BAOR, a mining company based in Burkina Faso is to acquire the Kouri and Babong gold projects in the country from ASX-listed Golden Rim for an aggregate purchase consideration of US$15,5 million in four staged cash payments over 12 months.
MTN-Halan an Egypt-based fintech, has added a digital offering to its merchant network with the acquisition of B2B e-commerce platform Talabeyah for an undisclosed sum. Talabeyah services the FMCG market, offering supplies directly to small merchants and retailers with next day delivery. The deal enhances MNT-Halan’s breath and scope.
A 30% stake in Kenyan retail chain Naivas Supermarket has been acquired by a consortium of investors led by Mauritian conglomerate IBL Group. The stake was acquire from exiting Amethis, a French fund and the International Finance Corporation.
Spear Capital, the private equity firm headquartered in Harare with a fundraising office in Oslo, Norway, has completed its investment into Associated Foods Zimbabwe. Spear Capital’s investment into the business will be a part buy-out of existing shareholders, part working capital injection and part capital expenditure as well as investment into systems and equipment to improve the manufacturer’s environmental impact.
Afrikamart, the Senegalese agritech startup, has closed a US$850,000 seed round. The platform allows for the sourcing and distribution of fresh produce. The funds, raised from BLOC Smart Africa Fund, Orange Digital Ventures, Launch Africa and Teranga Capital, will be used to scale the business in the West African country.
Kukua, the Nairobi-based edtech startup, has raised US$6 million in a series -A round. Investors included Tencent Investments, Alchimina, EchoVC, FirstMinute Capital and Auxxo Female Capital.
Moringa School, a Kenyan learning accelerator, has raised undisclosed funding from Proparco which will aid in the broadening of subject range and its expansion into Ghana and Nigeria as it prepares for series-A funding next year.
XENO, a Ugandan investment platform assisting individuals across Africa to plan, save and invest via an app, has raised US$2 million in seed funding led by Beyond Capital Ventures. Funds will be used to scale the platform.
DealMakers AFRICA is the Continent’s M&A publication
At the end of 2021, the South African Competition Commission’s (Commission) Burger King merger prohibition set into motion significant changes to competition law in South Africa. This was the first time in 20 years that a merger was prohibited on public interest grounds alone. This was also the first time that the Commission publicly interpreted section 12(3)(e) of the Competition Act (introduced by the Competition Amendment Act 2018). This new provision deals with the promotion of a greater spread of ownership and, in particular, increasing the levels of ownership by historically disadvantaged persons (HDPs) and workers.
The transaction was ultimately approved by the Competition Tribunal (Tribunal), and we hoped that the Tribunal’s reasons would provide some guidance on how the competition authorities should pursue their public interest mandate (and particularly the application of s12(3)(e)). However, since the Commission and merger parties reached agreement on all the proposed conditions before the Tribunal’s reconsideration hearing, the Tribunal’s recently published decision does not offer any further clarity. The Commission’s decision prohibiting the merger (also recently published in Government Gazette No. 46000) does, however, provide some insight into the Commission’s approach to s12(3)(e) of the Competition Act.
One of the main reasons that the Commission prohibited the transaction was the considerable negative effect of the merger on the promotion of a greater spread of ownership. Pre-merger, the target firms were ultimately controlled by an entity with a 68.56% HDP shareholding. In contrast, the merged entity would not have any HDP or worker ownership and, therefore, the Commission held the view that the proposed merger could not be justified on substantial public interest grounds.
Some key observations from the Commission’s prohibition decision are set out below:
• Following amendments to the Competition Act to this effect a few years ago, the Commission reiterated that, even when a merger transaction is not likely to raise competition concerns, competition authorities are obliged to determine whether it can or cannot be justified on substantial public interest grounds. The Commission views the competition assessment and the public interest assessment as co-equal in terms of the Competition Act. It highlighted that the assessment of public interest grounds is not dependent on the outcome of a competitive assessment.
• The Commission noted that s12A(3)(e) of the Competition Act imposes an obligation on the competition authorities to consider the effect of a merger transaction on the promotion of a greater spread of ownership. This provision falls under legislative measures contemplated in s9(2) of the Constitution, which states that: “to promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken”.
• While the merger parties argued that empowerment shareholders (in this case, the sellers), were entitled to a return on their investment, in the Commission’s view, a return on investment is a private gain to the empowerment shareholders. Although the Commission agrees with the view adopted in established case law such as Metropolitan / Momentum that a balanced approach needs to be taken when assessing public interest factors, it did not consider a gain to shareholders to be a countervailing public interest ground, weighed against the negative effect of the merger on the promotion of a greater spread of ownership.
