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.
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 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.
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 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):
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.
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.
Omnia Holdings has bucked the trend this year in a big way. The share price is up over 15% at a time when the market has burned bright red. In a bear market, picking your stocks is important.
For the year ended March 2022, revenue increased by a juicy 30% and operating profit (excluding Zimbabwe) shot up by 123%. Headline earnings per share (HEPS) was 86% higher at 672 cents.
By all accounts, this was a strong year.
Omnia has made a song and dance about its cash and capital management and hasn’t been shy to pay large special dividends. This year, the ordinary dividend of 275 cents is 37.5% higher than the prior year’s ordinary dividend of 200 cents. The special dividend of 525 cents is 31.25% higher than the 400 cents special dividend in the prior year.
It’s not often that a company pays special dividends in consecutive years. Omnia has been rationalising its investment portfolio and has sold off certain parts of the group in both years. Some say there is more to come.
The cash position is 31% higher year-on-year, which is a growth rate that is similar to the increase in the overall dividend.
Agriculture segment
This segment contributed just over half of group revenue and operating profit.
Revenue was 41% higher and operating profit from continuing operations (the right way to view it vs. revenue) was 17% higher, so there has been a margin squeeze here. Omnia attributes this to higher operating costs (obviously) and a fixed-price contract in Zambia.
The company reminds us that results from Zimbabwe are subject to hyperinflationary earnings volatility. The group also operates in Australia and Brazil, both of which posted solid results.
Investors should remember that the drivers of this great revenue result (like a good crop harvest and higher commodity prices) are volatile by nature. Primary agriculture is a tough place to play and Omnia is directly exposed to this industry.
Mining
The mining segment contributed nearly a third of group revenue from continuing operations and just over a quarter of group operating profit. Revenue was up 29% and operating profit jumped by 79%, so margins went in the right direction here.
Revenue was driven by increased sales volumes and a higher ammonia price. Margins improved thanks to a focus on operational efficiencies, market expansion and larger contracts, which simply tells me that economies of scale are coming through in this segment.
There are important structural underpins to the result, like demand for specialist chemicals and services in the battery metals and PGM markets, both of which are really important going forward as the world focuses on emissions.
Still, Omnia is once again exposed to a cyclical industry here, so investors must be cautious when forecasting growth.
Chemicals
The chemicals segment contributed almost 15% of group revenue from continuing operations and nearly 9% of group operating profit. Revenue was up only 2% and operating profit jumped by 41%, so the revenue mix made all the difference here in improving margins and driving profit growth.
The balancing numbers
Those of you with a strong feel for the numbers might be thinking that these segments don’t add up to the group total. The balancing numbers relate to head office costs and discontinued operations, like Umongo Petroleum which Omnia sold during the financial year.
SARS audit
In case you thought everything was perfect at Omnia, think again. The group is dealing with a SARS audit related to its transfer pricing practices between 2014 and 2016. SARS has raised an additional assessment of R415 million and understatement penalties of R165 million. If that isn’t bad enough, there’s also an interest amount of R365 million.
So, that’s a fight with the tax authorities worth R945 million, which is a huge number. Operating profit for this financial year excluding Zimbabwe was R1,726 million, so this is a critical battle.
Omnia has raised an objection with SARS and the receiver has until 30 September 2022 to respond. In the meantime, a payment of R207 million was made to SARS in December 2021 and interest continues to accrue on the rest.
Omnia believes that the most probable outcome is an Alternative Dispute Resolution process.
Outlook
Omnia has been working hard to simplify the group and optimise supply chains and manufacturing capabilities. It’s great to enjoy the benefits of being at the right point in the cycle (e.g. in mining) but experienced hands are well aware that these conditions are usually here for a good time rather than a long time.
The group has done well in its core operations but it needs to resolve the SARS issue to give investors certainty around that matter.
