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Thungela: the lump of coal you wanted for Christmas

The Finance Ghost
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Thungela: the lump of coal you wanted for Christmas

This year, Thungela is up over 84%. In early March, it was trading 8x higher than the levels after the unbundling in June 2021. For those who were happy to invest in coal, this has been far more lucrative than the lump Santa leaves under the tree for the naughty kids. This is the lump you wanted!

The maiden dividend per share is R18.00, which is particularly ridiculous when you consider that Thungela closed below R22 per share immediately after the unbundling. Those who bought in right at the beginning will have almost the entire investment returned to them through this dividend.

The empowerment partners to the structure (the SACO Employee and Nkulo Community Partnership Trusts) will receive R273 million in dividends. This could be life-changing stuff for those involved and I hope that the cash will be applied in such a way that it has a lasting impact.

To describe this business as “cyclical” would be the understatement of the decade. Even with pro-forma numbers for 2020 (which is important as the 2020 numbers on an unadjusted basis aren’t comparable at all as they only include one out of seven operating mines), revenue jumped 45% year-on-year.

Adjusted EBITDA margin was 38% in 2021, as the group managed to cut costs by R3 billion despite adding R8 billion to revenue.

Profit for the year ended December 2021 was R6.9 billion and the balance sheet had R8.7 billion in net cash at the end of 2021.

The scary thing is that it could’ve been even better, but Transnet Freight Rail continues to let the team down with poor performance. It doesn’t help us much to mine all the coal in the world unless our government can help the private sector take the stuff to the ports and export it. In response, Thungela prioritised higher quality coal so that it could send the highest margin product on the trains that were available.

Thungela describes the Transnet problem as being “transient” which sounds far too similar to Jerome Powell describing inflation as “transitory” and we all know how well that is working out in the US.

The company expects thermal coal prices to remain juicy in 2022 thanks to supply-demand imbalances in the market. With a cash-flush balance sheet, Thungela is able to either invest in internal projects or make external acquisitions. Sustainable capital expenditure for 2022 is expected to be between R1.6 billion and R1.8 billion. Strategic projects will need between R100 million and R200 million in 2022, increasing to between R700 million and R900 million by 2024.

We can only imagine what might be possible if we had a working railway system.

Alexander Forbes attracts a major investor

The Finance Ghost
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Alexander Forbes attracts a major investor

Alexander Forbes closed 24.5% higher on Friday on the news of a new strategic shareholder coming onto the register.

Prudential Financial, listed on the New York Stock Exchange (NYSE), is acquiring a 15.1% stake in Alexander Forbes (net of treasury shares) from Mercer Africa, a subsidiary of Marsh McLennan Companies Incorporated, which is also listed on the NYSE. That’s a bit of a mouthful, I know.

Don’t make the mistake of confusing this with South African company Prudential, which has subsequently rebranded to M&G Investments. The two are unrelated.

Prudential Financial is 145 years old and has more than USD1.5 trillion in assets under management. The company has a USD350 million strategic investment partnership with LeapFrog Investments to invest in high-growth markets for financial services in Africa. South Africa isn’t really a high-growth market, so there’s a broader African investment thesis going on here. Alexander Forbes services multinational employers across 32 African countries.

We should at least give ourselves a pat on the back for having a solid financial services industry. One major international shareholder is selling and is being replaced by another, which is a show of faith in our country.

To finish thoroughly confusing you with all this prudence going around, the deal with Mercer is subject to approval from the Prudential Authority within the SARB. There are other regulatory hurdles to jump as well, because the South African financial services space is extremely highly regulated (generally a good thing).

In addition to this transaction and assuming it goes ahead, Prudential Financial will make a partial offer to shareholders such that its stake in Alexander Forbes can increase to up to 33% of the issued shares. This is less than 35% and won’t trigger a mandatory offer for all the remaining shares.

ARC Financial Services has already said thank you, but no thank you, so it will be holding on to its 40.6% stake (net of treasury shares) in Alexander Forbes and declining any future offer. The ARC structure is extremely complicated. As a reminder, ARC Investments (the listed ARC company) holds a 49.9% stake in ARC Financial Services via the ARC Fund. If you hold ARC shares, you indirectly hold a stake in Alexander Forbes.