In its decision, the Tribunal sets out a summary of the proceedings and arguments put forward by the Commission and merger parties but does not refute or expand on any particular issues. Importantly, though, after agreements were reached between the merger parties and Commission, the merger was ultimately approved by the Tribunal, subject to several conditions, despite the reduction in HDP ownership. This indicates that a more holistic approach may be considered by the authorities, and that some degree of flexibility may be possible. For example, if one public interest element is negatively affected, it could be outweighed by other positive public interest outcomes.
In this merger, several extensive conditions were put forward. For instance, the merger parties committed to investments in South Africa of up to R500m, several supply commitments, and the establishment of an employee share ownership programme which will entitle workers to a 5% stake in the merged entity.
Since s(3)(e) was introduced into the Competition Act, and even more so since the Burger King decision, we have observed that the Commission has approved many mergers subject to conditions aimed at promoting the ownership levels of HDPs and workers. Overall, the Commission’s approach to the application of this section has been in line with its reasoning in the Burger King prohibition. We recommend that parties involved in transactions in South Africa adopt a proactive approach and make realistic assessments of what type of commitments may be required if potential public interest issues (especially involving a reduction in HDP/B-BEE ownership levels) are anticipated.
Daryl Dingley is a Partner and Elisha Bhugwandeen a Senior Knowledge Lawyer | Webber Wentzel
This article first appeared in DealMakers, SA’s quarterly M&A publication
Adding to a significant day of property updates, Hyprop released a pre-close update. The retail-focused fund was hammered by the pandemic, with the share price still 50% off pre-pandemic levels. Let’s take a closer look.
The balance sheet has been a major focus for investors, so it’s not surprising that the announcement starts there. Hyprop has investments in Eastern Europe, so there’s a mix of rand- and euro-denominated debt in the group.
The sale of Delta City Mall in Montenegro was implemented in May 2022 and put €70 million into the bank. Hyprop promptly used this to reduce euro-denominated debt. Along with other repayments, the euro-denominated debt has reduced from €373 million in June 2021 to €110 million currently.
Rand-denominated debt has headed in the other direction, up from R5.1 billion to R6.4 billion. This was driven by the purchase of four Eastern European assets from European investment vehicle Hystead for €173 million.
There’s a short comment on how US dollar-denominated debt in Nigeria hasn’t changed, other than capitalised interest. The group notes the ongoing US dollar illiquidity in Nigeria. If you’re a shareholder in the likes of Nampak or MTN, you should take note of that.
The group loan-to-value (LTV) is around 40% which is uncomfortably high for the complexity and risks of the group. In recent periods, Hyprop disclosed a see-through LTV and a consolidated LTV, due to the Hystead structure. It now only discloses a consolidated LTV, which went as high as 51.7% in June 2020.
The announcement goes into great detail about tenant news at Canal Walk, CapeGate, Rosebank Mall and other centres. One thing I’ll highlight is that Exclusive Books seems to be hanging on, with stores upgraded to the “latest specification” – as a great lover of books, I’m happy to see that!
In case you’ve forgotten what happened in March and especially April 2020, here’s a spectacular reminder from the announcement:
I would also like to highlight that although trading density is running higher than February 2020 (rand sales per square metre), foot count is still lower. This is in line with most of the commentary I’ve seen from retail property funds: people are spending more per trip and doing fewer trips.
The trading at entertainment tenants has shown significant improvement. With masks out of the way, that can only improve further from here.
If you’re wondering whether things will go back to normal in retail, the trading metrics in Eastern Europe may help. Masks were burned in March 2022 and everything has improved since then: turnover, trading density and footfall. Recent performance is in line with pre-Covid levels.
That’s really bullish commentary when you consider that the mask mandate has only just been lifted in South Africa. Will we see a strong second half of the year in retail-focused property funds in South Africa?
Hyprop is trying to sell its assets in the rest of Africa, including in Ghana where it is co-invested with Attacq. Currency risks and dollar liquidity are the major issues, as the update makes it sound as though performance at the malls themselves is rather strong. South African businesses in many sectors have learned hard lessons about rushing off into Africa.
With a net asset value (NAV) per share at the end of December 2021 of R58.97 and a current share price of R35.01, the market is putting a 40% discount on Hyprop’s net assets. With masks out of the way, is it finally time to have a punt at Hyprop? The share price is down 9% this year.
