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Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Orion Minerals has undertaken a capital raise to underpin the next phase of development of its portfolio of advanced base metal assets in South Africa. The company has had commitments for two of the three tranche placements at A$0.02 per share (R0.22 per share). Tranche one will raise A$3,1 million through the issue of 156 million shares and a further A$2,9 million through the issue of 145 million shares. For every two shares issued under the placement, one option is attached. The company may issue an additional 699 million shares to raise up to A$14 million. In addition, the company has announced a share purchase plan providing shareholders an opportunity to increase their shareholding in the company at the same offer price.

A special dividend of 525 cents has been declared by Omnia in respect of the year ended March 31, 2022. The payment date is August 1, 2022.

Schroder European Real Estate Investment Trust has declared a special dividend of 4.75 euro cents per share following the successful execution of the Paris, Boulogne-Billancourt business plan.

Resilient REIT has repurchased 12,055,757 shares on the open market for an aggregate value of R664,4 million with the average weighted repurchase price per share of R55.11. The repurchase shares represent 3.01% of the company’s issued share capital.

Mustek repurchased a further 1,620,000 ordinary shares for a purchase consideration of R25,4 million, representing 2.53% of the total issued shares of the company. The shares were repurchased during the period June 3 to June 21, 2022.

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

South32 this week repurchased 3,068,132 shares at an aggregate cost of A$13,01 million.

This week British American Tobacco repurchased 3,260,000 shares for a total of £114,03 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.

Glencore this week repurchased 7,910,000 shares for a total consideration of £37,4 million in terms of its existing buyback programme which is expected to end in August 2022.

This week three companies issued profit warnings. The companies were: Naspers, Prosus and PPC.

Five companies this week issued or withdrew cautionary notices. The companies were: Novus, Conduit Capital, Castleview Property Fund, Trustco and African Equity Empowerment Investments.

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

Thorts: Taking AIIM at The Logistics Group

Michael Avery
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Thorts: Taking AIIM at The Logistics Group

While the opening up of South Africa’s monopoly network infrastructure continues to progress at mixed speeds and with uncomfortable teething problems, particularly on the broken track of third-party access to rail, private equity infrastructure funds continue to position for a new era of private sector participation.

As President Cyril Ramaphosa said at the government’s recent fourth Investment Conference, there is optimism “that the various infrastructure development projects such as construction of bulk water infrastructure, construction of new road networks, energy capacity expansion plans, improvement of our port infrastructure among others, present great opportunities for sustainable as well as inclusive growth.” This was in the context of the Economic Reconstruction and Recovery Plan – government’s economic blueprint unveiled by the President in 2020.

And make no mistake, the challenge is one so large that the country seems consumed by the new national question of whether South Africa is well on its way to becoming a failed state, if not already there.

According to The South African Property Owners Association, the root of the challenge remains firmly embedded at local government level, with aging infrastructure, poor maintenance regimes, excessive numbers of potholes, rampant corruption, poorly maintained pedestrian walkways, leaking water mains and sewers, collapsing water treatment plants, electricity shutdowns, crime, grime, failing substations, and cable theft – all of which result in the loss of trading income, the order of the day.

When viewed through a distant lens, the progress appears a little more encouraging – the first spectrum auction in 18 years; Eskom being unbundled, glacially, but still; and Transnet Freight Rail opening up the tracks to third parties for the first time in 163 years. A new State water utility is being considered to “lure” private funds, and expected to be operational in 2023; and SANParks, which manages South Africa’s 20 national parks, recently gave details of the more than 100 projects for which it is seeking public-private partnerships. And there is more on the list.

The bottom line is that turning points are often hard to spot in the fog of anger and multiple disappointing false dawns. Could this time really be different?

The smart money at African Infrastructure Investment Managers (AIIM) seems to think so.

Most recently, AIIM, one of Africa’s largest infrastructure-focused private equity fund managers, with US$2,6bn assets under management across the power, renewable energy, digital infrastructure, midstream energy and transport sectors, with operations in 19 African countries, and the Mokobela-Shataki consortium, completed a R1,6bn takeover of The Logistics Group (TLG). The integrated logistics company operates in Southern Africa, with services across port, rail, warehousing and digital transport logistics.

The transaction was financed by a mix of equity and debt financing. AIIM, through its flagship South African IDEAS Fund and AIIF4 Fund, acquired a 74% stake in TLG. The remaining 26% stake was acquired by strategic investment partners, the Mokobela-Shataki Consortium, sponsored by Moss Ngoasheng, founder and CEO of Safika Holdings, and Monhla Hlahla, former CEO of Airports Company South Africa and current Chairperson of Royal Bafokeng Holdings.

Adding TLG to the AIIM portfolio bolsters its transport strategy in southern Africa, helping to address capacity deficits from ports and inland transport. South Africa’s ports are some of the continent’s least efficient. Doubling efficiency could equate to halving the distance between the country’s main trading partners.

