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Santam flags a tough net result

The Finance Ghost
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Santam flags a tough net result

Santam has provided an operational update for the four months ended April 2022. Insurance is a particularly colourful game in South Africa, with a solid combination of natural disasters and civil unrest to keep things “interesting” I suppose.

I’ve gone into the details below, with the overall message being that premium growth is strong, underwriting margins are under pressure (due mainly to the floods) and investment returns have also been knocked by the bear market.

Conventional Insurance

The first segment is called “Conventional Insurance” – perhaps ironic given the issues we’ve dealt with as a country.

Gross written premium growth was strong at 7%. Santam’s exposure to the KZN floods is R3.2 billion, with the net impact limited to R500 million as a result of the reinsurance program. Insurance is all about managing the amount of residual risk carried after paying for reinsurance.

Santam notes that this is a 1 in 25-year event and the largest natural catastrophe in Santam’s history, dwarfing even the PR catastrophe of Santam’s business interruption insurance court case during the pandemic. Ok, I added the second part in.

A negative net underwriting margin has been reported for this period due to the large negative impact in a short period (only four months is being considered here).

Apart from fires and other weather-related claims this year, Santam also notes that there has been an increase in vehicle accidents compared to the lockdown period. This makes sense as people return to work, though I would expect hybrid working trends to have a structural benefit for insurance companies. We are driving a lot less but our premiums haven’t come down.

The Santam Specialist business reported negative growth in gross written premiums, as strong growth in travel insurance was more than offset by the engineering and corporate property business. Underwriting results were solid in this space, though the property side was also affected by the floods.

In other important updates, MiWay had subdued gross written premium growth and experienced pressure on underwriting performance from the floods and weather conditions, while Santam Re had excellent gross written premium growth.

Market volatility negatively impacted the investment return on insurance funds, especially in the US component of the investments.

Alternative Risk Transfer

There wasn’t much to say on this one – the ART segment had strong operating results and lower underwriting results, which seems to be the flavour of the day in the broader group.

Sanlam Emerging Market partner business

The Sanlam Pan Africa General Insurance business achieved net earned premium growth of 7%, or 10% in constant currency. A lower investment return on insurance funds has negatively impacted the results, particularly due to the decline in Moroccan equity markets.

Investing in an insurance business means you carry all kinds of interesting underlying exposures!

Underwriting margins were at the lower end of the 5% – 9% range, adding to the narrative of the rest of the group.

Shriram General Insurance was hit by lower sales, with some relief coming from prescribed third-party premium increases in India. The good news is that the claims experience and investment returns were better year-on-year, contributing to a significantly improved overall result.

Other stuff

There have been some corporate actions, like Santam’s economic interest in Shriram General Insurance diluting from 15% to 14% in April as a leading global investment fund invested in the Indian business. Also in April, Santam became the sole owner of Indwe Broker Holdings by buying the remaining 76% for R125 million.

Then in May, the big news of the Allianz deal at Sanlam level hit the market. This is primarily a Sanlam transaction, with the impact on Santam being a disposal of a 10% interest in SAN JV to Allianz. Santam has hedged the proceeds using a 12-month zero-cost collar structure. This protects Santam against the EUR/ZAR dropping below R16.66 and allows Santam to benefit from rand weakness up to R19.16.

There are some balance sheet movements in terms of issuances and redemptions of subordinated debt, which is business as usual for insurance groups. Importantly, the balance sheet is still strong despite the poor underwriting and investment results.

Results for the six months to June will be released on 1st September, an unusual way to celebrate Spring Day. Despite all of this, the share price is up 5% this year!

Easy Does It podcast: Ins and Outs of USD Investing

The Finance Ghost
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Easy Does It podcast: Ins and Outs of USD Investing

In the EasyEquities podcast hosted by Tshepo Kgapana aka DJ@Large, my Magic Markets partner Mohammed Nalla and I went head-to-head in a highly entertaining format where we discussed US stocks.

The episodes were recorded in April so the price levels have changed. What hasn’t changed is the great banter between us and the insights into the underlying stocks!

You can listen to Part 1 and Part 2 using the podcast players below. Best of all, you can invest in these US stocks through your EasyEquities account!

If you enjoy our analysis, subscribe for Magic Markets Premium for R99/month and unlock incredible investment insights into the US market. We’ve developed an institutional level product at retail pricing, driven by our commitment to make investing accessible and fun.

Enjoy the shows!

DISCLAIMER: EasyEquities is a product of First World Trader (Pty) Ltd t/a EasyEquities which is an authorised Financial Services Provider. FSP number: 22588. This material is not intended as and does not constitute financial advice or any other advice and is neither exhaustive nor prescriptive. The views expressed by the contributor are his or her own (as an independently registered financial services provider, financial adviser or other independent capacity), and not necessarily endorsed by EasyEquities (as a separate financial services provider).

The US dollar is calling the shots

Andre Botha
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The US dollar is calling the shots

Andre Botha, Senior Dealer at TreasuryONE

In a market that has been very uncertain at the best of times in the recent past, where we have seen emerging markets running stronger with the US dollar and then a subsequent mini-emerging markets meltdown, one thing has remained relatively stable: given time, the US dollar is the ultimate market mover and holds the key to the movement of other currencies.

