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Thorts: When crisis facilitates opportunities

DealMakers
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Thorts: When crisis facilitates opportunities

Matthew Visser

When Russia invaded Ukraine on February 24th, it not only affected its Eastern European neighbours, but also created massive geopolitical ripple effects, causing global economic uncertainty to surface once again. The whole situation was further exacerbated by the Chinese government enforcing heavy lockdown measures in parts of its country.

The US is experiencing almost unprecedented rates of inflation due to the debasement of its currency and supply chain issues following the COVID-19 pandemic. The debasement of fiat currencies remains a huge source of nervousness for both institutional and retail investors, as countries are running large deficits, and the only way to make up the difference is by printing money (Quantitative Easing).

The US Federal Reserve is expected to increase interest rates seven times this year, which will, in theory, squeeze the capital markets (e.g. equities like tech stocks). However, with the current rate of inflation, investors will look to other assets to outgrow inflation. The question, therefore, is how do you diversify? In times of crisis, investors typically put their money in Gold and the USD, and into Bitcoin as of late.

While gold rose to a one-month high on April 18th – just shy of the US$2,000 an ounce level – on the back of rising fears around the Russia/Ukraine conflict, together with rising inflationary pressures, this was followed by a drop on the back of a benchmark 10 year U.S. Treasury yields and dollar gains, showing this to be a fickle market. The war in Ukraine, while appearing to favour the rise in crypto currencies, has also seen structural issues with credit, in many cases, drying up. Without this conflict, I think people would have been a lot more bullish about Bitcoin, and other crypto currencies in general, but it has yet to prove itself as a store of wealth or as a currency.

Impact on M&A Activity
Like similar historical events, the current crisis is temporary, affecting all industries. I feel that M&A activity will be vigorously revived and advisors will normalise company financial results in valuations, isolating the effect of the “temporary” disruption facilitating transactions at reasonable prices.

I expect the following industries to experience the most consolidation, disruption and change in the near future:
• Primary agriculture, including Agriprocessing and Agri-tech (as food security is increasingly becoming a cause for concern)
• Financial Services, including Fintech (as the value of fiat currencies continues to diminish and as the popularity of decentralised finance (“DEFI”) continues to grow)
• Energy, including Renewable Energy (as Europe is required to become less dependent on Russian oil and gas exports)
However, an accelerated wave of concentration is expected in most industries.

The first M&A transactions in a specific sector are usually made at higher multiples. Prices fall as concentration proceeds, as do the profits of those companies left out of the process. Because the appetite for buying will already be satiated at that stage, there will be fewer buyers, as size will no longer be a necessity for them. It is critical for business owners to move quickly, taking advantage of higher valuations during the first wave of accelerated concentration in the industries they operate in.
The driving forces behind this anticipated M&A activity are:

Private Equity
Globally, private capital fundraising remains at historically high levels. Private Equity funds have an urgency to invest this money, as they won’t be able to raise new capital until these funds are deployed. This will create a unique opportunity for business owners who appreciate the benefit of partnering with Private Equity funds and leading an industry consolidation.

Accelerated “de-risking” of investments
The recurrence of unexpected crises has forced many business owners to come to the realisation that it may be a wise decision to sell down some or all their shareholding in their businesses. Entrepreneurs tend to put cash generated by their business back into its operations to fund growth. As all the cash is tied up in their business, entrepreneurs have “all their eggs in one basket”. The risk of lack of diversification may have become intolerable for many entrepreneurs, especially those nearing retirement age.

Industry consolidation
Large established companies with strong balance sheets and cash reserves will be able to weather the current storm and emerge from the crisis leaner and more focused as a result. These companies will be in a position to acquire their weaker competitors and increase their market share. Many mid-sized companies lack the economies of scale of large businesses, and lack the flexibility of their smaller peers, making them attractive targets for their competitors.

Company restructures and optimisation
Companies are reviewing their internal organisational structures and will start divesting non-core units. Companies are actively making cost adjustments and optimising their capacities, learning to work more flexibly and efficiently, increasing their attractiveness for potential buyers. They are also looking at how they can maximise growth, for example, M&A, strategic positioning opportunities, and global expansion.

Acceptance and increased use of disruptive technology
Online education, e-commerce, virtual communication and telemedicine services have become more widely used, also making them attractive targets for acquisitions.

Favourable valuations for distressed companies
Many companies that operate in industries hardest hit won’t have access to adequate funding to continue trading when demand for their goods and services returns to normal. Buying opportunities will arise in distressed industries such as retail, hospitality, leisure and tourism.

In times of conflict, there are always windows of opportunity. Those brave enough to grasp these will be called fortunate, and others – outside the windows looking in – will be safe but stationary.

Matthew Visser is a Partner – Corporate Finance | PKF Octagon

This article first appeared in DealMakers, SA’s quarterly M&A publication

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

Ghost Bites: Vol 10 (22)