Investment in transport corridors running from strategic southern African ports will benefit from strong growth prospects for various bulk and break-bulk cargoes, such as battery metals, cementing the continent’s role as a key player in the global energy transition.

Ed Stumpf, Investment Director at AIIM, calls the deal “a rare opportunity” to acquire a multi-corridor player, while addressing regional capacity constraints in partnership with Transnet and other major operators in the region.

“We view TLG as the cornerstone for a regional ports and logistics platform which will pursue additional investments along a number of transport corridors.”

“Looking more broadly, this will help reduce transport costs, which can have a considerable impact on the price of goods, and catalyse trade regionally and beyond. Positioning the group to support multi-mode rail/road and backhaul cargo efficiency is a core part of our strategy to reduce carbon emissions as part of the journey to net zero.”

Investment to enhance the existing TLG terminals in Cape Town, Port Elizabeth and Durban will be pursued in partnership with Transnet National Ports Authority, while operational ramp-up of TLG’s businesses in Mozambique, Zambia and Namibia will be prioritised.

AIIM will also seek to develop bolt-on investment prospects in other key markets where it has portfolio investments and on-the-ground experience to ensure that TLG provides a comprehensive offering along diverse corridors to hinterland centres of production or demand, commencing in the Southern and East African region.

AIIM’s legal advisor was ENSafrica. Singular Consulting provided commercial advice and KPMG led on accounting and tax.

This article first appeared in Catalyst, DealMakers’ private equity magazine.

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

Ghost Bites Vol 33 (22)

The Finance Ghost
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Ghost Bites Vol 33 (22)
  • STADIO used its AGM as a good excuse to deliver a presentation giving an update on the business. Growth in student numbers is encouraging and there’s a strong bull case to be made for this company. The valuation even looks pretty reasonable to me based on the underlying fundamentals. To explain this in more detail, I wrote this feature article.
  • Orion Minerals is busy with a capital raise of A$20 million to invest in its projects in the Northern Cape. Around A$6 million has been secured, so there’s quite a gap to close. Investors have asked for more time to finalise their decisions, a direct result of a world that is becoming rather scared. This isn’t a good time to raise capital, so Orion needs to push as hard as possible here. I cover all the details in this feature article.
  • A British subsidiary of Glencore has formally pleaded guilty to seven counts of bribery in connection with oil operations in several African countries. Glencore admitted to paying over $28 million in bribes between 2011 and 2016. The UK Serious Fraud Office has confirmed that sentencing will be handed down in November. Glencore has told the market that it expects to pay up to $1.5 billion to settle various inquiries, of which $1.1 billion was already handed down in the US. The Glencore share price is up around 10% this year.
  • Anglo American has announced rough diamond sales for De Beer’s fifth sales cycle of 2022. Sales of $650 million were higher than $604 million in the previous cycle and much higher than $477 million in the comparable cycle of the prior year. The company has indicated strong demand from the US and a gradual reopening of sales outlets in China.
  • PPC released a trading statement on Wednesday afternoon and promptly lost a fifth of its value, which gives you a clue as to its contents. The update relates to the year ended March 2022. The numbers get really messy because of discontinued operations and the impact of hyperinflation in Zimbabwe. EBITDA from continuing operations (excluding Zimbabwe) is down by up to 4% and the headline loss per share is expected to be between -12 and -15 cents. In some good news, cash generated from operations increased by between 4% and 8%.
  • Mustek recently suffered the tragic loss of its founder, David Kan. The company will need to find its feet going forward. In the meantime, the classic strategy of share buybacks continues. During the past few weeks, Mustek repurchased 2.53% of shares in issue. The general authority is for 12.78% of shares outstanding. The share price is up 49% over the past year and is still on a low Price/Earnings multiple, though many are attributing that to an unsustainable earnings base driven by consumer demand for tech hardware during the pandemic. Still, buybacks at a low multiple are what you want to see as an investor.
  • Between March and June 2022, Resilient REIT repurchased shares to the value of nearly R665 million at a volume-weighted average price of R55.11 per share. A new authority has been granted to repurchase up to 20% of the shares in issue. The current share price is R53.70 and is down around 4% this year.
  • A non-executive director of Industrials REIT has bought shares in the company worth around R680k.
  • York Timbers has appointed Zukie Siyotula as Chairperson. Ms Siyotula’s current other directorships include Bidvest, African Bank, Toyota Financial Services and several more.
  • Castleview Property Fund is now trading under cautionary as the company is in negotiations to acquire properties from a related party. This is a potential reverse takeover, as the value of the properties is higher than the existing net asset value of Castleview. The fund only has a market cap of R205 million and there’s never any trade in the share, so perhaps this will help the company achieve scale and some degree of liquidity in time to come.
  • Letshego Holdings, listed in Botswana and on the JSE, has announced the resignation of three independent directors including the Chairman.
  • Safari Investments RSA has announced a trading statement related to the final distribution for the six months ended March 2022. This distribution is expected to be between 24% and 32% higher than the comparative final distribution, taking the full year distribution to between 33% and 38% higher than the prior year.
  • Octodec is the guarantor of wholly-owned subsidiary Premium Properties’ Domestic Medium-Term Note Programme on the JSE. Global Credit Ratings (GCR) has affirmed Octodec’s credit ratings and improved the outlook from negative to stable.
  • Oando Plc has released financial results for the year ended December 2019. That’s not a typo. In case you are an Oando investor who has waited for this for the past couple of years, I suggest you go check out the results. I’m not going to invest any energy reading results that are so far out of date!

