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Ghost Bites Vol 40 (22)

The Finance Ghost
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10
Ghost Bites Vol 40 (22)

Corporate finance corner (M&A / capital raises)

  • City Lodge Hotels punters will be pleased to know that the sale of the East African operations has become unconditional, which means there are no further hurdles in the deal. The effective date was 30 June and the proceeds will be received “imminently” – great news for the City Lodge bank account. The share price is down 29% this year and hasn’t shown signs of turning, despite a promising recent update from the company regarding occupancies.
  • Mondi has completed the sale of its Personal Care Components business to Nitto Denke (a Japanese diversified manufacturer) for an enterprise value of €615 million. Mondi is focused on growing in sustainable packaging and this business wasn’t seen as a strategic fit going forward.
  • Heriot REIT and Safari Investments are still sorting out finer details of the offer that Heriot is making to shareholders of Safari. The Takeover Regulation Panel has granted an extension for the offer circular to be posted by 29 July.

Earnings updates

  • Lesaka (previously Net1 – and now with a beautiful website instead of Net1’s hideous effort that looked like it was built using DOS) has released Connect Group’s financial statements for the 2021 and 2022 financial years. Remember, Lesaka just acquired this group for around R3.7 billion. Revenue was up 22% to R5.1 billion and gross profit grew 37% to R570 million. EBITDA was 26% higher at R382 million, outperforming the EBITDA that was “warranted” in the agreements i.e. promised by the sellers to the buyer. If you are interested in learning more, the company is hosting a webcast on 7th July that you can sign up for here.
  • Primeserv’s release of results has been slightly delayed. The numbers for the year ended March 2022 will be released on Friday, 8th July.

Share buybacks and dividends

  • Barloworld has given an update on its share repurchase programme. Over the course of June, Barloworld repurchased shares worth nearly R550 million at an average price of R91.33. This represents around 3% of shares in issue, with the authority from the AGM in February allowing for a further 7% of shares in issue (at the time of the AGM) to be repurchased. This has been a very tough year for Barloworld, with the share price down nearly 43% after a significant destruction of value in Russia that was obviously beyond the group’s control.
  • If you are a shareholder in Industrials REIT, please be aware that you need to choose whether to receive the next distribution in cash or in shares. The default selection is cash, so you need to act if you would prefer to receive more shares. Companies usually do this in an effort to preserve cash, as they would rather issue more shares than pay cash out of the group. Interestingly though, as the group is trading at a discount to net asset value, the board notes that it may execute buybacks to match the level of shares issued, so as to not dilute shareholders. This makes me wonder what the point of the scrip dividend is. I’m sure the answer lies somewhere in the circular which was distributed to shareholders on Friday, so make sure you read it if you are invested here.
  • Telemasters Holdings has announced a dividend of 0.5 cents per share. The share closed at R1.10 on Friday, so this dividend isn’t going to set anyone’s pants on fire.

Notable shuffling of (expensive) chairs

  • Following the tragic loss of iconic founder David Kan, Mustek has appointed Hein Engelbrecht as the new CEO. This secures continuity for the group, as Engelbrecht has been with the group for well over two decades.
  • York Timber has announced the permanent appointment of Gerald Stoltz as CEO of the group. This means that a new CFO will need to be appointed and the company will make an announcement in due course.
  • Shortly after leaving Altron as its CEO, Mteto Nyati has been appointed as an independent non-executive director at Massmart. He has plenty of experience in turnaround stories, so this is a solid appointment to the board for the struggling retailer. Massmart’s share price is down 42% this year as the group has struggled to find any success with formats like Game.

Director dealings

  • Back in June 2019, Famous Brands was trading at around R85 per share. The former CEO of Famous Brands and son of the founder entered into a collar structure around that time. This is a put option at R74.62 and a call option at R120.22, typically put in place as a defensive play for executives. The holder of the collar structure relinquishes the upside over R120.22 per share and is protected below R74.62 per share. With the share price at R58.70 on Friday, the put was exercised and the counterparty is now the proud owner of R14.2 million worth of shares at a price of R74.62, 27% above the market price. These structures are usually fully hedged by the counterparty (often a bank), with the bank locking in a margin in the pricing of volatility at the time of entering the collar.
  • An executive director has bought shares in CMH worth over R2.6 million. That’s a pretty big play at this point in the cycle, particularly with rising rates and clear pressure on consumers. The share price is up around 6% this year and 13.8% over the past 12 months. It does pay a large dividend, though.
  • An independent director of AngloGold Ashanti has bought shares in the company worth $80k (R1.3 million) – I’m glad he sees some value in the group. It would be nice if my gold shares eventually showed me some love.
  • A director of Kaap Agri has bought shares in the company worth R94k.
  • An associate of an executive director of Trematon has bought shares in the company worth R62.4k.

Unusual things

  • JP Morgan has reduced its stake in Clicks from 10.04% to 6.93%. I usually ignore institutional changes, but this one is notable because the Clicks share price is almost entirely supported by its offshore investor base. Local investors scratch their heads about the Clicks valuation on a regular basis. To see an international investor selling down like this is relevant, particularly in light of our current challenges with load shedding. What will it take to spook offshore investors?
  • The JSE has released a list of companies in the naughty corner for not submitting annual financial statements on time. Luxe Holdings, Chrometco, Brikor, African Dawn Capital and Sable Exploration and Mining are all in detention. In the case of African Dawn, the company confirmed in a separate announcement that the delay relates to a dispute with SARS and the impact this has on the financial statements.

There are often announcements that are immaterial to most readers (like low value director dealings, acceptance of share-based awards and changes in non-executive directorships) that don’t make the cut for Ghost Bites, though they may have some relevance to you. Ghost Bites (and Ghost Mail) is never a replacement for your own research into an investment.

