past two years, Premier grew its revenue from R11 billion to over R14.5 billion and improved adjusted EBITDA margin from 9.3% to 10.3%.

This means that adjusted EBITDA increased by 44% over the two years of the pandemic, a vastly different result to the pain at Virgin Active.

It’s worth noting that R11.9 billion of the R14.5 billion revenue came from the Millbake division. I now understand why “making dough” is slang for making money! This division produces bread, maize, wheat and baking products and has achieved a revenue CAGR of 15% over the past three years. A newly commissioned bakery in Pretoria is expected to drive further growth.

If you are a Brait shareholder and you want to support your team, then Blue Ribbon bread is the one to put in your trolley.

With inflation top of mind for all of us, you’ll be interested to know that wheat constitutes around 50% of the cost of a loaf and fuel is 6%. A R1/litre increase in the fuel cost adds around 3.5 cents to the cost of a loaf of bread.

Much of the market share in confectionary has come from the R419 million bolt-on acquisition of Mister Sweet. Despite only being included in this result for 10 months, it contributed R540 million of the R763 million confectionary revenue. This sweet deal makes Premier a major player in the South African market in this category.

Will you take the Brait?

Things are looking up at Virgin Active and there’s an argument to be made that momentum will be strong from here. Premier has certainly been a star performer throughout the pandemic.

An investment decision regarding Brait needs to go a lot deeper than just the two major investments, as Brait’s balance sheet has had a tough journey. For example, there was an issue of R3 billion in exchangeable bonds, with accounting rules recognising R624 million as equity and the rest as debt.

For those who enjoy digging in the rough for an opportunity, Brait offers an exciting place to look. Let us know if you hold a position in Brait and what your thoughts are!

Value your business and make a positive impact

As the founders of bizval, we are celebrating Mandela Day by inviting you to value your business between 18th and 31st July. Use coupon code 46664 on checkout and we will donate 50% of the fee to Gugulethu Chess College.

Chess is more than just a game. It teaches critical skills ranging from strategic planning through to dealing with failure. Anyone who has run a business will immediately recognise the benefits of those skills. Anyone who has lived in South Africa will know how badly we need them.

You don’t have to look far to find research that supports the use of chess in schools. It leads to growth in cognitive abilities and even IQ test results. Chess is recognised as being particularly powerful as a tool to improve mathematics, an area where we are falling terribly short as a country. Naturally, improved science marks are also linked to chess.

Surprisingly, studies also link chess to improved reading and comprehension skills. The visualisation skills required for a strategic sequence in chess are equally helpful in dealing with the written word.

“The game of chess is not merely an idle amusement. Several very valuable qualities of the mind, useful in the course of human life, are to be acquired or strengthened by it, so as to become habits, ready on all occasions.”

Benjamin Franklin

Perhaps the best thing about chess is that it is incredibly affordable. All you need is a chess board and the pieces! Of course, you also need a committed person to introduce children to the game and develop their skills.

Such a person isn’t easy to find.

Introducing the Gugulethu Chess College

This is where Babalwa Rubusana comes in. Babalwa founded the Gugulethu Chess College to make a difference in the community in which she lives. Gugulethu is riddled with crime and lack of infrastructure, yet she doesn’t let this stop her.

Just this month, Babalwa registered 20 kids for the SA open chess championship in Cape Town and managed to accommodate 12 players from Johannesburg at short notice.

Despite sending proposals to government departments for funding since 2016, Babalwa says that she has never received even a single chess board. Babalwa relies on private funding from individuals and corporates for basic needs like boards, food and transport costs. Remember, these kids don’t have the means to pay for any of this.

At bizval, we know that our country is in desperate need of more entrepreneurs. The links between chess and improved school results are clear and the likelihood of success for an entrepreneur increases at higher levels of education. The Gugulethu Chess College is run by a passionate community builder who can make a significant impact with modest levels of funding.

For these reasons, we chose to support the Gugulethu Chess College this Mandela Day. You can follow their Facebook page at this link.

Value your business and support chess in schools: everyone wins!

The bizval valuation tool offers entrepreneurs an affordable way to value their businesses. Your favourite purple ghost built the back-end model based on years of investment banking experience, so you can rest assured that this is the real deal and that the answer is based on market practice.

In this video, I show you exactly how the tool works with the example of a chain of pizzerias:

To take advantage of this win-win situation of valuing your business and supporting the Gugulethu Chess College, head over to bizval.co and make sure you use coupon code 46664 on checkout to trigger the donation to Gugulethu Chess College.

At bizval, we value your company.

Ghost Bites Vol 48 (22)

Corporate finance corner (M&A / capital raises)

  • We’ve had such a busy run of deals on the JSE recently that I was surprised to see no announcements that fall into this category.