As can be seen below, the rand has followed the dollar index closely:

Picture1-May-31-2022-12-12-29-00-PM

Let’s look at last week as an example. In the recent past, we have seen the ECB speculating that they might start hiking rates to curb inflation in the Eurozone. Granted, this was euro positive, but the real move in the US dollar came as the expectations of significant hikes in the back end of 2022 from the US have started to dwindle.

Picture2-May-31-2022-12-14-04-09-PM

Coupled with chatter from other reserve banks across the world about faster rate hikes as can be seen from the chart above, the possibility that the US might not hike as aggressively later in the year has caused the market to believe that the interest rate differential between the US and the rest of the world will be less at the end of the year. This has undercut some of the US dollar strength and has seen the US dollar move to 1.07 against the euro after trading at 1.04 not so long ago.

What does this mean for emerging markets, but in particular for the rand?

In the short term, we have seen that the rand has picked up the tailwinds after the MPC announcement and the US dollar weakness, and the rand has made a run at the R15.50 level. Whether there is enough momentum to continue down to the R15.20 level remains to be seen, but we expect that gains could be hard to come as the market needs a sustained signal that risky assets are the month’s flavour for the rand continues on its merry way.

One only has to look at the performance of the stock indices over the past couple of weeks to see that everything is a little topsy-turvy at the moment. From the graph below, one can see that the US equity markets ended its longest losing streak since 2001:

Picture3-May-31-2022-12-14-45-29-PM

US non-farm payroll number on Friday

As is usual with the first week of the month, the US non-farm payroll number is released on Friday, and while it is early days in the interest rate hiking cycle in the US, it will be interesting to note if/whether the recent rate hikes have caused a halt in hiring in the US. It will be interesting to see how the US dollar will react in an event like that.

On the local front, we believe the rand will trade in a range of R15.40-R15.70 for most of the week, with the real issue being the US non-farm payroll number on Friday.

New fuel price hikes are coming into effect this week. As parliament weighs up how to protect the consumer from the price hike, we can expect inflation to jump on the back of this and force the hand of the MPC down the line to hike interest rates again.

Ghost Bites Vol 18 (22)

The Finance Ghost
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  • The Gold Fields share price tanked over 11% in the morning and eventually closed over 20% lower once the US woke up. The market reacted to an announcement that the company is acquiring Yamana Gold. This is such a significant deal that I wrote a feature article on it that you can read here.
  • Famous Brands has released results for the year ended February 2022. This result is against a base that is so soft that you would send it back if it was your pizza. Nevertheless, it’s a strong performance and there’s further room for recovery. I covered it in detail here.
  • Reinet Investments has released results for the year ended March 2022. This is effectively Johann Rupert’s investment vehicle that was born out of a restructure of Richemont. Reinet holds investments in British American Tobacco and Pension Insurance Corporation Group, as well as several private equity and unlisted investments. The net asset value at 31 March 2022 is up 9.4% year-on-year, a similar growth rate to the average since 2009. The net asset value per share is EUR31.99 and Reinet has been using share buybacks to take advantage of the discount to net asset value. Converted at today’s exchange rate, the net asset value per share is around R535 and the share price is R320, so the discount is 40%. The proposed dividend per share of EUR0.28 per share is a 12% increase vs. the prior year.
  • Huge Group has released results for the year ended February 2022. The comparatives are useless, as Huge used to consolidate its underlying companies like an operating company usually does. Now, Huge has changed to an investment entity, so it recognises their fair values with the changes through profit or loss. I want to show you what this looks like in practice with a snippet of the balance sheet below. Personally, I think this accounting change is really weird and it puts me off ever buying the shares.
  • South32 has completed the acquisition of an additional 16.6% shareholding in Mozal Aluminium. The final price is just over $2 billion and takes the shareholding to 63.7%. Aluminium is key to South32’s strategy around a low carbon future, as the lightweight metal has numerous applications in making things lighter and more efficient (like cars).
  • Labat Africa has issued shares representing 5.2% of the company for cash. The prices range between 21.90 cents and 26.61 cents. The company has raised nearly R5 million based on the midpoint of this range. The funds will be used to expand the cannabis healthcare business and for working capital. The company also released interim results for the six months ended February 2022, in which revenue fell by 5.7% and the operating loss worsened by 37.4%. The headline loss per share was 4.3 cents.
  • Tongaat Hulett is in a really tough spot and is busy negotiating with its lenders around the capital structure. The lenders have made the seasonal overdraft facility available at an earlier date than previously contemplated and have extended other debt reduction milestones to 30 June 2022. These milestones include the proposed rights offer.
  • Renewable energy group Mahube Infrastructure announced results for the year ended February 2022. Revenue is up 76.6% and HEPS has increased to 118.9 cents. The tangible net asset value has increased from R10.63 to R11.21 and a final cash dividend of 32 cents per share has been declared. The share price closed around 12% higher at R5.99.
  • If you are a MiX Telematics shareholder, be aware that the company is presenting at a conference and that the presentation should be available on the corporate website by Tuesday night (it was not available at time of writing this).
  • Insimbi Industrial Holdings is a fascinating small cap. This group supplies ferrous and non-ferrous alloys, refractory materials and plastics. In the year ended February 2022, revenue increased by 23% to R6 billion and net profit jumped 138% to R104 million. The group generated cash from operations of R236 million and HEPS was 138% higher at 24.58 cents. Rising commodity prices have helped here. Still, no dividend has been declared in the interest of caution. The share price closed 1.8% higher at R1.14.
  • Afine Investments owns a portfolio of fuel forecourts. The company is recently listed and the group was restructured for the listing, so there are no sensible comparable financials. In the year ended February 2022, HEPS was 46.23 cents and the dividend is 27.80 cents. The net asset value is R3.55 per share. The share price closed slightly higher at R6.95.
  • DRA Global has appointed James Smith as interim CEO of the company. He is expected to resume his old role in the business when a new CEO is appointed. In the meantime, he will bank an annual package of R5.5 million plus bonuses.
  • FirstRand has renewed the cautionary linked to the potential repurchase of its B preference shares. The bank is still investigating the optimal process for a repurchase and has not made a formal offer as of yet.
  • If you are an Acsion Limited shareholder, you should pencil in 10th June for the release of full year results. I suggest a pencil, as there are “unforeseen circumstances” causing a delay.
  • Just when it seemed things couldn’t get much worse for Pembury Lifestyle Group, the company announced that CEO Andrew Mclachlan suddenly passed away.

