Wednesday, April 2, 2025
Subscribe
Home Blog Page 170

Putting your money in Stor-Age

The Finance Ghost
-
2
Putting your money in Stor-Age

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.

Ghost Bites Vol 30 (22)

The Finance Ghost
-
0
Ghost Bites Vol 30 (22)
  • 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.

Of inflation, interest rates and bear markets

Chris Gilmour
-
2
Of inflation, interest rates and bear markets

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.

Securing portfolio stability during anxious times

Sponsored Content
-
0
Securing portfolio stability during anxious times

Warren Buffet famously advised, “Rule No. 1 of investing: Never lose money. Rule No. 2: Never forget rule No. 1”. While many investors bias their decisions towards higher returns and a search for alpha, diversification and the inclusion of lower risk options remain an important part of the mix.

With the world in a constant state of flux and uncertainty, investors are increasingly needing to review their investment portfolios to ensure a balanced asset allocation and risk profile based on their individual needs. Even seasoned investors find themselves scratching their heads when it comes to making prudent investment decisions, especially when facing the prospect of financial loss.

When it comes to future-proofing portfolios, structuring a robust, diversified portfolio that can withstand volatile market fluctuations is key. A well-diversified portfolio with a suitable asset allocation strategy can help investors mitigate potential market losses and smooth out the bumps in the road.

However, with traditional fixed investments providing subpar returns, which are often further diminished by layers of unnecessary fees, investors need to dig deep to find products that complement their portfolio and suit both their long-term and short-term investment needs.

With so much proven volatility in the markets, Fedgroup Secured Investment provides investors with a measure of certainty by offering full capital security and inflation-beating returns. Since inception of this product over three decades ago, no investor has ever lost capital or the interest due to them. Equity investors riding events such as the 2008 crash or the COVID-era volatility would have experienced some peace of mind with the Fedgroup Secured Investment as a portion of their broader portfolio.

Strictly regulated and governed by the Collective Investment Schemes Control Act, Fedgroup Secured Investment is not subject to short-term market fluctuations. Rather, it offers a fixed interest rate over a five-year term, along with flexibility that allows investors to structure the offering in a way that suits their unique needs.

Investors have a choice between having the monthly interest paid out, reinvested for growth, or a combination of both. Because of this, Secured Investment has found favour with a large array of investors, as evidenced by the fund’s recent high growth to over R5.5 billion AUM in 2022.

Of all the unique aspects of this product, of note is the lack of any fees charged to investors. No ifs, no buts, no “qualifying products”, and no hidden clauses. Thanks to simplified financial structures and Fedgroup’s commitment to value creation, investors enjoy a market-leading rate on maturity of 11.7% p.a.* without unnecessary fees eroding returns.

Few other providers offer a better rate at comparable low risk.

Gone are the days of having to choose between capital preservation and competitive returns!

And because it’s available via the Fedgroup App or through a financial advisor, investing a lump sum of R5 000 or more for a five-year period has never been easier. No red tape, no unnecessary jargon, no problems.

Given all these advantages, it becomes apparent why an increasing number of investors regard the Fedgroup Secured Investment as the foundation of a balanced investment portfolio.
Click on this link for more information.

*Rate on maturity if the interest is reinvested over a five-year period at a fixed nominal rate of 9.25% p.a.
Rates represented at the time of publication are subject to change.

Is ESG coming to a home loan near you?

Jordan Theron and Kreeti Panday
-
2
Is ESG coming to a home loan near you?

Sustainability-linked lending has been around since 2017, with corporates tapping into pools of debt that get cheaper as ESG targets are met. This brings out the best and worst of humanity, of course, as you never have to look far to find opportunistic behaviour. Still, there are great examples of this type of lending in practice. Will it end up being offered to retail banking customers one day? Two of the Ghost Grads (Jordan Theron and Kreeti Panday) bring us this overview of the sustainability-linked lending industry.

In 2017, Dutch bank ING became the first financial institution to extend what we now know to be a sustainability-linked loan. Considering the world has become obsessed with ESG in recent years, the bank doesn’t make it a secret that it pioneered this approach.

