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JSE Limited: a cash cow in a shrinking field

The Finance Ghost
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JSE Limited: a cash cow in a shrinking field

You may not be aware of this, but the JSE Limited is listed on the JSE. You’re right in thinking that this sounds like the financial version of the movie Inception.

It’s no secret that the JSE is under pressure. The number of listings has fallen sharply (a situation that isn’t unique to South Africa) and competition from other exchanges has heated up. In my view, this is especially true for A2X, which has created a viable competitor to the JSE in the secondary market (trading of shares vs. regulation of listed companies).

This pressure is clearly visible in the numbers for the year ended December 2021. Operating revenue increased just 3% and EBITDA was flat year-on-year, so expense growth is running ahead of revenue growth. There is some noise in those numbers, as the acquisition of JSE Investor Services is now fully consolidated.

Profitability was hurt by the record low interest rate environment, which saw finance income drop 27%. To give more context to this, operating revenue was R2.52 billion and finance income was R146 million.

The finance income is generated on substantial cash reserves and regulatory capital, with the latter being required under the Financial Markets Act.

Net profit after tax fell 7% to R722 million. HEPS decreased 6% to 878.9 cents.

Despite this, the JSE has declared an ordinary dividend that is 4% higher than the previous year, coming in at 754 cents per share for 2021. The payout ratio has increased from 83% to 92%.

On top of his, there is a special dividend of 100 cents per share. This means that the company is paying out almost all profits generated last year, but doesn’t want to give the impression that this will be the case every year. This is why companies call them “special” dividends as a messaging tool to shareholders.

The total dividend of 854 cents per share is a yield of 7% based on yesterday’s share price. The JSE as a company is a classic cash cow, generating strong cash flows and paying nearly everything out to shareholders. Over the long-term of course, the bigger debate is around whether it can grow.

The share price is down more than 20% over the past 5 years.

PSG Group and the Great Value Unlock

The Finance Ghost
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PSG Group and the Great Value Unlock

This is one of the biggest news stories on the JSE that we’ve seen in a while, as PSG Group has taken the ultimate step towards getting rid of the investment holding company discount that has plagued the company and so many others just like it.

That step is to collapse the holding company structure altogether. Yes, PSG is planning to unbundle almost all of its assets and delist from the JSE.

Those who bought PSG as a discounted entry point into the underlying assets are smiling all the way to the bank, as the share price jumped over 30% in response to the news, before drifting lower over the course of the day to close 18.7% higher.

The assets to be unbundled are a 60.8% stake in PSG Konsult, a 63.6% stake in Curro, a 34.9% stake in Kaap Agri (subject to Zeder unbundling its stake in Kaap Agri), a 25.1% stake in Stadio and finally a 47% stake in CA&S, which will be separately listed on the JSE.

CA&S is the business you may not be familiar with. This is an FMCG business operating in several southern African countries. It is listed on the Botswana Stock Exchange and 4AX in South Africa. A JSE listing would now be added to that list, which makes me wonder about whether the 4AX listing will be retained.

In addition to the unbundled assets, shareholders would receive R23 per PSG Group share. Based on closing prices for the underlying assets on 25 February 2022, the value of unbundled investments to be received per PSG share is R90.94. Adding the cash consideration of R23 takes this to a total pre-tax value of R113.94.

This number will change based on movements in the share prices of the underlying assets, so you can expect ongoing volatility in the PSG share price. It closed yesterday at R97.15.

The tax consequences can get technical on deals like this. The position for most shareholders is that the unbundling will not attract any tax. The R23 in cash will be treated as a dividend and subject to dividend withholding tax.

Assuming the final decision to proceed is made, the next step would be the issuance of a circular to shareholders.

Alviva: 20% revenue growth excl. Tarsus

The Finance Ghost
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Alviva: 20% revenue growth excl. Tarsus

After teasing the market with a trading statement, Alviva has now released all the details of the interim results for the six months ended December 2021.

The technology group posted a 54% jump in revenue and HEPS skyrocketed 142%.

Importantly, the acquisition of Tarsus for R185 million is fully included in these numbers and that limits their comparability to the prior period. Excluding Tarsus, revenue would’ve increased 20%, not 52%. That’s still a solid outcome but it does show the impact of bringing the Tarsus numbers into the group.

Also take note that earnings per share (not HEPS) has been positively impacted by a R75 million bargain gain recognised on the acquisition of Tarsus.