Famous Brands – results fresh out the oven

The Finance Ghost
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0
Famous Brands – results fresh out the oven

After releasing results for the year ended February 2022, Famous Brands rallied by as much as 11% before settling down to a 4.9% gain by lunchtime on Tuesday.

As a quick reminder, Famous Brands is a vertically integrated company that primarily services a vast footprint of franchised fast-food outlets and restaurants. In some cases, there are corporate-owned restaurants.

The network has 2,824 outlets and 17 restaurant brands. Most of these are in South Africa (2,470) with the remainder in the rest of Africa and the Middle East (287) as well as the United Kingdom (67).

You also need to know that the group reports based on two segments, largely depending on whether you feel like a quick burger or a sit-down meal with a more interesting choice of drink. The Leading Brands segment is further split into Quick Services and Casual Dining, with Signature Brands as the fancier segment.

It should go without saying that the pandemic was truly horrible for Famous Brands. Woolworths was barely even allowed to sell cooked chickens at times, so you can imagine how things looked for Steers and Debonairs. This result is compared to the year ended February 2021, so the base year is one that is best forgotten.

Revenue is up 38% vs. that period and headline earnings per share (HEPS) has jumped by 568%. Importantly, cash generated from operations increased by 67% to R871 million. Net debt to EBITDA has fallen sharply from 3.04x to 1.32x, a far more comfortable level.

Return on Capital Employed (ROCE) is measured as operating profit divided by the sum of equity, interest-bearing debt and net lease liabilities. In simpler terms, this is a way of measuring the return achieved on investment, regardless of whether the capital used in that investment takes the form of equity or debt. ROCE was 29% in this period, which is a great reminder of why investors like this business model.

At segmental level, Leading Brands revenue was up 58% to R773 million and Signature Brands was up 91% to R145 million. You can clearly see the impact of Covid in the base year on the restaurants that rely on alcohol sales to make money. Another factor is that during Covid, people were prepared to get take-aways but weren’t so keen on sitting in a restaurant. Those were truly horrible times in our lives.

Turnover in the Signature Brands segment is still below Covid levels, as this reporting period was impacted by curfews, capacity reductions and alcohol restrictions.

Interestingly, Famous Brands notes that although competition in the sector is fierce, new brands are not emerging. This makes sense given the difficult backdrop. As Roco Mamas (eventually acquired by Spur) showed us though, a new kid can arrive on the block when the environment is more attractive.

Another important observation made by the company is that consumers are eating out less often because of financial constraints. Premium restaurants don’t really notice this issue, as rich people will always have money for great food and wine. In the rest of the market, restaurants must offer great value to compete successfully.

Looking abroad, most markets in rest of Africa and Middle East returned to 2020 trading levels by the end of this financial period. In the UK, Wimpy’s operating profit improved by 18% and margins were steady at 13%. Delivery sales have declined as customers have returned to restaurants.

Further back in the value chain (where Famous Brands actually makes its money), manufacturing operating profit was up 65%. In the logistics side of the business, operating margin increased to 1.5% from a loss-making -0.4% in the prior period.

Although consumers are clearly venturing out again, the retail business (a Steers sauce in a supermarket) registered a 47% increase in sales to R222 million. This is a substantial part of the business and Famous Brands shareholders enjoy all the wholesale profits here, as franchisees don’t get a slice of this action when head office sells sauces and similar products to retail outlets. This is an important growth area for Famous Brands, with a plan to launch at least 12 new products in the year ahead.

A dividend of 200 cents per share has been declared, representing a yield of around 3.3%.

This was a strong recovery year for Famous Brands against an easy base. After several years of making mistakes and pursuing international high-risk opportunities, the management is focused on the core business. This is good news for investors.

Gold Fields bets the farm – the market hates it

The Finance Ghost
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Gold Fields bets the farm – the market hates it

When it comes to gold miners, Gold Fields has been the most impressive weed in a swamp of disappointment for me. My investment in this sector has been an epic fail, as the gold price has decided that war and inflation are no longer drivers of its price.

Nobody is quite sure what does drive the gold price now.

In dollar terms, gold is lower than it was a year ago. In rand terms, it is marginally higher. This doesn’t help when underlying mining costs are climbing sharply from inflationary pressures on wages and energy costs.

Gold Fields tanked more than 11% on Tuesday morning after the company announced a deal with Yamana Gold. It got even worse once the Americans woke up, eventually closing more than 20% down. The swamp has claimed another victim, this time self-inflicted by doing a gigantic deal to acquire a global player that is trading at a vastly higher multiple.

