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KAP shows strong momentum for FY22

The Finance Ghost
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KAP shows strong momentum for FY22

KAP has provided an operational update and trading statement covering the eight months to 28 February 2022. This is effectively the most recent interim period (for which results were released) plus another two months.

PG Bison is performing well thanks to demand in the domestic and export markets. The eMkhondo particleboard plant expansion was commissioned in February/March and has added 14% additional production capacity to the division. This will offset much of the anticipated production losses due to scheduled maintenance in the second half of this financial year.

The Restonic business can’t say the same unfortunately, with a slow start to the period and pressure on raw material costs. KAP does highlight that the second half of the year is usually better than the first half in this business, which shareholders will hope to be the case.

Automotive components company Feltex has been struggling with technical challenges. Performance has improved into the second half of the financial year, as these challenges have been resolved and there is more stability in vehicle build volumes.

The narrative around Safripol sounds really positive, with the double-whammy benefit of strong demand for all three polymers and higher selling prices. Local manufacture and supply is favoured by global supply chain issues.

Unitrans is stable at least, with South Africa performing better than operations in other countries, especially Botswana.

Shareholders will be pleased to know that KAP does not have exposure to the crisis in Ukraine, other than the obvious macroeconomic impacts that affect all companies.

These are very early days for a trading statement (only eight months of the year have been completed), but KAP has indicated that HEPS should increase by at least 50% for the full financial year vs. the previous year.

That implies HEPS of at least 64.5 cents, which puts KAP on a forward multiple of 7x if that number plays out as expected.

Barloworld: masters of tough times

The Finance Ghost
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Barloworld: masters of tough times

Barloworld rallied more than 9% yesterday based on a voluntary trading update for the five months to 28 February. The share price has taken a nasty knock this year based on the group’s exposure to Russia.

This is a strong group and I was incredibly impressed with the company’s balance sheet management over the course of the pandemic. With some smart dealmaking and great capital allocation strategies, Barloworld weathered the storm and arguably emerged stronger.

In the Equipment southern Africa business, revenue for the period was up 2.3% thanks to activity in other African countries, as South Africa was subdued due to delayed deliveries. The good news is that the revenue is still coming, with the firm order book up by 43% to R4.6 billion based on strong mining demand and improved activity in South Africa.

Despite the modest increase in revenue, operating profit increased by 4.8% as expenses were tightly controlled. Operating margin expanded 20 basis points to 8.8% and EBITDA increased by 12.1%. The margin improvements were assisted by a return to profitability in the Bartrac joint venture in the DRC.

There’s a distinct narrative in the market around working capital pressures and Barloworld hasn’t escaped them, with a strong order book putting pressure on cash flows as Barloworld prepares to fill those orders. This isn’t a problem provided the cash is available, as return on invested capital (ROIC) on a rolling 12-month basis is 16.5%.

Equipment Eurasia is having a much tougher time at the moment, not least of all based on the needs of employees. Trading is restricted as one might imagine, with a difficult environment of rules and sanctions. The company has already suffered some cancellations and expects more based on the current disruptions, including the announcement by Caterpillar of the suspension of manufacturing facilities at the Tosno plant in Russia. The conflict has really derailed an otherwise excellent story, as the order book was at record levels at the end of February.

Barloworld flags that an impairment (accounting write-down of assets) could be on the cards here. I struggle to see how that situation would be avoided unless things improve significantly and very quickly. Despite the obvious risks, the underlying business delivered revenue growth of 11% in this period with Russia leading the way. EBITDA cash conversion was 90% so the cash follows the profits.

One must remember that this period was only impacted in its final few trading days by the Russia/Ukraine conflict. The numbers aren’t a reflection of what the next few months could look like.

Ingrain (the business that Barloworld tried hard to wriggle out of buying from Tongaat) grew revenue by 48.1%. The operating margin has decreased though based on a normalised sales mix. The company’s exposure to maize price fluctuations is limited thanks to the hedging strategy and it has secured enough maize to meet customer demand well into the next financial year.

The car rental business posted a whopping 205% increase in operating profit vs. the prior year and is 17% up on pre-Covid levels. Insurance business has rebounded and so has travel. Despite trading volumes being at just 65% of 2019 levels, the record EBITDA margin of 27.1% has driven a strong result in operating profits. Fleet utilisation averaged 79% (300 basis points higher than the previous year) and various other management initiatives have paid off.

The Avis Fleet business is also looking stronger, with operating profit up 17% vs. last year and 10% vs. the pre-Covid period. Record EBITDA margins of 54% (vs. 48% in the prior period) bear testament to management’s skills in managing through difficult times.

Barloworld is looking at ways to exit its car rental and leasing business, Avis Budget. This may even include a separate listing via an unbundling.