The Finance Ghost
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  • Afrimat has released results for the year ended February 2022. Yet again, this group has managed to deliver an excellent performance. Revenue increased by 26.7%, headline earnings per share (HEPS) was up 22.9% and the return on net operating assets was 33%. The group achieved volume growth at a time of attractive iron ore pricing and the benefits are clear to see. It certainly helps that all three group segments contributed strongly to growth. The share price traded slightly lower today and is 2.8% down this year. Over the past 12 months, the share price is up nearly 20%. I covered the results in detail here.
  • Massmart fell 5.9% after releasing a sales update for the 19 week period ended 8th May 2022. After US retail stocks took a hammering this week, I’m quite surprised it didn’t drop further. Massmart has lost a whopping 39% of its value this year as the group struggles to compete in a difficult South African market. This sales update reflects like-for-like sales growth of just 2.3% vs. the same period last year. For continued operations only (i.e. excluding Cambridge, Rhino and Massfresh), comparable store sales growth was 3.9%. The growth on that metric is 3.1% vs, the same period in 2019 before the world broke, so even Massmart’s core businesses have largely traded sideways during the pandemic. I wrote about the results here and I didn’t hold back.
  • Investec delivered its year end results presentation on Thursday, with the key point being that adjusted earnings per share is now ahead of pre-pandemic levels. Return on equity still has some way to go, coming in at 11.4% in FY22 vs. 12% in FY19. The cost to income ratio for the latest financial year is 63.3%. The South African bank’s loan book was up just 3.9% in this period, reflecting limited credit demand from the bank’s wealthy clients. To give you a flavour of the group exposures, 56% of adjusted operating profit is from Southern Africa and the rest is in the UK and Other. 76% of adjusted operating profit is earned by the Specialist Bank division and 17% is earned by Wealth & Investment. The rest sits in Group Investments. Learn more about Investec by referring to the results presentation at this link.
  • BHP announced that the shareholders of Woodside Petroleum have approved the substantial deal that merges Woodside with BHP’s oil and gas portfolio. This is an all-stock merger but most South African shareholders of BHP will be paid out in cash when the Woodside shares are unbundled, as Woodside will sadly not be listing on the JSE.
  • UK community shopping centre REIT Capital & Regional held its AGM and used the opportunity to update the market on its operations. Footfall for the four months to April 2022 was 76% of the level seen in the equivalent period in 2019, so there’s still a long way to go. The group believes that market sentiment has improved towards non-discretionary community centres, which would typically offer a convenience grocery store as the anchor. Through a lease with the NHS for a community healthcare centre, the group is experimenting with new strategies around community property needs. Occupancy at the end of April was 93%. The share price is 9% lower year-to-date.
  • Netcare released a trading statement for the six months ended March, in which it guided that HEPS would be between 19% and 21% higher and adjusted HEPS would be 28% to 30% higher. Adjusted HEPS takes out impacts like hedge accounting, fair value gains on derivatives, loan impairments and tax rate changes.
  • Frontier Transport Holdings, formerly called Hosken Passenger Logistics and Rail, has released a strong trading statement for the year to March 2022. HEPS will be 21% to 36% higher, coming in at between 85 cents and 95 cents. At R5 per share, the Price/Earnings multiple is around 5.5x. The group owns various transport businesses including Golden Arrow Bus Services.
  • Renergen has been a favourite of retail investors in recent times and has released its financial statements for the year ended February 2022. The value of the company sits in the future potential of the Virginia project, not in the current numbers. You can quickly see this by noting that this R4.5 billion market cap company recognised just R2.6 million in revenue in FY22! The share price is still 3.3% up year-to-date, holding up well amid the market chaos.
  • Vunani Limited released a trading statement for the year ended February 2022 that seems to tell a much better story for shareholders. HEPS will be between 34 cents and 35.4 cents, a massive increase on 7.2 cents in the prior period. The stock is highly illiquid and is down 12.8% this year.
  • Des de Beer (via entities linked to him) is buying up even more shares in Lighthouse Properties, with the latest acquisition being worth R6.6 million.
  • A non-executive director of Balwin Properties has bought just over R400k worth of shares in the company.
  • Value Capital Partners has acquired nearly R3.4 million worth of shares in education group ADvTECH.
  • If you are an Irongate Group shareholder, you should know that the Australian property fund is under offer from Charter Hall after attracting interest from a number of suitors. Deloitte has opined that the offer from Charter Hall is both fair and reasonable, so the board has recommended that shareholders vote in favour of the offer. The scheme meeting is scheduled for 29th June and the detailed scheme booklet (which we would call a circular to shareholders in South Africa) is available at this link.
  • AYO Technology has released a trading statement for the six months ended February 2022. The headline loss per share has worsened by between 34.4% and 54.4%. With the share price down 92% over the past 5 years, I’m sure the Public Investment Corporation (PIC) must be thrilled to see another loss. Not.
  • Chairman of Tongaat Hulett, Louis von Zeuner, will not be making himself available for re-election at the next AGM due to “personal circumstances” – he has also resigned from the board effective from 30 June 2022. Lead independent non-executive director David Noko has been appointed as interim chairman.
  • Globe Trade Centre, an Eastern European property fund listed in Warsaw and on the JSE, released a quarterly update. Rental revenue and Funds From Operations (FFO – the key measure for REITs) both increased year-on-year. The net loan-to-value ratio is 43% and a dividend has been declared thanks to a strong cash position.
  • enX Group has confirmed that the closing date to accept the R5.60 per share mandatory offer is Friday 3 June at 12pm, just in case you were planning a last minute Friday afternoon decision. With the share price trading at R8.30, I’m not expecting a rush through the door to take it.

Transaction Capital: still my favourite

The Finance Ghost
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Transaction Capital: still my favourite

Transaction Capital is quite possibly my favourite company on the JSE. With a top-class management team and a strong portfolio of assets, I’m a very happy shareholder and I plan to hold the shares forever unless something goes badly wrong.

After a strong share price run in the aftermath of the WeBuyCars deal and subsequent transactions to increase the group’s shareholding in the business, the earnings have had to play catch-up. The share price is trading at the same levels as November 2021, with plenty of volatility inbetween. Over the past year, the share price is up over 33%.

The latest news is the release of interim results for the six months to March 2022. With core headline earnings per share (HEPS) up 28%, it’s another solid performance.

Return on equity has been 14% for the past two interim periods. Return on assets increased from 4% in the comparable period to 4.5% in this period. This means that the group is carrying less debt overall, as debt is what “leverages” up the return on assets into a return on equity. Put differently, this is a higher quality way to have achieved a 14% return on equity.

The interim dividend per share is up a whopping 74%.