The first line of the announcement sounds rather exciting. The deal creates a top-4 gold player as measured globally, with operations in Canada, Australia, South America, Ghana and South Africa. The headquarters would be Johannesburg, which remains the City of Gold (and Potholes).

The deal structure is an all-share offer by Gold Fields based on an exchange ratio of 0.6 Gold Fields shares for each Yamana share, which implies a valuation of Yamana of $6.7 billion. The board of Yamana has unanimously approved the transaction and recommended to shareholders that they vote in favour of the deal, which makes me wonder whether Gold Fields has offered too much.

The reported value of net assets of Yamana is $5.25 billion and the profit after tax in the last quarter was $55.3 million. Even on an annualised basis, this is a forward Price/Earnings multiple of 30x! According to TIKR, Gold Fields is on a forward Price/Earnings multiple of 11.5x.

Can you say “earnings dilution”?

Yamana is currently listed in Toronto, New York and London, so the company moves faster between major cities than an oligarch’s yacht on a midnight escape route. The operations are in Canada, Brazil, Chile and Argentina and are focused on gold and silver production.

Gold Fields highlights the appeal of scale benefits from a larger portfolio, enhanced geographical diversification and complementary cash flow generation profiles. Both groups have healthy balance sheets and staggered capital investment cycles. The announcement also refers to an “industry-leading” growth pipeline.

Around $40 million worth of pre-tax synergies have been identified, mainly in operational integrations and financing synergies. A streamlining of overheads has also been highlighted. That’s not terrific news if your job at head office is to plug two systems into Excel and produce a pivot table.

No details are given of the triggers for the break fees. If they were to apply though, Gold Fields would have to pay $450 million or Yamana would have to pay $300 million, depending on which party is in breach.

So why has the market made its disgust clear with this deal? One reason might be the price – at a premium of 33.8% to the ten-day volume-weighted average price (VWAP) of Yamana, Gold Fields shareholders are paying up for this deal. Another might be the sheer size of the transaction and the risk that it brings, as existing Gold Fields shareholders will only own 61% of the combined group.

For this deal to go ahead, at least 75% approval is needed from Gold Fields shareholders. I’m not convinced that this is a dead rubber.

Ghost Bites Vol 17 (22)

The Finance Ghost
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1

Your daily market overview delivered in bite-sized bullets:

  • Bidvest Group has released a voluntary trading update for the ten months to April 2022. The strong momentum has continued since the interim result, with “strong trading profit growth” and “excellent” cash generation. The business service operations are doing well, with a shrinking fleet and finance book as the blemish on the update. In trading and distribution, Bidvest has pointed to a strong performance even measured against a high base. Although working capital investment has been required in response to supply chain pressures and inflation, there is no concern over debtors. The group is looking abroad for growth opportunities, with several possible deals at various stages of progression. Results for the year ended June will be released in early September.
  • Adcorp Holdings has released results for the year ended February 2022. Although revenue from continuing operations fell by 1.7%, gross profit increased by 7.0% and operating profit jumped by 68.2%. Headline earnings per share (HEPS) jumped by 190.6% to 99.4 cents. Importantly, group interest-bearing debt (i.e. excluding leases) fell from R456 million to R133 million. Banking facilities of R350 million are being negotiated and the facility in Australia has already been extended. Adcorp’s bid-offer spread is wider than the smile of an investment banking analyst getting a first bonus, so be careful with this one. The share price is flat year-to-date but the chart has flapped around between R4.65 and R6.30 this year.
  • Momentum Metropolitan has released an operating update for the nine months ended March 2022. HEPS is up a meaty 59% as reported or 46% on a normalised basis. Although new business volumes were 16% higher, value of new business has fallen by 16% as new business margin has deteriorated from 1.1% to 0.8%. Return on equity has jumped from 11.7% to 18.2%. Momentum Corporate was the segment with the largest positive swing, as a normalised headline loss of R72 million in the prior period transformed into normalised headline earnings of R617 million in this period.
  • Asset management group Sygnia has released a trading statement for the six months ended March 2022. HEPS will be up by between 20% and 25%, coming in at 89.8 cents – 93.5 cents. The share price closed 3.7% higher at R17.
  • Novus Holdings has released a trading statement for the year ended March 2022. HEPS is expected to improve by at least 100% vs. the headline loss per share of 5.4 cents. I guess this means that the company will at least break even for the period. The announcement was called an “initial trading statement” so I don’t think the full story has been told here yet. Keep an eye on this one.
  • Oceana Group has more twists and turns than a school of fish escaping a seal. The latest news is that auditor PwC has resigned with immediate effect in respect of the audit for the year ended September 2022. There is a “strained relationship” and Oceana points out that a significant number of votes were exercised by shareholders against PwC’s reappointment. There’s been a lot of negative noise around Oceana, with investigations into accounting practices and departures of executives in recent months. The company needs to appoint auditors within 40 business days and is in discussion with a Big Four audit firm. Shareholders will be hoping for some stability going forward.
  • Huge Group has concluded a new debt package with RMB for R240 million in refinance and acquisition facilities, R15 million in general banking facilities and R12 million in asset based financing facilities. They are repayable in 20 equal quarterly tranches. R230 million of the refinance facility will be used to repay debt from Futuregrowth, leaving R10 million for potential acquisitions. The company notes that the repayments under the RMB facility are significantly less than the Futuregrowth facility. Let’s just hope that whatever strategy they follow with the money will be more successful than the Adapt IT debacle.
  • Grand Parade Investments is in the process of unbundling its steak in Spur. I mean, its stake. The SARB needs to give approval for the transaction and this hasn’t been obtained yet, so the company has noted that the dates of the unbundling will need to be amended.
  • Sibanye-Stillwater has received the details of a claim from affiliates of Appian Capital Advisory LLP. This relates to the termination of the acquisition of the Santa Rita and Serrote mines in Brazil, a deal that Sibanye walked away from after a geotechnical event which Sibanye concluded would be material and adverse to the business. Sibanye will need to defend the claim in the High Court of England and Wales, so a few legal eagles will be making money shortly.
  • S&P has revised Telkom’s outlook from stable to positive, thereby confirming that nobody from S&P has ever tried to cancel a Telkom contract. Jokes aside, this is a result of the improved outlook on the South African government, which happens to own around 40% of Telkom. Many local companies have had their outlooks revised as a result of an improvement in the sovereign outlook.
  • AngloGold is the latest company to implement an additional listing on A2X. This exchange offers a trading platform rather than an issuer regulation platform. The JSE (or other primary exchange) still sets the rules that each company must abide by. A2X is simply a place for shares to trade in a more efficient manner, effectively stripping some income away from the JSE.
  • Renergen Limited has updated shareholders on the commissioning of the Phase 1 plant. If you have a deep and secret desire to be an engineer, you should read the full announcement for all the details. Investors will be interested to note that customer sites are being prepared in parallel to receive the liquefied natural gas (LNG), so the commercial operation date will be planned in such a way that the plant doesn’t need to be turned off again as part of providing customers with LNG. After a 32-month process, Renergen has had “no surprises” during hot commissioning and is nearly finished with the process. The announcement doesn’t give a completion date, though.
  • Fuel forecourt REIT Afine Investments listed in December 2021 and provided a profit forecast for the year ended February 2022 as part of the listing documentation. The trading statement released by the company is based on variance to that forecast as well as the prior reported period. The latter comparison is pointless, as the listed entity only existed for one month of the comparable period. The important thing is that HEPS will be approximately 8% lower than the guidance in the profit forecast of 50.14 cents.
  • UK property funds Shaftesbury and Capital & Counties are in discussions regarding a possible merger. The initial deadline was that by 4th June, JSE-listed Capital & Counties is supposed to either announce a firm intention to make an offer or confirm that it will not make an offer. That has now been extended to 17th June at Shaftesbury’s request, which the Takeover Panel has consented to. Further extensions are possible by Shaftesbury, once again with regulatory consent. Take note that as these are UK-based companies, those company laws apply even though Capital & Counties is listed on the JSE. Don’t confuse the domicile of the company with the exchange on which it trades.
  • Kibo Energy has done a deal with Hasta Trust. This immediately put Arnold Schwarzenegger one-liners into my head, so I hope it does the same to yours. The deal is to develop a portfolio of long duration energy storage projects held by National Broadband Solutions (NBS) in South Africa, which is 100% owned by Hasta. This is linked to the distribution deal with CellCube for long duration energy storage solutions in Southern Africa. Under this transaction, Kibo will acquire a 51% interest in NBS.
  • If you are a Textainer shareholder, you’ll be interested to know that the exchange rate for the dividend has now been set. The $0.25 dividend will be converted at R15.60/$, so a dividend of R3.90 will be paid on 15th June.
  • If you are unfortunate enough to be a shareholder in PSV Holdings, you should take note that the company is still in business rescue. If the group is not recapitalised, it will likely face liquidation with no prospect of any payment to shareholders. I’m afraid there isn’t even a website for me to link to for this company.

Ghost Bites Vol 16 (22)