STADIO: the alternative to UNISA

The Finance Ghost
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STADIO: the alternative to UNISA

Despite STADIO being a future-focused tertiary education business with 84% of students enrolled for distance learning, the corporate website is truly appalling. If you can look past the font that assaults your eyes when you visit the website, you’ll find a business that is doing good things.

At STADIO’s AGM on Wednesday, the company used the opportunity to deliver a presentation about the business. The group was established in 2016 and grew quickly through acquisitions. Building a business takes a long time, so buying one and creating a platform for further organic growth is a tried and trusted strategy.

To set the scene, I’ll quote a great line from the presentation:

“We want to be the alternative to UNISA.”

The group currently has 38,000 students across South Africa and the rest of Africa, so one day UNISA may describe itself as wanting to be the alternative to STADIO.

Before we go into further detail on STADIO, here’s a chart of the year-to-date performance of the three education stocks on the JSE:

Interestingly, STADIO says that it has only just “entered the growth phase” after a few years of establishing itself. The presentation talks about achieving a 20%+ growth rate going forward with minimal capital expenditure.

The group has been set up with three distinct platforms:

  • STADIO Higher Education,
  • AFDA (the leading film school in South Africa)
  • and Milpark Education (a business school focused on online education).

In my view, the STADIO Higher Education business is the most interesting. A quick look at the daily lives of South Africans reminds us that we need private security, healthcare and schools to ensure that we get a decent level of service (there are some exceptions of course). We are quickly going the way of private power generation as well, with ESKOM clearly unable to fix its issues.

In the next 10 years, will we see public universities go the same way?

With plenty of disruption from fee and other protests in recent times, it’s really not hard to make a case for demand for private universities. In addition to the more sensitive political issues, there’s a simple numbers game at play here: there are more matrics eligible for higher education than there are spots available at existing facilities.

STADIO steps perfectly into that gap, with the presentation noting that a School of Engineering and School of Humanities will be coming soon. STADIO already offers numerous courses across law, finance, IT and other fields of study.

The 2021 numbers have been known to the market for a while but they are worth repeating. In the year ended December 2021, student numbers grew 9% and revenue grew 18%. Adjusted EBITDA grew 23% and core headline earnings per share (HEPS) increased by 24%. You can see how operating leverage cascades down the income statement, as a percentage increase in revenue drives a much larger percentage increase in profit.

The joy of an education business is that once you have the infrastructure in place, growth in student numbers “drops to the bottom line” as the unit economics are excellent. This is true economies of scale.

STADIO has very little debt on the balance sheet and has access to a R200 million facility. The strength of the balance sheet was made clear to the market when the group declared a rather surprising maiden dividend related to the 2021 financial year. The dividend size of just 4.7 cents was less important than the signal to the market that STADIO is now a dividend-paying stock.

The group’s strategy is to target 80% distance learning and 20% contact learning in its student numbers. To reach the target of 56,000 students by 2026, 8% annual growth in student numbers is required. Between June 2021 and May 2022, student growth was 11%. None of these goals sound overly ambitious to me, so I wouldn’t bet against STADIO achieving them.

STADIO’s core HEPS in 2021 was 17.6 cents. The share price is R3.35, so the trailing Price/Earnings multiple is around 19x. If the growth rate of 20% in earnings can be maintained, the PEG ratio (P/E divided by the growth rate) is around 1x, which is a good rule of thumb when it comes to valuations. In other words, STADIO makes a strong case for itself at these levels.

It’s also worth highlighting that the key figures behind PSG are hanging on to a significant interest in STADIO. Remember, PSG is unbundling its assets and plans to delist from the JSE. The fact that the founding and management shareholders are retaining a big part of their exposure to STADIO tells you something about the business.

Orion belts out a capital raise

The Finance Ghost
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Orion belts out a capital raise

Orion is busy raising capital to invest in its South African base metal projects. In this three-tranche capital raise aimed at sophisticated investors, ASX- and JSE-listed Orion hopes to raise A$20 million at A$0.02 per share. There’s also a small raise aimed at all investors.

