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Ghost Bites Vol 14 (22)

The Finance Ghost
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  • Tiger Brands released results that the market seemed to find glimmers of hope in, with a 4.3% gain on the day to recover some of the steep losses in recent months. I remain as bearish as ever on the business, with pressure on volumes and a decrease in profitability. I’ve written a feature article on the result here.
  • Bidcorp gave shareholders an update covering the ten months to April 2022. This update is full of fascinating insights into trading conditions in the hospitality industry. There are even insights related to the hybrid working trend and the impact on offices. I wrote about the update in this feature article.
  • RFG Holdings (Rhodes Food Group) released earnings for the six months to 3rd April 2022. Yes, that’s a rather odd reporting calendar. Group revenue increased by 20.9% and headline earnings increased by 32.5%. That all sounds amazing until you notice “normalised headline earnings” only growing by 3.2%. The revenue number does include the acquisition of the Today pie business, but there’s a genuinely strong underpin here in categories like fruit, jams and other. International turnover was a major contributor (up 53%) as export volumes grew by 32.7%. The problem is that if you exclude the insurance proceeds for loss of profits during Covid, as well as restructuring costs, normalised operating profit margin declined from 7.6% to 6.5%. This is the story of inflation currently, with strong sales growth and a far less exciting impact at net profit level. A growing balance sheet drove a higher net debt number. The focus now is on managing cost pressure on margins, while capitalising on demand for canned goods.
  • Grindrod Shipping announced results for the three months to March 2022. The quarterly reporting is driven by the company’s listing on the Nasdaq. The group is still making plenty of money, with revenue of $110.3 million and adjusted net income of $29.8 million. There was $106.5 million in unrestricted cash at the end of the period. Headline earnings per share is $1.55 for this quarter, a spectacular increase year-on-year from $0.12. A dividend of $0.47 per share has been declared. The share price is up nearly 55% this year and has jumped 254% in the past twelve months!
  • Glencore has a reputation for being a rather wild establishment. With a “colourful” history, the group has recently cooperated with investigations by authorities in the US, UK and Brazil into past activities related to bribery. There were separate US investigations into market manipulation. Glencore must pay penalties of $700 million to resolve bribery investigations and $486 million to settle the market manipulation issue. There’s another $40 million payable to Brazilian authorities. There are further claims brought against Glencore Energy by UK authorities, which Glencore will plead guilty to. In summary, Glencore had recognised a provision of $1.5 billion in the 2021 financials for these matters and doesn’t expect the final amount to be materially different. To give context to this number, Glencore made $6.9 billion in headline earnings in FY21.
  • Mediclinic has released results for the year ended March 2022. Revenue increased by 8% in this period and is 5% higher than pre-pandemic levels. Thanks to the impact of operating leverage, adjusted EBITDA increased by 22% in FY22 and the margin increased from 14.2% to 16.1%. Comparing profitability to pre-pandemic levels is insightful, with adjusted EBITDA up 1% and adjusted operating profit flat vs. FY20. The cash performance in this period was encouraging, with cash conversion of 127% (i.e. a catch up on working capital from the prior year) that increased cash from GBP294 million to GBP534 million. Headline earnings per share was 19.0 pence, up from 9.6 pence the prior year. The proposed final dividend is 3.00 pence per share. For pre-pandemic context, it was 3.20 pence in FY20. In a separate announcement, it was noted that a non-executive director has acquired shares in the group.
  • Vunani has released its results for the year ended February 2022. Revenue from continuing operations increased by 17% and profit from continuing operations increased by 257%. HEPS jumped from 7.2 cents to 34.7 cents. This puts the group on a trailing Price/Earnings multiple of around 8x.
  • MiX Telematics released a trading statement for the year ended March 2022. HEPS is expected to be between 36% and 55% lower than the prior year, mainly driven by planned increases in operating costs to drive growth initiatives.
  • Value Capital Partners has mopped up more shares in education group ADvTECH, investing another R4.7 million or so in the group.
  • Hosken Consolidated Investments (HCI) expects HEPS to be at least 345.2 cents, an increase of at least 20% on the prior year. Guidance of “at least 20%” is the minimum disclosure required by the JSE in a trading statement, so the final answer may well be higher.
  • Reunert has released its financials for the six months to March 2022. Slow and steady is the name of the game, with revenue up 11% and HEPS up just 1%. The dividend per share is up 7%, which is somewhat more exciting. Growth was impacted by a three-week wage strike in the Electrical Engineering segment in the first half of the year, which reduced output capacity by 14%. Reunert recently announced the acquisition of Etion Create from JSE-listed Etion Limited for R168 million on a cash-free and debt-free basis. The free cash flow outlook for FY22 is positive, with an expectation that stock levels have now stabilised.
  • In remarks made at the AGM, the Chairman of Hulamin noted that demand for aluminium flat rolled products exceeds supply and that the order book is currently firm. This means that demand is likely to remain strong for the rest of 2022.
  • Cell C (part of listed company Blue Label Telecoms) has launched its bond process for the recapitalisation of the company. Debt of R7.3 billion will be compromised by offering 20 cents to the rand to the lenders. In other words, they will only get back 20% of their money if this goes ahead. A meeting of noteholders has been called for 20th June 2022.
  • Shareholders in Universal Partners should note that the mandatory offer from Glenrock is not fair and reasonable, as it is 33% lower than the fair value per share based on Deloitte’s report in the reply circular. If you want to see an example of such a document in an offer process, you can find it here.
  • Reinet Investments has completed its share buyback programme that began on 28 March 2022, with 2.5 million shares repurchased for a total of R810.2 million. Reinet’s market cap is around R62 billion.
  • Brikor released a trading statement for the year ended February 2022. HEPS has decreased by between 42% and 52%, with this news driving a 9% drop in the share price.