Retail-focused fund Hyprop has released a pre-close update with some incredibly interesting insights into the retail property portfolio in Eastern Europe in particular. Although it is obviously a different market to South Africa, the trend in metrics since mask mandates were abolished in March 2022 is quite something to see. I dedicated a feature article to Hyprop that you can read here.
Emira Property Fund’s B-BBEE deal was concluded in May 2017 with Letsema Holdings and Tamela Holdings, each of which held a 2.5% stake in the group after the deal was implemented. 90% of the price was funded by debt (40% from a third party and 50% as a vendor loan from Emira) for a five-year period which expired on 27 June 2022. The deal has been extended to 2027, including the guarantee provided by Emira to the lender. As Letsema is an associate of an Emira director, this is a small related party transaction that requires sign-off from an independent expert. Moore Corporate Services Cape Town has opined that the terms are commercially reasonable. No shareholder approval is required. The group also released a pre-close operational update, which I wrote a feature article on here.
There’s very bad news for Rebosis shareholders, with the property fund announcing that the dream deal to sell a multi-billion rand office portfolio was, in fact, a dream. Ulricraft, a special purpose vehicle spearheaded by Vunani Capital Partners, didn’t meet the deadline to raise the funding for the R3.35 billion transaction to buy the properties on a blended yield of 9.4%. The deadline had already been extended from 22 April to 22 June. The board of Rebosis won’t give another extension, so this deal is dead. Rebosis has promised to communicate a refinancing plan to shareholders by the end of July, as the fund simply isn’t sustainable in current form. The share price of Rebosis ordinary shares (JSE: REA) fell by 35%.
Safari Investments, a REIT (property fund), released results for the year ended March 2022. Property revenue increased by 14% and the group managed to improve its cost to income ratio, which is impressive in this environment. A mythical unicorn emerged a few paragraphs down in the announcement: positive reversions of +1.15%! This means that new leases were signed at a higher rate than the expired leases, which is almost unheard of in the sector currently. The loan-to-value (LTV) is down to 37% and the net asset value (NAV) per share has increased to 855 cents. The share price at R5.70 is a 33.3% discount to NAV. The total dividend for the year of 57 cents per share puts the fund on a yield of 10% on the nose.
If you haven’t been in the markets for a while, you may be shocked to learn that the JSE is listed on the JSE! The JSE as a company is publicly listed on the exchange that it operates and derives revenue from. For the six months ending June 2022, headline earnings per share (HEPS) is between 24% and 32% higher than the comparative period, coming in at between 520.92 cents and 554.53 cents. The group attributes this to higher revenue growth in all segments, active cost management and higher net finance income. The share price was down 6.6% this year before the announcement, so it will be interesting to see how it reacts.
Sasol has announced an update to the sale of its 30% interest in The Republic of Mozambique Pipeline Investments Company, also known as ROMPCO. I am quite sure that a few laughs have been had around the coffee machine about that name. Interestingly, a deal was originally announced in May 2021 that would’ve seen the stake sold to a consortium comprising Reatile Group and a fund managed by African Infrastructure Investment Managers. The other shareholders in ROMPCO quickly romped their way to exercising a pre-emptive right to buy the stake, effectively shutting out the consortium. The deal has now closed, with an initial payment of R4.1 billion and a further R1 billion payable if certain milestones are achieved by June 2024. Sasol retains a 20% stake in ROMPCO and agreements related to the pipeline and the transport of gas to Secunda are unaffected. This is great news for the Sasol balance sheet and takes the company a step closer to rewarding shareholders with dividends once more.
Argent Industrial has released results for the year ended March 2022. Revenue increased by 23.7% and EBITDA by 32.2%. HEPS was a whopping 55.7% higher at 339.2 cents. A final dividend of 42 cents per share was declared. At a closing price of R14.21, Argent is trading on a Price/Earnings multiple of just 4.2x. This R800 million market cap industrials group is looking interesting! It owns an array of businesses including Xpanda, American Shutters, JetMaster and many others.
Irongate shareholders voted almost unanimously in favour of the deal with Charter Hall. This is a key milestone of course, with a few regulatory approvals to go before Irongate shareholders get paid out and the company delists.