Financial updates

  • Pan African Resources has been the shiniest of the local gold miners, with the latest update being record production for the year ended June 2022. This has helped the company significantly reduce its debt. I dedicated a feature article to this update that you can read here.
  • Coronation Fund Managers has updated the market on total assets under management (AUM) as at 30 June 2022. Irritatingly, the announcements never give the comparative AUM, so I always have to go digging. The bear market has really hurt Coronation this year. AUM at 31 December 2021 was R662 billion. By the end of March it had dropped to R625 billion and now it sits at R580 billion.
  • Steinhoff’s pan-European discount retail subsidiary Pepco Group has released an update for the third quarter ended 30 June 2022. Like-for-like revenue growth was 4.9% vs. Q3’21 and total revenue growth in constant currency was 17.1%. On a year-to-date basis, revenue is up 17.4% in constant currency. This has been driven by a decent like-for-like growth and a rapid increase in the store footprint. In a time of high inflation, the group says that it is committed to maintaining its price leadership in the market. Here’s a nugget that I felt was worth repeating in full:

“Furthermore, against this backdrop, we are encouraged that the discount market across Europe is now much larger than at the time of the previous financial crisis in 2007-08 which means that a much larger customer base is more familiar with and more frequently shops across this channel.”

Pepco Group Q3 trading announcement
  • Schroder European REIT has announced an update on the independent valuation of the property portfolio and rent collection as at 30 June 2022. The portfolio valuation of €218.4 million is a -0.4% decrease vs. the preceding quarter. Negative drivers were increased vacancy assumptions in an office investment in Paris and higher capital expenditure provisions for upgrading of heating, aircon and renewable energy at an industrial investment in the Netherlands. There was good news in Germany, with a five-year lease extension for a Stuttgart office offsetting some of the negative impact. Schroder has reminded the market that 100% of the portfolio leases are subject to indexation, so rising inflation is starting to contribute to rental growth.
  • It’s interesting to note that Metrofile has appointed BDO South Africa as its next auditor, after the mandatory audit firm rotation that will see Deloitte bid goodbye to Metrofile. We are firmly in a “Big 5” audit firm environment these days, not just Big 4.
  • Sebata Holdings still hasn’t released results for the year ended March 2022 and has had to announce another delay, with results now expected on 18th July.

Operational updates

  • Anglo American has partnered with Nippon Steel Corporation to work together towards lower carbon steelmaking. This relationship is based on the premium physical qualities of Anglo’s iron ore and it helps that the companies have a working relationship spanning over five decades. Most of Anglo’s Scope 3 emissions are linked to materials sold to the steelmaking industry. By developing high-quality products and more carbon-efficient steelmaking methods with Nippon Steel, there are clear benefits to both companies (and all of us).
  • Kibo Energy’s 10-year take-or-pay power purchase agreement for a 2.7MW plastic-to-syngas power plant in Gauteng has been extended to 20 years. This project is the company’s first under its Sustineri Energy joint venture, in which Kibo Energy holds 65% and Industrial Green Energy Solutions (Pty) Ltd holds the other 35%. This improves the projected internal rate of return (IRR) range from 11% – 14% to 15% – 18%. Construction is scheduled to begin in Q1 2023 and project commissioning should be 11 to 14 months thereafter.
  • African Equity Empowerment Investments (AEEI) is still in dispute with British Telecommunications South Africa regarding whether the call option was validly exercised. The company has renewed its cautionary announcement in this regard.

Share buybacks and dividends

Notable shuffling of (expensive) chairs

  • Jubilee Metals has announced an impressive board appointment. Tracey Kerr has been appointed as an independent non-executive director. Ms Kerr was previously the Group Head of Sustainable Development at Anglo American Plc, so this is yet another example of positive momentum at Jubilee.
  • Interestingly, Dis-Chem co-founder Lynette Saltzman has resigned as a director so that she can focus on her operational role within the beauty category in the business. Dealing with governance matters really isn’t fun, particularly when you built a business from the ground up. I think it’s great to see Ms Saltzman focusing on where the real business is done. Hint: that’s not the boardroom.

Director dealings

  • Nothing to report today!

Unusual things

  • Trustco is one of those companies that is never far away from drama. The company has been fighting with the JSE over its listing. Trustco doesn’t like being listed on the JSE (and has made that fact known to anyone willing to listen), yet the company is also fighting in court to avoid suspension. In February this year, Trustco applied to the Financial Services Tribunal for a reconsideration of the JSE’s suspension decision. Also in February, Trustco launched an urgent application in the High Court for an interim interdict against the suspension. On 13 July, the Tribunal dismissed Trustco’s application, leaving the company with one week to take any steps it deems necessary. This now sits with the court as an urgent application, with the JSE agreeing to postpone the suspension until the court has ruled. Trustco has lost nearly 90% of its value in the past three years, so I won’t cry any tears if this one disappears from the market.

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