Bidcorp is ready for summer

The Finance Ghost
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Bidcorp is ready for summer

Bidcorp is a global foodservice group that offers a genuine rand hedge. The group has grown to cover five continents and can be bought right here on the JSE. Bidvest unbundled Bidcorp back in 2016 during a frothy time on the local market, which is why the share price gain since listing is just 8.2%, a snail’s pace compound annual growth rate (CAGR) of 1.3%. Between mid-2016 and the start of the pandemic, the CAGR was around 3.4% which isn’t exciting. This is another great example of why I tend to avoid new listings, as the entry price is often too high.

A useful trait of Bidcorp is that the company gives us insights into the hospitality industry and where consumers are spending their money. There are also property insights, like the hybrid working trend having hit office catering businesses which are only tracking 60% – 70% of pre-Covid levels.

In the last few months, group sales were running at between 100% and 120% of 2019 levels. Impressively, gross profit margin has “held up well” in this period despite input costs, assisted by the improved mix of the customer base and strategic buying ahead of significant price increases. The announcement notes that limited capacity in the wholesale environment gives an opportunity to “amicably part company” with customers that are less profitable. In other words, Bidcorp may use the current market pressures to get out of less attractive customer relationships, which could have a negative short-term sales impact but is the right decision over the long term.

This information comes from an update covering the ten months to April 2022. This period has seen tough inflation and fascinating labour shortages, with the announcement noting that restaurants in some countries are trading reduced hours and hotels have effectively mothballed multiple floors because they can’t find housekeeping staff! This is quite something when you consider the environment we have in South Africa of record unemployment.

Operating costs as a percentage of net revenue were 19.4%, which is still higher than the pre-Covid level of 18.8%. EBITDA margin in this period of 5.3% is up year-on-year from 4.3% but below pre-Covid levels of 5.7%.

Although free cash flow was an outflow of R2.3 billion due to working capital investment, this business is highly seasonal and generates cash at the end of the financial year. The full year result will give more details and I do expect to some some pressure on working capital, as we have seen in nearly every company at the moment.

The group is well within its debt covenants (2.5x net debt to EBIDA and an interest cover ratio of not less than 5x).

Forensic investigations into the Miumi fraud in China are now complete and nothing new has come to light. There are criminal and civil proceedings underway in both Hong Kong and China and Bidcorp hasn’t provided for any recoveries at this stage.

Overall, Bidcorp is looking forward to a European summer with a return of significant travel. Most other geographies are doing well except for China, which depends on an easing of Covid restrictions. The share price is slightly down this year and would benefit from a strong Northern Hemisphere summer period.

Ghost Bites Vol 13 (22)

