With a market cap of R26 billion, Transaction Capital is now raising R1 billion through a placing with institutional investors. The group currently holds 74.9% in WeBuyCars and is looking to acquire another 15%. This brings the put and call arrangement forward, as Transaction Capital is keen to deploy more capital into a business that it knows and loves. Interestingly, the remaining 10% is held by the founders (5% each) and they will defer their put options (the right to sell) to the 2027 and 2028 financial years, but not later than 2030. Transaction Capital will forego its call option on the remaining shares, so these shareholders could technically elect to remain in WeBuyCars forever. The capital will also be used for the GoMo business that will be housed in SA Taxi (refer to the snippet in the operating updates section below for more details). Some capital will be leftover for general group purposes. The announcement came out after market close, so you can expect to see share price pressure on Friday morning.
As part of its repurchase programme to try and undo some of the discount to net asset value that the management team so successfully created over time, Prosus has sold 1,115,000 shares in Tencent, reducing the total ownership in the Chinese tech giant to 27.99%. Another 192 million shares are being moved from certificated form into the dematerialised format in Hong Kong, which would pave the way for further sales in an “orderly way” over time. Whilst it makes sense from a finance theory perspective to sell the Tencent shares and repurchase the discounted Prosus and Naspers shares, it also increases the concentration of non-Tencent assets in the group, most of which really aren’t attractive in my view.
Absa has confirmed that Barclays holds just 0.02% of the issued share capital of our local bank. As for why there is still a small shareholding left, I can only assume that the bank holds it on its balance sheet as part of a hedge for a derivative structure somewhere or perhaps in a securities-related book. Either way, the strategic stake is gone.
The potential take-private of OneLogix is really dragging on now. The first announcement about a potential deal came out in December 2021. Since then, “negotiations have been in progress” and there’s still no guarantee of any kind of offer on the table. The financial performance of the company deteriorated sharply in recent times and of course the conflict in Ukraine came as a shock, so there are some reasons why it should be taking this long. Still, this is a case of you-know-what or get off the pot.
If you are a tax professional or you are interested in this field, you’ll want to read PSG’s announcement about the apportionment of tax cost for the unbundled shares. If you don’t fit into those categories, watching your grass grow will be a more entertaining use of time.
Financial updates
Tongaat Hulett released an update that ticked practically every box: debt restructuring, trading statement, operational update and further cautionary! I decided to put it in the financial section, as Tongaat’s terrible financial situation is driving all this news. There is R6.3 billion of excess debt in the South African operations, which is simply unsustainable. This number is R800 million worse than a year ago, as 2022 saw a significant cash outflow due to operating conditions. Net debt is R6.6 billion, of which R5.4 billion is owed to South African lenders and the balance is trade finance owed to the South African Sugar Association. There’s another R1 billion in debt in the African operations. To make it worse, there is a working capital shortfall in the 2023 financial year as existing headroom on the debt isn’t enough to fund the milling season. The board is currently considering options including an equity capital injection at various levels in the group or a disposal of some or all of the African operations. To keep the lights on while everyone figures this out, the lenders are working with Tongaat to structure a suitable facility. The banks are clearly scared here, as they haven’t invoked the interest rate ratchets on the debt (a penalty rate for breaching covenants). Tongaat is also negotiating with other potential lenders to secure a further R750 million. Although HEPS hardly matters right now, the range for the year ended March 2022 is -676 cents to -632 cents per share. The prior period was originally reported as -631 cents but was subsequently restated to -440 cents per share.
There was finally something to smile about for the long-suffering punters who have been short Capitec throughout its period of being “overvalued” – one of the most highly debated valuations on the market. In a trading statement for the six months to August 2022, Capitec noted that HEPS will be between 15% and 18% higher. That sounds ok until you consider that it has been trading on a Price/Book of higher than 8.5x at times. For reference, a really good bank can trade closer to 2x book if it is delivering outstanding Return on Equity (ROE). This kind of growth just doesn’t justify the Capitec growth rate and was below market consensus. If you are priced for perfection, you just can’t afford to slow down. The share price closed 9.4% lower!
In stark contrast, Sasfin closed 2.8% higher, thanks to guided HEPS growth in the year ended June of between 19.1% and 27.3%. Unlike Capitec, the market doesn’t put much faith in Sasfin and it trades at a modest valuation. When things improve, the share price can be rewarding!
Sanlam has now released its detailed results for the six months ended June 2022. It’s been a tough period, with HEPS down by 7%. The top line story is negative, with a 7% drop in life insurance new business volumes, a 2% decrease in net client cash flows and a significant 17% decrease in value of new covered business. The swings are rather wild at net earnings level, with life insurance up 23%, investment management up 25% and credit operations up 22%. This means that core demand for services was down (hence the decrease in revenue) but the impairment and mortality environment was much better than in the comparable period. Those earnings increases were more than offset by a 57% decrease in the general insurance earnings. The company has acknowledged the investigation by the Competition Commission regarding pricing practices in the life insurance industry and has reiterated that “all pricing practices within Sanlam Life are in the best interests of customers” – investors will watch this one closely! The share price is down by around 10% this year.