The Finance Ghost
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0
  • Pepkor has released results for the six months ended March 2022. Revenue increased by 3.3%, or 3.7% if you adjust for the disposal of John Craig, which represents a gain in market share of 189 basis points. Operating profit jumped by 19.1%, so margins have improved considerably. HEPS increased by 28.3% or 12.1% on a normalised basis (excluding the Steinhoff global settlement). Cash generated from operations was R4.1 billion. The group points out that revenue is up 15.4% over two years, representing substantial market share gains over the pandemic. Pepkor is still growing, opening 144 stores in this period (total footprint now 5,708 stores) and acquiring an 87% interest in Brazilian value retailer, Grupo Avenida. Avenida has 130 stores and Pepkor is happy with performance since February when the deal closed. Perhaps the most important insight in the announcement was this: “While global supply chain uncertainties persist, it seems that shipping costs have stabilised and may trend downwards.”
  • After an incredibly busy week of results for listed companies controlled by Hosken Consolidated Investments (HCI), the mothership released its results for the year ended March 2022. Revenue increased 31% and EBITDA doubled that growth rate with a 62% increase. At headline earnings per share (HEPS) level, the increase is a rather daft 359%. The percentages become silly at that level. To make it easier to see the jump, HEPS increased from 287.7 cents to 1,321.3 cents. When viewed per underlying sector, the biggest swing was in gaming with a R20.5 million headline loss in the prior period swinging into headline earnings of R622 million in this period. The other sector worth noting is hotels, which still made a loss of R35.2 million. That’s a whole lot better than the loss of R318 million in the comparative period. HCI’s share price has been exceptional this year, up 138%!
  • Gemfields is such an interesting business. With a market cap of over R3.8 billion, it’s also a substantial company that is still off the radar for most investors. The share price has doubled in the past year, so the lack of market knowledge on this company is a pity. Gemfields owns 75% of the Kagem mine in Zambia and has achieved a record-breaking emerald auction in May. Across 38 lots, revenue of $43.4 million was achieved. The price per carat was also a new record for Kagem auctions. Gemfields also mines rubies in Mozambique and has other gemstone prospecting licences in several African countries. As a final tidbit on this interesting group, Gemfields also owns premium jewellery business Fabergé.
  • Nedbank released a voluntary update for the four months ended April 2022. There’s plenty of fluffy language and not many hard numbers in the update. I was hoping to see strong commentary around growth in corporate balance sheets and how the banks are getting a piece of the action. Instead, Nedbank talks about “moderate credit growth” and “robust consumer spending” which suggests that corporates are using internally generated cash flows to fund growth in this environment and that retail consumers are still driving growth. Net interest margin has “increased” and interest earning assets increased by “low-to-mid single digits” with “selective growth” in the corporate book. Impairments are within the 80bps to 100bps guided range for FY22. Non-interest revenue growth is up by double digits without adjusting for fair value adjustments and mid-single digits when taking a normalised view. Although expense growth is mid-single digits, JAWS (revenue and associate income growth less cost growth) is positive. That associate line is important, with income from Ecobank (ETI) expected to be up 74% year-on-year in the first half.
  • Finbond Group has released results for the year ended February 2022. There’s a substantial increase in loans advanced, up by 25.9% to just over R5 billion. Despite this, turnover fell by 13.7%. The first reason is that there is a lag effect in revenue in the Illinois business in the US where loans are for 24 months, so the book needs to build up. The second reason is that Finbond now equity accounts for C1 Holdings (brings in the net income further down the income statement) vs. the base year where it accounted for all the revenue and then took out minority interest further down. As always, the sensible number to look at is HEPS, which improved by 25.3% but is still a significant loss of 17.9 cents per share. No dividend has been declared. Sean Riskowitz of Protea Asset Management LLC has joined the board.
  • PBT Group is a company on the move. With a market cap of around R960 million, the business operates in the exciting and growing world of data science and related analytics. The share price has gained around 135% in the past 12 months. A special distribution of 30 cents per share has been declared, which sent the share price 7% higher on Friday.
  • Murray & Roberts jumped 6.7% on Friday after announcing that the Clough Saipem 50/50 joint venture had been awarded the engineering, procurement and construction (EPC) contract by Perdaman Industries for the multi-billion Australian dollar urea plant. This is a huge contract with extensive work involved, of which Clough’s share is around R22 billion. This increases the group’s order book to an all-time high of around R80 billion. The share price is still down 21.5% this year.
  • Huge Group has been rather quiet since the company’s disastrous attempt to acquire Adapt IT. I’ve missed the comic relief of that process. Shareholders will be pleased to note that HEPS for the year ended February 2022 will be more than double than prior year, coming in at between 56.01 cents and 58.81 cents. I strongly caution against making any decisions based on this trading statement, as Huge changed its accounting approach completely on 1 March 2021 and now sees itself as an “investment entity” – which makes the Adapt IT debacle even funnier – so underlying businesses are now recognised at fair value rather than consolidated. Full results are due this week and the share price closed on Friday at R3.69. This announcement came out after market close, so look out for any share price action on Monday.
  • ISA Holdings is a company you’ve possibly never heard of. With a market cap of around R180 million, this small cap provides information security solutions and boasts nearly 80% of revenue being of a recurring nature. The share price is up over 57% in the past year, so plucky shareholders in this business have done well. Revenue for the year ended February 2022 was up 11% and HEPS increased by 26% to 10.5 cents, thanks mainly to a decrease in operating expenditure. A final dividend of 6.2 cents and a special dividend of 10.0 cents have been declared, adding to the 4.3 cents interim dividend. The illiquid share price closed 5.9% higher at R1.07 and now has an incredible trailing dividend yield. Be careful of assuming that the special dividend will be repeated. This is exactly why companies distinguish between ordinary and special dividends.
  • NEPI Rockcastle has confirmed permanent executive appointments after operating with an interim CEO and CFO. Rudiger Dany and Eliza Predoiu have been permanently appointed to those respective roles. They have also appointed a COO in the form of Marek Noetzel. The useful thing about buildings is that they tend to withstand wholesale leadership changes with far more ease than operational companies. Shopping centres don’t complain about culture.
  • Brimstone Investment Corporation has released a quarterly update on its intrinsic net asset value (NAV), which is based on the directors’ valuations of the underlying investments. Between December 2021 and March 2022, the intrinsic NAV is up 3.7% on a per-share basis. That’s a solid performance over three months in this environment. The fully diluted intrinsic NAV is R13.399 and the share price is trading at R7.09, a discount of 47%. Welcome to the frustrations of investment holding companies on the JSE! The largest contributors to the value are Sea Harvest (39.9%), Ocean (33.2%), Equites (5.7%), Phuthuma Nathi (4.8%) and FPG Property Fund (4.1%). Stadio also deserves a mention, contributing 3.1% to the intrinsic NAV.
  • The Implats – Royal Bafokeng Platinum deal has taken another twist, with Northam Platinum intervening in the proceedings before the Competition Tribunal. You may recall that Northam Platinum also owns a significant stake in Royal Bafokeng that it acquired from Royal Bafokeng Investment Holdings. The Competition Commission recommended the approval of the deal, but the Tribunal is what really counts. Based on this issue, Implats has extended the “longstop date” (the legal term for the date by which all conditions precedent must be fulfilled) to 8 August 2022.
  • Quantum Foods is a poultry group that includes Nulaid, the largest egg producer in South Africa. The share price jumped 22% on Friday after the company released results for the six months to March 2021. Revenue increased by 7% and HEPS fell by 41%. A dividend of 8 cents per share has been declared. The share price jump happened right at the end of the day and could well have been finger trouble, as I can’t imagine why people would react so favourably to an update like this.
  • Rebosis Property Fund is in the process of selling a R3.35 billion portfolio of assets to a special purpose vehicle being put together by Vunani. Rebosis shareholders are holding their breath as well as their shares here, as the disposal is critical and the deal hasn’t gone through yet. In the six months ended February 2022, Rebosis’ net property income fell by 6%. The group has breached loan covenants, so all debt has been disclosed as short-term debt and a loan from RMB of R242.9 million is being renegotiated, with no certainty that this can be achieved. Rebosis is a highly speculative play and there are two classes of shares, so anyone considering a punt at Rebosis needs to do very detailed research first (even more so than normal).
  • Kibo Energy has announced the termination of its intended acquisition of the Victoria Falls Solar Project. The deal didn’t pass the due diligence process. Kibo has other exciting things underway, like a waste-to-energy project in South Africa and its partnership with CellCube to deploy long duration energy storage solutions. The group is also busy investigating substitutions for coal in projects in Tanzania, Botswana and Mozambique. If you are bullish on renewable energy, this is a company that you could spend some time researching.
  • Brikor (a brick manufacturing and coal business) released results for the year ended February 2022. Revenue is up 5.7% but EBITDA is down 64%. HEPS has fallen by 47.6%. The bricks segment had its best revenue result in the past five years. The coal segment had the opposite result, with revenue down 31.3% to its worst result in the past five years, attributed to excessive rainfall in the last quarter of the year. The brick business has performed “exceptionally” in April and May, with the coal business showing “significant improvement” in those months. The stock has low liquidity and has lost a third of its value this year.
  • Capitec announced that S&P has revised the outlook for Capitec Bank’s issuer rating from stable to positive, in line with the change made to South Africa’s sovereign outlook. Capitec’s issuer ratings were also reaffirmed by S&P. The ratings agency noted that Capitec’s funding and liquidity profile compares well with the sector and forecasts that the risk adjusted capital ratio will remain strong.
  • African Equity Empowerment Investments (AEEI) released interim results for the six months ended February 2022. Revenue fell by 8.9% and the headline loss got worse, deteriorating from R32.6 million to R69 million. AEEI reports a normalised headline loss number which looks even worse in percentage terms, coming in at R39.7 million vs. R6.4 million last year. No interim dividend has been declared.
  • Buffalo Coal Corp has barely any trade on the JSE, so I’ll just give it a passing mention here. In the three months ended March 2022, revenue increased 12% and the operating loss more than halved from R52.7 million to R24 million.
  • Imbalie Beauty has a market cap of R27 million, which possibly makes it the smallest company on the JSE. The headline loss for the year ended February was between 0.06 and 0.08 cents.
  • Prior to Advanced Health listing on the JSE, the CEO of Presmed Australia (Mark Resnik) was granted an option to subscribe for shares in the Australian business. Resnik has exercised that option through an investment company, with the effect that Advanced Health’s interest in Presmed has been diluted from 60.57% to 56.44%.
  • In case you feel bad about your life this morning, remember that Pembury Lifestyle Group is busy negotiating a reappointment of its auditors because it can’t even afford to pay outstanding audit fees. On the plus side, the Northriding property (initially a school) has been converted to a commercial building and leases have been concluded. Pembury is currently suspended from trading on the JSE.