Ghost Bites Vol 39 (22)

The Finance Ghost
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0
Ghost Bites Vol 39 (22)
  • PBT Group released its results for the year ended March 2022 and they tell a wonderful story. By operating in the big data and cloud computing industry, PBT enjoys incredibly high organic demand for its services. Swimming downstream is always so much easier than upstream. Margins are higher and all of it lands in the bank account, with near-perfect conversion of EBITDA into cash from operations. To understand more about this result and the business, read this feature article.
  • Industrials group Hudaco has released its results for the six months ended May 2022 and they are worth paying attention to. Operating leverage is clearly visible here, as strong revenue growth looks even better once you reach the bottom of the income statement. The balance sheet is growing in response to pressures on supply chains, but Hudaco has enough flexibility in its operating model to handle this with relative ease. To learn more about Hudaco, you should read this feature article.
  • Exxaro released a pre-close update for the six months ended 30 June. The API4 coal export price index has averaged around $270 per tonne vs. $151 in the six months ended December 2021. Total production is up 1% vs. the preceding six months and sales volumes are down 3%, which means the company has mostly taken advantage of the pricing but it could’ve been a lot better. Logistical constraints were the major issue, with export volumes down 27%! The ongoing pressures on local ports can only be good news for Grindrod, which has enjoyed incredible growth in its Mozambique port and terminals business (refer to this feature article for more information on that). To give an idea of just how bad Transnet is, the Mpumalanga export rail performance declined from 15 trains per week in 2021 to 8 trains per week this year. In good news for cash flows, capital expenditure is around 47% lower.
  • Sibanye-Stillwater must’ve been pleased to announce something unrelated to strikes or floods. The group already holds a 30.29% stake in Keliber (a Finnish mining and battery chemical company) and intends to exercise a pre-emptive right to increase the shareholding to 50% plus 1 share, which will set Sibanye back €146 million. In addition, Sibanye will make a voluntary cash offer to the minority shareholders of Keliber, other than the Finnish Minerals Group (a state-owned holding and development company). This would take the stake to over 86% if minorities accept the offer, which would come at a further investment for Sibanye of €196 million. A capital raise will then be executed with a potential equalisation mechanism that would get Sibanye to an 80% holding anyway, with a maximum possible cheque from Sibanye of €104 million for the raise. The total potential investment is thus €446 million, with a maximum of €250 million being in equity and the rest being in debt. Keliber is aiming to be the first fully integrated lithium producer in Europe, so this deal is core to Sibanye’s “green metals” strategy. Sibanye hopes to close the deal by February 2023. The share price is down over 15% this year, so Sibanye shareholders (like me) will be pleased to see positive momentum.
  • Alviva jumped by over 16% on the news that it may join the long list of companies that have departed from the JSE. The company has received an expression of interest from a consortium looking to buy the remaining shares in Alviva that they don’t already own. The consortium comprises major shareholders and empowerment partners of Alviva with an existing stake in the company of 18.6% of shares in issue. Key managers at Alviva have been invited to participate in the consortium as well. A cash offer of R25 per share will be made to shareholders, representing a premium of 30% to the 30-day volume weighted average price. Absa will be providing funding to the consortium. At this stage, there is no firm offer. If discussions between the parties reach that point, a firm intention announcement will be released.
  • Sabvest Capital has acquired a look-through interest of 18.95% in Halewood South Africa by participating in a consortium that bought the entire company from UK holding company Halewood International. This is a manufacturer of alcoholic and non-alcoholic beverages including Red Square and Caribbean Twist. There’s also a drink called Buffelsfontein, which sounds like it hurts the next morning. Sabvest’s investment is held through its 41.03% interest in Masimong Beverage Holdings and RMB has come in as a co-investor. The share price closed 8.8% higher on a day that burned bright red on the JSE, taking the year-to-date performance to a highly impressive 34%. This investment group is a lovely reminder that there is plenty of money to be made in the local market if you know where to look.
  • Datatec has withdrawn its cautionary announcement and released all the relevant details of the disposal of Analysys Mason for up to £210 million. The purchaser is Bridgepoint Development Capital. Datatec’s share of this number is approximately 38% of Datatec’s market cap and the proceeds will be paid to shareholders as a special dividend. This is a substantial value unlock, which is why the share price jumped 22.5% on the day. A deal of this size has many hoops to jump through, so the various approval processes will now get underway.
  • Merafe Resources has announced the benchmark ferrochrome price for the third quarter of 2022. The price of $1.80 per pound is a 16.7% decrease from the second quarter. The share price has gained over 36% this year and only lost 3.7% despite this announcement. With Eskom as a major risk for the group, there’s rigorous debate on Twitter about whether this company is truly a bargain. On a trailing Price/Earnings multiple of 2.4x, there’s a pretty big margin for error built into the valuation.
  • Pan African Resources closed 5% higher on a day that was red for the gold miners. The group has completed a definitive feasibility study on the Mogale Gold Tailings Storage Facilities that form part of the Mintails Mining assets near Krugersdorp. The highlight is that the project has the potential to increase the group’s current production by at least 25%. The real ungeared internal rate of return (IRR) is estimated to be 20.1% based on a gold price of $1,750/oz and an exchange rate of R15.50 to the dollar. Construction capex would be R2.5 billion with an estimated payback period of 3.5 years post commissioning. The construction period would be between 18 and 24 months.
  • Lighthouse Properties has released a pre-close update related to the six months ended 30 June. In April and May, turnover in the portfolio exceeded the 2019 pre-Covid turnovers by 5.1%. That’s a major turnaround from the relative performance of -6.1% in the first quarter of 2022. Notably, France is still running well below pre-Covid levels, with the uptick coming from Iberia and Slovenia. Vacancies increased slightly from 5.1% at December 2021 to 5.2% at May 2022. The share price is down around 24% this year.
  • When it comes to pre-close updates in the property sector, Resilient chose to play its cards close to its chest. In a very brief update, the fund noted that the South African portfolio achieved comparable sales growth of 9.7% for the five months ended May 2022. A positive reversion of 2.8% was achieved overall (i.e. new leases were signed at higher rates than existing leases), though Resilient does note that leisure-related tenants experienced negative reversions. There is still pressure on those tenants, but the removal of the mask mandate should help with that. The fund is busy with solar installations at various malls in South Africa and construction work at properties in France.