The €1 billion loan to Philips had an interest rate (or cost of debt) that was designed to fluctuate based on the company’s sustainability performance. As we will explore, this is different to a “green loan” or specific bond issuance to raise funding for a particular project, like a solar farm or social housing development.

Estimates are that over $800 billion has changed hands in global sustainability-linked loans. Companies love borrowing money and banks love dishing it out, so this encourages corporates to spend time on designing and implementing sustainability measures that will warm the hearts of the banking credit committee.

Show me the metrics and I’ll show you the money

Those measures are the key in this industry. Sustainability-linked loans are structures that allow companies to borrow money at lower interest rates on condition that they meet certain ESG KPIs (Key Performance Indicators) as set out in the loan agreement.

If the targets aren’t met, the rate usually ratchets higher.

The borrower benefits from paying an interest rate that is often lower by 50bps – 100bps. It may not sound like much, but you need to remember that we are talking about billions in debt. On a R2 billion loan, a 100bps reduction is R20 million per year in interest savings.

That’s enough to pay for a beautiful ESG-inspired billboard advert and some extra bonuses for executives. Ok, the ever-cynical Ghost possibly wrote this part.

50 Shades of Green

Although the lines have blurred and will blur further, traditional “green funding structures” require the company to use the money to fund specific “green” projects, whereas the proceeds from sustainability linked loans can be used for general purposes.

An example of the former is Harmony’s R1.5 billion agreement with Absa Corporate and Investment Banking to fund Phase 2 of their renewable energy rollout. Harmony is just as tired of Eskom as we all are, so they are planning to create the capacity to produce up to 137MW of energy for their operations. Everyone wins in this scenario: the environment can breathe a bit better, the company enjoys lower energy costs and the rest of us in South Africa have slightly more table scraps from Eskom to power our homes and businesses.

The Harmony structure is interesting in that it also includes sustainability-linked loans – three of them, to be exact! These are based on renewable energy and water consumption targets and include KPIs that have been independently verified using the Sustainability Linked Loan Principles issued by the Loan Market Association. The ESG industry has become big business for professionals.

There’s a lot of marketing going on here

Inevitably, an argument is made for the correlation between corporate performance and sustainability measures. You don’t have to look far to find research in support of this view. Of course, investment firms offering sustainability-themed investment products (like ETFs) are quick to use these findings as well.

Whilst there is little doubt that a business run on sustainable principles has better long-term prospects than a business that doesn’t have this thinking embedded in the management teams, there’s also a correlation vs. causation discussion here.

Is it the case that sustainability is driving the increased profits, or do more successful companies simply have deeper pockets and flexibility to plan for the future, not least of all in a way that looks good in glossy integrated annual reports?

To give you an example of the type of research in this space, Accenture claims that high levels of innovation, without an emphasis on sustainability and trust, result in a negligible increase in operating profits. In contrast, high levels of innovation combined with sustainability and trust, resulted in a 3.1% increase in operating profits. Read into that what you will.

Whether you are rushing off to buy an ESG-weighted index or not, there’s no doubt that corporates are tapping into financing that uses these metrics and they are enjoying lower costs of funding as a result. The banks believe that these are better-quality clients, as a sustainable business is a good business.

Real-world examples

Research suggests that the US accounts for over 30% of global sustainability-linked issuances. We know that climate change is top of mind for corporates and politicians, so this has led to their largest banks (including Citi, JP Morgan and Bank of America) leading the charge towards a greener future, incentivising corporates along the way with climate metrics in ESG loans.

There are pools of capital looking for impact beyond just environmental measures. For example, Anglo American’s $100 million loan agreement with the International Finance Corporation included targets of providing three off-site jobs for every on-site job by 2025.

South Africa is barely a rounding error when it comes to our percentage share of global issuances. In our view, this is a growing opportunity though.

With Eskom seen as a business risk as much as a climate risk, renewable energy investments will likely drive demand for sustainability-linked loans. South African companies will be seen as embracing the change, eager to get their carbon-heavy feet in the door.

As with US lenders though, there are great examples of local companies raising sustainability-linked financing with metrics that go beyond just renewable energy targets.