There’s also a beneficial adjustment on the amount payable for Synergy UAE, with R11 million released to other income based on the remeasurement of what Alviva expects to pay. That sounds like good news, but it means that the underlying business is not hitting the financial milestones envisaged in the deal and so the purchase price is lower. Alviva notes that restrictions in movement during the lockdown stages have been a problem.

A sharp increase in finance costs has been driven by higher working capital in the ICT Distribution segment (e.g. carrying and funding more inventory), extensions of forex contracts and the inclusion of Tarsus in the numbers.

Speaking of ICT Distribution, that segment posted a solid result with a positive narrative across the underlying businesses. Tarsus is included in this segment.

The Services and Solutions segment has a number of interesting businesses. The likes of Datacentrix and Sintrex improved profit before tax by 20% and 22% respectively, while DG did even better with profit up 40%. The supply chain issues are still hitting certain parts of the business, like Solareff with a record order book (thanks Eskom) but supply constraints that have led to the business still only breaking even.

The Financial Services segment grew its book by R107 million and credit losses are at acceptable levels. A new investor has joined the securitisation structure, increasing the funding available to Centrafin to R1 billion. This is sufficient for at least the next 18 months.

Inventory levels at the end of December were very high (R2.5 billion vs. R815 million at the end of 2020), explained to some extent by the Tarsus acquisition. There was a general increase in stock over this period, which isn’t necessarily a bad thing given the supply chain challenges and shortages that many companies have experienced.

The Absa preference share facility has a R250 million outstanding balance, with R50 million of the R100 million raised for the Tarsus acquisition already settled.

In line with previous years, there is no interim dividend.

Liberty Two Degrees: reversions continue to bite

The Finance Ghost
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Liberty Two Degrees: reversions continue to bite

Liberty Two Degrees holds stakes in some of the most iconic properties in the country, like Sandton City (25% holding), Nelson Mandela Square (33% holding) and Melrose Arch (8% holding).

You would expect these properties to be strong even after the pandemic, but a portfolio rental reversion of -25.9% in the year ended December 2021 demonstrates that the power really has swung away from the landlords. This means that new leases are being signed at rates that are nearly 26% lower than in the expired lease. Note that this is over the entire portfolio, not just these crown jewels.

On the plus side, occupancy has increased to 96.8% and footcount increased 22.6% in this period. The office portfolio has an 86.2% occupancy rate, down from 86.6% at the end of June 2021. For context, the MSCI benchmark office occupancy rate is at an all-time low of 84%.

Net property income from the retail portfolio improved by 27.3% vs. the prior period but remains 18% below 2019. The quarterly trend is important during this period, with retail portfolio turnover a notable 5.1% higher in Q4’21 vs. Q4’19. Luxury brands, technology and grocery stores have led the recovery.

Sandton City is the star of the show (unsurprisingly), posting all-time high turnover in 2021 that came in 4.3% above 2019. Eastgate isn’t doing so well, as the surrounding area has suffered an economic decline.

The hospitality sector is still struggling, with those assets contributing R17 million less to net property income than in 2020 – surprisingly going backwards vs. the first year of the pandemic. The contribution is R65 million lower than in 2019.

The balance sheet is in excellent health, with a loan-to-value of nearly 23.9% (lower than many REITs). This has enabled a 5.47% increase in the full year distribution to 34.1 cents per share. As a reminder, REIT “dividends” are called “distributions” as they are taxed at normal income tax rates, not the lower dividends withholding tax rate.

In a story that many Joburg residents can relate to, Liberty Two Degrees is fighting (I mean “engaging”) with the City of Johannesburg to finalise the valuation of Sandton City for the purposes of rates increases. The fund has lodged an appeal in this regard.

The fund believes that the property portfolio valuation has stabilised, down 0.8% in 2021.

HEPS increased by 31.86% vs. the prior year, a much higher increase than the distribution per share. The relationship between HEPS and distribution per share looks more sensible now, with the distribution per share only slightly higher than HEPS. I would suggest focusing on the cash rather than the accounting earnings, which are more volatile due to complexities in accounting rules.

The net asset value (NAV) per share is R7.56 (down 1.9%) and the share price closed 5.6% lower at R4.20, a discount to NAV of 44%.

Bidvest: strong trading profit growth in every division

The Finance Ghost
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Bidvest: strong trading profit growth in every division

Bidvest closed 3.8% higher after releasing results for the six months to December 2021.

This is a highly diversified group with exposure to everything from businesses servicing office properties through to commodities and renewable energy solutions, with some automotive and freight thrown in for good measure. There are even pianos, of which I’ve been a happy customer of a Yamaha digital example!

There are winners and losers within the group each year, with the theory being that the management team focuses its energy and capital investment on the juiciest bits.