The Finance Ghost
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  • There has been a fair bit of excitement around Datatec after the company appointed international investment bankers Lazard & Co to assist with a strategic review of the business. When you appoint bankers to help with strategy, they aren’t going to suggest operational improvements – they are going to suggest deals! With the release of a cautionary announcement, Datatec has noted that it is in negotiations regarding a disposal of Analysys Mason. The company also released its results for the year ended February 2022. With so much news around the business, I covered it in this feature article.
  • Bytes Technology Group, which was previously unbundled from Altron, released results for the year ended February 2022. The UK-based software, security and cloud specialist achieved a record set of results with an improved gross margin and a substantial 57% growth in operating profit. Headline earnings per share is up 61%. A gross final dividend of 4.2 pence per share has been declared as well as a special dividend of 6.2 pence per share. The share price closed 2.4% higher at R86.69, down 27% this year as market sentiment has soured towards the tech sector.
  • Balwin Properties has announced a share buyback transaction in subsidiary Balwin Rentals. Balwin Properties currently holds 25% in Balwin Rentals, with 75% held by a company called Yieldex Trading. The portfolio has 215 rental apartments with 94% occupancy and a net operating yield of 9.77%. The deal is structured as a buyback from Yieldex of its 75% stake for R18 million. Over the past three years, the property has appreciated from the discounted acquisition price of R128 million to a current value of R170.7 million. Balwin Rentals currently has a loan to book value ratio of around 73%. The buyback is funded by a loan from Balwin Properties to Balwin Rentals. As there are directors who are common to both companies, this is a small related party deal that required a fairness opinion. BDO Corporate Finance has signed off that the transaction is fair.
  • Coronation Fund Managers has released results for the interim period ended March 2022. Revenue fell by 10.8% and headline earnings per share (HEPS) decreased by 22.2%. The interim dividend is down 12.3%. Coronation expects institutional flows to remain under pressure in line with difficult economic conditions. The reality is simple: asset management businesses depend on the ability of South Africans to save for their futures. Inflation puts that heavily under pressure. When combined with pressure on equity prices, the impact on an asset management firm like Coronation intensifies. Coronation’s share price is down 30% this year.
  • Delta Property Fund has released results for the year ended February 2022. Collections have improved dramatically and Funds From Operations increased by 17.8% despite a 4% decrease in rental income. There are still significant negative fair value adjustments to the portfolio. Loan-to-value is very high at 57% (up from 56.5%), which is why Delta is still firmly a turnaround story. No dividend has been declared at this stage. The auditors have raised an emphasis of matter related to a material uncertainty around going concern status of the fund. In simple terms, this means that the auditors have highlighted that the fund is facing major financial challenges and there is risk of it simply not coming right. The share price fell over 10% in response to these results.
  • Entities linked to Des de Beer are still buying up shares in Lighthouse Properties. Certain Resilient directors also received substantial stakes in Lighthouse from the distribution in specie by Resilient of shares in Lighthouse.
  • Platinum group metals (PGM) and chrome miner Tharisa has closed its deal with The Tharisa Community Trust to acquire the trust’s 6% stake in Tharisa Minerals (Pty) Ltd in exchange for an issue of shares in Tharisa representing around 1.1% of shares in issue. This is a R90 million deal that effectively flicked the B-BBEE shareholder to the top of the structure.
  • African Bank releases results on the JSE even though the shares aren’t listed, as the company issues other instruments in the market. You may recall that this bank was rescued from the dead through a curatorship process to avoid a systemic shock to the local banking system. In the six months to March 2022, African Bank achieved a net profit after tax of R257 million after a net loss in the comparable period of R135 million. Customer advances are higher, impairments are lower and retail deposits are up – all good stuff. The MyWORLD transactional banking product has attracted 967,000 accounts of which 512,000 are funded. Operating costs were slightly lower year-on-year, a very impressive performance. It’s great to see these kinds of numbers from a bank that very nearly disappeared from our landscape.
  • After the very sad passing of David Kan, the founder and CEO of Mustek, Group Managing Director Hein Engelbrecht has been appointed as Acting Group CEO.
  • Sable Exploration and Mining’s deal with Magni Investment Holdings and Lurco Metals is no longer proceeding as conditions precedent were not met. Sable has confirmed that companies have approached it for a potential reverse listing, which means using Sable to acquire assets and quickly achieve a listing of those assets in the process.
  • Despite Sibanye-Stillwater CEO Neal Froneman’s recent remuneration of R300 million making headlines (most of which was in equity awards), over 78% of shareholders voted in favour of the remuneration policy at the company AGM.
  • The listing of Southern Palladium on the JSE was originally planned for 25th May. As the primary listing on the Australian Stock Exchange (ASX) isn’t finalised yet, the date has been pushed out. The company is awaiting a revised listing date from the ASX.
  • Exemplar REIT has released results for the year ended February 2022. The property fund grew its net asset value (NAV) per share by 14.7% to R12.29 and has a loan-to-value of 35.2%, which is a bit high in this environment. The total dividend for FY22 is 117.60 cents. The share price is R9.60 but there is almost no trade in this stock.
  • Investec’s repurchase programme for its preference shares will start on 25th May, with an authority to repurchase a maximum of 5% of preference shares in issue.

Datatec is in the right industry at the right time

The Finance Ghost
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Datatec is in the right industry at the right time

Datatec’s share price ramped up at the end of 2021 as the group announced a strategic review process. After paying a substantial special dividend, the group has kept the market waiting for news on what that strategic review will lead to.