The closing price on the market on Friday was R4.68 and Prudential Financial will pay Mercer R5.25 per share, adjusted for any dividends paid by the company prior to closing. This price is a 26% premium to the 180-day volume weighted average price (VWAP), a meaty premium for a significant minority stake.

Texton is pushing its indirect offshore strategy

The Finance Ghost
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Texton is pushing its indirect offshore strategy

Texton has released financial results for the six months to December 2021. The company has walked a difficult strategic road over the years and is now pursuing a strategy of investing in the US market via property funds.

The direct portfolio is valued at R3.3 billion as at 31 December 2021 and the indirect investments amount to R189.2 million. The company describes its strategy as “reinvesting heavily into direct property investments” (in SA and the UK) and investing in high-quality property investments in developed markets with “best-in-class partners” (the US strategy).

Property revenue fell by 29.3% and distributable earnings fell by 56.9% in this period. Headline earnings per share (HEPS) increased by 39.9% though to 15.43 cents. A dividend per share of 10 cents has been declared.

A critical metric in any property fund is net asset value (NAV) per share. This decreased by 1% since December 2020, now at R6.03 per share. The closing price on Friday of R3.75 (up 16.8% on the day) reflects a discount to NAV of 38%.

The vacancies in the SA portfolio increased to 16.6% from 10.5% at 30 June 2021, primarily due to the Transnet Ports Authority not renewing the lease at 30 Wellington Road. Collections in the SA portfolio were 93% and the UK portfolio achieved 100% collections.

I’m personally not convinced by Texton’s US strategy of investing in other funds, as the alternative would be to buy back Texton shares at a deep discount to NAV. Instead, Texton has invested USD4.4 million in the Blackstone Real Estate Income Trust iCapital Offshore Access Fund SPC (and breathe…) and USD7.0 million was invested in Starwood Real Estate Income Trust Offshore Fund SPC.

Texton has also made a GBP2.5 million commitment to an ESG-focused last mile logistics fund in the UK and Western Europe. The key differentiator is that the fund focuses on environmentally friendly solutions for the e-commerce sector.

Texton has identified two further funds to invest in and hopes to conclude the investments by 30 June 2022.

There were some buybacks at least, with just over 3 million shares repurchased at an average of R3.14 per share during the period. That’s tiny compared to the offshore investments, so my comment stands re: buybacks vs. investments in offshore funds.

Over the period, the company sold and transferred four of the eight properties held for sale, realising R398.4 million in cash in the process. Long-term debt was reduced by R127.8 million but only R26.5 million is a permanent decrease. The loan-to-value ratio has improved to 31.2%.

Texton has R342 million cash on hand, which I suspect will mostly find its way into other offshore property funds.

The share price is up around 58% in the past 12 months. The discount to NAV remains substantial and returning cash to shareholders would probably go a long way towards closing it. Texton has other plans, so we will have to see how that pans out.

Unlock the Stock: Astral Foods and Trellidor

The Finance Ghost
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Unlock the Stock: Astral Foods and Trellidor

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Companies do a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

I co-host these events with Mark Tobin, a highly experienced markets analyst who combines an Irish accent with deep knowledge in the Australian market (I know, right?) and the team from Keyter Rech Investor Solutions.

You can find all the previous events on the YouTube channel at this link.

On 17 March 2022, we hosted Astral Foods and Trellidor on the platform. Astral Foods is a mid-cap poultry business that operates in a tough industry known for low margins and high rewards when things go well. Trellidor isn’t just a security door company – this small-cap business has diversified into premium products like shutters and blinds as well.

Sit back, relax and enjoy this video recording of our session with Astral Foods and Trellidor:

Hyprop’s balance sheet is on the mend

The Finance Ghost
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Hyprop’s balance sheet is on the mend

Shopping centre REIT Hyprop has released results for the six months to December 2021. You know it’s been a tough time for a company when the first two bullets of the announcement are related to the balance sheet.

Since June 2021, Hyprop has reduced borrowings by around R1 billion. It held on to R876 million in equity via the 2021 dividend reinvestment plan, a clever way for a REIT to hang on to cash.

If you read further, you’ll see why all the focus has been on the balance sheet. The loan-to-value ratio was at a dangerously high 45.8%. It has since been reduced to 41.5%.