Advanced Health released its financial statements for the year ended June 2022. This group operates in the South African and Australian markets, with over 40% of the population of Australia having private healthcare cover. Advanced Heath operates in that country through Presmed Australia, a business which recently increased its shareholding in the Metwest business by a further 10% to 57%. It also acquired 40% in a day surgery in Tasmania. The group notes that South African medical schemes are aligning themselves to the day hospital model as a cost-effective alternative. In this period, the Australian business generated profit after tax of R62.6 million and the South African operations generated a loss of R41.1 million before tax (the tax issue becomes tricky when there are losses). The group has cash flow issues in South Africa because of the losses, which isn’t great. At group level, the headline loss per share is 5.82 cents, a small improvement on last year’s loss of 6.82 cents per share. Advanced Health’s ability to continue as a going concern depends on the directors managing to procure funding for the local operations or selling strategic investments. This illiquid stock has lost over 62% of its value in the past five years.
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Operational updates
Anglo American Platinum has revised its production guidance. Sub-standard materials were delivered for the Polokwane smelter rebuild, which will cause a two month delay to the completion of the project as well as a built-up in work-in-progress inventory. Without doubt, it is better to be delayed than to rebuild the smelter at lower quality than planned, so it’s just as well that the quality control processes picked this up. It’s a significant knock though, with production and sales guidance for 2022 revised down to 3.7 million – 3.9 million PGM ounces (vs. 4.0 – 4.4 million previously). The share price closed 4.6% lower on this news.
As part of the news of an accelerated bookbuild to increase the stake in WeBuyCars, Transaction Capital also released an operational update. Overall, the group is expecting HEPS for FY22 to grow at a rate in line with historic rates, driven by Transaction Capital Risk Services (TCRS) and WeBuyCars. The latter is now the group’s largest business, generating almost half of headline earnings. The business continues to outperform on key metrics and the higher penetration of finance and insurance (F&I) products is a core driver of growth. I am a shareholder in Transaction Capital and certainly a fan of the business, so I found it pretty weird that a product called GoMo offers F&I solutions and will form part of the SA Taxi segment, even though the service is being offered within WeBuyCars. That just sounds like they are trying to make the SA Taxi segment look a lot better, as it has been the pressure point for the group (FY22 earnings will be down on FY21). Even if the business will benefit from SA Taxi’s fundraising capabilities, why build this business in an entity that has outside shareholders like SANTACO? I’ve included the excerpt from the SENS announcement below so you can decide for yourself:
The business rescue process at Rebosis is well underway, with the first meeting of creditors scheduled for 13 September. Lenders and creditors will be asked to prove their claims and will be updated on the process going forward. It will be held online, thereby reducing the risk of fists being shaken.
Altron announced the resignation of FluidRock Governance Group as Interim Company Secretary and has appointed Ms. Mbali Ngcobo as the new Interim Company Secretary. The placement of a permanent company secretary will hopefully be concluded in due course!
SilverBridge Holdings announced a couple of director changes related to the offer by ROX Equity Partners, as at least one major shareholder has sold out (hence the appointed representative on the board is leaving) and ROX has appointed its own representative.
Director dealings
A director of a major subsidiary of Tharisa has acquired shares in the company worth R418k.
Unusual things
MC Mining’s share price has gone insane, up over 300% in the past six months. In the last few days alone, it has jumped over 35%. A trading halt has been put in place on the Australian Stock Exchange where the real liquidity is, with trade allowed to continue on the JSE and London Stock Exchange. The company also reiterated that there is no new news, with the previously disclosed position still applicable: MC Mining is advancing the funding process for the Makhado hard coking coal project and there is no guarantee that a capital raising will be completed. Further to this, the company also took the opportunity to renew its cautionary announcement.
Kibo Energy issued convertible instruments to directors and management in settlement of outstanding fees. As this is a related party transaction, an external advisor had to opine on whether the issue is fair and reasonable. This opinion has now been given.
The Industrial Development Corporation (IDC) is to become a 43.75% shareholder in New Okiep Mining (NOM) alongside Orion Minerals which will hold the remaining 56.25% stake. NOM will acquire the prospecting and mining rights from Southern African Tantalum Mining (SADTA) in which the IDC is a 43.75% shareholder. The IDC will then sell 22.22% of its shares in NOM to BEECo, an entity led by Lulamile Xate. Community and Employee Trusts will each acquire a 5% economic participation interest in NOM, resulting in a B-BBEE ownership of approximately 30%.
Old Mutual has acquired 100% of licensed non-life insurer Generic from various parties including RH Bophelo. The 30% stake held by subsidiary RH Financial Services was disposed of for a cash consideration of R90 million. Details of the consideration paid for the remaining 70% was undisclosed.
The August 2021 deal announced between Shoprite and Massmart for the sale by Massmart of its Rhino Cash and Carry and Cambridge Food businesses, the Fruitspot business and Massfresh Meat business and 12 Masscash Cash and Carry stores has hit a stumbling block. The R1,63 billion deal has been objected to by the Spar and Pick n Pay in a submission to the Tribunal claiming that if the discount brands were sold to Shoprite, it would lessen competition in the market and create a dominate retailer.
Unlisted Companies
Swedish firm Epiroc, a productivity and sustainability partner for the mining and infrastructure industries, has acquired local mining equipment manufacturer AARD in a deal where financial details were undisclosed.
GardenRouteMan Auto, a black-woman-owned heavy truck dealership, has received an investment of R13,5 million from Volkswagen South Africa’s B-BBEE Initiatives Trust.
Host Africa, a provider of Cloud Server solutions in South Africa, has acquired DigiServ Technologies, a South African web hosting provider and the leader in low-cost web hosting. Financial details were undisclosed.
TSK Interiors, a local black-owned commercial interior fitout and construction company, has received an undisclosed investment from the Vumela Fund. The funding will be used to scale the business by providing liquidity to capitalise on larger and more resource-intensive opportunities.