The good news is that committed funds for the first two tranches come to A$6 million in aggregate. The bad news is that this only covers 30% of the intended capital raise, so the bulk of the money needs to be raised in a world where “recession” is suddenly part of the vocabulary again.

The impact of this uncertainty is that participants in the third tranche have requested more time to finalise their involvement. Whilst this doesn’t mean that the raise will fail, one of the biggest lessons I learnt in my investment banking days was that a delayed deal can easily become a cold deal.

Included in the existing A$6 million commitment is A$2.2 million from directors of Orion.

It’s also worth noting that the first two tranches include a sweetener in the form of share options with a strike price of R0.275 per share and an expiry of June 2023. The current share price is around R0.24, so that’s by no means a giveaway price and this does give some indication of the opportunity that the investors believe in.

The current capital raise is priced at R0.22, so that’s a small discount to the traded price.

The proceeds will be used for dewatering and feasibility studies at the flagship Prieska Copper-Zinc mine, feasibility studies at the Okiep Copper Project, pre-production test work in the Jacomynspan nickel-copper-cobalt battery project and further exploration efforts in the Northern Cape.

In addition to the raise aimed at more institutional investors, there is a share purchase plan being made available to all shareholders at the same price as the institutional raise. The minimum subscription under this plan is A$2,000 and the maximum is A$30,000 per investor. The company is aiming for A$3 million under this raise and reserves the right to amend this amount.

Orion’s share price is down more than 10% this year. As is usually the case in junior mining companies, there’s a large helping of both risk and opportunity. With a market cap of over R1 billion and underlying projects focused on metals that are in high demand, Orion is worth keeping an eye on.

Ghost Bites Vol 32 (22)

The Finance Ghost
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Ghost Bites Vol 32 (22)
  • Absa has released an update covering the five months to May 2021, along with a formal JSE trading statement for the six months ended June 2022. There are many insights in here about the banking sector, which has seen prices come off recently. The sector has still been a strong performer this year, though there are cracks starting to show in credit quality of consumers. Find out more in this feature article.
  • Brait has released its financials for the year ended March 2022. They make for great reading, especially as the underlying portfolio is so diverse. Premier put in an excellent performance, raising even more questions about a competitor like Tiger Brands. Virgin Active is also a big part of the business though, with the gyms needing a proper recovery after the horrors of the pandemic. To get a solid overview of Brait, read this feature article.
  • In an update linked to Brait, Ethos Capital released a voluntary update. This vehicle offers shareholders a way to invest indirectly into funds or co-investments that are actively managed by Ethos Private Equity (including Brait). The net asset value increased just 1% over this quarter and is up 11% since June 2021. The unlisted portfolio is doing better than Brait, with a valuation increase of 13% this year. Ethos Capital’s net asset value per share at the current Brait share price is R8.17 and the Ethos share price is R5.63, so there are layers of discounts here.
  • Blue Label Telecoms released a short update on the recapitalisation of Cell C. There are numerous steps that need to take place with important legal procedures along the way. Much like every Home Owners’ Association meeting I’ve ever attended in my complex, the meeting of Noteholders held on 20 June failed to achieve a quorum. It has been reconvened for 5th July, in case you are following this closely and want to make a note.
  • Executives of Raubex have been buying up the shares recently. The company has now released a firm intention announcement to acquire all the shares in Bauba Resources. Regulator readers will know that Raubex has just concluded a mandatory offer to shareholders in Bauba, resulting in Raubex holding 61.68% in the company. The offer price is R0.42, which is identical to the mandatory offer price. Raubex wants to buy the company, yet the announcement waxes lyrical about all the risks facing Bauba and the significant losses it incurred recently. If at least 90% of eligible holders accept the offer, then Raubex can implement a compulsory acquisition under s124 of the Companies Act for the remaining shares. As three holders have 96.59% of the shares in Bauba, there is almost no liquidity whatsoever in the stock, so Raubex is suggesting that this is last chance saloon for investors who want to exit. A circular will be issued in due course.
  • Novus Holdings released a cautionary announcement that raised a few eyebrows, noting that it had entered into negotiations regarding a potential acquisition.
  • Schroder European Real Estate Investment Trust has released results for the six months ended March 2022. It hasn’t exactly been a great two years, with a net asset value (NAV) total return of -0.4% in FY21 and +5.5% in FY22. The loan to value ratio is 28% gross of cash or 18% net of cash. In good news, 100% of leases benefit from inflation-linked rent reviews. An interim dividend of 6.6 euro cents per share has been declared, of which 4.75 euro cents is a special dividend related to the successful execution of the Paris, Boulogne-Billancourt business plan.
  • Conduit Capital has been in the process of raising R500 million in redeemable, convertible, participating preference shares. This is a fancy instrument that gives an investor numerous rights that ordinary shareholders don’t enjoy. The capital was to be raised from the Mmuso Consortium for the purposes of capitalising the insurance business in Conduit for growth. The consortium didn’t fulfil certain conditions in the term sheet and so the proposed transaction has lapsed. Conduit reassured the market that it is in “advanced negotiations with alternative investors” to recapitalise the insurance business, so the company is trading under a cautionary announcement until further details can be announced.
  • Labat Africa decided that there’s no PR quite like free PR, releasing a SENS announcement with a headline that reminded me of those terrible article suggestions you see at the bottom of really clickbaity news websites. Long story short: a clinical trial is underway locally for the use of cannabis in treating chronic pain. The next strain to be used in the study is called “9 Pound Hammer” which is what it feels like Labat Africa hit me with when a SENS announcement that included an exclamation mark in the headline was released.
  • Associates of the Company Secretary of Stor-Age have bought shares in the fund worth over R856k.
  • Sabvest (a legal entity related to Chris Seabrooke who is a non-executive director of Metrofile) has acquired shares in Metrofile to the value of R325k. It’s a very small purchase in Sabvest’s world but I felt it still deserved a mention.