Sea Harvest dove head-first into the green waters of sustainability-linked loans, having secured R700 million in financing from Standard Bank in November 2021, subject to KPIs and sustainability performance targets.

In June 2021, Woolworths became South Africa’s first retailer to engage in sustainability-linked financing, taking out an R1.15 billion loan from Standard Bank. The terms include a rise in local sourcing of fashion, beauty, and home products, a focus on sustainable food supply and a reduction in the use of electricity in stores. These things just sound like intelligent business practices, don’t they?

Mondi is also tapping into sustainability-linked financing with a 5-year revolving multi-currency credit facility agreement. There were no fewer than 10 relationship banks involved! Mondi’s Action Plan to meet its ambitious 2030 sustainability goals (called MAP2030 by the marketing department), shines a green spotlight on three areas described as “circular-driven packaging and paper solutions, created by empowered people, taking action on climate.”

Coming soon to a home loan near you?

The trend of sustainability-linked financing does seem to help more than it hinders. Banks want to be seen as doing the “right thing” and corporates are thrilled to reduce the cost of debt.

Soon enough, it is possible that we may even see this kind of financing extended not only to companies, but consumers too.

Can you imagine enjoying a lower interest rate on your bond if you achieve electricity reduction targets, thereby reducing carbon emissions in your daily life?

Perhaps it’s time to teach your children to switch the lights off when they leave a room, in this case because it might one day save them money on their bonds rather than because Eskom will do it for them if they don’t!

The Ghost Grads are four talented students who have joined me for an internship during their studies. I’m thrilled to have them and you can look forward to many more great articles from them.

Ghost Bites Vol 29 (22)

The Finance Ghost
-
0
Ghost Bites Vol 29 (22)
  • Growthpoint has released an update covering the nine months to March 2022. The South African property recovery has stumbled. In this market, I prefer having exposure to concentrated property funds rather than those with broad exposure across the market. Read this detailed feature article and see if you agree with me.
  • EOH shareholders will be relieved to learn that the conditions related to the disposal of the Information Services business have all been met. EOH has received R422 million in proceeds, including R25 million in interest. The proceeds net of costs are R374 million and will be used to reduce the R1.2 billion bridge facility. After this repayment, group debt is R1.33 billion, comprising a R500 million three-year bullet facility and the remainder of the bridge facility. The share price is still languishing in the mid-R5s and I’m glad I got out of the way when I broke-even at just over R7.
  • Tongaat Hulett is still reeling from the Takeover Regulation Panel’s ruling that the waiver of a mandatory offer related to Magister Investments is a nullity. This throws the recapitalisation plan out the window and puts the company into significant difficulty in finding a solution for the balance sheet. Against this backdrop, it’s not surprising that the company is not going to meet the deadline to release financials for the year ended March by 30 June 2022. They can’t finalise results unless there is a plan, otherwise the “going concern” assumption becomes a little difficult.
  • Naspers and Prosus released trading statements for the year ended March 2022. The Prosus share price is down nearly 37% this year and Naspers is down almost 28%. In this period, Prosus invested $6.2 billion right at the top of the venture capital / tech cycle in growth verticals like EdTech and Food Delivery. I still have major question marks about the unit economics of many of these business models. Headline earnings per share (HEPS) is down this year because of lower fair value gains, investment in ecommerce businesses (i.e. ones that lose money) and increased net finance costs. The board of Prosus suggests using core HEPS as the best performance indicator, down between 14% and 21% this year. I’m happy to not have a position here.
  • Sephaku Holdings has released a trading statement for the year ended March 2022. HEPS has skyrocketed to between 17.20 and 17.78 cents vs. 6.09 cents in the prior period. The share price is down 28% this year and was trading at R1.33 before the announcement was released after hours on Wednesday. Let’s see how it reacts.
  • If you are interested in Santova, the JSE small cap that offers solutions in global supply chains, you should check out the investor presentation that was delivered on Wednesday. It gives a thorough overview of the company, its strategy and some of the risks it faces.
  • Southern Palladium is going to be one of those mining companies that makes everyone wish they had studied geology before reading the announcements. In what sounds like a Marvel movie, there are helicopters and gamma rays in the latest update. Based on management’s commentary in the announcement, the Total Magnetic Field survey aimed to confirm the structural integrity of the inferred mineral resource and investigate loss-of-ground disruptions. The aims were achieved and Phase 1 drilling can now commence with a targeted start date of July 2022.
  • Raubex and Bauba Resources have announced the final results of Raubex’s mandatory offer to Bauba shareholders. The offer was accepted by holders of 10.59% of the issued shares in Bauba, representing 39.40% of shares held by minority shareholders.
  • Separately and importantly, a prescribed officer of Raubex has invested a substantial sum of R4.5 million in the company’s shares.
  • Alphamin, the tin miner in the DRC, has confirmed that the recent closure of the Bunagana border post between the DRC and Uganda has no impact on its operations. Alphamin’s exports move through border posts with Uganda that are 1,000km north of the Bunagana town where rebels and DRC government forces are fighting.
  • Afrocentric is acquiring the remaining interest in Afrocentric Distribution Services. This is a small related party transaction and required an independent expert to sign off on the terms as being fair to shareholders of Afrocentric. Mazars Corporate Finance was appointed and has provided such an opinion, so the deal is going ahead.
  • Advanced Health has announced that it is undertaking an internal strategic review of the business. I always shake my head at these types of announcements. If the company isn’t doing this type of work as part of business as usual, then what are executives being paid to do? I may as well announce that I’m sitting down to write something.
  • In another reminder of why attempted arbitrage trades on large corporate deals are often a bad idea, Distell has had to extend the timing of the implementation for the Heineken deal. Distell originally hoped to get approval by the end of June but is now only expecting it before the end of 2022. I always suggest taking a cautious approach when assuming the timing of a regulatory approval from the Competition Commission, especially on landmark deals.
  • Despite leaving the business soon, the CEO of Altron has elected to retain the shares that have vested under the incentive plan, other than those sold to cover the tax liability. That’s an encouraging message about the company.
  • An entity related to several directors of Ninety One has acquired shares in the company worth over £900k.
  • Trustco has managed to miss the deadline for the release of its interim financial statements and has promised to release them by the end of June. This company has made it known publicly that it dislikes the listed environment and missing deadlines is just part of that overall attitude.