Octiv, a local gym management software platform, has closed an eight-figure series A funding round led by Knife Capital. Funds will be used to further scale the business internationally. Octiv has a presence in 27 countries, predominantly in Europe with a membership of over 60,000.
South African healthtech startup BusyMed, has raised undisclosed funding to scale the business and further improve access to pharmacies by improving its technology stack to offer automated and optimised digital healthcare services.
As part of the continued Prosus and Naspers repurchase programme, Prosus has advised that it has sold a further 1,115,000 ordinary shares in Tencent to fund the repurchases. Prosus total ownership in Tencent now stands at 27.99%.
As mentioned at its annual results presentation in August, MAS plc will take a secondary listing on A2X as of September 14, 2022. MAS will retain its primary listing on the Main Board of the JSE and its issued share capital will be unaffected by the secondary listing.
A number of companies announced the repurchase of shares
Invicta has repurchased 4,011,200 shares for an aggregate consideration of R108,45 million. The general repurchase was funded from cash generated from operations.
Glencore this week repurchased 12,880,000 shares for a total consideration of £59,58 million. The share purchases form part of the second part of the Company’s existing buy-back programme which is expected to be completed over the period from August 4, 2022 to February 14, 2023.
South32 repurchased this week a further 5,296,095 shares at an aggregate cost of A$21,73 million.
Prosus continued with its open-ended share repurchase programme. This week the company announced that during the period 29th August to September 2nd 2022 a total of 3,453,497 Prosus shares were acquired for an aggregate €214,37 million.
British American Tobacco repurchased a further 960,000 shares this week for a total of £33,21 million. Following the purchase of these shares, the company holds 208,114, 782 of its shares in Treasury.
Two companies issued profit warnings. The companies were: Metair Investments and Advanced Health.
Five companies this week issued or withdrew cautionary notices. The companies were: Chrometco, Conduit Capital, Onelogix, MC Mining and Tongaat Hulett.
UK-based power company Bboxx has acquired PEG Africa, a pay-as-you-go solar energy company in West Africa. Via its financing model, it enables customers to replace polluting fuels spend with solar energy spend. PEG has recently expanded its financing deployment capabilities to include solar water irrigation and bigger solar power systems for SMEs. The acquisition consolidates Bboxx’s position as a leading source of clean energy solutions in Africa with over 35 MW of installed solar capacity.
Eni, the Italian energy company, has acquired from BP, its upstream business including its interests in the gas-producing In Amenas and In Salah concessions in Algeria. Financial details were undisclosed.
Pwani Oil Products, a Mombasa-based manufacturer, has acquired Kartasi Industries, a manufacturer of stationery products based in Nairobi, through a newly created entity called Kartasi Products. The deal, the value of which was undisclosed, represents a strategic move by Pwani to diversify its business.
Enppi, a provider of fully integrated engineering, procurement, construction supervision and project management services, and Petrojet, a state-owned construction arm of the Egyptian Petroleum sector, have acquired Star Gas’ 50% stake in the International Company for Drilling (ICD) for US$117,6 million. The ICD manufactures, assembles and maintains covers and conducts which regulates pipes. Following the closure of the deal, Enppi and Petrojet will each hold a 40% equity stake in ICD with the remaining 20% owned by existing shareholder South Valley petroleum.
Nigerian Metaverse Magna, a crypto gaming platform, has secured US$3,2 million in seed funding from investors Wemade, Gumi Cryptos Capital, HashKey, Tess Ventures among others. The funding will be used for expansion of the WEMIX ecosystem in Africa.
NowNow, a fintech platform based in Lagos, has raised US$13 million in a seed round led by NeoVision Ventures, and India-based DLF Family Office. The funds will be used to grow its platform, team and marketing capabilities.
el-dokan, a specialist in enterprise e-commerce solutions in MENA, has successfully secured US$550,000 in a pre-seed round led by local and regional investors including Flat6Labs, EFG EV, Hala Ventures and 500 Global. The investment will be used to increase market share.
3atlana, an Egypt-based car service app, has closed a six-figure seed round from Ghabbour Auto, a local automotive company. Funds will be used to strengthen its AI system.
Carzami, an online retailer for quality used cars and vehicle financing, has closed a pre-seed round led by Contact Financial Holding. Together with an inventory financing facility, Carzami will use the funding to launch its innovative model for a digital car dealership which provides transparency and convenience.
Leading Edtech platform in the MENA region, Emonovo, has raised an undisclosed bridge round by strategic angel investors from the US, Europe and MENA and a follow-on investment from Flat6Labs. The investment will be used to boost the new brand strategy and fuel growth in university onboarding and student recruitment through the platform.
Duplo, a Lagos-based platform digitising payment flows for African B2B enterprises, has raised US$4,3 million in a seed funding round. The capital injection from Liquid2 Ventures, Tribe Capital, Y Combinator among others, will be used to launch new products and expand into new business verticals in Nigeria.
All On, an impact investment company has invested £1 million in Mobile Power, a Nigerian alternative power company. The funds will be used to increase growth of All On’s pay-per-use battery sharing platform MOPO. The MOPO offering removes the product acquisition challenge from the equation for underserved homes and micro businesses in Nigeria by empowering them to secure the energy only when needed by renting 50Wh-1000Wh lithium-ion batteries for 24-hour periods.