Recently-listed Southern Palladium has awarded a drilling contract to Geomech Africa, with the phase 1 programme to commence in mid-July 2022. The results will be used in pre-feasibility studies, which in turn will be used for a mining right application. Phase 2 drilling will be over a wider area and will be used for more accurate life-of-mine planning. The goal of Phase 2 would be to upgrade the project to Inferred Mineral Resource status. If you have any interest in junior mining (whether financial, intellectual or both) then you’ll want to keep an eye on updates from this company.
In case you’ve ever wondered how much money Magda Wierzycka and her husband Simon Peile have made from Sygnia, here’s a clue: through a restructuring of the family’s investment interests, nearly R831 million worth of Sygnia shares have changed hands. Very importantly, this isn’t a sell-down of the stake in Sygnia – it’s only a restructure, so don’t panic! I’m just including it here to give you an idea of what serious wealth really looks like.
Sable Exploration and Mining has released a trading statement for the year ended February 2022, noting that the loss per share will be between 127 cents and 155 cents. They describe this as a “decrease in the loss” from the 76.21 cents loss reported in the prior year. This kind of maths is why you need to stay in school, kids.
Salungano Group (previously Wescoal) released a trading statement for the year ended March 2022. HEPS has swung massively into the green, from a loss of 2.87 cents to a profit of between 5.70 and 6.60 cents. There’s not much trade in the stock and it closed yesterday at R1.46, with this announcement coming out after the close.
In a trading statement covering the six months to the end of February 2022 (yes – this is long overdue), Trustco noted that net asset value per share has increased from 1.48 cents at the end of August 2021 to between 3.95 and 4.25 cents. Just four hours later (presumably after a hugely productive afternoon), the company then released results confirming this number as 4.13 Namibian dollars, so the trading statement was incorrect to refer to those numbers as being cents rather than NAD. It’s also ridiculous to see a trading statement coming out four hours before results.
York Timbers has been dealing with a strike by NUMSA employees at its Escarpment operations since 25th April. The Labour Court confirmed the strike as being unprotected on 7th June, leading to ultimatums to return to work as well as disciplinary proceedings. Investors will be more interested to know that operations have been reinstated, though not yet at full capacity.
Marcel Golding has entered into agreements to buy shares in two listed companies in which he is a director. There’s an agreement to buy R15.4 million worth of shares in Rex Trueform in February 2023 at a price of R18 per share (current price R14.90). There’s also a future purchase of nearly R10 million in shares in African and Overseas Enterprises at a price of R27 per share (current price R16.96). I’m not close to the details of what is going on here but as director dealings go, these are big ones.
The CEO of Fairvest’s family trust has bought another R1.5 million worth of shares in the property fund.
Capitalworks is a long-standing partner of RFG Holdings (known to many as Rhodes Food Group) and holds a large stake in the group. Shares worth another R195k have been added to the position. This is tiny in the world of private equity but it does indicate ongoing commitment to the business.
A private entity related to two Brimstone directors (including CEO Mustaq Brey) has bought shares in Brimstone worth nearly R53k. It’s not an amount to get excited about but it’s still a positive signal, as I guess they could’ve punted on crypto instead (or just spent it on a nice holiday).
Speaking of small director purchases, a director of Kaap Agri has bought shares worth around R90k in the company.
Yet another example is the CEO of Spear REIT, who bought another R95k worth of shares for his kids.
Andre du Plessis has retired from his position as CFO of Capitec, which opened the door for Grant Hardy to be appointed as his successor. Hardy will take over from 1 July and his bank account will no doubt thank him.
A prescribed officer of Thungela has sold shares in the company worth nearly R143k.
Emira’s financial year will close at the end of June 2022. Ahead of that, the group has updated the market on progress since the interim results that covered the six months to December 2021. Property’s recovery has had a wobbly this year, so investors are watching the sector closely.
Emira holds assets in South Africa and in the USA. There are direct and indirect holdings. To make it easier, the fund discloses the information for each segment of the portfolio separately.
The fund has extended it’s B-BBEE transaction to 2027. In this article, I focus on the pre-close update and the metrics in the property portfolio. If you want more details on that extension, you’ll find them as part of Ghost Bites here.
Before delving into the details, it’s worth noting that the loan-to-value (LTV) ratio has increased from 41.8% at December 2021 to 42% at May 2022. Dollar-denominated debt has increased to $73 million after an acquisition in the US (further details below).
Emira has refinanced R1.3 billion in maturing debt facilities this year and has unutilised facilities of R370 million along with cash of R50.6 million in the bank.