With results for the year ended February 2022 now released, Datatec has reminded the market that it has a solid core business. With all numbers reported in US dollars except the dividend, revenue is up 12.8% and adjusted EBITDA (excluding share-based payments and restructuring costs) is up 16%. EBITDA without the adjustments is up over 30%. Headline earnings per share (HEPS) is up a ridiculous 800%, coming in at 16.2 US cents. The dividend is 11% higher at R1.11 per share.

The underpin to all this is strong demand for networking, cyber security and cloud infrastructure. The recurring income streams in the group have grown and so has the backlog for hardware, a direct result of supply chain pressures globally. Open product orders at the end of the year were around $1.2 billion vs. $467 million the prior year, so there’s a substantial jump here.

It doesn’t seem as though the backlog has driven pricing power though, with gross margin actually decreasing by 20bps to 16.6%.

Moving to segmentals, there was growth across the board. Logicalis is the largest division and offers services like infrastructure, hybrid cloud and related advisory services, growing revenue by 14.2% and EBITDA by 12.9%. Westcon International experienced strong demand in network infrastructure and cybersecurity, with revenue up 11.8% and EBITDA surging 52%. Management consulting business Analysys Mason increased revenue by 23.5% and EBITDA by 8.8%.

The group has left the door open for further announcements related to the strategic review, whilst also confirming that the small Analysys Mason business has been recognised as held for sale. The management consulting business isn’t a natural fit with the rest of the group, so this makes sense to me.

The balance sheet has come under pressure, a trend I’ve seen across the market currently. Excluding lease liabilities, net debt is $35.7 million vs. a net cash position of $53.4 million a year ago. In order to hang on to cash, there will be a scrip alternative to the latest dividend i.e. the ability for shareholders to elect to reinvest the dividend rather than receive cash.

One thing is clear: the supply chain backlog in tech hardware is far from over. For companies like Datatec, this means ongoing demand for products and related services.

Some positives for the rand to hold on to

Andre Botha
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Some positives for the rand to hold on to

Andre Botha, Senior Dealer at TreasuryONE, takes a look at the rand’s recovery last week and the market sentiment around central banks and especially the Fed this week.

Last week was quite exciting, as the rand staged a recovery on the back of an interest rate hike and the credit rating of South Africa being bumped up a notch.

Rand movers

On the international front, we saw Fed Chair Powell reiterate his stance that they will hike interest rates as high as needed to fight the inflation surge. The ECB President Christine Legarde also entered the fray by stating that interest rate hikes are on their way.

Most of the news of late and related market movements have been in anticipation of the moves Central Banks will implement to fight inflation. The MPC of the SARB hiked interest rates by 50 basis points, in a move that was mostly expected by the market. However, the reaction of the rand was fascinating, as the rand moved 15 cents stronger on the back of the hike as we expected that the hike would have been priced in the market and the market would be muted after the decision. We also saw S&P lifting South Africa’s credit rating to “positive” which helped the rand trade a little more robustly in the early part of the week.

Fed Chair Powell stated that they will react aggressively until such a point in time that they see inflation coming down in a clear and convincing way. He also said that while he expects that there could be pain in controlling inflation in the way of higher unemployment and slower economic growth, there are pathways for the pace of hikes to ease a full-blown recession.

We saw the US dollar touch the 1.04 level against the euro after the Powell speech, but since then, it has given up some of its gains.

USD / ZAR:

usdzar24may

The slide in the US dollar has been accentuated further by ECB President Lagarde, who stated that the Eurozone would look to hike rates in June and September while also phasing out its bond-buying program. This caused the euro to flex its fatigued muscles and move to almost 1.07 against the US dollar in anticipation of the rate hikes and hawkish tone struck by the ECB.

EUR / USD:

eurusd24may

This week, some of the momentum of last week will still be in the market – we saw the rand making full use of the weakness in the US dollar and favourable winds from the MPC and S&P, and trade all the way down to R15.65 on Monday.

However, the rand rebounded quite sharply at those levels, which gives us a good idea that any significant move stronger for the rand is likely off the table and that gains below R15.60 will be hard to come by in the short term unless the risk sentiment changes. The data and event calendar is relatively bare this week, with the most noteworthy release being the FOMC minutes on Wednesday.

The market will be looking for clues to the mindset of the Fed, and we could see the US dollar on the front foot post the release should the view of the Fed minutes stay hawkish. This could push the rand a little bit higher this week, and we could see the rand test the upper reaches of the R15.90s.

For more information on TreasuryONE’s market risk, corporate treasury and other services, visit their website.

DealMakers AFRICA – Analysis Q1 2022

DealMakers
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DealMakers AFRICA – Analysis Q1 2022

Marylou Greig

The COVID-19 pandemic has turned many an industry on its head, and none more so than that of dealmaking and private equity. But the disruption caused has resulted in some positive outcomes for investors, with this industry adapting to the new normal surprisingly quickly.
The total value of deals captured by DealMakers AFRICA (excluding South Africa) for Q1 2022 was US$9,7 billion (an increase of almost three-fold that of Q1 2021) off 196 transactions. This jump is attributed to the acquisition by international Swiss shipping line, MSC Mediterranean Shipping of the African transport and logistics business of Balloré SA for US$6,3 billion.