Growthpoint wants you to watch Top Gun

The Finance Ghost
-
1
Growthpoint wants you to watch Top Gun

When it comes to property updates, Growthpoint is the most important of them all. With a market cap of R46 billion, Growthpoint is a massive fund that touches practically every type of property in the country. Every investor in the sector follows Growthpoint’s updates closely.

The latest news from the company is an update for the nine months ended March 2022. With the share price down around 13% this year, the property recovery has taken a knock and this update demonstrates why.

It starts off with something you won’t read about every day: Growthpoint’s credit rating is higher than the South African sovereign rating i.e. our government. This sounds silly at first blush, as most of us would invest in the private sector in this country long before the public sector. That’s not how credit ratings work though, as the agencies take a view that the company cannot be better off than the government in a high stress scenario. The companies are a function of the environment they operate in.

The nuance for Growthpoint is that it has significant foreign currency earnings that more than cover foreign debt payments, so the group becomes less risky than the South African government overall. Whilst the credit rating isn’t an indication of equity returns, it’s worth highlighting these points.

The foreign exposure is a theme that is carried into the strategic priorities of the group: international expansion, “streamlining and optimising” the South African portfolio and generating returns from the funds management business.

The three international businesses are listed separately, so investors can check them out for more details. Growthpoint Properties Australia is listed on the Australian Stock Exchange (ASX), Globalworth Real Estate Investments is listed on the London Stock Exchange (LSE) and Capital & Regional Plc is listed right here on the JSE.

The Growthpoint announcement focuses on the South African portfolio., in which total vacancies increased from 10.5% at the end of December to 10.9% at the end of March. That’s at least better than 11.6% at the end of June 2021 but has clearly gone the wrong way.

The fund talks about a “perfect storm” for rent reversions, which means leases are still being renewed at a lower rate than the expired lease. The bargaining power is still in the hands of tenants.