In case you haven’t noticed or don’t get out much, the shopping centres are busy again. I’m not surprised to see a 21% growth in like-for-like distributable income vs. the comparable period. Importantly, tenant turnover and trading density in the South African portfolio has reached pre-Covid levels.

The group is busy with a rework of the portfolio in Europe. The Delta City property in Serbia was disposed of and Hyprop is in the process of acquiring the four remaining Hystead assets for EUR193 million, subject to shareholder approval.

Assuming this goes ahead, Eastern Europe will represent around a third of Hyprop’s investment portfolio.

Net asset value (NAV) per share has decreased to R58.97, so yesterday’s closing price of R32.08 is a substantial discount of 45.6% to the NAV.

The share price fell 3% in response to this announcement and is up just 12% in the past year, so Hyprop hasn’t experienced the significant recovery that some other property counters have achieved.

Metair’s earnings now exceed 2019 levels

The Finance Ghost
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Metair’s earnings now exceed 2019 levels

Metair generates 49% of its revenue from automotive batteries, 47% from automotive components and 4% from industrial and non-automotive products. 61% of the revenue is generated in South Africa, so there’s a solid offshore component – 28% in Turkey and the UK and 12% in Romania.

Metair has released results for the year ended 31 December 2021. They paint a pretty picture, with revenue up 23% and EBITDA up 80%.

The numbers get bigger and more exciting the further down you go, with HEPS up 139% for the year to 354 cents. That’s higher than the 336 cents achieved in 2019 before the virus-that-shall-not-be-named attempted to ruin our lives. It’s Friday and I’m allowing myself one Harry Potter reference for the day.

The dividend per share of 90 cents is 20% higher than last year but still well below the 120 cents per share declared in 2019. The earnings may have beaten pre-pandemic levels but the company isn’t ready to pay those levels of dividends.

A 39% drop in cash from operations is a good explanation for why the payout ratio hasn’t recovered. Working capital investments, unusual costs driven by supply chain disruptions and investments for new customer models and facelifts were to blame for the free cash flow pressure.

Importantly, group return on invested capital (ROIC) improved to 16.4%, well ahead of the target of 13.4%. Metair needs to invest shareholder cash but achieves good results when it does.

After a record performance in the energy storage business in 2021, Metair will hope that the automotive components business will have a year of fewer supply chain disruptions.

The share price rallied 5.9% in response to this result. Metair is up 55% in the past year but has gained just 11% in total over the past five years.

Resilient wants to close the discount further

The Finance Ghost
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Resilient wants to close the discount further

With a market cap of over R23 billion, the market pays attention when Resilient releases results. To give some context to that number, Growthpoint’s market cap is just under R46 billion and shopping centre REIT Hyprop (which also released results yesterday) has a market cap of around R11.4 billion.

Resilient is a retail-focused REIT, so the pandemic did a thorough job of testing whether the fund is appropriately named. The group received R12.6 million from its insurers for pandemic cover, an amount which was not previously accrued. A claim of R13.7 million has been received for the social unrest, with R3 million still outstanding and not accrued for.

In the six months to December 2021, Resilient collected 97.1% of rentals. Covid-related discounts fell from R43.7 million in the comparable period to R21.5 million in this period.

The REIT owns 27 retail centres in South Africa and achieved a 3.7% valuation increase in the portfolio in this period. The average annualised property yield was 8.2% at December 2021.

The company has changed its year-end to December, so this “year” is only six months vs. the prior period which was a full calendar year. Comparing the movement in key metrics to the prior period is thus pointless.

Notably, Resilient’s net asset value (NAV) per share is R65.03. Yesterday’s closing price of R57.90 is a discount of just 11% to the NAV. Although this is a modest discount by many standards on the JSE, Resilient has appointed expert property sector advisors Java Capital to suggest strategies to unlock the discount.

One initiative that is already underway is to unbundle a portion of the shareholding in Lighthouse to Resilient shareholders. Regular InceConnect readers will recognise Lighthouse as a JSE-listed property fund that focuses on Europe. The recent strategic push of that fund has been into France. After the unbundling, Resilient will still hold a 30.7% stake in Lighthouse.