The first half of 2022 has brought with it a significant divergence from the global M&A activity that we saw in 2021. The main indicator of this change is deal values which, according to data compiled by Bloomberg, have fallen by 17% year-on-year to $2,1trn. Unfortunately, there appears to be little light at the end of this gloomy tunnel.
Global macroeconomic volatility is set to continue, if not increase, heading into the second half of the year, on the back of rising inflation, escalating interest rates and the protracted Russia-Ukraine conflict. This is likely to sustain the downward trend in global M&A activity for the foreseeable future.
In its latest annual report, the Bank for International Settlements (BIS) warns that leading economies are dangerously close to tipping into a high-inflation scenario that will prove difficult to reverse. The fears expressed by BIS appear founded when you consider that the inflation baskets of more than 60% of advanced economies and just over 40% of emerging economies are now reading higher than 5%.
As a result, central banks around the world face an impossible decision. Do they continue to combat inflation via aggressive interest rate hikes, and risk the possibility of recession as a result? Or do they accept higher inflation as a new reality, which may cause financial instability in the medium to long term.
While energy prices have soared as European nations scramble to find alternatives to Russian gas supplies, South Africa’s power utility, Eskom, has been left relatively unscathed by the energy impacts of the war, thanks to its primary reliance on coal to generate most of its power. Of course, this is of little comfort to South Africans who have had to endure record levels of load shedding as Eskom’s power plants continue to deteriorate at an alarming pace, thereby placing additional strain on the economy.
The steady deterioration in the value of the rand over the past number of months is fuelling this challenging situation. In the first half of the year, the rand benefited from high commodity prices that lifted the current account into a surplus, with inflation rates supported by a particularly hawkish stance by the South African Reserve Bank. While the national currency had been fairly resilient during the first two quarters of the year, recent sharp declines point to the likelihood that it is finally beginning to succumb to the fears of a US recession.
South Africa also remains highly exposed to any decline in demand for the country’s raw-material exports, which would curb a vital source of foreign exchange. One can observe a positive correlation between the value of the rand and the price of industrial metals.
On the slightly more positive side, the prospect of a global recession may result in downward pressure on oil prices, which may help control inflationary increases. However, the consequence of lower oil prices would be a stronger US dollar, which would then put additional pressure on emerging-market currencies, not to mention having the effect of increasing funding costs.
All of this makes for a very challenging backdrop for M&A activity in the coming months, and possibly years. With projections for further rate increases in the second half of 2022, going into 2023, and the local currency forecast to hit R17.50 against the US dollar by the end of 2022, it’s likely that companies will continue to find it challenging to pursue large, strategic acquisitions in the coming months.
Of course, challenges often bring with them at least some opportunities. There is a possibility that all the macroeconomic pressures outlined here may serve to fuel the market consolidation trends that have been seen in certain industries and sectors of late. If so, some companies may be prompted to seek out merger and acquisition opportunities rather than avoiding them. Despite the economic headwinds, most organisations recognise the need to adapt to fast-changing consumer behaviours and preferences, bolster the resilience of their supply chains and align with the global sustainable development imperative; and for many businesses, one of the most effective and efficient ways of doing so remains mergers or acquisitions.
So, while the slowdown in M&A is likely to continue for some time, the deal market certainly hasn’t ground to a complete halt. However, we can expect to see a far more cautious and measured M&A sector during the remainder of 2022.
Deshan Pillay is an Analyst: Corporate Finance | Nedbank Corporate and Investment Banking.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
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There was a time in this market when you literally couldn’t give your mining stocks away. It wasn’t even that long ago really, as the industry that South Africa was built around was on the brink of collapse. With depressed commodity prices, ongoing labour disputes and of course the tragic events at Marikana, there were truly tough times in the industry in the past decade.
Thankfully, things are now looking a lot better. Commodity prices have spiked in the aftermath of the pandemic, driving an inflationary cycle across the world. South Africa has been a beneficiary of this, helping to reignite our economy after Covid.
Ok, “ignite” is perhaps a strong word after the latest tepid GDP growth number was released. Still, where would we be as a country if this industry wasn’t performing well again?
The team at Who Owns Whom has released two recent reports on the mining sector. As they point out, mining output exceeded R1tn for the first time in 2021 on the back of record commodity prices. There has been a significant related increase in employment numbers. Of course, there’s always a frustration when it comes to doing business in South Africa, in this case the poor performance of rail and port infrastructure that has plagued our exporters. Transnet’s challenges are well documented.
In the South African Mining Industry Trends Report, the researchers highlighted the following SWOT analysis while noting a favourable overall outlook for the sector:
In the more recent Service Activities Incidental to Mining of Minerals in South Africa Report (hot off the press – released in August 2022), the researchers reiterated the favourable conditions in the sector. Companies like Stefanutti Stocks and Murray & Roberts were quoted in this report, so there are important insights in here for investors in this sector.
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There’s big news from Orion Minerals, with the IDC coming on board to fund 43.75% of the pre-development costs at Okiep. The total budgeted pre-development costs of the New Okiep Mining Company are just over R49 million, with Orion on the hook for R44.5 million and the IDC providing the rest. The IDC will then facilitate B-BBEE ownership by selling 22.22% to a B-BBEE Entrepreneur entity led by Lulamile Xate. Thereafter, Community and Employee Trusts will each acquire a 5% economic participation interest in the company, taking B-BBEE ownership above 30% in line with the objectives of the Mining Charter. When all is said and done, my understanding is that Orion will hold 50.63% economic participation in the asset, the IDC will hold 19.38%, the entity led by Xate will hold 20% and the trusts will hold 5% each. The plan is to finalise the agreements for draw-down on the IDC funding by the end of October.