Office sector

In the office sector, the vacancies are just getting worse. They were 19.9% at June 2021, 21.2% at December 2021 and 22.4% at March 2022. Where Growthpoint has managed to secure new leases, the average lease renewal term has decreased to 2.8 years from 4.4 years. Tenants are making full use of the flexibility available to them in this market.

Office reversions of -17.3% reflect the oversupply in this market.

Growthpoint highlights Claremont and Illovo as having achieved good letting. That makes sense to me – these are smaller buildings in prime areas, which makes them perfect for companies that are sticking to hybrid working arrangements.

Larger buildings in traditional office areas are the biggest issue and Growthpoint has huge exposure to Sandton, which is exactly what you don’t want right now. A whopping 21.7% of Growthpoint’s gross lettable area (GLA) in the office portfolio is in Sandton.

Growthpoint has sold seven office assets for R320 million and another four sales worth a total of R546.8 million are awaiting transfer. There are a further nine properties worth R600 million that have been earmarked for disposal.

Retail sector

This is a happier story, with shopping centres reporting turnover growth and smaller neighbourhood centres doing particularly well. In my view, this is a direct result of people returning to their daily lives and quickly popping in at the shops for regular grocery trips.

Footfall has neared pre-pandemic levels and increased basket sizes are still the norm, as people do fewer trips than before Covid.

As Growthpoint has all the data on retailer performance, it’s useful to note that the apparel segment continues to be driven by value fashion (affordable clothing) and that athleisure is trading strongly. The hybrid working trend has been great news for yoga pants and not such great news for formal pants.

The fund also highlights that on-demand shopping has driven business through the malls, positively impacting trading densities (sales per square metre). I scratched my head a bit on that one, I must be honest. Fulfilment of an online order at the local grocery store would count towards turnover clauses but I don’t see how that is any better for densities than someone going to the mall instead.

Rental reversions at -14.5% are at least better than -15.6% in the prior financial year. It’s still ugly out there for property funds but it is becoming less ugly in retail.

Vacancies deteriorated slightly from 4.7% at December 2021 to 4.9% at March 2022. There are major issues at Bayside Mall in the Western Cape which Growthpoint note could create a significant increase in vacancies. That’s my neck of the woods and a beautiful new mall has been built right across the road from Bayside (a really unappealing place), so I’m not shocked by what’s happening there but I am surprised that it can have a material impact on a group this size.

95% of the portfolio is concentrated in 26 of the 42 retail assets, so there is more concentration than I expected. Growthpoint wants to de-risk the portfolio and plans to sell properties in excess of R1 billion that no longer meet the investment criteria.

The highest arrears amount is R43.4 million owed by Ster-Kinekor. Growthpoint would very much like you to go watch Top Gun, if you don’t mind.

Industrial sector

Industrial properties have been the relative winners in the pandemic. Still, whilst some funds enjoy zero vacancies in the industrial book, Growthpoint is dealing with 6.2% vacancies. That’s at least better than 9.4% at the end of June 2021.

The reason for the vacancies is that Growthpoint has a large and geographically diversified portfolio, whereas smaller funds often have a handful of properties with blue-chip tenants. This makes Growthpoint vulnerable to issues like business rescue processes at smaller tenants. 40 tenants have concluded business rescue proceedings in this period and terminated their leases.

Rental reversions of -8.1% have improved from -10.9% in the prior financial year.

The good news is that selling industrial assets is rather easy at the moment. Assets worth R353 million were sold and transferred, another R400 million in properties are awaiting transfer and R650 million worth of properties have been identified for disposal.

V&A Waterfront

The Waterfront is such an important property that Growthpoint reports it separately. By the end of March, international tourist arrivals in Cape Town reached over 70% of pre-Covid levels, so there’s still room for further rebound.

Vacancies at the iconic property are just 1.85%, with even the offices enjoying almost no vacancies. In this world, you want to own the very best properties you can.

In exciting news for the tourism sector and my beloved Cape Town, the V&A has confirmed more than 100 cruise arrivals for the next season, starting in October 2022.

The Waterfront should return to normalised performance or better within the next financial year.