North and West Africa were the two regions with the greatest deal activity (each with 30% of deals recorded), with West Africa receiving the lion’s share of investment at US$1,86 billion. East Africa made a slight recovery, drawing just 23% of total deal volume in Africa (see analysis table below).

While human interaction is a key part of the ability of fund managers to raise capital, online fundraising and parts of due diligence have become workable tools in this digital revolution accelerated by the pandemic. Africa continues to be fertile ground, with attractive investment opportunities for investors in search of yields. The difficulties of the past two years have presented good deal opportunities, especially among companies in need of investment to rebuild and be profitable and has accelerated the adoption of e-commerce.

The importance of private equity investment on the continent is clearly reflected in the Q1 2022 numbers with deal activity outstripping previous years (see below). Private equity continues to grow its presence, representing 70% of deal activity on the continent (excluding South Africa) during the first three months of this year. The value attributed to the 137 private equity transactions of US$1,3 billion is not a true reflection of the aggregate investment, as the majority of PE deals are scarce with financial information.

Interestingly, according to the 2022 Preqin Global Private Equity Report, the total size of the global private equity and venture capital asset pool is above US$5 trillion, and is expected to swell to more than $11 trillion within the next four years. However, current global allocation of this asset pool to Africa is well below 1% and falling in real terms.

Looking forward, geopolitical turmoil in Europe (the main trading partners with Africa) and higher oil and energy costs related to the war in the Ukraine will likely cause increased inflation and supply constraints, dragging on growth. However, provided that rising prices don’t flatten demand and send economies into recession, Africa’s M&A activity should continue to perform well.

Data source: DealMakers AFRICA

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za

DealMakers AFRICA is Africa’s corporate finance magazine
www.dealmakersafrica.com

Key trends likely to shape the M&A landscape in 2022, and beyond

DealMakers
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Key trends likely to shape the M&A landscape in 2022, and beyond

WARRICK HASKELL

It should come as no surprise that the M&A space, both domestically and internationally, has been characterised by caution over the past 12 to 18 months. Today, despite the lingering spectre of new COVID-19 waves, at least a measure of economic and commercial stability appears to be returning, which means that many organisations are again looking for M&A opportunities, albeit still with a healthy pinch of caution.

At Nedbank Corporate and Investment Banking (CIB), we’re noticing several clear trends emerging, which we are confident will become key drivers of M&A activity over the course of 2022.

The first of these, especially in the South African context, is the search for growth. There are a number of companies that have managed to sustain their operations through the past (very challenging) 24 months, but which are now largely tracking GDP in terms of their ongoing growth. These organisations obviously recognise the importance of restoring their profitability trajectories, and many are looking, or will be looking, to M&A as a means of bolstering their long-term growth; not just at a top-line level, but also in terms of enhanced efficiencies, unlocking synergies, and casting their operational nets wider into sectors where they believe there are good prospects.

To compliment these direct efforts to underpin and bolster revenue and profitability growth, the recognition of the need to secure supply chain resilience is also likely to be a key driver of M&A activity in the coming months and years. COVID-19 and the resulting lockdowns cast a bright spotlight on the supply chain vulnerability of many businesses. This was especially true of organisations that had a significant dependency on imports within their supply chains, and many of these companies will want to enhance the resilience of such supply by seeking out alternative sources or reliable backup supply options, preferably on home soil. This has the potential to give manufacturing in South Africa a much-needed shot in the arm, provided that the country’s energy security and labour challenges can be effectively and timeously addressed.

A final trend worth noting is a gradual but steady increase in foreign investors looking for opportunities to inject cash into areas of future value and growth within emerging markets. The volatile situation in Eastern Europe has understandably dulled the appeal of investing in that region, and this is likely to offer at least some benefit for South Africa, which is still recognised as a stable, high-potential emerging market, despite its own economic and political challenges. This is already becoming evident within industries focused on export-related products, particularly commodity-focused entities.

Of course, while the local and global economic environments are now undoubtedly more conducive to M&A than they were this time last year, or two years ago, it’s unlikely that this will translate into a sudden, massive upswing in activity in the sector. There are factors besides the economy that are having an increasingly significant influence on the ability and willingness of many companies to engage in M&A. An emerging theme is the need to exercise caution in the allocation of capital due to the likelihood of shifting shareholder expectations going forward. The growing requirements for businesses to demonstrate meaningful ESG commitments will likely see many companies being more selective in the allocation of the capital they have, to ensure that they can meet the expectations of current and prospective shareholders to steadily increase their environmental and social investments.