The company believes that earnings and dividends can grow over the medium-term at rates in excess of pre-pandemic growth rates. This is a direct result of the relevance of the group’s businesses in the South African economy: WeBuyCars, SA Taxi and Transaction Capital Risk Services.

WeBuyCars has been an astonishing story, with core headline earnings up 58%. As Transaction Capital has been increasing its stake in the company, core headline earnings attributable to the group has increased by 122%. Unit sales increased by 41% and the F&I product penetration (finance and insurance sold as part of the deal) increased from 12.9% of units to 16.6% of units. This helped drive revenue growth.

Interestingly, 29.5% of sales were online and of those sales, 17.6% were direct-to-consumers. A year ago, just 5% of online sales were direct-to-consumer. Watch this space, as friends in the UK tell me that buying a car online is a common practice there.

WeBuyCars has recently expanded into Morocco. The group is looking to take this business model to global markets and will do so in a measured manner.

SA Taxi is also a great business, though it has come under a lot of pressure in the past couple of years. Core headline earnings fell by 4% as commuter activity was suppressed by civil and taxi unrest. This impacts the ability of taxi operators to afford loan repayments, driving higher credit loss and provision coverage ratios.

In positive news, demand for new and quality renewed taxis (QRTs) has exceeded pre-pandemic levels, which drives growth in loans and advances. The insurance business grew its gross written premiums by 14% and claims have largely normalised to pre-pandemic levels except in the credit life book which remains elevated.

Transaction Capital Risk Services (TCRS) grew core headline earnings by 25% and had a far busier year buying debt books, with purchases up 94%. This puts local activity above pre-pandemic levels, with conditions in Australia subdued as fewer books of non-performing loans (NPLs) are being offered for sale.

Overall, WeBuyCars is leading the way and TCRS is performing well. SA Taxi has had to deal with all kinds of challenges. As those hopefully go away, the strength of the business will position it for growth.

I really do love Transaction Capital. Did I say that already?

Ghost Bites: Vol 9 (22)