Direct local portfolio
The direct local portfolio is 74% of the fund’s investments, so the South African macroeconomic picture is important for Emira. Thankfully, vacancies reduced from 6.1% at the end of December 2021 to 5.5% by the end of May 2022. The focus is on retaining clients, with an 82% retention rate over the 11 months to May 2022.
Tenants still have the upper hand in negotiations, with weighted average reversions for the period at -12.8%. That’s better than -14.1% in the six months to December.
Weighted average lease expiry is 2.7 years and average annual escalations are 6.7%.
Emira has recycled almost R270 million in capital by disposing of four properties.
In the retail portfolio (49% of the direct portfolio), vacancies fell from 3.6% to 3.3% and 90% of maturing leases were retained. Weighted average reversions improved slightly in recent months, coming in at -14.4% for the 11 months to May. This is a portfolio of grocer-anchored neighbourhood centres, which is one of the better places to be right now. It shows how tough things still are.
This brings us neatly to the office portfolio, which is 30% of the direct portfolio. There’s a surprisingly good story to tell here, with vacancies improving from 18.2% for the six months to December to 16.6% for the 11 months to May. Only 65% of maturing leases were retained and the weighted average lease expiry is 2.7 years, so Emira will be desperately hoping that people return to work soon. Reversions were actually rather good at -11.4% vs. -16.9% in the interim period. That’s lower than the retail portfolio!
In the industrial portfolio, which is 19% of the direct local portfolio,vacancies fell from 2.6% to 1.9%. Industrial is still the best place to be in property. 81% of maturing leases were retained at a weighted average negative reversion of -12.6% (worse than -11.7% in the interim period), which is a real surprise relative to the office portfolio.
There’s only one directly held residential property in the portfolio: The Bolton. Occupancy increased from 92.2% at the end of December to 98.6% by the end of May.
Enyuka
Emira is disposing of its shares and claims in Enyuka for R638.6 million, which is 5% of Emira’s investment portfolio value. Many conditions still need to be fulfilled, including the biggest one of all: the buyer confirming finance.
Vacancies in the Enyuka portfolio are stable at 3.2%.
Transcend Residential Property Fund
Transcend is separately listed on the JSE, with a share price down around 17% this year. This is a small fund with a market cap of less than R1 billion. Emira holds 40.69% of the shares in issue and it contributes 4% of Emira’s investment portfolio value.
USA
The portfolio in the US of A is 17% of Emira’s portfolio value and comprises 12 equity investments into open air retail centres. These are grocer-anchored properties, so they feel a bit like Emira’s local retail portfolio.
Emira bought the twelfth property in this period at a cost of $18.45 million for a 49.5% equity interest.
Ten of the investments are paying dividends again and the eleventh is expected to resume dividends later this year. The final property needs to find a tenant to replace Dick’s Sporting Goods before dividends are likely.
In closing, Emira’s share price is only slightly down this year as well as over the past 12 months. It remains over 30% down from pre-pandemic levels. Although the LTV remains on the high side, Emira has demonstrated an ability to recycle capital. This may be one to keep an eye on.
With no real data out of the market last week, the main event of last week was the testimony by Fed Chair Jerome Powell to Congress. TreasuryONE expected the market to be very cautious around the testimony and with no other significant events last week, the market traded relatively flat for most of the week.
Much of the Fed Chair’s testimony has been available for some time. With little to no new information, it’s easy to see why the market didn’t react much to the testimony.
One of the highlights of the meeting was Fed Chair Powell’s statement that whilst raising interest rates aggressively will fight inflation, there is a real risk of rising unemployment rates as the economy slows. There have been forecasts for a recession and the copper price, one of the leading signs of a recession, entered a bear market last week.
The chart below shows that copper is presently trading at a 16-month low:
The IMF has reduced the US growth rate from 3.7% to 2.9% for 2022, so the US should still avoid a recession. The report also highlighted that there is a high degree of uncertainty in the outlook of the US economy. It’s very uncommon for the market to run on second- or third-level data during times of uncertainty, especially now with inflation and interest rates.
That was the case on Friday when the University of Michigan 12-month CPI number dropped slightly from 3.3% in the previous month to 3.1%. This caused some of the markets to run as the US dollar lost some ground and risky assets like the rand and stock indices had a decent Friday afternoon.
As shown in the chart below, inflation breakeven rates in the 2-year, 5-year and 10-year space have started to turn down once again:
With this in mind, the more aggressive rate hikes that the US market is pricing may also self-correct. The question is, at what interest rate will the US economy collapse?