  • MAS Real Estate received strong support from shareholders to acquire six properties in Romania and extend its development joint venture with Prime Kapital. This is critical for the fund’s pipeline of acquisition opportunities in the region.
  • In an unusual combination of Lord of the Rings and general flatulence, Gandalf has struck gas in the Free State. Renergen is every geek’s dream, using names from Star Wars and Tolkien’s finest to refer to elements of its projects. Gandalf is a new gas blower and gas was intersected at 480 metres from the surface. Further drilling to 1,200 metres is expected to be complete by August. Separately, the company reiterated that the Phase 1 plant is making progress and so are the customer sites, so synchronisation of the project timelines should be achieved. There has been a cautious approach taken in testing, which has delayed things by a few weeks. In this case, “safety first” is definitely the name of the game. Renergen made significant progress with capital raising activities in the last quarter (both debt and equity), as detailed in the company’s quarterly report that you can read here.
  • Anglo American has a zero emissions haulage solution called nuGen, which sounds more like a USN product designed to help you get ready for summer. Names aside, Anglo has agreed non-binding terms to combine this with First Mode, the company that partnered with Anglo to build the technology. In other words, Anglo would take an equity stake in this business, which would remain independent and would operate under the First Mode name. Anglo needs to decarbonise its fleet of around 400 ultra-class mine haul trucks. This also requires investment in critical supporting infrastructure. Anglo has held 10% in First Mode since 2021 and will move to a majority holding under this deal. First Mode would offer similar services to other third parties, so Anglo effectively creates a profit centre out of decarbonising its fleet and helping others do the same. Clever stuff!
  • Wilson Bayly Holmes – Ovcon, which most of us simply know as construction group WBHO, released a trading statement for the year ended 30 June 2022. WBHO has withdrawn funding from the Australian operations and they have been placed into administration, a painful decision no doubt. The group provided A$119 million to settle obligations on that side of the pond and expects to be better off than this estimate by at least A$23 million. WBHO is also negotiating an exit on an amicable basis from the contract related to the Western Roads Upgrade. But by the time you take into account other costs to close the Australian business, the original A$119 estimate actually goes the other way, with an updated figure of A$135 million. WBHO can fund this from current resources and a three-year term loan facility. In the local business, revenue in Building and Civil Engineering is expected to be 5% lower and in the Roads and Earthworks division will be at least 11% lower. In both cases, operating profit is higher (by 8% and 4% respectively). The situation in the UK isn’t pretty, with revenue down by 25% and profit by 40%. There’s also no real improvement in the steel industry, with the Construction Materials segment revenue 15% higher and operating profit 48% lower. Across major areas of the business, the order book is considerably higher than a year ago and the balance sheet is in decent shape. Excluding the Australian operations, HEPS is expected to be at least 3.6% lower for the year ended June 2022.
  • Christo Wiese has entered into a derivative structure related to Shoprite shares. He’s sold puts at a strike price of R198.87, which means that he receives a premium and would need to buy the shares at that level if the counterparty so chooses. Wiese has also bought calls at R217.94, which means he has paid a premium to be able to buy the shares at that level if he so chooses. The maturity date is 15 December and 10,000 contracts were entered into for both trades, so the call exposure is higher than the put exposure. The current traded price is around R197.88, so my interpretation is that Wiese is happy to buy at this level anyway (hence the sold puts) and is looking for leveraged upside based on the share price increasing from here this year. You gotta risk it to get the biscuit, as they say.
  • Crookes Brothers has released results for the year ended March 2022. The agriculture group reports “operating profit before biological assets” which is interesting, as it tries to show the operating profit without the significant swings in the value of the “living” assets in the group. That number increased by 18% and the profit after biological asset fair value adjustments fell by 39%, so that gives you an idea of the volatility in that fair value measurement. Headline earnings per share fell by 16% to 229.6 cents. The Price/Earnings multiple is thus 18.2x but it hardly matters as there is almost no liquidity in the stock.
  • After a huge director dealings announcement related to Marcel Golding earlier this week, an associate of a different director bought shares in both Rex Trueform and African and Overseas Enterprises. The amounts were only R48.5k and R86k respectively, but it’s interesting to note this activity.
  • A director of Thungela has acquired shares in the business worth R195k.
  • Trustco has issued a cautionary announcement, so now you have to be cautious of a potential deal in addition to being skeptical of their accounting policies. An independent third party is having a serious look at the option to become up to a 70% shareholder in Meya Mining for $50 million. This potential deal is at term sheet stage and Trustco hopes to finalise agreements by the end of July.
  • Nictus has declared a final dividend for the year of 3 cents per share. This little company has a market cap of only R36.8 million and liquidity is practically non-existent. The spread is the size of the moon, with the best bid at R0.39 and the best offer at R0.92 per share. It’s worth noting that in the year ended March 2022, HEPS fell by 48.84% to 9.43 cents.
  • Eastern Platinum Limited has announced Wanjin Yang as its new CEO. The company is working towards restarting underground operations at the Zandfontein section of the Crocodile River Mine. An independent competent person’s report on the mine has been filed.
  • Bauba Resources, which Raubex is in the process of mopping up the minorities in, has announced that Nuco Chrome has been granted a mining right valid for a period of eight years. It will allow for the mining of chrome, cobalt, copper, gold, nickel and platinum groups metals in an area near Rustenburg.
  • Sable Exploration and Mining has released results for the year ended February 2022. The headline loss per share has been confirmed as -141.76 cents. The net asset value per share is -598.1 cents. So, in case you were curious, this isn’t exactly a financial powerhouse.
  • Property developer Visual International has reported a loss for the period ended February 2022 of R7.9 million. The announcement claims that this is an improvement from a loss of R7 million, proof once more that in the bottom of the dustbin on the JSE, the sponsors (or designated advisors for AltX companies) don’t even read announcements properly before releasing them. The auditors have raised a material uncertainty about the company’s ability to continue as a going concern.