The Finance Ghost
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  • Transaction Capital has released interim results for the six months to March 2022. Core headline earnings per share (HEPS) is up 28% and WeBuyCars continues to shine a light on the group’s prospects. I love this company and hold it in my portfolio. I’ve written a feature article here to give more details.
  • Santova has been riding the wave of supply chain shortages and pricing increases in the aftermath of the pandemic. In the year ended February 2022, HEPS increased by a massive 169.4% to 126.81 cents. No dividend has been declared as the group is focused on reinvesting in the business, a strong sign of the opportunities it is seeing. Santova also bought back 4 million shares in this period, contributing 19.9% to the increase in HEPS. Offshore operations contributed 82.6% of earnings in this period, significantly lower than 91% in the prior period as the local operations recovered. Santova’s share price has rallied over 42% this year, a really strong showing for this interesting company.
  • RFG Holdings (Rhodes Food Group) took a 19% knock on the market after releasing a trading statement for the six months to March (well, technically the 3rd of April). At first blush, it’s not clear why as HEPS was 30% to 35% higher. Normalised HEPS strips out restructuring costs and (more importantly) the insurance settlement for lost profits in lockdown. Normalised diluted HEPS only inched upwards by between 1% and 6% as input cost pressures hit the business. Cans, raw materials and logistics costs are increasing sharply and the group was unable to fully recover this impact through price increases to customers.
  • Indluplace Properties closed 11.9% lower after releasing results for the six months to March 2022. The residential-focused REIT reported a 4% drop in revenue and 18.2% drop in HEPS. Net asset value (NAV) per share fell by 10.8% to 698.51 cents, so the closing price of 275 cents is a discount of around 60% to the NAV. The positive element of the result is that the interim dividend has made a return, with 13.16350 cents per share declared. This puts the group on an annualised yield of 9.6% at the current share price, which should immediately tell you why there is such a large discount to the NAV. If it traded at NAV, the yield would be unacceptably low.
  • Shoprite has announced a B-BBEE employee trust transaction that will increase effective Black Ownership in Shoprite Checkers from 13.5% to 19.2%. There’s an important nuance here that you may have noticed: the group is talking about ownership in Shoprite Checkers (the SA subsidiary), not Shoprite Holdings (the listed group). This is typical in such empowerment structures, as there is usually no value to the group in effectively subsidising Black Ownership as defined in its businesses outside of SA’s borders. Interestingly though, employees in the group outside of SA will receive a cash bonus payment equivalent to that received by local staff under this scheme and based on similar rules. Distributions to beneficiaries will be based on minimum years of service and the position held. As 97% of employees are Black and 66% are Black Women, it seems as though all employees will qualify i.e. not just Black employees as defined in the Codes. The only exclusion is employees who receive share-based compensation as part of their packages. This deal comes at a significant cost, estimated to be 2.7% of group headline earnings on an annual basis. Although this is pitched as a B-BBEE deal, that is a function of the staff demographics rather than the structuring of the deal.
  • Nampak’s share price had a rollercoaster day where it traded as high as R3.22 in the morning and eventually closed at R2.76, flat for the day. An early-morning trading statement drove the activity, with an expectation of HEPS growth of between 88% and 107% to between 33.0 cents and 36.5 cents for the six months ended March 2022. This is an annualised Price/Earnings multiple of around 4x but I would tread very carefully here, as you need to do deep digging into the balance sheet and the debt covenants before having a punt at Nampak. The share price is down 28% year-to-date and is flat over the past 12 months.
  • Ninety One fell 3.7% after releasing results for the year ended March 2022. Although the asset management firm achieved record earnings and assets under management (AUM), the announcement noted that conditions worsened in the final quarter. When global markets are taking pain, asset managers take pain along with them as fees are based on AUM and those assets are worth what the market says they are worth. Net inflows of GBP5 million were achieved in this period, which is a key measure of how clients perceive Ninety One and how the funds are performing vs. the relevant benchmarks. HEPS increased by 27% and the dividend per share increased by 16%. The share price is down 20% this year.
  • Furniture retail group Lewis has released a trading statement for the year ended March 2022 that tells a good story. HEPS is expected to be between 30% and 40% higher, demonstrating the value creation potential of a share buyback programme when a company has traded at low multiples. Effectively, the company buys its own shares back at a great price and creates value for remaining shareholders by turbocharging earnings growth. Operating profit before impairments and capital items was only 2% – 6% higher.
  • Diamonds could be an investor’s best friend this year, with Anglo American announcing Cycle 4 diamond sales by De Beers of $604 million. This compares favourably to Cycle 3 at $566 million and is much higher than Cycle 4 in 2021 at $385 million.
  • In case you’ve always wondered what big ships cost, Grindrod Shipping announced the sale of Matuku (a 2016-built medium range product tanker) for $30 million. In a neat little trade, Grindrod will first exercise the option to buy the tanker for $25.4 million under the existing lease. The company is also buying 2015-built supramax bulk carrier IVS Pinehurst for $18 million. The charter on 2014-built supramax bulk carrier IVS Crimson Creek has been extended at a rate of $26,276 per day. So there we have it – now you know what they cost!
  • Deneb Investments released a trading statement for the year ended March 2022. HEPS is expected to be 30% to 50% higher, coming in at between 30.22 cents and 34.86 cents. The stock closed 25% higher at R2.50 per share, a Price/Earnings multiple of around 7.7x at the mid-point of the earnings guidance.
  • eMedia Holdings, the owner of e.tv, eNCA, Openview and YFM amongst other assets, has reported a strong result that saw increased share of the prime time market and 29% growth in television advertising revenue in the year ended March 2022. All those Anaconda reruns are clearly paying off, with HEPS from continuing operations approximately tripling to between 63 cents and 67 cents. The share price closed more than 15% higher on the back of this update.
  • NEPI Rockcastle released a business update covering the recent months of operations. The group will invest EUR37 million in solar PV at 30 shopping centres, reducing the carbon footprint and stabilising energy costs. Although the fund operates in Central and Eastern Europe, the war in Ukraine hasn’t impacted operations as there are no properties in the fund in either Ukraine or Russia. Sales in malls in February and March exceeded pre-pandemic levels and net operating income in the three months to March was up 32% year-on-year. Of concern is property operating expenses which jumped 47% as a result of much higher energy costs, necessitating the investment in solar. Liquidity is strong and the loan-to-value ratio was 32.5% at the end of March. Previous earnings guidance for 2022 has been maintained.
  • Investec Property Fund has released results for the year ended March 2022. Distributable income per share increased by 10.8% and the final dividend is up 10%. Loan-to-value has improved from 40.5% to 38.2%. Net asset value per share is up by a modest 2% and values of SA properties have stabilised. The fund expects low-to-mid-single-digit growth in distributable income per share in FY23. Notably, the CFO is leaving the group to spend more time with her family and the previous CFO as been appointed as interim CFO while a successor is found.
  • Newpark REIT is a small property fund that owns four buildings, including the JSE Building and 24 Central, an adjacent mixed-use property in Sandton where I spent many a Friday evening after work in my banking days. In the year ended February 2022, revenue fell 1.6%, funds from operations increased 16.8% and the dividend increased by 17.63%. The loan-to-value ratio is 33.6% which is healthy. The share price of R3.79 is a discount of 55% to the net asset value per share of R8.45. As the portfolio has considerable office exposure, the value went the wrong way in the current environment. The total dividend for the year was 46.91 cents, so Newpark is trading on a yield of 12.4%.
  • Emira has agreed to dispose of its 49.9% stake in Enyuka Prop Holdings for R638.6 million. This is a joint venture that owns 24 retail centres in lower-LSM (i.e. lower income) areas in South Africa. To help facilitate the deal, Emira will provide a R100 million vendor loan that bears interest at prime plus 3% for 36 months. The rate goes up if the debt isn’t repaid by then. The asset was carried in Emira’s books at a value of R624.15 million at the end of December 2021. The deal is too small to trigger shareholder approval.
  • Master Drilling deferred its dividend declaration in March based on uncertainty around the impact of the war in Ukraine. Clearly feeling more confident, the company has declared a dividend of 32.5 cents per share.
  • Mining group Tharisa has exercised its farm-in option to acquire a controlling interest in Karo Mining Holdings. As this is a small related party deal, an independent expert needed to opine on it. Mazars Corporate Finance has given its view that the deal is fair to shareholders of Tharisa.
  • Property mogul and Lighthouse Properties director Des de Beer has bought more shares in the company via one of his associated entities. The total value of the purchase was R728k.
  • Stefanutti Stocks is implementing a restructuring plan in a fight for its survival. The construction company is disposing of certain operations and is hoping to conclude the sales in the next 12 months. For the year ended February 2022, the headline loss per share for continuing operations was between -60 and -90 cents i.e. related to the businesses it plans to keep. The group headline loss per share is between -80 and -110 cents. In the civil claim by City of Cape Town related to Green Point Stadium, each construction party has agreed to make an annual payment of R10.5 million for the next three years, along with a commitment to social investment projects in the Cape Town district. This group’s share price collapsed shortly before the pandemic and has been clawing back a recovery since then.
  • Premier Fishing and Brands Limited as well as African Equity Empowerment Investments Limited are fighting to keep their bank accounts open with Nedbank. With Sekunjalo (Iqbal Surve) as the common link, the companies had to go to the Equality Court to try and stop Nedbank from cutting ties with them. I’ve never heard of an interim-interim interdict before, but that is what the companies have achieved to keep the accounts open pending the outcome of the interdict hearing that took place on 19th April 2022. For now at least, the bank accounts are still open.