Brait: bread, boets and (exchangeable) bonds

The Finance Ghost
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Brait: bread, boets and (exchangeable) bonds

Brait is such an interesting group. They sell bread in one division and offer gym contracts in another, aimed at those who think bread is poison and the low-carb life is everything, boet.

Ok, there are only certain sections of the gym that follow that approach, but you get the idea.

They also sell clothes in the UK and pay incredible fees to Ethos Private Equity for the pleasure of managing this rather disparate portfolio.

Does this portfolio make any strategic sense? No, of course not. Brait is an investment holding company that was built with a private equity mindset, so the portfolio isn’t designed to make sense when viewed overall. Each investment needs to be assessed based on its merits.

The latest update from Brait is the annual results for the year ended March 2022. As a final bit of context, the share price is flat this year.

Premier

The food business is called Premier and Brait intends to list it separately. The business is performing well, bucking the trend in a sector that has tamed certain tigers.

Premier is 49% of Brait’s total assets and the value increased by 22% in this financial year, a really impressive result. The business somehow managed to increase its EBITDA margin from 8.8% to 10.3% in this period, despite the clear pressures being exerted by retailers on food producers.

The Millbake business contributes 82% of Premier’s revenue and grew revenue by 12.5% and adjusted EBITDA by 32%. Volumes grew by 6% and price inflation was 6.5%. It’s quite extraordinary to compare this to the numbers we’ve seen from the likes of Tiger Brands, which has lost a fifth of its value this year.

The Groceries and International division is 18% of group revenue and has been boosted by the acquisition of Mister Sweet, which was included in this result for 10 months.

Capital expenditure of R519 million was slightly higher than R504 million in the prior year. There were big swings between maintenance and expansionary capital expenditure though. Maintenance dropped to R186 million from R244 million and expansionary increased from R260 million to R333 million.

Virgin Active

Virgin Active is 44% of Brait’s total assets.

The gyms went through a torrid time in the pandemic, as governments worldwide felt that the best way to combat a respiratory virus was to create an unfit and unhappy population. Cash flow dried up for the gym group, an issue that can only end in tears for investors.

There’s a renewed sense of purpose at Virgin Active, with the founder of Kauai joining as CEO and shareholders supporting a recapitalisation of the business to the tune of R1.8 billion. Real Foods (the holding company of Kauai and Nu) is going to become part of the group, subject to regulatory approvals.

New Look

New Look is only 4% of Brait’s total assets. This is a UK-based multichannel fashion business which hasn’t been a happy story for Brait over the years.

The business did well for three quarters of the year. Sadly, Omicron turned New Look into New Variant, ruining the trading performance between October and December. Brait highlights strong momentum into the new financial year, which is obviously good news.

Brait Group

In December 2021, Brait raised R3 billion in capital through the issuance of exchangeable bonds by a wholly-owned subsidiary. This helped partially repay Brait’s committed revolving credit facility, which has been extended to June 2024 with a limit of R3 billion. The drawn balance at reporting date was R2.478 billion. In case you’re wondering where the rest went, R1.7 billion was invested in Virgin Active.

Post year end, Brait finally realised the investment in Consol at a 16% premium to the September 2021 valuation.

Brait’s net asset value (NAV) per share of R8.37 is a 5.9% increase year-on-year and a 2.9% increase since the mid-year number. That’s the kind of growth rate that an angry personal trainer would shout at you for.

It’s certainly worth noting that Ethos Private Equity gets paid an absolute fortune as the investment advisor to Brait. The fee was supposed to be R100 million in 2021 and was reduced to just R91 million – such sacrifice. In FY22 it was still R91 million (vs. contracted R105 million) and has increased to R96 million in FY23 (vs. contracted R110 million). The contract has been extended for FY24 at a fee of R65 million.