Hudaco: operating leverage that works

The Finance Ghost
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Hudaco: operating leverage that works

Hudaco has released results for the six months ended May 2022 and they look juicy, with revenue up 11.8% and HEPS up by a substantial 25.1%.

It’s great to see the short-form announcement include a comparison of key financial line items to pre-Covid numbers. For example, revenue is 19.1% higher than the comparable period in 2019 and operating profit is 52.2% higher, so there’s through-the-cycle operating leverage here that shouldn’t be ignored. In other words, revenue grew faster than costs.

In case you aren’t familiar with Hudaco, this is a South African group that imports and distributes automotive, industrial and electronic consumable products. There are parts of the business that would compete with Invicta, for example. There are also consumer-facing parts of Hudaco, like recently-acquired CADAC (yes, the gas braai company – although many would argue that “gas braai” is an oxymoron).

I’ve written many times this year about how supply chain pressures are driving inflated balance sheets. In other words, more investment in inventory is needed. This either drives demand for debt from banks (which has not been as high as I expected) or a decision to retain more cash rather than pay higher dividends, which is the route most companies have taken. I guess they are nervous of banks after some of them behaved like such pigs in the pandemic (I’ve heard some frightening stories of opportunistic behaviour).

Hudaco has gone the route of adding debt, with bank borrowings up R266 million to R860 million. There’s plenty of internal reinvestment as well, with cash from trading of R558 million supporting a R459 million reinvestment in working capital.

Hudaco’s business model is hungry for working capital, not for fixed assets. This gives the group a lot of flexibility, as the balance sheet can shrink or grow in response to market trends and levels of demand.

With headline earnings per share (HEPS) of 857 cents, Wednesday’s closing price of R149 is a Price/Earnings multiple of 8.7x on an annualised basis i.e. by doubling the interim earnings. That’s a really quick-and-dirty approach, usually only useful in deciding whether to scratch deeper into a potential investment.

With a share price up more than 16% this year, that’s probably all the evidence you need to justify doing more research into Hudaco and forming a view.

PBT: the little tech company that could

The Finance Ghost
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PBT: the little tech company that could

PBT Group is a really interesting business that gives local investors a way to access themes like “big data” right here on the JSE. The share price is up nearly 10% this year, significantly bucking the bear market trend.

PBT describes itself as a “technology agnostic data specialist organisation” – although this may sound like the usual corporate marketing gumph to you, there’s a critical point here: PBT isn’t tied to any particular technology provider or product. The group provides specialist services that clients can use whether they are running on AWS, Azure or anything else.

Around 91% of revenue is earned from time and material fees, with 9% from projects and fixed-price contracts. The latter has reduced significantly from 25% of group revenue in 2019.

This model does a great job of keeping the till ringing, with strong organic revenue growth. The management team here knows what they are doing, with cost management leading to EBITDA margin expansion.

To put some numbers to it, revenue jumped by 24% in the year ended March 2022, coming in at R975.7 million. Operating profit grew by 45%, as the group achieved higher operating margins.

Here’s something you won’t see every day: earnings before interest, taxes, depreciation and amortisation (EBITDA) of R138.6 million was converted into R135.8 million in cash from operations. That is a near-perfect cash conversion performance, which speaks to high quality earnings and a business model that is a well-oiled machine.

Headline earnings per share increased by 64% to 82.89 cents, so yesterday’s closing price is a Price/Earnings (P/E) multiple of 10.25x. On a normalised HEPS basis (75.56 cents), the P/E is 11.25x.

The total dividend for the year was 57 cents per share, so the yield is 6.7%.

Looking at divisional insights, the South African business has a strong pipeline across its service offerings. A shortage of local skills remains a hindrance though, with the PBT Cloud Academy trying to play a role in addressing this.

The group says that its European business is “starting to fulfil its anticipated potential” and described the United Kingdom business as being an “outstanding contributor” – this is all good stuff. PBT is even starting to service US-based clients from the European operation.

The business in Australia is focused on the healthcare industry, with a team based in Melbourne that is servicing clients in Australia and even in the UK.

PBT isn’t the most liquid counter around, yet it is a favourite among small cap investors who want to buy exposure to a growth industry at a reasonable multiple. The P/E isn’t cheap anymore, but the business is doing a good job of justifying why. This is a great example of the opportunities on the JSE that not enough people talk about.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange Listed Companies 

Sibanye Stillwater intends to exercise its pre-emptive right to increase its shareholding in Finish mining and battery chemical company Keliber Oy from 30.29% (acquired in February 2021) to 50% plus one share at a cost of €146 million. The company will also make a voluntary cash offer to the minority shareholders of Keliber (excluding the state-owned Finnish Minerals Group) for a total consideration of €196 million. If successful its shareholding in Keliber will increase to 86.1%.

Alviva’s empowerment partners Tham Investments and DY Investments 3 have issued a non-binding expression of interest to acquire the remaining 81.4% of the company at an offer price of R25 per share (representing a 30% premium to its 30-day VWAP of R19.50) in a potential deal valued at R2,4 trillion. The consortium has received an offer of funding from Absa.