Pick n Pay: a new Boone sweeps clean

The Finance Ghost
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Pick n Pay: a new Boone sweeps clean

Pick n Pay has been on a charge since March, with the share price up around 30% since the start of that month. Over the past 12 months though, the performance is disappointing with an increase of under 3%. Is that about to change?

In the 52 weeks to 27 February 2022 (retailers report based on weeks rather than calendar years), group turnover increased by 5.2% and gross profit margin fell by 100bps to 18.8%. After putting significant focus on cutting R1 billion in head office costs over the past two years, trading expenses only increased by 4.2%.

This turned an average performance at gross profit level into a strong performance at operating profit level. With a 6.7% decrease in net finance costs added to the mix, headline earnings per share (HEPS) increased by a decent 14.5%.

The dividend per share is 23% higher, a move that institutional investors will appreciate.

This result has been achieved against the backdrop of civil unrest in July 2021. It feels like a really long time ago now, but it falls into this reporting period. There were also trading restrictions on liquor, another issue that I’ve tried hard to forget about. The group recovered all material damage losses from SASRIA and also received R145.2 million in interim business interruption insurance payments.

Sales momentum was strong towards the end of the period, with 7.4% growth in the final quarter. As we move into a new reporting period, the growth should look good at top-line level as Pick n Pay is lapping the period that was significantly impacted by the riots.

The decrease in gross profit was partly attributed to substantial investment in price, which means the retailer absorbs some of the inflationary pressure rather than passing all of it on to customers. Price inflation was just 2.9% vs. CPI Food inflation of 6.2%. It’s not an exaggeration to say that our grocers are saving our people in this environment.

Pick n Pay indicates that the civil unrest impacted gross margin by 80bps. If Covid restrictions are stripped out of the base year, then gross margin of 19.6% in FY22 was only 50bps lower than 20.1% in FY21. Still, the retailers cannot absorb consumer price increases forever and ongoing inflation is going to favour the most efficient players in the sector.

Looking deeper, Pick n Pay Clothing continues to win market share as a pocket of excellence in the group, posting 21% sales growth. The group has refurbished 40 Pick n Pay Select supermarkets (aimed squarely at Checkers FreshX stores) and these have performed well. Bottles was rebranded to Pick n Pay asap! in August 2021 and has enjoyed ongoing consumer demand for convenient deliveries, growing 300% year-on-year since August.

Boxer remains an important growth area, with 200 new Boxer stores planned over the next three years. There are 66 new Pick n Pay Clothing stores planned for FY23. It is encouraging to see the group focusing in the right places.

Strategically, it seems as though Pick n Pay is FINALLY going to distinguish the Select stores from the middle-income stores. This is exactly what Shoprite Group has done so brilliantly with Checkers.

Recently-appointed CEO Pieter Boone is doing the right things here. This is the strongest update I’ve seen from Pick n Pay.

To learn more about the new strategy, you can read this investor presentation.

25 or 50, that is the question…

TreasuryONE
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25 or 50, that is the question…

Andre Botha, Senior Dealer at TreasuryONE, delves into the MPC meeting later this week and related considerations.

Last week was just the latest in a long line of data that only affirmed the scale of inflation currently in the market. US inflation numbers printed higher (8.5%) than the expected 8.3% number. From the numbers alone, it was easy to gauge the market reaction as the US dollar went on another rally, stronger all the way down to 1.04 against the euro.

US Inflation

The reason the US dollar went on another run is simple: with no signs of inflation being transitory as initially thought, the US Fed will have to act to curb inflation and bring it back to adequate levels. This will force the Fed’s hand to continue to hike rates in the immediate future, and this has caused the market to run toward the US dollar in anticipation of further hikes. It is also a possibility that with Central Banks in hiking cycles, we are in for a more challenging economic climate, and with the real possibility of recessions across the world, the US dollar is also seen as a safe bet.

The question is, what does this do to risky assets like the rand and its kin? We have seen a sell-off in the equity space worldwide as major indices recorded significant negative days in the past week.

This leads into the rand, where we have seen it bump its head at the R16.30 level numerous times over the past week. The level has held for now, but if the sentiment stays negative, it will only be a matter of when rather than if for the rand to break above R16.30, which could open the dollar for a swift run higher.

Another factor impacting the movement in the rand is the loss of ground in the commodity space and bad data out of China. With the rand being a commodity currency, it is influenced by drops in prices, as we have seen currently with Gold dropping all the way from $2,000 per ounce all the way to $1,800 in the wake of the Fed rate hike and inflation numbers coming out.

Brent Crude Oil is trading above $110 per barrel as there is optimism in the market, with China relaxing some of their COVID lockdown restrictions, which could see a surge in demand for oil. However, Oil is stuck in a hard place as some countries in the EU are vetoing the vote by the EU to ban Russian oil imports, which could relieve some of the pressure on supply should the ban fail to pass.

EURUSD 17May

Looking to this week, the biggest event is the speech by Fed Chair Powell later on today, which will shed some light on the Fed’s thinking, especially after the inflation numbers out last week. Some other inflation numbers are out as well, with the most notable being those from the UK and Japan. We expect markets to follow the US dollar this week for the most part.

We also have CPI data out later this week on the South African side, and we have the MPC meeting on Thursday. While an interest rate hike has been penciled in, the real question is whether the hike will be 25 or 50 basis points.

If growth was not a concern in South Africa, a 50 basis point hike would have been a dead certainty. Instead, the MPC has to balance the growth of South Africa versus hiking rates too quickly. A lot of emphasis will be placed on the tone being struck by the MPC in their statement. We can see the rand trading stronger if there is a hawkish tone, but the opposite is also true.

Visit the TreasuryONE website for more information on market risk management, corporate treasury and other services.