Best of all, there’s a short-term incentive payable on top of this. A further R30 million was approved for FY22, taking the total fee to R121 million. This works out to around 2% of the market cap of Brait which I’m sure is no coincidence, as this is a typical active management fee. My point is that you can hire a truly impressive team for less than half that number, especially as this is a group-level management fee and doesn’t include anyone working in the underlying businesses.

This is how most investment holding companies work though, which is why they tend to trade at substantial discounts to net asset value.

The share price is R4.58, a discount to NAV of around 45%. That’s on the high side but certainly not unheard of among investment holding companies. To assess whether you want to invest at this level, you need to consider the valuations that create the NAV.

Valuations supporting the NAV

Premier is valued on a valuation multiple of 7.6x maintainable EBITDA, compared to the peer group spot multiple of 7.7x. Although the finer points of this multiple could surely be debated, I think there are other investments that deserve your attention.

Virgin Active is valued using a two-year forward multiple of 9x, which is more ambitious than me attending a double spinning class after two years of no exercise. This is apparently a 10% discount to the peer average two-year forward multiple of 10x. The maintainable EBITDA on which this valuation is based is 23% less than the actual EBITDA achieved in 2019, so there’s at least some conservatism in the earnings if not in the multiple.

Although the market is clearly discounting Brait’s assets and I suspect much of that is being attributed to the gyms, the R1.8 billion recapitalisation of Virgin Active was achieved based on Brait’s methodology. There are some nuances to this, though. The parties who recapitalised the business are friendly parties and the merger with Real Foods (Kauai and Nu) was also done at a juicy valuation for the food business.

My point is that I would have more faith in a multiple supported by an offer from an independent third party to buy the business. I am not convinced that they would offer 9x.

New Look is valued on a forward multiple of 5x, which is a discount of 25% to the 6.7x peer average. This is a tiny part of Brait’s business, so debating this valuation hardly moves the dial.

A “forward multiple” is based on an expectation of future profits. One would take this approach when using “maintainable earnings” – simply, this is like saying to someone “please ignore the current numbers, instead use this number based on what we think the business looks like in a normalised world two years from now.”

The really fascinating thing to watch will be an eventual listing of Premier, leaving Virgin Active behind along with New Look. If the “RemainCo” share price takes enough of a knock, it may become interesting. There are many complexities one would need to consider though, including the dilutionary impact of the exchangeable bonds.

The Fed shows its hand

Andre Botha TreasuryONE
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The Fed shows its hand

Although we had a short week last week, some significant events happened. This included a rate hike by the Fed and an emergency meeting called by the ECB. Andre Botha, Senior Dealer at TreasuryONE brings us these insights.

The Fed showed its hand and hiked by 75 basis points to get rates back to neutral at a faster pace while also fighting the current inflation “monster” prevalent in the market.

We also saw an emergency meeting called by the ECB, at which a new tool was discussed to reduce bond market volatility as the Bank raises interest rates.

The Fed was always going to hike interest rates, so the question was whether they would do so by 50 or 75 basis points. With inflation picking up in the previous month, the smart money was on a 75 basis point hike, which Fed Chair Powell delivered.

The dot plots below demonstrate that the Fed expects the rate to be 3.5 per cent by December, implying that even if this occurs, there will be some significant increases in the coming months.

However, the market has begun to worry about the Fed raising interest rates causing a recession, and we have seen multiple signals that the market is concerned about this possibility. Oil prices dipped on Friday, especially in the Northern Hemisphere summer, where demand for oil increases. Stock markets are losing some ground as flows have started to move away from risky assets like stock markets back into safe havens like the US dollar. 

To address unwarranted moves in the bond market, the ECB called an emergency meeting, with many speculating that the Governing Council would reveal the tool mentioned above. Instead, the Governing Council agreed to direct APP reinvestments to the markets that require the most attention.

A portion of the statement reads as follows:

“The Governing Council decided that it will apply flexibility in reinvesting redemptions coming due in the PEPP portfolio, to preserve the functioning of the monetary policy transmission mechanism, a precondition for the ECB to be able to deliver on its price stability mandate.”

With that said, the US dollar was on the front foot immediately after the interest rate decision, but it lingered around the 1.05 level against the euro during the latter half of last week and the start of this week.

We must remember that the US was out of the market on Monday, which would have impacted the US dollar’s lack of momentum.

The rand had a rollercoaster week, fluctuating wildly between the R15.75 and R16.15 levels – appearing to want to break above the R16.15 level a couple of times but unable to sustain the break each time:

In the short term, we believe that the rand could come under some pressure as risky assets have come under pressure, and the rand could bear the brunt of it as it usually acts as a proxy currency for all emerging markets currencies. 

On Wednesday, Fed Chair Powell will give his semi-annual testimony to Senate Lawmakers on monetary policy. We expect the market to watch the testimony closely as the testimony is the main highlight of a very bare data and event cupboard and could cause some volatility in the market.