Trading and Development

Growthpoint has reduced its speculative development activity. Still, the division earned revenue of over R130 million and sold properties worth R855.4 million in this period.

Growthpoint Investment Partners

In this segment of the business, Growthpoint co-invests in and co-manages specialist alternative real estate portfolios. There are three funds with total assets under management of R15 billion, which Growthpoint hopes to double in the next five years.

Growthpoint Healthcare REIT owns hospitals and medical centres. It has a pipeline of development and acquisition projects has raised funding from the International Finance Corporation. The focus is on raising further capital from development finance and institutional investors.

Growthpoint Student Accommodation REIT enjoys a R2 billion portfolio of seven properties that are 99% let. Student accommodation is an important asset class and two further properties are being developed. Like in the healthcare portfolio, specialist financing is available. A great example is the R550 million social loan from Standard Bank for funding for students from lower-income communities.

Lango Real Estate is focused on assets in Nigeria and is a successful, dividend-paying operation. It is busy with its second fundraising round and is even targeting a listing on the London Stock Exchange in the next three years.

Other stuff you should know

Growthpoint’s weighted average interest rate on local debt is 7.9%. After including cross-currency interest rate swaps and foreign-denominated loans, it decreases to 6.0%. Both those numbers are slightly higher than at the end of December 2021, reflecting the higher yield environment.

On the renewable energy front, Growthpoint is targeting 32MW of solar power by the end of FY23. 12.9MW has already been achieved across 19 sites.

Outlook

South African retail and industrial properties are mostly on the mend but things are still difficult. The office portfolio is in serious trouble. The V&A Waterfront is a gem that is set to bounce back as tourism returns to our beautiful country.

In the international listed groups, Capital & Regional is on track to resume dividend payments. Growthpoint Properties Australia is described as a “standout performer” which is obviously good. Globalworth is paying lower dividends than Growthpoint would like as the fund is retaining surplus cash on the balance sheet. Growthpoint wants to “unlock value” from that investment which could mean anything, really.

Growthpoint’s FY22 results will be released on 14 September and the fund pays dividends twice a year of 75% of distributable income. As you consider your investments in this sector, keep in mind what Growthpoint is telling you. This is the broadest possible look at local property conditions.

Who’s doing what this week in the South African M&A space?

Marylou Greig
-
0
Who’s doing what this week in the South African M&A space?

Exchange Listed Companies

African Infrastructure Investment Managers (Old Mutual), as part of a consortium which includes Royal Bafokeng Holdings and SUEZ SA, has acquired EnviroServ from Rockwood Private Equity for an undisclosed sum. EnviroServ is the largest private waste management business operating in sub-Saharan Africa.

The results of the mandatory offer to Bauba Resources minorities show the offer was accepted in respect of 79,412,185 shares, constituting 10.59% of the company’s total issued share capital. The R0.42 per share offer was a joint firm intention by Raubex acting in concert with Pelagic.

Texton Property Fund via its 50% held joint venture Inception Reading, has entered into an agreement to dispose of Broad Street Mall in Reading, UK for a headline consideration of £57,5 million (R1,11 billion) in cash.

Afine Investments has acquired Glomor Three, a holding company for two petrol station properties. Glomor is owned equally by Petroland and Terra Optimus who will receive in aggregate 8,54 million Afine shares and R2 million in cash. The properties are in Randfontein and White River and have long leases with Engen and Sasol respectively.

Belvedere Resources has acquired a majority stake (347,945,097 shares) in Buffalo Coal at $0.001552 per share from exiting private equity fund Resource Capital Fund V. In addition to the $540,000 paid for the stake, Belvedere will also assumed a US$27 million convertible loan with the maturity date of June 2023.

Aveng this week issued a cautionary announcement to shareholders informing them that it was in advanced negotiations to dispose of Trident Steel, a division of Aveng Africa. The disposal is in line with Aveng’s 2018 strategy of disposing assets which are deemed non-core to the company. The proceeds from the transaction will be utilised to settle remaining external debt in South Africa, create further liquidity and strengthen the financial position of Aveng.