Mpact released an important announcement in the context of its sour relationship with Caxton. I must say, Caxton really hasn’t behaved well in my view, releasing all kinds of inflammatory or odd announcements along the way. Mpact complained to the TRP about elements of Caxton’s conduct and the regulator ruled in favour of Mpact. This means that Caxton is prohibited from making further public announcements in any form about a potential acquisition of Caxton.
Etion Limited has released an update on its process of unlocking shareholder value, i.e. selling assets for more than the market price suggested they were worth and then returning that cash to shareholders. For example, the disposal of Etion Connect for R71.5 million has now been finalised. Another disposal underway is the sale of Etion Create to Reunert, for which Competition Commission approval has now been obtained. The sale is still subject to shareholder approval at a general meeting to be held on 21 September. Assuming that goes ahead, proceeds of between R197 million and R210 million should be received in October. Etion has also sold its investment in the Etion Create building for an equity amount of R6.91 million (i.e. net of debt associated with the building). A dividend of R1.5 million was received from the property company before the sale. There’s also a deal to exit the lease for the Etion head office building that expires in October 2027, for which a once-off exit fee of R12 million is payable. The value unlock strategy has been extremely profitable for shareholders thus far.
RMB Holdings (unrelated these days to the bank with a similar name) has announced that all conditions have been met for the disposal of the stake in Atterbury Europe to Brightbridge Real Estate for R1.75 billion. The transactions will now be implemented in line with the timetable in the circular. This is a classic example of a managed wind-down of a legacy listed structure that still had solid assets in it.
Financial updates
Discovery has released results for the year ended June 2022. The share price closed 10.1% lower, so that gives you an indication of how the market felt about the lack of a final dividend. The year-on-year growth rates are all very high of course, as the base period was impacted severely by Covid. Annualised new premium growth was 6%, which sounds tame compared to growth in normalised headline earnings of 71%. This is because profits in Discovery Life were up by 200% as the mortalities normalised and existing provisions were found to be adequate, so the magic happened further down the income statement. Discovery Insure slipped into the red from the floods in KZN, but this is thankfully a relatively small part of the group. Looking at the more exciting side of the business, Discovery wants spending on new initiatives (Discovery Bank / Amplify Health) to revert to 10% of operating profit. In this period, the rest of the group made R11.5 billion in operating profit and new initiatives posted R2.1 billion in operating losses, so that’s way above the long-term target. Discovery Bank’s loss was R990 million in this period. The bank now has over 470k clients and grew deposits by 30% and advances by 14%. They are working towards having 1 million clients by 2026. The focus is on high quality clients, bringing strong levels of non-interest revenue and a low credit loss ratio of 1.56%. I also want to highlight that Vitality is now in 35 global markets, a truly remarkable export of South African intellectual property. Finally, something to keep in mind is that Discovery is looking to raise equity capital for the Ping An Health Insurance business, an overhang for the stock that is also raising question marks around the dividend prospects. The share price is down more than 22% this year.
The Foschini Group has released a trading update for the first 23 weeks of the 2023 financial year. This covers the period from 27 March to 3 September. Group turnover is up 21.6%, with a solid performance in TFG Africa (14.7%), a strong result in TFG London (up 23.5%) and incredibly high growth of 42.3% in TFG Australia. At group level, online sales grew 5.1% and contributed 9.2% of total turnover. Notably, these results exclude the Tapestry Home Brands acquisition. Growth looks really strong in the core TFG Africa categories of clothing (up 17.3%) and homeware (up 15.7%), which contribute a combined 83.8% to TFG Africa turnover. Cellphones only grew by 0.8%, which isn’t great as this category contributes 9.1% to turnover (more than homeware). Cash turnover is 70% of TFG Africa’s total turnover and grew by 13.6% vs. 17% growth in credit turnover. Acceptance rates for credit turnover are lower due to overall economic conditions i.e. the group is being more cautious with credit. Online turnover grew by 19.8% and contributes 3.2% to TFG Africa turnover. This online growth rate is much higher than in the UK and Australia which have a much higher base of online sales participation (37% and 6.7% respectively). The share price is up around 10.5% this year.
The show is practically over at Conduit Capital, as the company will not be opposing the liquidation of Constantia Insurance Company Limited. The prohibition on writing of new business and the adverse publicity associated with the provisional curatorship led to brokers and underwriting managers taking the insurance portfolios elsewhere, which has effectively killed off the business. This subsidiary represents 94.4% of Conduit Capital’s revenue. The market cap of the group is now just R46 million and the share price was down 50% by afternoon trade. If there is anything left here for shareholders, it will be tiny.
SA Corporate Real Estate released a trading statement for the six months ended June 2022. The group has mostly sold off its office exposure, leaving a portfolio with a focus on convenience-oriented retail centres, logistics and “quality residential” properties. Although distributable income per share is only up 5% vs. the prior period, the improved financial position and operating environment means that the distribution per share will be between 17% and 27% higher.
Chrometco Limited released an update on the business rescue process at the Black Chrome Mine, a material subsidiary of the company. The business plan is expected to be published by 14 October, an extension of around six weeks vs. the previously communicated deadline.