Many of the logistics businesses were sold and the remaining businesses are dedicated customer contracts which are either being transferred or exited in an orderly manner. Barloworld is engaging with potential buyers for the Supply Chain Solutions business.

After paying a special dividend in January, Barloworld is well within target debt and gearing levels. Net debt to EBITDA is 1.2x (the target is to be below 3.0x) and EBITDA cover is over 8x (vs. group target of over 3x).

Interim results for the six months to March 2022 are due in May. If there is enough certainty of a difference of more than 20% in earnings vs. the prior year, a trading statement will be released before then.

This was an impressive update and I’m not surprised that the market liked it.

ADvTECH shows (cost) discipline in the classroom

The Finance Ghost
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ADvTECH shows (cost) discipline in the classroom

For the year ended December 2021, ADvTECH achieved revenue growth of 8%. The Schools South Africa division could only manage revenue growth of 4% and the Tertiary / University division achieved a similar result. The higher growth numbers came from Rest of Africa (up 36%) and the Resourcing division (up 20%).

Despite the modest revenue growth in some areas, restructuring efforts and cost controls led to an increase in operating profit of 22% to R1.1 billion, reflecting an operating margin of 18.7%.

The cash followed the earnings nicely, with cash generated by operating activities up by 21%.

Normalised earnings, which the company reports to help investors understand the underlying result without the impact of once-offs, increased by a meaty 35% to R656 million.

The standard measure that investors always look at is headline earnings per share. HEPS increased by 33% to 121.6 cents, so yesterday’s closing price of R16.48 is a Price/Earnings multiple of 13.6x.

The dividend has increased sharply from 20 cents per share in 2020 to 50 cents per share in 2021. This is a 3% yield on yesterday’s closing price. The final dividend still to be paid to shareholders is 31 cents per share (included in the 50 cents for the year).

ADvTECH’s share price is down 7.4% this year. In the peer group, Curro Holdings is down by a similar amount and Stadio is up 13.3%.

Renergen announces another strategic investor

The Finance Ghost
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Renergen announces another strategic investor

Renergen’s projects are full of helium and so is the share price, with another 9.7% increase yesterday. The year-to-date performance is now a 27.7% jump, which is a wonderful return especially when viewed against global equity markets.

The latest rally was driven by the news that the state-owned Central Energy Fund (CEF) will subscribe for a 10% stake in Tetra4 (which holds 100% of the highly coveted Virginia Gas Project) for R1 billion. The proceeds will be used in the development of Phase II of the project.

This transaction still needs to go through due diligence and approvals at levels as high as National Treasury. It’s not a foregone conclusion by any means, but deals like this usually aren’t announced unless the parties believe there is a high probability of completion. There are 141 days for all conditions precedent to be fulfilled (I guess 140 days was just too much pressure…)

This is another feather in Renergen’s cap after a recent announcement that Ivanhoe Mines will take a strategic stake in the company and put in capital towards the Phase II development. It’s clear that Renergen’s operations are attracting major strategic investors.

Phase I operations at Virginia Gas Project are due to commence in April. The nature of energy companies is that the lead times between investment and revenue are long, so the Phase II capital is being lined up before Phase I has even started producing.

The introduction of the CEF as an equity participant in this project is an important political step, as the government now has a stake in the project. This gives the CEF economic participation in South Africa’s first and only onshore petroleum production right. It’s usually a good idea for energy companies to have a strong working relationship with government, so this is positive news for Renergen for reasons beyond the injection of R1 billion.

Renergen’s share price has increased by nearly 370% over the past five years. The army of retail investors in this business will be thrilled to see institutional and strategic investors putting their money behind Phase II.

Hulamin: a big result but no dividend

The Finance Ghost
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Hulamin: a big result but no dividend

Hulamin released a cracking set of the results for the year ended December 2021. Much of it seems to have been priced in, as the company only closed 2.8% higher.

The result was strong right from the top, with sales volumes up 34% and revenue up 52%. This means that the result was driven by both production and pricing improvements, the holy grail for any industrial company.

Local sales were up 54% thanks to increased beverage can consumption and import duties on aluminium flat rolled products into South Africa. This is a good example of where trade policies can support local industry, something a company like PPC is screaming out for in the cement industry.

Thanks to the benefits of operating leverage, operating profit increased by a whopping 760% to R538 million. The group has swung from a headline loss per share of -94 cents to HEPS of 82 cents.

Cash flow conversion lagged operating profit growth, with free cash flow from operating activities up 166% to R239 million. Hulamin is working capital intensive, requiring net working capital investment of R346 million in 2020 and R291 million in 2021. Working capital is the net of inventories, accounts receivable, accounts payable and related derivatives.

Momentum looks promising into the new financial year, with a positive narrative around demand and pricing.