In August 2021  Datatec  announced it was to undertake an evaluation of strategic options and initiatives to unlock shareholder value. An update in May disclosed that negotiations were underway regarding Analysys Mason (AM). This week the company, via its UK subsidiary, announce the disposal of its 71.2% stake (diluted from 79.4% prior to completion) in AM for £136,1 million. The deal with Bridgepoint  Development Capital will see BDC also acquire a 21.4% stake of AM from management. 

Anglo American has agreed to lead the latest investment round of Sanergy, an organic waste upcycling business with operations in Kenya. Sanergy manages waste by upcycling it into high value agriculture and energy products – such as insect-based protein for animal feed, organic fertiliser for regenerative farming and biomass fuel for sustainable, localised power sources.

RMB Holdings is to sell the A ordinary shares (37.5% stake) in Atterbury Europe plus the shareholder loan claims to existing shareholder Brightbridge for R1,75 billion, to be settled in cash. The aim is to return the proceeds to shareholders in the form of another special dividend.

Texton Property Fund is to sell Hermanstad Industrial Park in Pretoria to Property Genius and Cream Magenta 228 at a premium to its disclosed book value. With a focus on repurposing its office assets, the disposal further reduces the company’s exposure to industrial assets in its direct property portfolio. The proceeds of the R133,5 million deal will be used to repay debt and to further invest in its SME strategy. 

Motus has issued a letter of intent for potential acquisition of 100% of the shares in an Aftermarket Parts business for cash.

Etion is to sell its subsidiary Etion Connect, a provider of  carrier-grade passive connectivity equipment and solutions that enable telecommunications networks to function, connecting communities, businesses and government with mission-critical connectivity access. The business will be acquired by a newly formed entity Etion Telecommunications (representing management and third party equity partner) for R71,5 million. 

Massmart has announced the acquisition of appliance brand Eiger to add to its private product portfolio. The acquisition follows Massmart’s analysis of South Africa’s appliance market.

The deal announced in February between Ascendis Health and Apex Management Services for the sale by Ascendis of the assets through which Ascendis Medical operates has been terminated by mutual agreement.

The October 2021 deal between Acension Properties (Rebosis Property Fund) and Ulricraft (Vunani Capital Partners) has been terminated. Although the conditions precedent of the R3,35 billion deal whereby Ulricraft was to acquire a portfolio of rental enterprises at a blended yield of 9.4%, was extended to allow Ulricraft to obtain finance it was unable to do so within the required period.

Unlisted Companies

Zenysis Technologies, a data integration and advanced analytics company headquartered in Cape Town and San Francisco, has closed a US$13,3 million series-B round led by the Steele Foundation for Hope. The funds will be deployed towards building partnerships with governments and local institutions to manage complex linkages between climate change and human health in Africa, Asia and South America.

Eco (Atlantic) Oil & Gas via its subsidiary Azinam, has signed a farmout agreement for the acquisition of an additional 6.25% participating interest in Block 3B/4B offshore South Africa. The interest will be acquired from the Lunn Family Trust, a shareholder of Riocure. The block is located lies120-250kms offshore South Africa in the Orange Basin. The consideration payable is US$10 million (R158 million).

DealMakers is SA’s M&A publication

www.dealmakerssouthafrica.com

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

The saga with embattled Tongaat Hulett continues with Magister Investments terminating the agreement to underwrite R2 billion of its proposed R5 billion rights offer. The capital raise was to be instrumental in curbing its escalating debt. The company will now establish a restructuring committee and has announced the appointment of non-executive director Piers Marsden as chief restructuring officer to intensify focus on the turnaround of Tongaat.

Prosus has disposed on the open market, 131,873,028 JD.com shares (c.4% stake) it received as an in specie distribution, realising proceeds of c.$3,67 billion. JD.com was considered not part of the group’s core strategic focus. 

Adcorp has repurchased an aggregate 1,374,187 shares during the period June 13-24, 2022 for a total value of R8,52 million, funded out of the group’s cash resources. The shares, which represent 1.28% of the issued share capital of the company will be held as treasury shares.

Tiger Brands repurchased a 5,768,836 ordinary shares for a purchase consideration of R898,7 million, representing 3.04% of the total issued shares of the company. The shares were repurchased during the period February 21 to March 31, 2022.

Naspers and Prosus have announced the start of an open-ended share repurchase programme of Naspers and Prosus shares. The programme will run as long as elevated levels of the trading discount to the Group’s underlying net asset value persists. The repurchases will be funded by a reduction in the group’s Tencent stake – an about turn on comments made by Prosus management in April 2021 which stated that it would not dispose of any further Tencent shares for three years.

CA Sales listed on the JSE on June 27, closing the day at R7.54 per share giving the fast moving consumer goods company a market capitalisation of R3,48 billion.

A2X will, on July 4 2022,  welcome Discovery to its bourse. Discovery’s secondary listing will bring the total number of instruments available for trade on A2X to 69 with an aggregate market capital of R4,5 trillion. 

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

South32 this week repurchased 1,472,651 shares at an aggregate cost of A$6 million.

This week British American Tobacco repurchased 1,423,000 shares for a total of £49,8 million. The purchased shares will be held in treasury with the number of shares permitted to be repurchased set at 229,400,000.

Glencore this week repurchased 8,610,000 shares for a total consideration of £38,8 millionin terms of its existing buyback programme which is expected to end in August 2022.

This week three companies issued profit warnings. The companies were: Sable Exploration and Mining, Wilson Bayly Holmes-Ovcon and Visual International.

Four companies this week issued or withdrew cautionary notices. The companies were: Afristrat Investment, Premier Fishing and Brands, Finbond, Ascendis Health and Datatec.

DealMakers is SA’s M&A publication

www.dealmakerssouthafrica.com

Who’s doing what in the African M&A space?