My major irritation is that the short-form SENS announcement doesn’t mention the SARS problem and this isn’t the first time that Omnia has buried it deeper in the presentations and reports. You have to read the full results booklet to find information on it. This really isn’t good enough from a disclosure perspective and it gives a poor impression of the company’s attitude towards shareholders.
In theory, property is supposed to be a defensive asset class. The pandemic demonstrated that many types of property aren’t nearly as defensive as people thought.
For a detailed look at the South African property market, last week’s update from Growthpoint is well worth a read. I wrote a feature article on it that deals with all the important insights into the retail, office and industrial property sectors, along with a reminder of what a gem the V&A Waterfront is.
Stor-Age has managed to give investors somewhere to hide over this period.
It’s not the kind of company that is likely to give incredibly high returns. Importantly, many see it as unlikely to fall over, as the self-storage asset class has been resilient throughout all the challenges. It also helps that Stor-Age enjoys geographical diversification, with R4.9 billion in local assets and R5.3 billion in UK assets under the brand Storage King.
The fund has now released results for the year ended March 2022 and declared a cash dividend. Distributable income increased by 7.5% year-on-year, so now you understand why I believe it is a solid but not necessarily spectacular place to put your money.
It’s important to remember that distributable income doesn’t include the increase in value of the underlying portfolio, as you can’t pay an unrealised gain as a dividend. If that is included, the total return for the year was 16.5%. That’s an excellent accounting return that isn’t being reflected in the share price, which is trading at the same levels as June 2020.
The business model is great. Same-store closing occupancies were over 90% in the SA and UK and the loan-to-value (LTV) ratio is 27.9%, which is the right sort of number for a property fund. An LTV of over 40% is where property executives start to have a few sleepless nights.
Stor-Age continues to grow its portfolio, having acquired 11 trading properties and completed three developments. There’s a development pipeline of 14 properties, four of which are already in progress with Stor-Age’s joint venture partners (Moorfield in the UK and Nedbank in South Africa).
The company is also taking a leaf out of the hotel industry’s book, offering a third-party management solution to other storage businesses. This lets Stor-Age generate additional revenue without needing to invest capital, which is exactly how hotel groups (e.g. Hyatt) operate once they have a proven model. It’s early days with this offering but I do find it rather interesting.
Stor-Age also raised a seven-year £21 million sustainability-linked loan from Aviva Investors. If you want to learn more about sustainability-linked loans, check out this great feature written by the Ghost Grads.
There is R2.9 billion in gross debt on the balance sheet, of which R1.28 billion is local and R1.62 billion in in the UK. In terms of interest rate hedges, 71.5% of local gross debt is hedged and 77.7% of UK debt is hedged. The effective interest rates are 6.65% in South Africa and 3.41% in the UK.
The equity side of the balance sheet also received some love, with a R575 million oversubscribed accelerated bookbuild in January 2022. This is a way of raising money that is a bit like releasing concert tickets to legions of adoring fans who fight over the right to part with their money.
The full year dividend of 111.90 cents is 5.4% higher than the prior year and is a yield of 7.9% based on the closing price the day before this announcement. I must remind you that dividends from Real Estate Investment Trusts (REITs) are taxed like normal income, not dividends, so you need to apply your marginal income tax rate to this number (which varies whether you hold shares through a company or in your own name).
The net tangible asset value per share is R13.59 and the share price was trading at R14.17 before the announcement came out, so Stor-Age is still trading at a premium.
The key risk here is rising yields and the impact on distributable income, as a decent chunk of the debt isn’t hedged. The question then becomes whether Stor-Age will be able to increase rental rates if we head into more economic difficulties. Will people finally get rid of that extra stuff as budgets become tighter, especially if storage rates increase? Or is the business so strong that there will be enough demand to keep the units full?
I’ve held shares in the company before but I don’t currently have a position.