South Africa needs to catch up on infrastructure spend

Chris Gilmour
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South Africa needs to catch up on infrastructure spend

Chris Gilmour writes weekly for Ghost Mail, sharing his international perspectives and on-the-ground insights into what the global investment community is focusing on.

South Africa’s infrastructure used to be highly regarded globally. Its road system in particular was world-class, as was its electrical utility company Eskom. Its water reticulation systems were easily the best in Africa. The rail system, though based on the quaint so-called “Cape gauge” track width of three foot six inches, nevertheless worked well.

But that’s all changed now.

As a percentage of GDP, gross fixed capital formation (GFCF) reached a peak of 32% in 1976 and with the exception of the blip in the noughties associated with the FIFA World Cup stadium construction and the Gautrain, that percentage has been in secular decline ever since. At 14% in 2020, it was the lowest it had been since 1960. The average for all countries covered by the World Bank is 26%, so South Africa is a little over half the global average. In an IMF report on infrastructure earlier this year, it was reported that SA’s GFCF to GDP had reached an all-time low of 12.2% in 2021.

The net results can be seen in the badly potholed road system (apart from the arterial trunk roads, which still seem to be in reasonable condition), the fact that Eskom has now been indulging in rotational power cuts (loadshedding in Eskom-speak) for 15 years and the fact that many of the waterways are heavily polluted with raw sewage. Additionally, the rail tracks are literally being stolen from under our noses on an industrial scale.