Marylou Greig
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Who’s doing what in the African M&A space?

DealMakers AFRICA

BAOR, a mining company based in Burkina Faso is to acquire the Kouri and Babong gold projects in the country from ASX-listed Golden Rim for an aggregate purchase consideration of US$15,5 million in four staged cash payments over 12 months.

MTN-Halan an Egypt-based fintech, has added a digital offering to its merchant network with the acquisition of B2B e-commerce platform Talabeyah for an undisclosed sum. Talabeyah services the FMCG market, offering supplies directly to small merchants and retailers with next day delivery. The deal enhances MNT-Halan’s breath and scope.

A 30% stake in Kenyan retail chain Naivas Supermarket has been acquired by a consortium of investors led by Mauritian conglomerate IBL Group. The stake was acquire from exiting Amethis, a French fund and the International Finance Corporation. 

Spear Capital, the private equity firm headquartered in Harare with a fundraising office in Oslo, Norway, has completed its investment into Associated Foods Zimbabwe. Spear Capital’s investment into the business will be a part buy-out of existing shareholders, part working capital injection and part capital expenditure as well as investment into systems and equipment to improve the manufacturer’s environmental impact. 

Afrikamart, the Senegalese agritech startup, has closed a US$850,000 seed round. The platform allows for the sourcing and distribution of fresh produce. The funds, raised from BLOC Smart Africa Fund, Orange Digital Ventures, Launch Africa and Teranga Capital, will be used to scale the business in the West African country.

Kukua, the Nairobi-based edtech startup, has raised US$6 million in a series -A round. Investors included Tencent Investments, Alchimina, EchoVC, FirstMinute Capital and Auxxo Female Capital.

Moringa School, a Kenyan learning accelerator, has raised undisclosed funding from Proparco which will aid in the broadening of subject range and its expansion into Ghana and Nigeria as it prepares for series-A funding next year.

XENO, a Ugandan investment platform assisting individuals across Africa to plan, save and invest via an app, has raised US$2 million in seed funding led by Beyond Capital Ventures. Funds will be used to scale the platform.

DealMakers AFRICA is the Continent’s M&A publication

www.dealmakersafrica.com

Thorts: Merger control in South Africa after Burger King

Daryl Dingley and Elisha Bhugwandeen
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Thorts: Merger control in South Africa after Burger King

At the end of 2021, the South African Competition Commission’s (Commission) Burger King merger prohibition set into motion significant changes to competition law in South Africa. This was the first time in 20 years that a merger was prohibited on public interest grounds alone. This was also the first time that the Commission publicly interpreted section 12(3)(e) of the Competition Act (introduced by the Competition Amendment Act 2018). This new provision deals with the promotion of a greater spread of ownership and, in particular, increasing the levels of ownership by historically disadvantaged persons (HDPs) and workers.

The transaction was ultimately approved by the Competition Tribunal (Tribunal), and we hoped that the Tribunal’s reasons would provide some guidance on how the competition authorities should pursue their public interest mandate (and particularly the application of s12(3)(e)). However, since the Commission and merger parties reached agreement on all the proposed conditions before the Tribunal’s reconsideration hearing, the Tribunal’s recently published decision does not offer any further clarity. The Commission’s decision prohibiting the merger (also recently published in Government Gazette No. 46000) does, however, provide some insight into the Commission’s approach to s12(3)(e) of the Competition Act.

One of the main reasons that the Commission prohibited the transaction was the considerable negative effect of the merger on the promotion of a greater spread of ownership. Pre-merger, the target firms were ultimately controlled by an entity with a 68.56% HDP shareholding. In contrast, the merged entity would not have any HDP or worker ownership and, therefore, the Commission held the view that the proposed merger could not be justified on substantial public interest grounds.

Some key observations from the Commission’s prohibition decision are set out below:

• Following amendments to the Competition Act to this effect a few years ago, the Commission reiterated that, even when a merger transaction is not likely to raise competition concerns, competition authorities are obliged to determine whether it can or cannot be justified on substantial public interest grounds. The Commission views the competition assessment and the public interest assessment as co-equal in terms of the Competition Act. It highlighted that the assessment of public interest grounds is not dependent on the outcome of a competitive assessment.

• The Commission noted that s12A(3)(e) of the Competition Act imposes an obligation on the competition authorities to consider the effect of a merger transaction on the promotion of a greater spread of ownership. This provision falls under legislative measures contemplated in s9(2) of the Constitution, which states that: “to promote the achievement of equality, legislative and other measures designed to protect or advance persons, or categories of persons, disadvantaged by unfair discrimination may be taken”.

• While the merger parties argued that empowerment shareholders (in this case, the sellers), were entitled to a return on their investment, in the Commission’s view, a return on investment is a private gain to the empowerment shareholders. Although the Commission agrees with the view adopted in established case law such as Metropolitan / Momentum that a balanced approach needs to be taken when assessing public interest factors, it did not consider a gain to shareholders to be a countervailing public interest ground, weighed against the negative effect of the merger on the promotion of a greater spread of ownership.

In its decision, the Tribunal sets out a summary of the proceedings and arguments put forward by the Commission and merger parties but does not refute or expand on any particular issues. Importantly, though, after agreements were reached between the merger parties and Commission, the merger was ultimately approved by the Tribunal, subject to several conditions, despite the reduction in HDP ownership. This indicates that a more holistic approach may be considered by the authorities, and that some degree of flexibility may be possible. For example, if one public interest element is negatively affected, it could be outweighed by other positive public interest outcomes.

In this merger, several extensive conditions were put forward. For instance, the merger parties committed to investments in South Africa of up to R500m, several supply commitments, and the establishment of an employee share ownership programme which will entitle workers to a 5% stake in the merged entity.