Should the Fed reinforce its hawkish stance, we could see emerging markets currencies under pressure, and this could be the catalyst for the rand to move above the R16.15 level that it has been tested so frequently. 

To find out more and to discuss your market risk needs (like forex) with the team at TreasuryONE, visit their website here.

Absa gives us more banking insights

The Finance Ghost
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Absa gives us more banking insights

Absa has released a trading update for the five months to May 2022 as well as a trading statement dealing with the six months ending June 2022. The banks have been stellar performers this year in a market that has inflicted pain on most people.

Regular readers of Ghost Mail will know that I’ve been talking about the banks quite a bit this year. With rising rates and demand for credit from both consumers and businesses, it’s an environment in which the banks tend to shine.

The bank share prices tend to be highly correlated when it comes to short-term moves, as they are impacted by similar macroeconomic realities. They may move together, but that doesn’t mean they have moved to the same extent this year.

Here’s a chart explaining what that looks like (note the gap between Nedbank and Capitec, despite the waves typically rising and falling together):

I must say, when I wrote on the banks just a few weeks ago, the share price gains looked a lot better in a similar chart.

In the Absa update, the bank notes that demand for customer loans was high single digits, with improved growth in the Corporate and Investment Banking (CIB) division. There was similar growth in Retail and Business Banking (RBB), which is driven by demand for home loans and vehicle and asset finance.

Customer deposit growth slowed to mid-single digits, with Absa noting that this was driven by a reduction in low-margin national government deposits. Deposit growth in the RBB division has been described as “solid” which is too vague to really give us insights.

Keep an eye on RBB customer deposit growth this year. People are saving less and spending more in my view, no doubt a function of the cost-push inflationary environment we find ourselves in. It’s good for banks when consumers are buying assets and bad for banks when they are buying petrol and food instead, as this lowers the credit quality of the average borrower. Absa hasn’t included any specific commentary on this – it is just common sense.

Revenue growth for the five months looks good, up by low double digits. This was driven by net interest income (which benefits from higher rates and loan growth) and non-interest income (assisted by a rebound in life insurance revenue and decent growth in fee and commission income as well as trading revenues).

This strong revenue growth resulted in improved margins. The bank talks about positive JAWS, which means income growth exceeded growth in operating expenses. The cost-to-income ratio improved to the low 50s.

Pre-provision profit over the five months grew by mid-teens. Below that, the bad news is that “credit impairments grew materially” though this was off a relatively low base. The credit loss ratio is above the through-the-cycle target range of 75 to 100 basis points.

Inflation is starting to bite I think, visible in higher vehicle and asset finance credit impairments. Be careful here – when the banks tighten up on lending for vehicle finance, the incredible numbers we’ve seen from car dealership businesses will falter.

On the plus side, the impairments in CIB decreased materially. Absa’s models are suggesting that companies are a lot better off than consumers at the moment.

Return on equity for the period has improved to almost 17% which is really good. To sweeten this deal even further for investors, the dividend payout ratio will increase from 30% to 50% as the core equity tier 1 ratio is very strong at 12.5%. Simply, this means that the bank’s balance sheet can easily support a higher dividend.

Normalised headline earnings per share (HEPS) for the six-month period will be at least 20% higher than the 1,019.7 cents in the first half of 2021.

The net asset value per share at the end of 2021 was R149. The share price is trading around R169, which is a 13.4% premium to a number that is nearly six months out of date and would’ve grown accordingly, as this has been a strong period for the business.

We will only know once June results are released, but I would guess that the current price is probably at or slightly above the 1H22 NAV per share.

With return on equity of 17% (well above the cost of equity in South Africa), this creates an argument that Absa may be undervalued. The risks lie in overall consumer health, particularly if inflation drags spending away from durable assets and into the basics, like food and fuel.

Ghost Bites Vol 31 (22)