A dividend of 226.62 cents per share has been declared. This is a yield of 3.9% on yesterday’s price. Although it is a “final” dividend because of the change in year-end, it only represents distributable earnings achieved over six months.

Altron prints a smart disposal

The Finance Ghost
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Altron prints a smart disposal

Altron is in a “value unlock” phase of its life. The best indicator of this is when a company has a “2.0” strategy. You only have such a strategy when the 1.0 version of yourself wasn’t terribly popular.

Altron unbundled Bytes at the end of 2020 and the divergence in share price performance has been breathtaking, with Bytes as a strong performer and Altron as a significant disappointment for shareholders. I was a shareholder at the time of the unbundling as I had bought into the turnaround plan, so I’ve seen the divergence of the stocks in my own portfolio.

While Bytes is busy blazing a trail in the UK market, Altron is trying to focus on its core ICT businesses, so anything outside of that strategy needs to be sold off if the company can get a decent price.

The latest news is that Altron Document Solutions (ADS) is being sold to Xerotech, a subsidiary of Bi-Africa Investment Holdings. The deal includes ADS’ subsidiary in the Eastern Cape, Genbiz.

This is an office printer business that has been a strategic partner for Xerox in the sub-Saharan Africa region. The business also distributes other printing-related equipment. This is a capital-intensive model that is not a good fit with Altron’s core operating model.

The ADS business (excluding working capital) has been valued at R20.1 million for this transaction. There’s a debtors’ balance of R346 million which will be collected by Xerotech and paid across to Altron. The inventory balance of R316 million is a bit more complicated, as 49% of it is considered “not slow moving” and will be paid off to Altron over three months, with the rest paid when sold at the lower of cost or 90% of net realisable value as at the effective date. The various liabilities in the business will be settled by Altron (R191 million as at 31 August 2021).

Genbiz is much simpler. The value for the 57.7% stake has been valued at R14.6 million. There’s also a shareholder loan from Altron of R9.9 million that will be repaid in four monthly instalments.

There are also amounts payable for the book values of computer equipment etc. The total price for the deal has been capped at R715 million (the amounts disclosed above are R706.6 million in total).

Altron’s net cash inflow will be somewhere around R520 million after settling the liabilities. The net book value of the business at 31 August 2021 was R538 million, so the deal has effectively been done at nearly net book value. The net cash will be used to reduce Altron’s debt.

For the six months to August 2021, ADS (including Genbiz) generated interim revenue of R500.1 million, EBITDA of R5.2 million, operating profit of R0.4 million and an attributable loss after tax of R11.2 million.

The deal will close by 31 May, with a few operational hurdles to clear along the way
As an Altron shareholder, I’m very happy to see this business go out the door. Anything with an EBITDA margin of 1% isn’t something I want to own.

Disclaimer: I hold shares in Altron

ARC Investments makes it Rain

The Finance Ghost
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ARC Investments makes it Rain

In the six months to December 2021, ARC Investments’ intrinsic investment value in the ARC Fund grew by 16.8% to nearly R13.5 billion. The net asset value (NAV) per share reported under IFRS rules increased by 16.5% to R10.31, so yesterday’s closing price of R6.16 is a discount to NAV of around 40%. This is higher than the discount seen in some other investment holding companies on the JSE.

ARC Investments holds a 99.95% stake in ARC Fund. The ARC Fund holds 49.9% in ARC Financial Services Holdings, which in turn holds 75% in ARC Financial Services Investments. ARC Fund also holds 100% in a portfolio of diversified investments. To make this diagram even more complicated, ARC Fund also holds 7.2% in ARC Investments.

This is so tricky to understand that I’ve included a screenshot from the interim results below:

ARC investments (the third block in the middle) is the listed company that we are talking about here.

The annualised growth in the portfolio value of 36.2% is way above the modest performance participation hurdle of just 10%. For that reason, a provisional amount of R311 million has been recognised for the issue of performance participation shares to UBI. These types of “management fees” (in whatever form they take) are why these structures trade at a discount to the underlying portfolio value.

The plan is to relook at the fee structure by the time of the next annual general meeting. In the meantime, UBI is laughing all the way to the bank with a performance structure that has had no shortage of critics in the market.