Ghost Bites: Vol 8 (22)

The Finance Ghost
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  • Pick n Pay has released a genuinely impressive set of results, with recently-appointed CEO Pieter Boone clearly having an impact on the group. Cost containment measures have paid off, allowing the group to cushion the impact of inflation on customers. Find out more in this feature article.
  • The CEO of mining giant BHP delivered a presentation at the Bank of America Global Metals, Mining and Steel Conference. The speech highlighted BHP’s strong balance sheet and world-class resources (including the largest copper resource and second largest nickel sulphide resource in the world), important ingredients for success in the current environment. Despite being a cyclical business, BHP’s diversification has helped flatten the peaks and troughs to deliver more consistent cash flows – by mining standards at least! There’s also a discussion on the decision to invest in potash, with Russia and Belarus contributing almost 40% of global production. BHP believes that the potash business can be at least as big as the petroleum business over time, which BHP is exiting through the deal with Woodside Petroleum. There are many more details in the full speech and presentation available at this link.
  • Investors in Discovery would do well to flick through the DMTN roadshow presentation available at this link on the website. Although the presentation is being used to raise debt, the information is just as relevant to equity holders. I found the Discovery Bank metrics interesting, with over 400,000 clients and 850,000 accounts. The bank has attracted R9.5 billion in retail deposits and made R4.5 billion in advances. Operating losses of R498 million are substantial but Discovery says this is running ahead of plan. I also found this slide so interesting that it was worth sharing here:
  • Quantum Foods has released a trading statement for the six months ended March 2022. HEPS will be between 14.5 cents and 17.1 cents, a decrease of between 36% and 46% from the comparable period. The pain was inflicted by an outbreak of avian influenza at the Lemoenkloof layer farm, a further reminder of the risks in the poultry industry. This had a negative impact of 8.6 cents per share and whilst an insurance claim is in process, no recovery can be recognised for the claim in this period as it isn’t finalised.
  • Industrials business enX Group has released results for the six months to February 2022. Although revenue is up 16.6% and headline earnings per share (HEPS) from continuing operations has nearly doubled to 53 cents from 28 cents in the comparable period, net cash before financing activities (i.e. operating cash net of capital expenditure) has fallen sharply from R336.1 million to R29.9 million. The driver of this cash movement is that the comparable period had a huge positive swing in working capital which didn’t repeat in this period. Capital expenditure is noticeably lower at R658 million vs. R871 million in the comparable period. The overall cash position has improved substantially thanks to the receipt of cash from the sale of Impact Handling UK. In the months after the end of this reported period, enX also concluded the sale of EIE SA for a net transaction value of R676 million. The share price is down 28% over 3 years but up more than 63% in the past 12 months. I think this is a turnaround story worth watching.
  • The soap opera at Ascendis Health continues. I may need to start calling it Descendis again. After the latest round of changes to the board, the debt facility from Apex Management Services and Pharma-Q Holdings was cancelled and made immediately due and payable, at the ratcheted (i.e. higher) interest rate just to add some spice. Never fear though, as there is yet another lender ready to take their place. These lenders and directors seem to come as a package deal. Austell Pharmaceuticals will lend R590 million to Ascendis at JIBAR plus 4% to settle the debt. This will also inject R10 million in working capital into the group. The debt is on more favourable terms than the previous debt package and is repayable by November 2022. A default is triggered if the Pharma business doesn’t end up being sold to Austell. The sales of Nimue and Ascendis Medical appear to be unaffected and must go ahead to help settle the debt. I still think Netflix is missing out on a boardroom drama here.
  • Speaking of Ascendis, director Gary Shayne has been closed out of more CFD positions i.e. he has lost more money on Ascendis. Lightning just doesn’t stop striking here.
  • Renewable energy company Kibo Energy has signed a rolling 5-year framework agreement with Enerox GmbH to develop and deploy CellCube Long Duration Energy Storage solutions in Southern Africa. This technology is based on vanadium redox flow batteries. The deal is exclusive for microgrid applications behind the meter (e.g. shopping centres and gated communities) and non-exclusive for any utility scale projects. Kibo hopes to sell this into an existing pipeline of projects ranging from 40kWh to 2,000kWh. If you want to see more of this technology in action, you’ll find the CellCube website here. There is unfortunately almost no trade in Kibo, with the share price having lost 93% of its value over the last five years.
  • Insimbi Industrial Holdings has updated its trading statement for the year ended February 2022, reflecting expected growth in HEPS of between 127% and 147%. The expected earnings range is 23.5 cents to 25.6 cents. The share price closed at R1.07 yesterday.
  • Gerrie Fourie, CEO of Capitec, has sold a whopping R56 million worth of Capitec shares. As director dealings go, that’s a biggie, though I must also note that this is a small part of his wealth. We can only dream, hey?
  • Stefanutti Stocks has agreed to sell a property for R33 million. This is part of the company’s restructuring plan and proceeds will be used to reduce debt.
  • Indluplace has released a trading statement for the six months ended March 2022. Distribution income will be just over R55 million, a decrease of 6.5% year-on-year. The good news is that the dividend is back, with 13.16350 cents per share declared as an interim dividend in accordance with the group payout ratio of 75% of distributable income.
  • Premier Fishing and Brands released results for the six months to February 2022. Revenue fell by 22% and profit before tax dropped by 38%. Despite this, HEPS increased by 75% to 3.07 cents as profit attributable to shareholders of Premier (as opposed to minority shareholders in subsidiaries) was much higher than in the prior year.
  • Equites shareholders should note that the dividend reinvestment alternative (receiving shares rather than a cash dividend) has been priced at R19.80 per share, a 3.2% discount to the 30-day volume weighted average price (VWAP). Those who elect to receive cash would receive a gross dividend of 84.61177 cents per share (the company’s previous announcement incorrectly said 80.56 cents per share).