Apart from the possible reticence to spend money on M&A that this shifting focus may cause, it’s also likely that the heightened shareholder focus on ESG, and ESG reporting, will become an increasingly prominent consideration in M&A transactions in general going forward.

While it’s difficult to predict exactly where any uptick in M&A will be most evident in the coming year or two, it’s likely that we will see activity involving entities positioned to tap into the global food market, given the uncertainty of food security in Europe, together with commodity-based entities/investors that need to invest, or return to shareholders, the large accumulated cash reserves.

Warrick Haskell is a Senior Associate | Advisory Nedbank Corporate and Investment Bank

This article first appeared in DealMakers AFRICA, Africa’s corporate finance magazine
www.dealmakersdigital.co.za

Ghost Bites Vol 12 (22)

The Finance Ghost
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  • Dis-Chem released a cracking set of results for the year ended February 2022. If I were forced to choose between Dis-Chem and Clicks at the moment, I would invest in Dis-Chem. I think both are overpriced though, so I don’t hold either of them. Find out more about the Dis-Chem results and the group’s growth levers in this feature article.
  • Barloworld took another knock on the market on Monday after releasing interim results. They were mostly good actually, with pressure on working capital as the likeliest culprit for the market response. Although an impairment of R1 billion has been recognised in the Eurasia division, the group doesn’t plan to exit Russia. Find out more in this feature article.
  • Netcare has released results for the six months to March 2022. Operating leverage is clear to see here, with a modest 2.3% increase in revenue driving an 8.1% increase in EBITDA and 19.9% increase in headline earnings per share (HEPS). Normalised EBITDA margin improved to 15.8% from 14.8% in the comparable period. With net debt down by 11.4% (net debt to EBITDA now 1.7x), there’s a return to paying interim dividends with a declaration of a 20 cents per share dividend. I want to specifically point out that occupancy for mental health has increased from 60.6% to 64.2% year-on-year. Look after yourselves, Ghosties. Netcare’s share price is down 8.7% this year.
  • Tradehold released results for the year to February 2022. Headline earnings swung from a loss of 1.9 pence per share to a profit of 6.1 pence per share. The tangible net asset value (NAV) per share increased to R20.96 from R19.75 a year ago. A final dividend of 30 cents per share has been declared. The 74.3% stake in Collins Property Group has been a strong performer as the Collins portfolio is focused on industrial space and distribution centres, which is exactly where you wanted to be in the property sector during the pandemic. The UK retail shopping centre and commercial property business Moorgrath has had a tougher time and Tradehold separately announced a potential disposal of its stake in Moorgarth for GBP102.5 million in a related party transaction, as several directors (including Christo Wiese) are also shareholders in the purchaser. This would see Tradehold change its tax residency to South African and its reporting currency to rand. The focus going forward would be on the Collins portfolio. The proceeds from the disposal would redeem preference shares funding issued to RMB and pay a special dividend of around R4.00 per share to Tradehold shareholders. The share price closed 7.9% higher at R10.75, still a discount of nearly 50% to tangible NAV.
  • Adcorp is in the middle of a turnaround strategy that it needs to deliver just for investors to get out of the bid-offer spread that was enormous during the pandemic. I know this because I was one of the Adcorp punters who got in after the March 2020 crash, paying R5.58 per share. With a bid-offer spread of as much as 30% from memory, it’s taken a long time for the bid to come up to my offer, closing at R5.50 yesterday. At least I got the turnaround story right, with the latest trading statement reflecting an increase of between 181% and 201% in HEPS for the year ended February 2022. This takes HEPS to between 96.0 cents and 102.8 cents and puts Adcorp on a Price/Earnings multiple of around 5.5x at the midpoint of the guidance. I learnt a lesson here about how to enter positions in illiquid small caps. The bid-offer spread seems to have improved these days.
  • Tsogo Sun Gaming shone brightly yesterday, climbing 12.8% after releasing a trading statement for the year ended March 2022. HEPS has swung magnificently into the green, coming in at between 106.9 cents and 113.5 cents per share vs. a loss of 3.1 cents per share in the prior period. After closing at R12.01 per share yesterday, the share price is up just 2.7% this year.
  • Steinhoff is trying very hard to keep the contents of the PwC report secret. Tiso Blackstar and amaBhungane won a fight in the High Court to get Steinhoff to provide a copy of the report and Steinhoff has filed a notice applying for leave to appeal the ruling. Steinhoff is arguing that the report is protected by legal privilege and believes that the court overlooked the timing of a demand from the Dutch Investors Association (VEB) which was received before PwC was appointed. In other words, litigation was already contemplated when PwC was engaged. The Steinhoff share price has lost nearly half its value this year. I took profit at the start of 2022 and I’m very glad that I did.
  • Invicta released a trading statement for the year ended March 2022. Earnings per share is impacted by substantial once-off gains linked to underlying operations, including a profit on disposal of businesses and a fair value gain on remeasurement of joint venture investments. Headline earnings per share (HEPS) excludes these once-offs, which is why investors tend to use this measure. There’s still complexity here, with HEPS of 316 cents in the prior period including 85 cents attributable to a business that was subsequently disposed of. HEPS is expected to be within 20% of the 316 cents number (i.e. between 252.8 cents and 379.2 cents). The correct comparable base strips out the discontinued operations, which would be 231 cents. This means HEPS is at least 9% higher than last year for continuing operations, provided I’ve interpreted the difficult announcement correctly.
  • Alexander Forbes released a trading statement for the year ended March 2022. The group’s retirement operations were negatively impacted in this environment by retrenchments. New business wins and positive market returns helped offset this headwind. HEPS from continuing operations is expected to increase by between 16% and 21%. The share price is down around 5% this year after dropping 3.4% in response to this update.
  • Fortress REIT is under pressure to retain that all-important REIT status, which requires the fund to meet distribution requirements under JSE rules. The fund has A and B shares and has had a controversial relationship with shareholders in recent times, with a prior attempt to get A shareholders to give up their preferential right to distributions. The latest news is that a subcommittee of the board has been appointed to explore a merger of the two share classes. This would help the fund maintain its REIT status by only needing to meet the requirements on one class of shares. I suspect that this might get feisty again as there will need to be a great deal of engagement with shareholders.
  • Impala Platinum has increased its stake in Royal Bafokeng Platinum by a further 0.21% of total shares outstanding. This takes the shareholding to 37.83%. The offer to Royal Bafokeng shareholders remains open.
  • Conduit Capital has updated the market on Constantia Insurance Group, the major asset in Conduit. Claims from the floods in KZN are not expected to exceed R25 million and net exposure is within risk appetite after reinsurance recoveries. For the nine months to March 2022, the Constantia Insurance Group achieved operating profit of R24 million off gross premium income of nearly R1.6 billion. Cash generated from operations was R80.3 million and the cash balance at 31 March 2022 was R172.6 million. Conduit is in the process of raising R500 million in preference share funding.
  • Hystead Limited, in which locally listed property fund Hyprop holds a 60% interest, has completed the disposal of its investment in Delta City Mall in Montenegro. The proceeds of EUR70 million will be used to reduce Hyprop’s Euro-denominated debt. Since 31 December 2021, that debt would have been reduced from EUR373 million to EUR111 million.
  • Raubex has extended the closing date for its offer to the shareholders of Bauba Resources to 10th June 2022. When the clock strikes midday on that Friday, the R0.42 per share offer closes.
  • Hulamin has been trading under a cautionary announcement since 14th October 2021 and renewed that cautionary on Monday. Time will tell what the company is up to and what the “discussions” that necessitated the cautionary announcement entail.
  • Irongate has confirmed that its distribution net of withholding tax in Australia is R0.4548671 per share. As a reminder, this Australian property fund is currently under offer.