All divisions posted double digit trading profit growth in this period, so there was plenty of juice.

The Services division grew trading profit by 19.3%. Branded Products grew trading profit by 24.4%, driven by a strong recovery in Adcock Ingram as people got sick again from something other than Covid. The Freight business posted a whopping 29% increase in trading profit, thanks to bumper agricultural volumes and decent LPG and bulk mineral volumes.

Commercial Products grew trading profit by 24.9%, which includes businesses like Plumblink and Yamaha. Automotive grew trading profit by 15%, with new vehicle sales up 9.0% and used vehicle sales down 10.8%. Finally, Financial Services grew trading profit by 20.1% with growth in foreign exchange and insurance business lines.

From continuing operations, the group posted a juicy R50 billion in revenue, up 13%. R5.1 billion in trading profit reflects a 25% increase on the prior year, a pleasing operating margin expansion for investors.

Group headline earnings per share (HEPS) from continuing operations increased by 35.3% to 813.8 cents. On a normalised basis, the group reported a 31% increase in HEPS.

The earnings have translated solidly into cash, driving a 31% increase in the interim dividend to 380 cents per share.

Of the R4 billion in cash generated from operations (after hefty working capital movements), R1.2 billion was needed for capital investment. Shareholders won’t mind, as return on invested capital (ROIC) of 15.5% is above the group’s weighted cost of capital.

Bidvest is looking abroad, having successfully raised a USD800 million international bond at a fixed semi-annual coupon of 3.625%. This has been swapped into GBP using a cross currency swap, reflecting the group’s focus on the UK. From 1 April 2022, the Services division will split into Services SA and Services International, so its no secret where the international growth strategy will focus. As things stand, there’s an almost equal split between local and offshore revenue in this segment.

The share price is up 25% in the past year, a solid return for those who punted on the stock. Bidvest was stuck in a range from 2018 to the start of the pandemic and is now at a level that is firmly back in that range.

The key consideration for shareholders is whether it can finally break higher.

RCL is far more than just a chicken business

The Finance Ghost
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RCL is far more than just a chicken business

RCL is far more than just a chicken business these days, which isn’t a bad thing. The chicken business isn’t for chickens, with paper-thin margins and a long list of risks, including the threat of biological issues like avian influenza.

The dreaded influenza was an issue for local poultry producers in the latest reporting period and RCL didn’t escape that problem. Despite that, RCL managed to return to break-even in the Chicken Division in the six months to December 2021.

It turns out that you can have too much of a good thing and that it is possible to be too diversified, creating operational and structural complexities.

RCL is reworking its corporate structure to enable the value-add branded foods business (Groceries and Baking) to operate in a more pureplay environment and be scaled accordingly. Investors will be hoping for a value unlock here in the form of a corporate transaction or major strategic push. Whilst the former is anything but guaranteed, the latter has been confirmed by the company talking about a “growth agenda” in this part of the business.

Vector Logistics had to integrate the local Imperial Logistics cold chain business, an additional challenge in a period that was difficult for supply chains everywhere. The group highlights that volumes have almost returned to pre-Covid levels, which is encouraging for investors.

In this six-month period, RCL achieved 9.2% growth in revenue, driving an increase in earnings before interest, taxes, depreciation and amortisation (EBITDA) of 14.4%. With adjustments made to reflect once-off items and calculate “underlying EBITDA” the growth drops to just 2.5%.

A similar story plays out in headline earnings per share (HEPS), which increased by 21.6% under standard accounting rules and just 3.1% with the adjustments made.

The adjustments relate to fair value changes in commodity procurement positions, civil unrest and Covid-related direct costs and fire damage at the Komatipoort sugar warehouse.

RCL has a new CEO in the hotseat, as Paul Cruickshank took over from Miles Dally on 1 December 2021 following Dally’s retirement. This led to a new executive structure being put in place, including a consolidation of the CEO and COO roles.

Going forward, the group is focused on its innovation pipeline to keep the range in line with consumer trends. The Food Division boasts the highest Return on Invested Capital (ROIC) in the group, so it is clear why the executive team is focused on this part of the business.

The share price is up around 70% in the past year and 5.6% year-to-date.

Unlock the Stock: Afrimat and Spear REIT

The Finance Ghost
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Unlock the Stock: Afrimat and Spear REIT

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

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

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

The inaugural event featured Afrimat (a company with an incredible track record of delivery to shareholders) and Spear REIT, a property fund that punches well above its weight.

Sit back, relax and enjoy this video recording of our session with Afrimat and Spear REIT:

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