Market update: currencies and commodities

TreasuryONE
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Market update: currencies and commodities

Rand update

Some very poor economic data out of China saw EM markets weaken to the Far East this morning, with the rand taking the biggest hit. Chinese retail sales for April fell by 11.1% vs. estimates of a 6.1% drop, while industrial production dropped by 2.9% vs. estimates of a 1.4% increase. The Covid-driven lockdowns also saw Chinese unemployment rise to 6.7% in April.

The rand, which had closed at R16.15 on Friday, weakened to R16.27 levels this morning on the back of the Chinese data but has managed to recover some of the losses and is currently quoted at R16.22. The R16.30 level has been tested on five occasions now and is still holding.

Commodity update

Gold and Platinum both closed softer on Friday, while Palladium ended 1.9% stronger. We start the new week with Gold slightly softer at $1,807, but Platinum and Palladium are both trading firmer at $941 and $1,955, respectively. The price of Oil has fallen this morning, with both Brent and WTI down 2.0% at $109.50 and $108.60, respectively.

International update

There was a pause in the dollar’s advance on Friday, and we saw both the euro and pound end marginally higher. Global geopolitical tensions and global growth concerns are underpinning the dollar as Sweden, and Finland’s NATO plans have seen Russia threaten retaliation.

The DXY index is sitting at 104.59 this morning, with the dollar trading at 1.0406 against the euro and at 1.2246 against the pound. US Treasury yields ended a touch higher on Friday, while Wall Street had a strong close to the week. The S&P was 2.39% stronger, the Nasdaq climbed by 3.82%, and the Dow was 1.47% higher. US futures, along with Asian markets, have started the new week in negative territory.

To find out more about TreasuryONE’s suite of solutions, visit the company website here.

Calgro M3 just shot the lights out

The Finance Ghost
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Calgro M3 just shot the lights out

Calgro M3 is an interesting company that has just reported the third highest revenue number in its history for the year ended February 2022.

The main focus of the business is to build integrated residential developments that bridge the gap between subsidised social housing and affordable housing. In other words, these are low-cost developments that offer a dignified way to live, which is critical in the South African social landscape as so many of our people are still making their way along the LSM curve from levels of poverty.

The other part of the business builds memorial parks as an alternative to traditional cemeteries. Again, this has an important role to play in society. The Memorial Parks business is still small (under 4% of revenue) and grew by 23.1% in this period.

This is by no means an easy business to run in South Africa. The group has struggled to deliver value to shareholders, with a share price that is down 77% in the past five years. Importantly though, the share price has nearly doubled in the past 12 months!

For value investors and those who like turnaround stories, Calgro seems to be worth a look.

In the year ended February 2022, revenue jumped by over 50% and headline earnings per share (HEPS) swung beautifully into the green, with earnings of 105.63 cents vs. a headline loss of 15.17 cents in the prior year.

This earnings performance was assisted by the gross profit margin returning to its target range (21.3% vs. range of 20% – 25%), which means the core property development business is back to where it needs to be.

Return on equity (ROE) of 14.7% is a solid performance and makes the share price interesting, as it is trading at around half of the net asset value (NAV) per share. This means the effective ROE is closer to 30%.

In this environment, Calgro needs to focus on keeping prices of new units affordable and at a level where banks will approve 100% bonds. This certainly isn’t easy in an environment of inflation and rising interest rates, effectively a double-whammy negative impact on home affordability.

There’s no shortage of pipeline for Calgro. The residential property development pipeline has estimated revenue of R15.3 billion and the memorial parks pipeline suggests revenue of R2.1 billion. Of course, it takes a long time to realise the full potential of the properties and the key is to maximise margin while doing so.

The balance sheet has been improved considerably. R107.4 million in debt was repaid this year, with a closing balance of R850.6 million. Net debt to EBITDA has dropped to 0.71x , a return to 2018 levels after a peak in 2019 of 1.09x.

If you are interested in learning more about the company, register to attend the next Unlock the Stock event that I co-host with Mark Tobin and the team from Keyter Rech Investor Solutions. We will be hosting the management team at 12pm on Thursday 26th May for a presentation and Q&A session where retail investors (like you) can ask questions directly. This is a wonderful learning opportunity that gives you the kind of access to the management team that is usually reserved for sell-side analysts. Attendance for this online event is free and you need to register at this link.

Ghost Bites: Vol 7 (22)