Barloworld trudges through the mud in Russia

The Finance Ghost
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Barloworld trudges through the mud in Russia

In a nasty day for Barloworld punters, the share price fell 6.8%. I was very tempted to climb in after the initial loss in value as a result of the Russian invasion of Ukraine. I’m glad that I sat on my hands this time, forcing myself to wait. The share price closed at R97.34 yesterday, hardly any higher than the R95.08 closing price on 7 March.

The decrease was driven by the release of results for the six months ended 31 March 2022. Unlike many other companies, Barloworld has not elected to retreat from the Russian market. Although impairments have been recognised, Barloworld hasn’t given up on that business yet. The rest of the results look good actually, so I’m not entirely sure why the share price took such a knock. The likely culprit is probably the pressure on working capital.

The major exit planned at this stage relates to the car rental and leasing business, which Barloworld plans to unbundle to shareholders as no satisfactory offers have been received for the business. To put a positive spin on this game of corporate hot potato, at least the JSE looks set to get a new listing.

The car rental and leasing business (Avis) is now classified as a discontinued operation. Another nuance in the numbers is the normalisation adjustment related to the motor retail division, which is now equity accounted instead of recognised in each individual line on the income statement.

So, mentions of “continuing operations” and “normalised” numbers have nothing to do with Russia in this result!

The Russian business is actually performing extremely well under the circumstances, although trading is becoming difficult in the country and opportunities to grow the business are limited. Of course, a number of investors may choose to exit Barloworld for ethical reasons. To be fair to Barloworld, the company is “focused on addressing the needs of employees” at this time. An impairment of R1 billion has been recognised in relation to the Eurasia division.