Food price inflation will be a major source of concern around the world. Food prices skyrocketed following Russia’s invasion of Ukraine, as the fear of shortages had a significant impact. This could also be a turning point for several other countries, as crop estimates from throughout the world are higher than expected. Brazil and Australia, in particular, are having bumper crop years.
This will help to reduce inflation significantly.
The rand closed last week at R15.80 after spending the majority of the week around the R16.00 level. The US dollar also slipped to 1.055 against the euro after threatening to break below 1.04 earlier in the month. For now, the USD/ZAR seems to be stuck within a short-term range of R15.70 to R16.10:
Looking ahead to this week, most of the risk is concentrated on Wednesday with speeches by both Fed Chair Jerome Powell and ECB Chief Christine Lagarde. Much of the focus will be on interest rates and inflation, with German CPI due on Wednesday and the EU inflation figure due on Friday.
We expect the rand to stay within tight ranges for the early part of the week, with Wednesday being the big day for emerging markets movements as any hawkish/dovish talk by both Central Banks leads to movement in the currency market.
A keen eye will also be given to the commodity space, with a commodity sell-off also a good indicator of expected recessions, which could be negative for the rand should that happen.
For assistance with managing market risk and many other services ranging from treasury solutions through to robotic process automation, visit the TreasuryONE website.
Sun International had such a tough time during the pandemic. Casinos are places for bad decisions and good memories, which isn’t the mood that anyone was in while wearing masks. There are already strong signs of life in the numbers for the first five months of this year. With things back to normal and people frothing to get out there and have some fun, the future looks bright for Sun. I dedicated this feature article to the company’s capital markets update.
Grindrod is proof that every dog has its day. The share price has shot the lights out this year, having done almost nothing in the prior year. The value unlock strategy is part of it, but so is the incredible growth being seen in the port and terminals business in Mozambique. To learn more about why Grindrod wins when Transnet loses, read this feature article.
Nedbank is doing a great job of keeping the market updated with its performance. After releasing an update covering the four-month period ended April 2022, there’s now a pre-close update that adds the performance from May into the mix. You may be interested (or saddened) to learn that the bank’s interest rate forecast is a 100bps increase to a prime rate of 9.25% by the end of the year. Average interest earning assets increased by low-to-mid single digits, with retail and business banking growing faster than corporate and investment banking, which has seen moderate loan demand. The important thing is that the credit loss ratio is expected to be within the 80bps to 100bps range this year, which means the bank can enjoy the net benefit of higher interest rates. Non-interest revenue is up by “early double digits” which is a strong driver of return on equity (ROE). Expense growth is under control, which means positive JAWS i.e. expansion in operating margin, as income growth is faster than expense growth. Nedbank’s share price is up around 23% this year.
Hot on the heels of the optimisation study related to the Kola asset in the Republic of Congo, Kore Potash has announced that it has signed a heads of agreement for the construction of the project. A heads of agreement (sometimes called a heads of terms) simply sets out the most important elements of a relationship, allowing the parties to reach consensus before moving to the detailed legal drafting stage. Lawyers just love it, as it means they get paid even more for the same deal. SEPCO Electric Power Construction will build Kola, allowing it to produce Muriate of Potash over an initial 31-year life. I realise that this sounds like something from Snape’s class in Harry Potter. It will take 40 months to build at a capital cost of $1.83 billion. The Summit Consortium has reaffirmed their commitment to pay for this wizardry.
Motus is strategically expanding its aftermarket parts business and the best way to do this quickly is through acquisitions. The company is now trading under a cautionary, after notifying the market that it has made an offer to acquire 100% of an aftermarket parts operation. There’s no certainty at this stage of a deal and no indication of transaction size either. The company does note a potentially “material effect” on the share price, so this suggests that it is a meaty deal.
Hudaco Industries has published a trading statement for the six months ended May 2022. Headline earnings per share (HEPS) will be between 845 and 870 cents, which is between 23% and 27% higher than the comparable period last year. The share price is R145.65 so this is an annualised Price/Earnings multiple of around 8.5x.
Spear REIT has given a quarterly update for the three months ended May 2022. The fund is focused on the Western Cape, which is the province you currently want to be investing in. Rental reversions have improved slightly to -4.31%, a number that many can only dream of right now. Importantly, Spear is seeing an uptake of vacant office space amid a general return to offices by businesses. The loan-to-value (LTV) ratio of 38.33% is far lower than 45.34% 12 months ago, demonstrating Spear’s steps taken to achieve a solid balance sheet. Around 68.6% of debt is fixed in nature, so there is exposure to rising interest rates that investors need to consider. Spear deserves its reputation as a solid operator.