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Operational updates
Capital Appreciation Group released a business update for the five months to 31 August 2022. The release was driven by the AGM being held on Wednesday. The group notes strong demand from local and international customers for the products and services in the Software division. The digital offering was enhanced by the acquisition of Responsive, with those financial results to be included in full for the first time in the reporting period covering for the six months to September. Headcount in the Software division is up 50% year-on-year including a number of recently qualified graduates, so that gives an indication of growth. In the point-of-sale terminals business, the comparable period saw growth of 68% as the economy emerged from Covid and that level won’t be repeated in this period. Still, growth is expected on a full-year basis. The Android devices offer solid functionality at attractive price points, so economic challenges are driving sales mix in favour of these terminals. The group describes the balance sheet as “very strong” and the divisions are highly cash generative. The share price is down around 20% this year as valuation multiples have cooled off, even though it trades at a modest multiple by tech company standards.
I would normally put this in the “unusual things” section but these disasters happen so regularly at Tiger Brands that I’ve started treating them as operational risks. The latest problem is a recall of Purity Essentials Baby Powder after trace levels of asbestos were detected. The share price closed more than 6% lower, bringing to an end a recent rally in the price. The best thing about this is that Tiger Brands is in the JSE Responsible Investing Index, further proof that ESG as it exists today is absolute garbage that gives almost no indication of good corporate citizenship.
Clientele Limited’s company secretary has resigned after 17 years of service. The current Head of Group Legal has been appointed to replace her.
Director dealings
A couple of directors of Woolworths sold shares to cover the tax on vested share incentives, which I usually ignore as this is ordinary course of business stuff. As I worked further down the announcement, I noticed that there were other chunky sales. The CFO of Woolworths South Africa sold R1.48 million in shares, the interim CEO of David Jones sold a whopping R5.3 million in shares and the CFO of Country Road Group banked R1.09 million from selling shares.
Unusual things
MAS Plc is the latest company to list on A2X, offering an alternative place to trade to the JSE. The primary listing on the JSE is unaffected by this secondary listing.
Ghost Grads Karel Zowitsky and Sinawo Bikitsha joined forces during a busy week of varsity exams to pull off an excellent edition of Ghost Global.
Lululemon: manifesting returns
Yoga moms, rejoice! Lululemon recently released results for the second quarter of the financial year, proving once again that despite roaring inflation affecting consumers, not all consumers are affected equally. With the right products targeting a high-end niche, inflation is but a small bump in the road.
Lululemon essentially developed the athleisure clothing industry. This has been a hugely popular category in the new reality of working from home and dressing down. The products aren’t Louis Vuitton but aren’t at Nike levels either, creating an interesting price point that is premium enough to be resilient but also not out of reach for many consumers.
The other key element of the model is the direct-to-consumer strategy. Lululemon got this right before people realized how powerful it was, with the likes of Nike now playing catch up. The Finance Ghost and Mohammed Nalla explored this extensively in their report and podcast on Lululemon in Magic Markets Premium:
Source: Magic Markets Premium report on Lululemon, April 2022
The results for Q2’22 revealed a 29% increase in revenue to $1.9 billion, up 28% in North America and 35% internationally. Online sales contributed nearly 42% of net revenue. Although gross margin decreased by 160 basis points to 56.5%, that’s still a very healthy margin.
One of the most important things about this business is that it’s not just the yoga moms who should be rejoicing. The company’s growth strategy is to double revenue from 2021 to 2026, which requires significant growth in men’s clothing as well. The group plans to quadruple its international revenue, so opening new stores in Spain and regional eCommerce platforms is in line with that.
Lululemon’s share price is down nearly 19% this year, a reminder that even the best businesses at the wrong valuation multiple are still bad investments.
Best Buy. Or not.
In stark contrast to its name, Best Buy’s share price is down nearly 30% this year. Ouch.
With a focus on the sale of consumer electronics, this is a classic case of a general merchandise dealer feeling the pinch of consumer demand. As demand for digital goods normalized after the pandemic and stimulus cheques became a distant memory, US revenue fell by 13.1%. International revenue didn’t do much better, down 9.3%.
The impact on non-GAAP diluted earnings per share was particularly severe, dropping by nearly 50% to $1.54 per share for the quarter.
Although a share buyback programme was underway to take advantage of the decline, this was halted in Q2. The cash dividend stuck around though, with $0.88 per share for the quarter. For context, year-to-date dividends are $397 million vs. $465 million in share buybacks.
Weirdly, the CFO sold a tiny portion of his shareholding just a few days before the release of earnings. This wouldn’t be allowed in the South African market, as this would be considered a closed period. With only 890 shares sold and a shareholding of 59,513 shares remaining, perhaps he was just trying to afford lunch in an inflationary economy.
The biggest shock of all at Bed Bath & Beyond
This is sad news: the CFO of Bed Bath & Beyond (Gustavo Arnal, 52 years of age) passed away on Thursday after jumping from the 18th floor of an iconic building in Manhattan. The Jenga Building is perhaps a cruel example of dramatic irony in the context of the company’s operations, which are close to collapse.
Prior to the event, Arnal and activist investor Ryan Cohen were sued under a class action lawsuit for allegedly taking part in a “pump and dump” scheme that would falsely inflate the company’s value. Refer to the previous edition of Ghost Global to learn about Ryan Cohen’s relationship with the company. It’s worth noting that JPMorgan is also on the wrong end of this lawsuit.
This is a scheme that involves fraudsters and market manipulators spreading misleading and false information in an effort to send the share price into a frenzy, profiting along the way by selling the stock at an inflated price. This is not what you want to be accused of in life.
The lawsuit alleges that Cohen initially approached Arnal about a plan to profit from the stock. Over a couple of days in August, Arnal sold shares worth $1.4 million. That’s nothing compared to Cohen, who is believed to have made a profit of around $68 million on his trades after buying nearly 12% of the company in the first quarter of 2022.