Novus Holdings has released results for the year ended March 2022. The printing and packaging company is only down 2% this year and paid out a special dividend in February of around 17% of the start-of-year share price, so it has way outperformed the market this year. Revenue for the year is 6.2% higher and headline earnings per share (HEPS) swung heavily into the green, posting a profit of 53.2 cents per share. The share price is only R2.30 and the closing cash position is R567.9 million vs. the market cap of nearly R800 million. It’s not all a bed of roses though, with the company noting that Covid inflicted permanent damage to the print industry e.g. magazine titles that are gone forever. The company is now facing a gauntlet of global pulp and paper shortages and excessive price increases, which is why the share price performance has been modest when viewed against the improvement in profitability. No final dividend has been declared, which is another clue that the board is playing a cautious game here.
Capital & Counties Properties Plc and Shaftesbury Plc have reached agreement on the terms of an all-share merger, so this is a deal recommended to shareholders by the boards of both companies. This is a far better scenario than a hostile takeover. The structure is that Capital & Counties will own 100% of Shaftesbury if the deal goes ahead, paid for through the issuance of new shares in Capital & Counties. The existing shareholders of Shaftesbury would hold 53% of the combined group with the existing shareholders of Capital & Counties holding the remaining 47%. It’s important to note that Capital & Counties already holds 25.2% in Shaftesbury. The merged portfolio would be 670 buildings in London’s West End. The split would be 35% retail, 34% hospitality and leisure, 17% offices and 14% residential. The loan-to-value ratio would be 29% and there would be GBP500 million of available liquidity in the group. JSE investors will be pleased to learn that Capital & Counties will retain its listing on the JSE, so the merged group is something that local investors can participate in. The deal is expected to become effective by the end of 2022 if all goes to plan and shareholders should look out for the circular to be issued within 28 days.
The CEO of Equites Property Fund has sold shares in the company worth R5.3 million. The COO isn’t far behind, having sold shares worth R1.4 million. When top executives in the company are selling at the same time, it sends a pretty strong message to the market about the share price. Equites is down 16.6% this year and is slightly up over 12 months.
Glencore released a trading update on a day that was extremely painful for investors in the resources sector. The share price fell 5.8% but that was in line with the bloodshed across the sector. Coal prices are through the roof and government is a major beneficiary of that, with higher royalties as a result. There’s substantial inflation in input costs like energy and logistics as well, so the unit cost has also risen significantly. Glencore’s Marketing segment is expected to achieve $3.2 billion in interim adjusted EBIT, at the top end of the through-the-cycle guidance. That’s good news for investors, though you would never say it by looking at the share price.
Having sold its petroleum assets to Woodside and its stakes in Carrejon and BHP Mitsui Coal in prior transactions, BHP has been reducing its exposure to fossil fuels. The company has announced that it will retain New South Wales Energy Coal in its portfolio, with a plan to extend its mining licence until 2030 (it is due to expire in 2026). BHP tried to sell this asset and ran a process to receive offers, but they weren’t satisfactory, so this is Plan B. Once the mine is shut down, there will be a 10 – 15 year rehabilitation process. The provision for this process was $700 million in the 2021 financial statements.
Marshall Monteagle Plc has released a trading statement for the 18 months ended March 2022. This is a weird reporting period that is a result of the company changing its financial year end from September to March. The group has swung into the green, with headline earnings per share (HEPS) over the period of $7.90 cents. Keep in mind that you can’t use this in calculating a price/earnings multiple as this number covers an 18-month period (rather than a 12-month period).
Vodacom’s B-BBEE scheme YeboYethu is separately listed on the JSE and has released results for the year ended March 2022. The total dividends declared for the year were 213 cents per share, so the scheme is trading on a dividend yield of around 5%. The share price has ended up flat over the past year, so the dividend has been the only return for shareholders.