The Finance Ghost
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  • Calgro M3 released results for the year ended February 2022. There’s been an enormous positive swing in Headline Earnings Per Share (HEPS), from a loss of 15.17 cents in 2021 to a profit of 105.63 cents in 2022. The good news starts right at the top, with revenue up 50.3%. Although there is still no dividend, this is clearly a strong result. Despite this, the share traded lower and remains at a substantial discount to net asset value per share.
  • It was a day of results from property developers, with Balwin also announcing results for the year ended February 2022. Revenue is up 16%, HEPS is up 6% and core HEPS (which excludes charges related to the B-BBEE deal) is up 16%. The cash position approximated doubled year-on-year. The net asset value (NAV) is 10% higher at 749.01 cents per share and the share traded at R2.65 in morning trade, a hefty discount to NAV that hasn’t been helped by market sentiment towards the company, which soured further after a poorly communicated deal to buy a new head office near Melrose Arch. A final dividend of 13.5 cents per share takes the total 2022 dividend to 20.9 cents.
  • After blockbuster results from MTN (see yesterday’s feature article at this link), sector peer Vodacom released results for the year ended March 2022 and reminded the market that it is on a much slower and steadier growth path. Revenue was up 4.5% (or 5.8% on a normalised basis excluding currency effects) and Vodacom now has 129.6 million customers across the group. HEPS was up 3.4%, free cash flow increased by 4.6% and the full year dividend was 3% higher at 850 cents per share. Interestingly, capital intensity (the percentage of revenue invested in capital expenditure projects) increased 80bps to 14.3%. The share price traded 3% lower in the morning at around R141.6 per share, reflecting a dividend yield of 6%.
  • Altron released results for the year ended February 2022, with revenue growth of 5.7% and HEPS growth of 37.8%. If you are happy to work with the company’s definition of normalised HEPS, then that is 82.9% higher at 75 cents per share (vs. 51 cents without adjustments). There have been several disposals of businesses by the group and a few segments that were turnaround stories. There’s been significant focus on reducing costs and collecting debtors as well, so it is encouraging to see a decrease in working capital (cash tied up in the operations). This bucks the trend in IT hardware businesses globally which have had to increase their investment in inventory in a time of chip and other shortages. CEO Mteto Nyati is leaving the group in June 2022, having given it a solid base off which to deliver the Altron 2.0 strategy.
  • Redefine Properties has released results for the six months to February 2022. Distributable income per share is up just 0.6% and the SA REIT NAV per share has dropped by 8.8%. Portfolio occupancy fell from 92.9% to 91.7% over the past six months. The major concern is that office vacancies have deteriorated even further, from 12.9% at the end of August to 16.4% at the end of February. The group is making slow progress in reducing the loan-to-value (LTV) ratio, down 50bps to 41.9% with a target to reduce it to 40%. This isn’t an easy reduction to achieve, requiring a halt to non-essential capex and disposals of properties to pay down debt. Redefine is down around 6% this year and it looks like the tough times aren’t over in the sector.
  • Raubex has announced its results for the year ended February 2022 and it mostly makes for enjoyable reading. Revenue is up 30.9% and HEPS is up by a whopping 263.1% to 297.4 cents. The cash flow statement isn’t as flashy as the income statement, with cash generated from operations down 39.8% to R800 million and capital expenditure up sharply to nearly R696 million. Once all cash flows are considered, the group devoured R259 million in cash. This included R137 million in dividends to group shareholders and R42 million in share buybacks. There’s still R1.5 billion on the balance sheet, but I always tread carefully when a company is effectively paying dividends from cash reserves rather than operating cash flows net of capital expenditure.
  • Astral Foods certainly wasn’t clucking around in the six months to March 2022. The poultry producer achieved a revenue increase of 26% and HEPS jump of 138%. The interim dividend of R7.90 per share is much higher than R3.00 per share in the comparable period. In fact, it’s even higher than the full year 2021 dividend of R7.00 per share. This excellent result was driven by higher poultry volumes and the partial recoupment of input costs. The balance sheet is strong, with net cash inflows of R639 million in this period and a net cash balance of R909 million at the end of March. The company has indicated that the supply-demand dynamic for the rest of the year looks balanced, which could support further recovery of input costs. The share price rallied 4% shortly after the announcement, but is still more than 6% down this year.
  • Barloworld has released an update for the six months ended March 2022. Without any adjustments, group HEPS has more than doubled to between 750.6 and 760.6 cents. There are various other growth ranges presented based on the treatment of Avis Budget Southern Africa as being held for sale. The company also used the announcement to remind shareholders that the secondary listing in London was cancelled back in October 2021 based on lack of liquidity in the shares on that market. Barloworld jumped over 5% higher after the news to trade at around R111.50, a Price/Earnings multiple of around 14.8x. The share price is still down around 27% this year because of the exposure to Russia.
  • Life Healthcare released a trading statement for the six months to March 2022. HEPS from continuing and discontinued operations is between -15% and -12% lower. If you exclude the Scanmed disposal and the strength in the base from Covid-related contracts, earnings growth would’ve been around 10%. Normalised EBITDA margin is 17% (up from 16.6% in the comparable period) and net debt to normalised EBITDA is 2x, a significant improvement from 2.78x a year ago but worse than 1.82x at 30 September 2021. The market didn’t like it, sending the share price over 4% lower in initial trading after the announcement came out.
  • Jubilee Metals Group has invested R796 million over the past 12 months in its operations. The expanded, wholly-owned Inyoni operation in South Africa is exceeding design throughput and has put Jubilee on course to achieve its PGM ounce production target even without relying on joint ventures in the group. Chrome concentrate is sold to offset PGM production costs. In Zambia, the group has achieved significant milestones in delivering the Southern Copper Refining Strategy, which also makes use of a cobalt by-product. Jubilee’s share price is four times higher than at the start of 2020, an astonishing return, but has drifted 24.5% lower over the past 12 months.
  • Sirius Real Estate has agreed to sell an asset in London for GBP16 million on a net initial yield of around 2%. The asset was acquired at the time of the BizSpace deal and this selling price is a 94% premium to the value at the time Sirius acquired the asset. The company points to this as an example of how the BizSpace platform creates value in the portfolio by increasing rental income.
  • Premier Fishing and Brands has released a trading statement for the six months ended February 2022. HEPS is expected to be between 65.4% and 85.4% higher, an expected range of 2.90 to 3.25 cents. Although the share price closed 24% higher, that trade took place hours before the announcement came out, so it wasn’t a reaction to this news.
  • Ascendis Health is trading under cautionary as the company has entered into negotiations to refinance its loan facilities. Hold onto your hats, as anything is possible here!
  • A director of a subsidiary of PSG Konsult has bought shares in the company worth nearly R2 million. That’s a meaty enough trade to warrant a place in Ghost Bites.
  • Michiel Le Roux, founder of Capitec and non-executive director, has entered into a collar transaction on Capitec shares through associated entity Kalander Sekuriteit with a deemed value of R1.2 billion. The put strike price is R1,871.20 and the call strike price is R3,326.58. These option structures provide hedging protection against a move below the put strike price, while giving away upside above the call strike price. The current price is R2,140 per share.
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