The pain just keeps on coming at Bed Bath & Beyond, with the stock down 52% this year and more than 15% after the news of the CFO’s death hit the market. This comes off the back of strategic moves to strengthen the financial position, closing down around 150 stores (out of a footprint of 700+) and laying off 20% of its 32,000 employees. On the plus side, the company announced financial commitments of more than $500 million of new funding.
The company is preparing for a potential offering of up to twelve million shares of common stock, with the proceeds used to reduce debt.
Dial 911: Porsche is coming to the market
In lighter and certainly faster news, Volkswagen AG (VW) announced that the initial public offering (IPO) of Porsche is underway. This is a bold move against a bearish backdrop in global markets, particularly in Europe where the energy crisis is escalating.
To be fair, VW started preparing for this IPO back in February, before all hell literally broke loose in Europe.
Group CFO Arno Antlitz noted that the proceeds from listing Porsche will give the company more financial flexibility. With Porsche valued at $85 million or more, VW only intends to list 12.5% of the stock in the company.
This is an exceptionally complicated shareholding structure, with the Porsche family expected to acquire more than 25% of the carmaker closer to the IPO. Figuring out the VW group’s corporate structure is arguably trickier than designing the next generation 911!
Although car sales are under pressure, the VW group is making good progress in its electric vehicle strategy. There are other very exciting brands in the portfolio as well, including Lamborghini, Bentley and Audi. If you aren’t at the point yet of ordering your new GT3RS, you can at least add some Porsche shares to your portfolio.
Interested in global stocks? Not sure how to do your own research, or looking to supplement your own process? The Finance Ghost and Mohammed Nalla release a weekly podcast and report on global stocks, available for R99/month or R990/year in Magic Markets Premium. The full library is available, giving you over 40 reports to enjoy!
Emira Property Fund has previously offered to acquire 100% of the shares in Transcend Residential Property Fund and Emira has now released its offer circular. This is a general offer rather than a scheme of arrangement, so the circular is sent out by the offeror (Emira). The offer price is R5.38 based on a “clean price” i.e. excluding distributions, which is a 10.5% premium to the 90-day volume weighted average price. Transcend is utterly illiquid, with Emira reminding shareholders that less than 0.44% of Transcends shares have traded in the last six months. The premium is relatively low because large shareholders have no other obvious ways to realise their investments. Based on irrevocable undertakings received by Emira, it should achieve a stake of least 63.46% in Transcend. The offer closes at midday on Friday 4 November.
Due to Northam Platinum’s intervention in the Competition Tribunal process regarding Impala Platinum’s offer for Royal Bafokeng Platinum, there is yet another delay to the process. The previous longstop date of 26 September has been written off and Implats hasn’t provided another date. This is because the Competition Appeal Court has clarified the scope of Northam’s participation as an intervening party, leading to Implats requesting a pre-hearing to determine the further conduct of the merger hearing. This is a perfect example of how long an acquisition can really take, particularly when it becomes ugly among competitors.
Although there’s no deal just yet, Dipula Income Fund is preparing for action. After simplifying the dual-share capital structure, the board now wants to replace the memorandum of incorporation (MOI) and increase the authorised share capital.
A major shareholder of Telemasters (L Pieton) has reduced his stake to 8.96%. The announcement was triggered as he moved through the threshold of 10%.
Financial updates
The biggest news of the day was the release of financial results by Shoprite for the 52 weeks to 3 July 2022. Although the announcement kicked it off by saying that they are proud of the result, the market still gave Shoprite a proper klap – down 7.5% on the day! This is despite the dividend increasing by 10.3%, a strong reminder of the dangers of a stock being priced for perfection i.e. trading on a high multiple. On a comparable 52-week basis, the South African supermarkets grew sales by 12.6%. Selling price inflation was 3.9% for the year in South Africa and 5% in the second half of the year. Shoprite and Usave make up 52.8% of the segment and grew by 7.2%. Checkers and Checkers Hyper grew sales by 9.1% despite two Hypers remaining closed after the riots. The LiquorShop business contributes 7.2% of sales and increased by 44.5% vs. a base period with many restrictions. The Xtra Savings loyalty programme became a monster in record time, now boasting 24.7 million members. No growth percentage was provided for Checkers Sixty60, other than confirmation that it is still growing. Looking beyond the core Supermarkets RSA segment, the Supermarkets non-RSA segment grew by 12.9% and Furniture was only 0.7% higher, both on a 52-week comparable basis. The OK Franchise was up 7.5% and the pharmacy businesses both grew by an undisclosed percentage. Gross margins were maintained at 24.5%, an impressive outcome in this period. Expense growth was 10.7% which is why I think the market got a fright. We aren’t used to seeing a negative trend in operating margins at Shoprite, with trading profit margin down from 6.1% to 6.0%. HEPS was 7.8% higher, which doesn’t adjust for the extra week of trading in the comparable period.
Metair Investments released a trading statement for the six months ended June 2022. It really has been a tough time for the company, with hyperinflation accounting applied to the business in Turkey (an exceptionally complicated framework) and operational challenges in South Africa like the floods. When added together, HEPS is expected to decrease by between 71% and 76%. The good news is that the energy storage segment is still doing ok, although volumes were lower in Romania and South Africa. The bad news was in the automotive components vertical, with the semiconductor shortages hurting Ford as a key customer and the floods literally shutting down Toyota South Africa’s operations for months. A business interruption claim of R360 million has been accrued and R150 million has been received thus far. Somehow, the share price is only slightly down this year.