Steinhoff Investments has released results for the six months ended March 2022 and there’s a very important nuance here: this is the subsidiary that has issued listed preference shares, not Steinhoff International Holdings which is the ordinary shares that most Steinhoff investors hold. A gross dividend of 293.55308 cents was declared for the period, so the interim dividend yield was nearly 3.8% and the annualised yield would be double this number. The preference shares trade under the ticket JSE: SHFF and the ordinary shares are JSE: SNH.
Royal Bafokeng Platinum shareholders will be pleased to note that the legal risks related to the Maseve deal from 2017 have been put to bed. Royal Bafokeng acquired the Maseve assets for $70 million and was subsequently on the receiving end of legal proceedings by Africa Wide Mineral Prospecting and Exploration (holder of 17.1% of Maseve prior to the deal) that sought to have the transaction declared unlawful and invalid. The arguments were based on consents needed for the deal. The High Court wasn’t buying that story, dismissing the proceedings with costs.
In case you’re itching to travel to Eastern Europe (or invest in property there), NEPI Rockcastle has been hosting a property tour and has made the presentation available online. It includes a useful overview of the company and many details about the underlying properties. You can find it at this link.
Montauk Renewables is now being included in the Russell 3000 Index. It was also recently added to the MSCI Global Small Cap Indexes within the MSCI USA Small Cap Index. This is important because it means that index tracking funds will need to buy the stock in proportion to its weighting in the index.
Randgold & Exploration Company has announced that its legal fight with certain minority shareholders of the company has been fully and finally settled among the parties.
The chair of the US Federal Reserve (The Fed) announced last Wednesday 15th June that the Federal Open Market Committee (FOMC) had decided to increase the US federal funds rate by 75 basis points. It’s probably too little, too late and markets have already baked in a significantly higher interest rate environment by year end. But will it be enough to contain inflation? Perhaps not. Chris Gilmour explains.
The late Archie Shapiro told me decades ago that if you’re bullish and you’re wrong, people will forgive you. Conversely, if you’re bearish and you’re wrong, people remember and never let you forget it. Ever since then I have tried wherever possible not to be bearish on markets, even when my gut told me it was the wrong approach.
And of course this is not just a South African phenomenon; it applies to all financial markets worldwide.
But lots of other people have been expressing bearish sentiment recently, notably Jamie Dimon, CEO of JP Morgan Chase, who predicted a few weeks ago that an economic “hurricane” was about to hit US financial markets. He cited loose monetary policy, massive fiscal stimulus by the US government and the impact of the war in Ukraine on food and fuel prices as the main factors feeding this hurricane.
South African-born Tesla CEO Elon Musk fears an imminent recession in the US and has “a super-bad feeling” about the economy. This is why he feels it necessary to cull 10% of the group’s workforce. This was just after he issued a blunt warning to workers to return to workplace in person or consider themselves as having resigned.
And John Waldron, President and COO of US investment bank Goldman Sachs echoed the warnings, citing a series of concomitant unprecedented factors hurting the economy, including a commodity shock (mainly oil and gas) and an unprecedented amount of fiscal and monetary stimulus.
One of the most authoritative voices out there is former US Treasury Secretary Larry Summers, who accurately predicted last year that inflation in the US was getting out of control and that if the US Federal Reserve didn’t act quickly, it would get a lot worse. Now, with inflation at a 40-year high of 8.6% in the US, Summers is sounding even more alarmist, suggesting that only a full-blown recession will be able to tame inflation.
The research at the National Bureau 0f Economic Research (NBER) can be read in its entirety in a free download at this link, but the essence of it is that Summers and his co-authors claims to have found a better way of analyzing inflation than using the CPI method. Using this alternative method, Summers and his co-authors reckon that current inflation levels are much closer to past inflation peaks than the official CPI series would suggest.
One of the biggest divergences between the Summers et al method and the traditional CPI method is the way in which housing inflation in calculated. The NBER paper states that prior to 1983, the CPI did not correctly account for consumer spending on housing, including either the final home purchase value or the value of mortgage rates spread out over 30 years. The pre-1983 index included both home purchase prices and the total outlay of mortgage payments, despite mortgages being paid out gradually over several years. By including both, the CPI method effectively double-counted housing inflation between 1953 and 1983. The net effect was that inflation measures before 1983 looked artificially high at the start of the tightening cycle but they dissipated artificially quickly.