The Finance Ghost
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Ghost Bites Vol 31 (22)
  • Omnia flooded SENS early in the morning with no fewer than three announcements. The easiest one was that Ralph Havenstein will be retiring as Chairperson, replaced by Tina Eboka as Chairperson-designate who has been on the board for over six years. Another short announcement gave investors what they wanted to hear: a meaty dividend! A final dividend of 275 cents and a special dividend of 525 cents have been declared. The total of 800 cents per share is over 10% of the current share price and will be paid on 1st August. The third announcement was the story behind the numbers, with the results for the year ended 31 March 2022. I wrote about it in detail in this feature article, including an important section about the dispute with SARS.
  • As Real Estate Investment Trusts (REITs) go, Stor-Age is one of the most dependable. The self-storage asset class has been resilient during the pandemic, bringing some stability to an incredibly volatile set of opportunities in the market. With results released for the year ended March 2022, the fund has posted a solid set of numbers. Investors need to form a view on the interest rate exposures and the impact of inflation when assessing Stor-Age. I’ve written on the company in detail in this feature article.
  • City Lodge Hotels has released a voluntary operational update and trading statement. The group achieved 47% occupancy in South Africa with all its local hotels finally being open. In March, that number increased to 58%. This was mainly driven by strong weekend and leisure occupancies, with increased business travel. Occupancies were down to 49% in April, negatively impacted by the weather. May increased to 52% in South Africa and 49% for the group, which was in line with pre-Covid occupancies in May 2019. In wonderful news for staff, salary reductions were suspended from May 2022, so there is some degree of normality returning. Looking beyond South Africa, the pending disposal of the East African operations is imminent and the long stop date has been extended to the end of June 2022. Those proceeds to be used to repay debt. City Lodge has had positive monthly cash flows since February 2022 and has access to R223 million of liquidity in short- and long-term facilities. The group is busy refinancing R600 million in debt to allow for facilities that expire in the next 13 months. City Lodge has guided an improvement of at least 75% in headline earnings per share (HEPS) for the year ended June 2022. As the prior period was a loss, this implies that the base expectation is to make another loss (albeit a much smaller one). The share price is down nearly 26% this year.
  • MAS is a real estate company focused on Central and Eastern Europe (CEE). The company holds properties in Romania, Bulgaria and Poland and has a development pipeline with its joint venture partner Prime Kapital. MAS has released a trading update and pre-closing statement, which includes some really bullish commentary on Romania’s GDP growth and its immediate prospects. MAS highlights that its properties have triple-net leases that allow for full indexation to base rents, which means inflation can be passed on. The group also points out that most of its debt has fixed interest rates. The properties proposed to be acquired from the joint venture have debt that is fully hedged via interest rate caps for the next seven years. Footfall in May 2022 exceeded pre-Covid levels and sales per square metre are way ahead of pre-Covid levels, helped along by inflation. The share price is down 5.9% this year.
  • Fortress REIT has issued a firm intention announcement regarding the exchange of Fortress A shares for new Fortress B shares through a scheme of arrangement. The proposal is designed to give Fortress A shares an 80% share of distributions and Fortress B shares the remaining 20%. The company believes that a simplified strategy is preferable in this market and that collapsing everything into a single share class significantly reduces the risk of loss of REIT status by not meeting distribution requirements. The announcement notes “divergent views” on a fair swap ratio among shareholders and there are some in the market who feel that the board is bullying them with the threat of loss of REIT status. An independent expert will need to be appointed to issue an opinion on this scheme. I don’t envy whoever will be appointed on this one. I also don’t envy the independent directors.
  • Gemfields has announced a record ruby auction result based on the aggregate outcome of seven mini-auctions held in Bangkok in recent weeks. The rough rubies are from the Montepuez Ruby Mining (MRM) operation in Mozambique, which is 75% owned by Gemfields and 25% by a Mozambican partner. Importantly, the records tumbled for the total auction result and the per-carat revenue, so this is a volume and pricing story. The group does caution that 24% of the total weight offered in the auction was not sold. Revenue for the first half of the year is now $181 million (driven by this auction and two emerald auctions), which is almost double the previous record of $93 million in the first half of 2018. Gemfields has noted that second-half revenues are unlikely to match a “remarkable” first half of the year.
  • Afine Investments, the REIT that invests in petrol stations, is buying properties in an entity that has a related party among its shareholders. For the deal to go ahead, an independent expert needed to opine that the terms are fair to shareholders of Afine. AcaciaCap Advisors was appointed to give this opinion and has determined that the deal is fair, so no shareholder approval is required for the transaction to go ahead.
  • Orion Minerals has not yet finalised its capital raising transaction, so the voluntary suspension of trading in securities will remain in place until Wednesday. This is an Australian Securities Exchange (ASX) rule, as Orion’s primary listing is in the land down under.
  • The mandatory offer by Glenrock to the shareholders of Universal Partners has now closed. Only holders of 1.12% of Universal Partners shares accepted the offer, which doesn’t surprise me given the offer price. Glenrock now holds 35.3% of the shares in issue.
  • Equites Property Fund is hosting a site visit and presentation in the UK and has made the presentation relating to the site visit available on the website. It is full of useful information on the UK portfolio and you can download it at this link.
  • A couple of directors of Dipula Income Fund have bought B ordinary shares in the company. The amounts are small though (just over R200k across both directors) so I’m not sure how much importance can be placed on this.
  • There’s also been a fairly small acquisition of shares in Hammerson plc by the alternate director to Des de Beer. The total value is £21.4k which equates to around R420k.
  • A director of Raubex has bought shares in the company to the value of R357k. There has been quite a bit of buying by directors recently, which is a strong signal.
  • A director of EPP, which is now a subsidiary of Redefine, has bought shares in Redefine worth over R1 million.
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