Attacq has released a trading statement for the year ended June 2021 and the share price closed 9% higher in appreciation, though I must point out that the bid-offer spread is wider than the entrance to Mall of Africa. Distributable income per share is expected to be between 61.8 cents and 63.6 cents, an increase of between 32% and 36% vs. the prior year. This is significantly higher than the guidance given when interim results were released, thanks to generally improved trading conditions and lower costs associated with the offshore investment holding structure. The payout ratio is expected to be between 75% and 85%. The share price closed at R6.37. This is one of the property recovery plays in my own portfolio.
Bowler Metcalf has released financial results for the year ended June 2022. Although revenue grew by 6% with flat volumes (i.e. the full uptick was based on price increases), operating profit fell by 10% and HEPS was 9% lower. The company attributes this to an incredibly difficult trading period and is looking to the future, like with the relocated Cape Blowmoulding plant and the acquisition of the SkyePlastics business. The final dividend of 27 cents per share is 16% lower than last year.
Advanced Health has released a trading statement for the year ended June 2022. The headline loss per share improved from 6.82 cents to 5.89 cents, an improvement of 13.6%.
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Operational updates
NEPI Rockcastle has officially concluded its journey of migrating into the EU. It was quite a process and plenty of lawyers made money along the way, as the company first had to migrate to Luxembourg before moving to the Netherlands. A new director has been appointed who is familiar with Dutch law.
Share buybacks and dividends
Between 29 August and 2 September, Prosus repurchased shares worth $214 million.
Based on the general authority granted in September 2021, Invicta has repurchased shares worth over R108 million at an average price of around R27 per share. This represents 3.6% of shares in issue at the time the authority was given, so the remaining authority is for 16.4% of share capital. The current share price also happens to be R27!
Lighthouse Properties is paying a cash dividend of R0.2492111 per share with a scrip dividend alternative that works out more favourably for shareholders than the cash dividend based on my calculations. This is typically the case, as companies prefer shareholders to accept the scrip dividend so that cash can be retained in the entity.
Capital & Regional will be paying a dividend of R0.49425 per share, which comes to R0.3706875 after UK withholding tax and SA dividends tax based on the double tax agreement. There is a scrip dividend alternative that enjoys a less onerous tax calculation.
Reinet has confirmed that its gross dividend will be R4.7656 per share, payable on 21 September.
The Chairman of Tharisa has bought shares in the company worth R1.47 million and the CEO followed suit with a purchase of almost identical value.
Directors of Old Mutual have climbed into the shares in a big way. The CEO was good for more than R3.25 million and four other directors put more than R3.57 million in the pot in aggregate.
A director of a subsidiary of Stadio (AFDA – the film school, in case you were curious) has sold shares in the company worth R1.06 million.
A director of Thungela Resources has acquired shares in the company worth nearly R300k.
Three directors of a subsidiary of Blue Label Telecoms have sold shares in the company worth R1.77 million, R1 million and R273k respectively.
Unusual things
I honestly don’t know when last I saw one of these: a company announcing a lease renewal that is also a related party transaction. A division of Hudaco (Dosco Precision Hydraulics) has renewed a lease in Edenvale for a property that is held by a company called Dufomo, in which the CEO of Hudaco has an 82% stake. The company has been in these premises for over 18 years. Merchantec Capital was appointed as the independent expert to conclude whether the lease renewal is fair. I’m sure they spoke to a few property experts, as most corporate financiers (myself included) have no idea whether a lease would be considered fair or not! In any event, the determination is that it is indeed fair to shareholders of Hudaco.
Based on a question at the most recent TreasuryONE webinar, Andre Botha (Senior Dealer at TreasuryONE) took a closer look at why diesel and petrol prices have diverged.
In recent months, the petrol and diesel markets have seen an unusual development. In South Africa, petrol and diesel prices are normally closely aligned when it comes to adjustments at month-end to the various prices – although not exactly the same, it usually is within the same realm.
That is until recent developments in the oil market had a direct impact on the difference we will see in the adjustments in the various fuel prices in September – petrol decreasing by 204 cents per litre and diesel by between 46 cents and 56 cents.
Oil prices have come down from highs of $140 per barrel, hovering just below the $100 per barrel mark. The rand has also lost some value due to a flight to the US dollar by investors. Despite the currency losing value, we are still looking at a reduction, although it is less than expected due to an adjustment to the slate levy.
Where does the disparity come from?
The graph illustrates the US Dollar per litre for Diesel (orange) and Petrol (white). It is clear to see that normally these are in sync, but there is a clear divergence at the moment.
The reason for this is not refining cost or any input cost – it boils down to the simplest form of economics: supply and demand. Many market players have bought diesel in the short term due to the lack of supply, as well as the current energy crisis in the eurozone as the winter approaches.
Diesel is used in generating electricity as well as being the preferred fuel for machinery for production. With the market scrambling for diesel surety, supply is king and suppliers are selling diesel at a premium due to the high demand.
The question then becomes: how long would this anomaly still be in the market? Should the crisis in the Eurozone continue and supply not increase from oil-producing countries, we could see this going on for a while.
In short, we either need a resolution in Russia, or an increase of supply from other countries. While alternatives are being explored, they will take a while to manifest in the market.
Visit the TreasuryONE website to learn more about the wide range of services offered, including market risk, corporate treasury, cash management and more.
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