Since s(3)(e) was introduced into the Competition Act, and even more so since the Burger King decision, we have observed that the Commission has approved many mergers subject to conditions aimed at promoting the ownership levels of HDPs and workers. Overall, the Commission’s approach to the application of this section has been in line with its reasoning in the Burger King prohibition. We recommend that parties involved in transactions in South Africa adopt a proactive approach and make realistic assessments of what type of commitments may be required if potential public interest issues (especially involving a reduction in HDP/B-BEE ownership levels) are anticipated.

Daryl Dingley is a Partner and Elisha Bhugwandeen a Senior Knowledge Lawyer | Webber Wentzel

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

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

Hyprop: are masks the catalyst?

The Finance Ghost
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Hyprop: are masks the catalyst?

Adding to a significant day of property updates, Hyprop released a pre-close update. The retail-focused fund was hammered by the pandemic, with the share price still 50% off pre-pandemic levels. Let’s take a closer look.

The balance sheet has been a major focus for investors, so it’s not surprising that the announcement starts there. Hyprop has investments in Eastern Europe, so there’s a mix of rand- and euro-denominated debt in the group.

The sale of Delta City Mall in Montenegro was implemented in May 2022 and put €70 million into the bank. Hyprop promptly used this to reduce euro-denominated debt. Along with other repayments, the euro-denominated debt has reduced from €373 million in June 2021 to €110 million currently.

Rand-denominated debt has headed in the other direction, up from R5.1 billion to R6.4 billion. This was driven by the purchase of four Eastern European assets from European investment vehicle Hystead for €173 million.

There’s a short comment on how US dollar-denominated debt in Nigeria hasn’t changed, other than capitalised interest. The group notes the ongoing US dollar illiquidity in Nigeria. If you’re a shareholder in the likes of Nampak or MTN, you should take note of that.

The group loan-to-value (LTV) is around 40% which is uncomfortably high for the complexity and risks of the group. In recent periods, Hyprop disclosed a see-through LTV and a consolidated LTV, due to the Hystead structure. It now only discloses a consolidated LTV, which went as high as 51.7% in June 2020.

The announcement goes into great detail about tenant news at Canal Walk, CapeGate, Rosebank Mall and other centres. One thing I’ll highlight is that Exclusive Books seems to be hanging on, with stores upgraded to the “latest specification” – as a great lover of books, I’m happy to see that!

In case you’ve forgotten what happened in March and especially April 2020, here’s a spectacular reminder from the announcement:

I would also like to highlight that although trading density is running higher than February 2020 (rand sales per square metre), foot count is still lower. This is in line with most of the commentary I’ve seen from retail property funds: people are spending more per trip and doing fewer trips.

The trading at entertainment tenants has shown significant improvement. With masks out of the way, that can only improve further from here.

If you’re wondering whether things will go back to normal in retail, the trading metrics in Eastern Europe may help. Masks were burned in March 2022 and everything has improved since then: turnover, trading density and footfall. Recent performance is in line with pre-Covid levels.

That’s really bullish commentary when you consider that the mask mandate has only just been lifted in South Africa. Will we see a strong second half of the year in retail-focused property funds in South Africa?

Hyprop is trying to sell its assets in the rest of Africa, including in Ghana where it is co-invested with Attacq. Currency risks and dollar liquidity are the major issues, as the update makes it sound as though performance at the malls themselves is rather strong. South African businesses in many sectors have learned hard lessons about rushing off into Africa.

With a net asset value (NAV) per share at the end of December 2021 of R58.97 and a current share price of R35.01, the market is putting a 40% discount on Hyprop’s net assets. With masks out of the way, is it finally time to have a punt at Hyprop? The share price is down 9% this year.

Ghost Bites Vol 38 (22)