With that out the way, I can now inform you that revenue from continuing operations increased by 13.6%. Operating margin from continuing operations improved by 100bps to 10.5%. Headline earnings per share (HEPS) from continuing operations increased by 197 cents to 447 cents and an ordinary dividend of 165 cents has been declared.

Delving into the segments, the equipment southern Africa division grew revenue by 7.7% thanks to machine sales and rentals. Equipment Eurasia grew revenue by 11.8%, driven by mining activity and aftermarket revenue in Russia. Mongolia came under revenue pressure from supply chain challenges on the border of Mongolia and China. Ingrain grew revenue by 45.7% but this is largely due to the prior period only having Ingrain for part of the year.

EBITDA margins increased slightly in the African and Eurasian businesses to 14.1% and 14.0% respectively. Ingrain suffered a drop in EBITDA margin of 300bps to 17.4%.

It’s also worth mentioning that trading conditions in Bartrac (the joint venture in the DRC) have improved, driving a substantial swing in profitability. Income from associates and joint ventures was R113 million in this period vs. a loss of R56 million the year before.

A drop in average net debt from R9.3 billion to R7.0 billion helped decrease net finance costs. Working capital came under considerable pressure though, with a cash outflow from operating activities of R1.9 billion vs. an inflow of R3.7 billion in the prior period. GBP68 million of this was attributed to a contribution to the UK pension scheme deficit.

The market has treated Barloworld as though the Russian businesses are practically worthless. With the group persevering in that country, this is an interesting play for those with higher risk appetite.

Dis-Chem: my pick in the sector

The Finance Ghost
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Dis-Chem: my pick in the sector

Dis-Chem is my pick of the litter in the retail pharmacy sector on the JSE. Admittedly, that litter only has two kittens in it and both are expensive. Clicks and Dis-Chem trade at multiples that leave many scratching their heads. My suspicion is that Dis-Chem will outperform Clicks over the next 12 – 18 months, but time will tell. Importantly, “outperform” shouldn’t be interpreted as “will perform well” as both are at lofty multiples.

In the year to February 2022, Dis-Chem posted revenue growth of 15.7%. Headline earnings per share (HEPS) is up 27.6% to 99.2 cents and the total dividend per share is up 27.6% as well.

Like its arch-rival Clicks, Dis-Chem was a beneficiary of the Covid vaccine program. 1.4 million doses were administered, contributing R513 million in revenue. On a prior-year revenue base of R26.3 billion, that’s a 2% revenue uplift that I sincerely hope won’t be there in the coming year. I’m rather sick of pandemics, if you’ll excuse the pun.

Unlike that same arch-rival, Dis-Chem is strongly weighted towards its retail business rather than the wholesale sector. Retail revenue was R27.1 billion of the group total of R30.4 billion, or 89% of group revenue. It grew by 15.6% which includes the impact of acquisitions.

The retail margin improved from 27.5% to 28.2% as the group experienced a normalisation in the sales mix. This is critical, as higher margin categories in the “front shop” needed to recover. Pharmacy groups don’t make their money behind the medicine counter.

The wholesale business grew by 13.7%, with a particularly interesting 25.2% increase in external revenue to The Local Choice franchises, which increased in number from 122 to 147. Sales to independent pharmacies grew by 10.9% or 14.8% if you exclude once-offs in the base. The wholesale margin was 7.5%.

Expenses grew by 17.3% overall and 15.2% if you exclude the Medicare cost base as a major acquisition. Retail expense growth of 15.4% (excluding Medicare) included investment in pharmacists and clinic sisters to facilitate the vaccine program. Wholesale expenses excluding depreciation grew by 8.7%, a surprisingly low amount relative to revenue at a time when inflationary cost pressures have been evident. I would caution here that this reporting period ended in February, with most of the fuel price pain coming from March onwards.

With a focus on return on invested capital (ROIC) and related working capital efficiencies (net working capital cash inflow of R45 million despite the growth in the business), net financing costs fell by 29.7% excluding the impact of IFRS 16, the world’s stupidest accounting standard that treats lease payments as interest. Of course, a reduction in interest rates also helped.

Capital expenditure was R377 million, of which R237 million was expansionary expenditure and R140 million was maintenance expenditure.

Revenue growth has accelerated since the end of this period, up 16.1% year-on-year for the 1 March to 16 May trading period. In my view, Dis-Chem has a number of exciting growth drivers (Baby City, medical insurance and wholesale market penetration to name a few) and is one to watch. With a Price/Earnings multiple of 34.6x though, I personally am not buying the shares at this price. If the multiple doesn’t unwind though, it could offer strong returns.

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