The group refers to “early-stage businesses” that comprise 53% of the ARC Fund’s intrinsic portfolio value. These aren’t exactly small startups run by your friendly local hipster, as this category includes the likes of Rain, TymeBank, TymeGlobal and Kropz. More on those to come. Examples of established businesses in the portfolio would include Alexander Forbes and Afrimat.

Notable portfolio moves included R496 million raised through the disposal of shares in Afrimat (ARC Fund still has a 10% stake in Afrimat) and another R115 million through the sell-down of property business Majik. Much of this cash landed in the bank and stayed there, as the cash in ARC Fund increased from R339 million at 30 June 2021 to R538 million at 31 December 2021.

Cash that did leave the building included R182 million invested in Kropz Group, R64 million in ARCH Emerging Markets Funds and R56 million in Rain.

In the Financial Services portfolio, ARC Financial Services Holdings acquired 37.33% of Crossfin for R415 million and invested a further R257 million into TymeBank and TymeGlobal. The ARC Fund has an effective look-through interest of 25% in TymeBank.

The largest individual exposure is Rain, contributing 24.1% of fund value. The company broke even in the last 12 months and has accelerated quickly from there, with an expectation of R1 billion EBITDA for the year ended February 2022. The company is participating in the spectrum auction, with the result outstanding at the time ARC Investments finalised its report. During the opt-in round of the auction, Rain bid R1.15 billion.

The second largest exposure is Kropz Plc (15.2% of fund value), a phosphate developer with an advanced development-stage phosphate mine in South Africa and exploration assets in the Republic of Congo. Having finally made significant progress at Elandsfontein, ARC Fund recognised a R860 million fair value gain on this asset.

The third asset I’ll highlight is TymeBank, which contributes 10.1% of fund value. The bank has 4.2 million customers with 1.2 million active accounts. TymeBank recently attracted investment from Tencent and the CDC, which allowed ARC Investments to recognise a valuation uplift. The strategy includes the roll-out of similar banking operations in other emerging and frontier markets, with the technology white-labelled by TymeGlobal. Philippines is the first market outside of South Africa where the TymeBank technology will be launched in mid-2022.

There are many more companies in the portfolio. If you are interested in this group, you should refer to the full result and read carefully through the list of portfolio investments. It’s not easy finding the right website of the listed company, so here’s the link.

The share price is still well below its original listing price, having lost 26.7% of its value since 2017. Over the past year, the price has jumped 62.5%.

Growthpoint really wants you back in the office

The Finance Ghost
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Growthpoint really wants you back in the office

Growthpoint, the largest South African primary JSE-listed REIT, has released its results for the six months to December 2021. With a portfolio of 421 directly owned properties in South Africa and stakes in healthcare and student accommodation funds, it’s a great barometer for the overall property market in South Africa (other than one-bedroom flats in Fourways).

Growthpoint also has substantial investments in Australia and in London. The value split is 56.9% South Africa and 43.1% offshore.

Perhaps the most iconic investment is a 50% stake in the V&A Waterfront, which suffered a significant write-down in value in this period as Covid restrictions continued to bite. The beautiful property is highly reliant on tourism.

The overall property sector staged a huge comeback in 2021 after a terrible time during the worst of the pandemic. Office properties have continued to struggle though, with elevated vacancies that have continued to deteriorate. Growthpoint’s office portfolio vacancies increased from 19.9% to 21.2% in this period.

Growthpoint’s portfolio mix means that revenue fell by 4.8% in this interim period and headline earnings per share (HEPS) fell by 23.4%. The movement in HEPS deserved a deeper look – I discovered that this was driven by huge swings in the investment property valuations.

The better measure is probably funds from operations per share, which increased by 17.4% to 77.40 cents. This is significantly higher than HEPS of 56.55 cents. The dividend per share increased by 5.1% to 61.5 cents.

The loan to value ratio improved from 40% to 39.2% and the interest cover ratio increased from 2.9x to 3.0x.

The net asset value (NAV) per share increased by 6.2% to R21.48 per share. Yesterday’s closing price of R13.23 means that Growthpoint is trading at a discount to NAV of around 38.5%.

Growthpoint needs tourists to return to the V&A and the workforce to return to offices. I think one of those is a certainty and the other is never going to be the same again.

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