The Finance Ghost
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Ghost Bites Vol 38 (22)
  • Retail-focused fund Hyprop has released a pre-close update with some incredibly interesting insights into the retail property portfolio in Eastern Europe in particular. Although it is obviously a different market to South Africa, the trend in metrics since mask mandates were abolished in March 2022 is quite something to see. I dedicated a feature article to Hyprop that you can read here.
  • Emira Property Fund’s B-BBEE deal was concluded in May 2017 with Letsema Holdings and Tamela Holdings, each of which held a 2.5% stake in the group after the deal was implemented. 90% of the price was funded by debt (40% from a third party and 50% as a vendor loan from Emira) for a five-year period which expired on 27 June 2022. The deal has been extended to 2027, including the guarantee provided by Emira to the lender. As Letsema is an associate of an Emira director, this is a small related party transaction that requires sign-off from an independent expert. Moore Corporate Services Cape Town has opined that the terms are commercially reasonable. No shareholder approval is required. The group also released a pre-close operational update, which I wrote a feature article on here.
  • There’s very bad news for Rebosis shareholders, with the property fund announcing that the dream deal to sell a multi-billion rand office portfolio was, in fact, a dream. Ulricraft, a special purpose vehicle spearheaded by Vunani Capital Partners, didn’t meet the deadline to raise the funding for the R3.35 billion transaction to buy the properties on a blended yield of 9.4%. The deadline had already been extended from 22 April to 22 June. The board of Rebosis won’t give another extension, so this deal is dead. Rebosis has promised to communicate a refinancing plan to shareholders by the end of July, as the fund simply isn’t sustainable in current form. The share price of Rebosis ordinary shares (JSE: REA) fell by 35%.
  • Safari Investments, a REIT (property fund), released results for the year ended March 2022. Property revenue increased by 14% and the group managed to improve its cost to income ratio, which is impressive in this environment. A mythical unicorn emerged a few paragraphs down in the announcement: positive reversions of +1.15%! This means that new leases were signed at a higher rate than the expired leases, which is almost unheard of in the sector currently. The loan-to-value (LTV) is down to 37% and the net asset value (NAV) per share has increased to 855 cents. The share price at R5.70 is a 33.3% discount to NAV. The total dividend for the year of 57 cents per share puts the fund on a yield of 10% on the nose.
  • If you haven’t been in the markets for a while, you may be shocked to learn that the JSE is listed on the JSE! The JSE as a company is publicly listed on the exchange that it operates and derives revenue from. For the six months ending June 2022, headline earnings per share (HEPS) is between 24% and 32% higher than the comparative period, coming in at between 520.92 cents and 554.53 cents. The group attributes this to higher revenue growth in all segments, active cost management and higher net finance income. The share price was down 6.6% this year before the announcement, so it will be interesting to see how it reacts.
  • Sasol has announced an update to the sale of its 30% interest in The Republic of Mozambique Pipeline Investments Company, also known as ROMPCO. I am quite sure that a few laughs have been had around the coffee machine about that name. Interestingly, a deal was originally announced in May 2021 that would’ve seen the stake sold to a consortium comprising Reatile Group and a fund managed by African Infrastructure Investment Managers. The other shareholders in ROMPCO quickly romped their way to exercising a pre-emptive right to buy the stake, effectively shutting out the consortium. The deal has now closed, with an initial payment of R4.1 billion and a further R1 billion payable if certain milestones are achieved by June 2024. Sasol retains a 20% stake in ROMPCO and agreements related to the pipeline and the transport of gas to Secunda are unaffected. This is great news for the Sasol balance sheet and takes the company a step closer to rewarding shareholders with dividends once more.
  • Argent Industrial has released results for the year ended March 2022. Revenue increased by 23.7% and EBITDA by 32.2%. HEPS was a whopping 55.7% higher at 339.2 cents. A final dividend of 42 cents per share was declared. At a closing price of R14.21, Argent is trading on a Price/Earnings multiple of just 4.2x. This R800 million market cap industrials group is looking interesting! It owns an array of businesses including Xpanda, American Shutters, JetMaster and many others.
  • Irongate shareholders voted almost unanimously in favour of the deal with Charter Hall. This is a key milestone of course, with a few regulatory approvals to go before Irongate shareholders get paid out and the company delists.
  • Recently-listed Southern Palladium has awarded a drilling contract to Geomech Africa, with the phase 1 programme to commence in mid-July 2022. The results will be used in pre-feasibility studies, which in turn will be used for a mining right application. Phase 2 drilling will be over a wider area and will be used for more accurate life-of-mine planning. The goal of Phase 2 would be to upgrade the project to Inferred Mineral Resource status. If you have any interest in junior mining (whether financial, intellectual or both) then you’ll want to keep an eye on updates from this company.
  • In case you’ve ever wondered how much money Magda Wierzycka and her husband Simon Peile have made from Sygnia, here’s a clue: through a restructuring of the family’s investment interests, nearly R831 million worth of Sygnia shares have changed hands. Very importantly, this isn’t a sell-down of the stake in Sygnia – it’s only a restructure, so don’t panic! I’m just including it here to give you an idea of what serious wealth really looks like.
  • Sable Exploration and Mining has released a trading statement for the year ended February 2022, noting that the loss per share will be between 127 cents and 155 cents. They describe this as a “decrease in the loss” from the 76.21 cents loss reported in the prior year. This kind of maths is why you need to stay in school, kids.
  • Salungano Group (previously Wescoal) released a trading statement for the year ended March 2022. HEPS has swung massively into the green, from a loss of 2.87 cents to a profit of between 5.70 and 6.60 cents. There’s not much trade in the stock and it closed yesterday at R1.46, with this announcement coming out after the close.
  • In a trading statement covering the six months to the end of February 2022 (yes – this is long overdue), Trustco noted that net asset value per share has increased from 1.48 cents at the end of August 2021 to between 3.95 and 4.25 cents. Just four hours later (presumably after a hugely productive afternoon), the company then released results confirming this number as 4.13 Namibian dollars, so the trading statement was incorrect to refer to those numbers as being cents rather than NAD. It’s also ridiculous to see a trading statement coming out four hours before results.
  • York Timbers has been dealing with a strike by NUMSA employees at its Escarpment operations since 25th April. The Labour Court confirmed the strike as being unprotected on 7th June, leading to ultimatums to return to work as well as disciplinary proceedings. Investors will be more interested to know that operations have been reinstated, though not yet at full capacity.
  • Marcel Golding has entered into agreements to buy shares in two listed companies in which he is a director. There’s an agreement to buy R15.4 million worth of shares in Rex Trueform in February 2023 at a price of R18 per share (current price R14.90). There’s also a future purchase of nearly R10 million in shares in African and Overseas Enterprises at a price of R27 per share (current price R16.96). I’m not close to the details of what is going on here but as director dealings go, these are big ones.
  • The CEO of Fairvest’s family trust has bought another R1.5 million worth of shares in the property fund.
  • Capitalworks is a long-standing partner of RFG Holdings (known to many as Rhodes Food Group) and holds a large stake in the group. Shares worth another R195k have been added to the position. This is tiny in the world of private equity but it does indicate ongoing commitment to the business.
  • A private entity related to two Brimstone directors (including CEO Mustaq Brey) has bought shares in Brimstone worth nearly R53k. It’s not an amount to get excited about but it’s still a positive signal, as I guess they could’ve punted on crypto instead (or just spent it on a nice holiday).
  • Speaking of small director purchases, a director of Kaap Agri has bought shares worth around R90k in the company.
  • Yet another example is the CEO of Spear REIT, who bought another R95k worth of shares for his kids.
  • Andre du Plessis has retired from his position as CFO of Capitec, which opened the door for Grant Hardy to be appointed as his successor. Hardy will take over from 1 July and his bank account will no doubt thank him.
  • A prescribed officer of Thungela has sold shares in the company worth nearly R143k.
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