It should come as no surprise that South Africa ranks extremely poorly in the World Bank’s ranking table of GFCF to GDP. Only Equatorial Guinea, a basket-case, Cuba (a failed state where little or no material infrastructure spend has occurred since the late 1950s), Ukraine and Eswatini have lower GFCF to GDP ratios.

Source: World Bank

But there may be light at the end of the tunnel, at least in certain areas of infrastructure development. The good news is that President Ramaphosa unveiled plans to materially boost SA’s infrastructure spend in late 2020. The bad news, according to a report released by Standard Bank on May 25 this year, is that a quarter of South Africa’s R340 billion worth of strategic infrastructure projects have been delayed or put on hold.

A recent article by Antoinette Oosthuizen from Futuregrowth Asset Management dimensions the impending water crisis in South Africa and offers practical solutions to that crisis:

“The challenges that confront the country are varied. Old/aging, poor quality and poorly maintained infrastructure is contributing to high levels of water wastage and the pollution of rivers and groundwater with sewage. Climate change is driving the country towards a warmer and drier future, with longer, more extreme droughts and more intense floods predicted.”

This is especially apparent given the tragedy of the recent widespread flooding in KZN, the worst natural disaster in South African history.

According to Oosthuizen, capital expenditure on the second phase of the Lesotho Highlands Water Project (LHWP-2) is expected to increase substantially from 2022/23, as construction ramps up. The combined debt of the augmentation schemes in the Vaal River System must be repaid within 20 years after completion of LHWP-2, with estimated water delivery in 2027.

Eskom appears to be an altogether more intractable problem, with a massive debt burden of just less than R400 billion compounding a host of operational issues. In addition, sabotage at the Tutuka and other power stations is causing a far greater incidence of rotational power cuts.

But even here, there are signs that things may be improving, at least from a broad perspective. Industry and the mines were recently given the authority to generate up to 100 megawatts of power internally. An increasing number of people who can afford it are migrating off the Eskom electricity grid via installation of rooftop solar panels and battery arrays. Even if Eskom is unable to put in new capacity, a far higher commitment to renewable energy development should help boost infrastructure spend.

According to the Standard Bank report, the rollout of one project – a plan worth billions of dollars to build 2,000 megawatts of new power-generation as quickly as possible – has been held up by court cases and Eskom. This couldn’t have happened at a worse time, as South Africa heads for a record year of disruptive rotational power cuts as Eskom is incapable of meeting even the current diminished demand for electricity.

The national road network is a SANRAL competency which it appears to be executing reasonably well, with a few exceptions. A new funding model will need to be found for the Gauteng Highway Improvement Project, as motorists have made it very clear that they are not prepared to pay via electronic gantries on a user-pays basis. The worst examples of potholes and other road degradation are to be found in the urban areas, where municipalities have been failing dismally to keep roads in good shape. As long as municipalities are regarded by certain political parties as an easy way to make money, this poor road situation is likely to persist.

Having said that, Raubex recently posted strong results and made mention of the SA government’s higher level of infrastructure spend.

This just leaves the national rail network. During the depths of the pandemic, a great deal of metal in the stations and on overhead power cables was stolen. It is only very gradually being replaced. Railtrack has been stolen and in certain areas, shacks have been built on the tracks. It is difficult to think of anywhere in Africa where a similar situation persists.

And for over a decade now, the Chinese have been making plans to establish a high-speed rail link between Johannesburg and Durban that would carry both passengers and freight. This would be constructed on international gauge track – the same width of track as Gautrain – but as yet is only really seen as a possibility in the minds of politicians.

This is a pity, as this is the stuff that dreams are made of. If a high-speed rail link could be established between Johannesburg and Durban that could cut the journey time from the current approximately 14 hours to nearer 4 hours, it could compete head-on with the airlines, when all-in logistics are taken into consideration. And for a developing economy such as South Africa, that is precisely what is required. Also, putting more freight back onto the railways and taking it off the roads would result in far less damage being done to the road network.

Considering how far South Africa has fallen on the global infrastructure ranking, even if only a few new big projects get commissioned in the next few years, the effect could be profound, albeit from a low base. It’s quite conceivable that SA’s GFCF/GDP could double in five years if everything manages to align. Here’s hoping.

Honest Money guest appearance: active vs. passive investing

The Finance Ghost
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Honest Money guest appearance: active vs. passive investing

I‘ve been a guest on the Honest Money podcast on two prior occasions. Warren Ingram and his team work hard to bring excellent insights on personal finance and investments to a wide audience. This is ultimately my passion as well, so I always welcome the opportunity to be on the show.

In my third appearance, Warren wanted to talk about my thoughts on active vs. passive investing. This is so important, as any wealth creation journey needs to at the very least include passive exposure to equities i.e. index tracking ETFs. The strategies can go far beyond that of course, with juicy ETFs that give exposure to interesting themes and the use of stock-picking strategies to add an active element to a portfolio.

As you know, I do all my investing through the EasyEquities platform. The great thing is that active and passive investments can be executed through an EasyEquities account. A tax free savings account is a no-brainer for all investors and only passive investments are allowed in that ring-fenced account. Again, this can be done through EasyEquities.

In this episode, we also touch on single stock portfolio diversification, rebalancing, the psychology behind risk trading and great tips and insights on how to maximize on your returns. 

Listen to the show using the podcast player below:

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