Applying the NBER methodology, the current inflation rate in the US is eerily close to a period in US history when there was considerable financial distress and the and the only way to cure it, according to Fed chair at the time Paul Volcker, was to crush it with extremely high interest rates.
In 1980, the official CPI inflation rate was 13.6% but applying the NBER methodology, that would reduce to 9.1%. Volcker raised interest rates in the US to over 20% in the early 1980s, a move that tipped the US into the most severe recession since the Great Depression of the 1930s. Unemployment soared to almost 11%, but the end goal of taming inflation was achieved.
Volcker was a single-minded civil servant who just got on with the job of running the Fed, which he did extremely well over two terms and two administrations. He was very different to his successors such as Alan Greenspan, Ben Bernanke, Janet Yellen and now Jerome Powell who have all used a variety of tools to attempt to keep prices stable. Volcker understood the power of interest rates. Period.
Here is a chart of the United States average monthly prime lending rate:
And here is a chart of the United States core inflation rate:
To raise interest rates to the levels that Volcker did back in the 1980s would have devastating effects on the real economy. This is the last thing that Powell or president Joe Biden needs and neither of them probably have the intestinal fortitude to go down that road.
Another way of looking at this issue is to examine how the Fed has handled the COVID-19 pandemic. With the benefit of hindsight, it is now clear that Powell and his FOMC made a disastrous decision to throw so much money at the situation and not expect inflationary consequences. Powell exacerbated the situation with his stubborn insistence until relatively recently that the inflation that had been generated was only transitory and would soon evaporate.
He and his team completely missed the consequences of massively disrupted supply chains, for example.
Now the US finds itself in the unenviable position of having a Fed that is still relatively accommodative, despite the recent rate increases, coupled with supply chain disruptions that are likely to persist well into next year and beyond and the war in Ukraine is just making everything much more expensive.
This is a perfect inflationary storm.
Reading Powell’s statement after the rate increase announcement, it is clear that he genuinely believes that inflation will be back to much more manageable levels by 2024. The clue lies in the wording. It seems reasonable to agree that inflation will indeed be more “manageable” within two years but it may not necessarily have been tamed.
No matter, at least it should be going in the right direction. We need to be realistic.
While a return to a Volcker-type approach appeals to the fundamentalist in me, I have to admit that the cost in terms of financial wipeout would probably be too great to bear. Back in Volcker’s day, life was far simpler. Today, everything is far more connected and as a consequence, perhaps more fragile.
At the time of writing, the S&P 500 was down 23% from its peak. Put another way, its market capitalisation is 23% below its all-time high of just over $40 trillion in early January this year. So, about $10 trillion has been wiped off the value of US stocks in this current rout.
That in itself will provide a substantial deflationary effect to the US economy, so pervasive is share ownership in America, and if sustained for any period of time will result in the Fed not having to do an awful lot more in the way of further tightening.
Powell and his peers in central banks across the globe must tread a very fine line between attempting to contain inflation and preventing the real global economy from stalling. So once again, a repeat of the Volcker-type approach to tightening may not be required. If this line of thinking becomes conventional wisdom, it may not be too long before we reach a bottom in the S&P 500 and even in the tech-heavy Nasdaq.
Where it goes from there, however, is anyone’s guess.
A period of going nowhere slowly for a couple of years would seem likely. As another old-timer on the markets also said to me many decades ago:
“Nobody rings a bell at the top of the bull market or the bottom of the bear market”
Chris Gilmour writes wonderful opinion pieces for Ghost Mail every Monday. His most recent pieces on Russia and China were extremely popular reads and you should make time for them if you haven’t done so already.
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