Etion Limited is selling its Etion Connect business in what is effectively a management buyout, as the acquirer is a new entity funded by a third party with the executive management of Etion Connect as shareholders. The value for the deal has been announced as R71.5 million. Remember, the group is also in the process of selling Etion Create. It is effectively selling off all assets and shutting down, giving excellent returns to value investors along the way who spotted the opportunity. The profits after tax in this business were R32.6 million in the last financial year, so management is paying a multiple of barely 2.2x for the business. There’s also up to R13.5 million in cash and receivables (mainly VAT) being retained by Etion.
In good news for the mining sector, Impala Platinum has signed a five-year wage deal with AMCU. The deal is effective from 1 July 2022 and gives an annual increase of 6.5%, which seems fair under the current inflationary environment. The deal was achieved without any mediation by third parties, which is encouraging. Certainty is good for everyone involved, as the company can build this into its financial planning and the workers know that they don’t need to go through the difficulties of potential labour action.
As I’ve covered previously in this article, Orion Minerals is in the process of an extensive capital raising plan with institutional and retail investors. The latter can participate via the company’s Share Purchase Plan, which opened on Tuesday and will close on 5th August. It’s great to see a company using our local exchange in the way it was actually intended: as a capital raising platform!
Accelerate Property Fund is best known for trading at a spectacular discount to net asset value, not least of all because of related party transactions with the directors. In the year ended March 2022, the fund had to stomach a negative fair value adjustment of R429 million after a negative adjustment of R660 million in the prior year. Covid hasn’t been kind to the flashy buildings owned by Accelerate! Debt has reduced from R6 billion to R4.5 billion and the loan-to-value has dropped from 48.5% to 42.8%. A dividend of 21.98 cents per share has been declared, a huge yield of 18.6% on Tuesday’s closing share price. The fact that the share only closed 6.3% higher despite the dividend tells you everything you need to know about market sentiment towards this fund.
In a scenario that was just a few days off from delivering the perfect Christmas in July pun, Thungela CEO July Ndlovu sold R50.6 million in shares to pay the tax on vested shares. I wish that this was my tax bill, as that’s just a portion of the value he has received. Timing is everything in mining and the Thungela employees have been in the right place at the right time!
ESG enthusiasts will be interested to know that mining giant BHP has released a “social value” report that focuses on the six pillars of BHP’s framework and its 2030 scorecard. This covers concepts ranging from decarbonisation to communities and supply chains. If you would like to read the full report, you’ll find it here.
Sebata Holdings has experienced a delay in the finalisation of results for the year ended March 2022, as there are major valuations that need to be concluded for B-BBEE deals. They will be released in mid-July.
Sun International hosted a capital markets day on Tuesday and made the presentation available online, which is always a great opportunity to learn more about a listed company. In this case, it’s all about the glamorous world of casinos and hotels, which weren’t so glamorous in 2021 and 2021.
Since the start of 2020, Sun International has lost nearly 30% of its value. Needless to say, there were times when things looked a lot worse than they do now. Over the past year, the share price has put in a strong recovery of over 55%!
The group owns 11 urban casinos, including the iconic Sun City Resort as its most famous venue for bad decision-making and good memories. Carnival City, GrandWest and Sibaya are also in the portfolio, along with Golden Valley which entertains the people On The Other Side Of The Tunnel in Worcester.
In the five months to May 2022, revenue was up 34% and adjusted EBITDA jumped by over 80%. One thing you need to understand about the hospitality industry is that operating leverage is substantial. This means that any percentage impact in revenue is amplified at operating profit level. This applies on the way up and the way down.
The operations have bounced back considerably, with income over the five months running at approximately 92% of the comparable period in 2019. Adjusted EBITDA margins have improved thanks to major cost cutting and efficiency projects during the pandemic, so adjusted EBITDA is higher now than in 2019. The group is aiming for further improvement, including between 200bps and 400bps in the Casino segment by FY26.
Of R4.29 billion in income over this five-month period, just over 60% is from the Casino segment. If gambling bothers you, then Sun International isn’t for you. There’s nearly a 23% contribution from Resorts and Hotels and 14% from Sun Slots, with the rest from Sun Bet (a sports betting business).