Unlisted Companies

UK-headquartered Woven Solutions has scaled its presence in South Africa with the acquisition of a majority stake in SA Commercial, a BPO provider based in Cape Town.

Kasada, the South African-based investment platform, has announced the acquisition of the Umubano Hotel in Kigali, Rwanda. The hotel will be rebranded and redeveloped into a 100-key Mövenpick hotel.

MFS Africa, a pan-African digital payment company, headquartered in Johannesburg, has raised US$100 million in equity and debt funding in a series-C extension round led by Admaius Capital Partners with participation from Vitruvian Partners and AXA Investment Managers, among others.

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

Who’s doing what in the African M&A space?

Marylou Greig
-
0
Who’s doing what in the African M&A space?

DealMakers AFRICA

AIM-listed Wentworth Resources, the Tanzania-focused natural gas production company has reached an agreement to acquire a 25% interest in the Ruvuma gas project in Tanzania. Scirocco Energy will sell the stake for an initial cash payment of US$3 million due on completion with further deferred and contingent cash payments of up to $13 million dependent on certain development and production milestones.

Egybelg (Egyptian Belgian Co.) a Cairo-based consumer goods firm manufacturing and distributing bakery goods, has been acquired by Savola Foods, a subsidiary of Saudi-listed Savola Group. The EGP622 million deal is part of Savola plans to invest EGP1,7 billion in Egypt over the next few years.

Kasada, the South African-based investment platform, has announced the acquisition of the Umubano Hotel in Kigali, Rwanda. The hotel will be rebranded and redeveloped into a 100-key Mövenpick hotel.

Chari, a Moroccan-based FMCG and financial services platform, has acquired Diago, a retail app operating in Abidjan, Côte d’Ivoire. The deal is part of Chari’s plan to digitise the retail value chain in Francophone Africa.

Nigerian fintech CredPal has received an undisclosed investment from Egypt-based VC fund The Cairo Angels Syndicate. CredPal provides a platform for users to buy anything and pay for it in instalments across online and offline merchants by providing them with instant access to credit at the point of checkout.

Egypt-based DXwand, a conversational AI tool assisting businesses turn conversations into growth insights, has closed a pre-series A investment round of US$1 million. The round was led by Huashan Capital with commitments from angel investors. The funds will be used to accelerate growth across the region, scale its market share and accelerate its AI research.

British International Investment and Symbiotics, have partnered to launch a US$75 million Green Basket Bond which will accelerate the origination and funding of green projects through MSME banks. The green lending programme is structured to support small-scale green projects across Africa, South and Southeast Asia.

d.light, a global innovator of solar-powered projects, and Solar Frontier Capital have jointly established a US$238 million financing vehicle Brighter Life Kenya. The off-balance sheet vehicle will provide d.light with flexible working capital, enabling it to provide finance to customers for a range of affordable and transformative products that drive quality-of-life improvements.

DealMakers AFRICA is the Continent’s M&A publication
www.dealmakersafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
-
0
Weekly corporate finance activity by SA exchange-listed companies

Castleview Property Fund has issued 3,631,378 new company shares in terms of its scrip distribution alternative retaining R16,74 million in new equity. The company’s total issued share capital now consists of 41,042,547 ordinary shares.

The JSE published the names of companies who have failed to submit provisional reports within the three-month period as stipulated in the JSE’s listing requirements. They are: Visual International, Chrometco, Sable Exploration and Mining, Luxe and African Dawn Capital. If provisional reports are not submitted before June 30, 2022, their listing may be suspended.

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 836,073 shares at an aggregate cost of A$3,76 million.

This week British American Tobacco repurchased 2,130,000 shares for a total of £74,35 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 6,970,000 shares for a total consideration of £34,76 million in terms of its existing buyback programme which is expected to end in August 2022.

Three companies issued or withdrew cautionary notices to shareholders this week. The companies were: Aveng, Chrometco and Onelogix.

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

1...169170171...194Page 170 of 194

Focuses on making market news and investment concepts accessible, understandable and fun!

Ghost Mail is free to read

SUBSCRIBE TODAY

Partner with Ghost Mail

CONTACT US

© Ghost Mail

Verified by MonsterInsights