The Resorts and Hotels segment posted the highest year-on-year growth (62.3%) with Sun Slots the slowest at 15.9%. This is hugely skewed by the relative impact of the pandemic on the different segments, so I wouldn’t read too much into this.
There was a great chart in the presentation that I’ve included below to demonstrate how the pandemic hammered the Casino segment in particular:
Importantly, the group managed to reduce debt from R6.4 billion at the end of December 2021 to R5.8 billion by the end of May. With interest rates clearly on the up, Sun International needs to keep chipping away at the debt.
Luckily, these businesses practically print cash once the initial build cost is out of the way. Annual capital expenditure is only around 5% to 7% of revenue, with Resorts and Hotels being the most cash hungry with 10.3% of revenue expected to be invested in capital expenditure in FY22.
I also found it interesting to see how EBITDA margins can vary in the different Resorts and Hotels. For example, the ambition at Sun City is to grow EBITDA margin to over 20% by FY24, yet the Table Bay Hotel is only aiming for over 15%. These are totally different business models of course, so I’m just including these as interesting nuggets to help you learn about the industry.
If you would like to flick through the entire presentation, you’ll find it at this link.
With masks now a thing of the past, the outlook for Sun International is looking a lot brighter. The sooner that the debt balance comes down, the better.
Grindrod is up nearly 80% this year, finally showing some love to the patient value investors who have been waiting for it to behave in the way that the financial models suggested it would. That entire return has come in the past six months, making it one of the best places you could’ve invested your money this year.
The group has released a pre-close presentation covering the first five months of 2022. If you’ve ever prepared a discounted cash flow valuation, you’ll know what a terminal growth rate is. Grindrod offers a different kind of terminal and is growing at pace.
Ironically, the general decay of local infrastructure is doing wonders for Grindrod. The port volumes at Maputo are flying and the port is now able to receive and load bigger vessels than before.
Overall, Grindrod’s port volumes grew by 26% year-on-year. The drybulk terminalsgrew volumes by 47%, a particularly strong result considering the 20-day suspension of the vessel loading activity at Matola (in Maputo) in April after damage to the berth infrastructure. The Maputo Car Terminal grew volumes by 51% against the prior period.
A bet on Grindrod at the moment is essentially a bet against Transnet. When you put it like that, these numbers make more sense don’t you think?
In the logistics side of the business, the shipping and container depot recovered strongly from the severe floods. I’ll never forget reading the announcement about how it was a priority to retrieve containers that had been swept away. Those were truly shocking scenes.
Grindrod managed to resume operations just two weeks after the infrastructure rehabilitation had commenced. Interim insurance proceeds have offset the related asset impairments, so Grindrod came through a terrible time with great strength.
In the rail business, Grindrod sent another three locomotives to the Tonkolili iron ore mine in Sierra Leone, taking the total fleet there to 11 locomotives.
As a final note on the logistics segment, the Northern Mozambique graphite operations and the clearing and forwarding business delivered results that Grindrod seems to be happy with.
Grindrod Bank is in the process of being sold to African Bank, in a deal that was announced just last month. African Bank looks to be acquiring a solid business, with stable advances and deposits up by 7% during the period. There’s large surplus liquidity, which would be appealing to the envisaged new owner.
There are more businesses being sold, like the Marine Fuels operation that Grindrod is working with management and the co-shareholder to try and exit. In the private equity book, the medical investment was sold for R150 million which helped with the recent value unlock.
The major remaining asset is the property portfolio in KwaZulu-Natal, which has sadly been through a terrible time that can’t have done wonders for the value. People tend to have short memories though, so Grindrod will hopefully find a way to extract value from them.
If nothing else, Grindrod is proof that good things can come to those who wait. You just need a strong stomach to survive growth investors laughing and calling you a boomer. It’s clear who had the last laugh this year!
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Companies do a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
I co-host these events with Mark Tobin, a highly experienced markets analyst who combines an Irish accent with deep knowledge in the Australian market (I know, right?) and the team from Keyter Rech Investor Solutions.
You can find all the previous events on the YouTube channel at this link.
The latest event saw executives from Attacq (the property fund synonymous with the Waterfall precinct in Midrand) and Capital Appreciation Group (a fascinating local technology group) presenting their businesses and answering questions. To give you some further context, you can read this article on Attacq and this one on Capital Appreciation Group.
Sit back, relax and enjoy this video recording of our session:
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