Despite the much stronger result, there’s still no dividend. The share price of R4.75 reflects a Price/Earnings multiple of 5.8x.

Bell: the company, not the distractions

The Finance Ghost
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Bell: the company, not the distractions

After a year in which the focus was firmly on the shareholders of Bell Equipment rather than the company itself, the group will be pleased to report a solid set of numbers for the year ended 31 December 2021.

The focus now is on the operations rather than the other distractions, especially as investigations by the FSCA and JSE in response to complaints found no basis for legal action or evidence of breaches of JSE rules respectively.

Revenue increased 20% to over R8 billion as the business recovered after the Covid year. In any industrial business, operating leverage plays a substantial role i.e. the mix of fixed and variable costs. Thanks to fixed costs and the improved capacity utilisation that is a feature of a stronger revenue period, operating profit increased by such a huge percentage that it isn’t worth commenting on because it just isn’t relevant.

The absolute numbers are far more useful, with operating profit increasing from just R35.6 million to nearly R404 million.

This has been achieved despite the supply chain issues and civil unrest that plagued many businesses in 2021. Bell’s Richards Bay factory and several sales branches were closed during the unrest.

Generally, Bell’s offshore export markets performed well. There are highlights (like Bell UK’s record revenue year) and areas for improvement (like market share in Canada). The Russian business contributed 3% of group revenue in 2021. Importantly, machinery destined for that market in 2022 can be absorbed by other markets, so Bell’s model is flexible enough to minimise exposure to that market.

Interestingly, the net cash inflow headed in the opposite direction to profitability, down 54% to R81.6 million. There were substantial negative swings in working capital behind this result, along with good news stories like a substantial decrease in interest paid.

Headline earnings per share (HEPS) came in at 294 cents, a far prettier number than the headline loss per share of 31 cents in 2020. A final dividend of 50 cents per share has been declared.

Net asset value (NAV) per share increased by 10% to R40.38, so yesterday’s closing price of R14.75 still represents a large discount to NAV.

Based on this HEPS number, Bell is trading on a Price/Earnings multiple of 5x.

If you want to engage with the Bell management team and learn more about this company, then register for free for the next Unlock the Stock event happening on Thursday, 31 March at 12pm. This is a wonderful opportunity for retail investors to ask questions to the management team and participate in a professional Q&A session.

I co-host Unlock the Stock with Mark Tobin, who has experience running numerous such sessions in the Australian market under his Coffee Microcaps brand.

Attendance is free, but you must register at this link.

Don’t miss out on this opportunity to enhance your investment knowledge as an InceConnect reader!

Rebosis disposal slashed by nearly R3 billion

The Finance Ghost
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Rebosis disposal slashed by nearly R3 billion

Rebosis is in the process of selling a substantial property portfolio to Ulricraft for R6.32 billion, an injection of cash that Rebosis desperately needs.

You’ve probably never heard of Ulricraft. I suspect you’ve heard of Vunani, though. Ulricraft is a special purpose vehicle wholly owned by Vunani Capital Partners. If this transaction goes ahead, then Vunani is expected to hold a small stake in Ulricraft after making space for other equity funders.

The key condition precedent was that Ulricraft needed to perform a detailed due diligence. In particular, the sales agreement made provision for an adjustment to the purchase price based on any changes to the individual estimated net operating income (NOI) for each property.

The deal was originally based on a yield of 9.5%, so the value of each property was the NOI divided by 9.5%.

A further critical point was that the parties could choose to change the mix of properties included in the deal. Provision was also made for an adjustment to the individual purchase prices i.e. the yield.

The good news is that the due diligence has been completed to the satisfaction of both parties. The bad news is that the deal is much smaller than originally envisaged.

After the exclusion of 11 properties from the deal, the total deal value is R3.35 billion at a blended yield of 9.4% for 21 properties. Within the list of 21 properties, there are seven that still have further conditions attached to the sale. This means that R1.17 billion of the price isn’t guaranteed.

There may still be a deal for the excluded assets, provided the purchaser can execute a capital raise and meet other conditions.

The most important condition of all is that the purchaser needs to obtain finance for the R3.35 billion initial deal before 22 April 2022. That is less than one month away and the clock is ticking.

The clock is also ticking for the Rebosis balance sheet, with the share price having lost over 98% of its value in the past five years. It rallied 9% on Friday at this hint of good news.

Gemfields signs off on a sparkling year

The Finance Ghost
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Gemfields signs off on a sparkling year

If nothing else, the Gemfields announcement taught me the term annus mirabilis which is the opposite of annus horribilis – another Latin term with a first word that hasn’t aged well.

CEO Sean Gilbertson called 2021 an annus mirabilis – a remarkable or marvellous year – which is a fitting description for a period that has seen a dramatic rise in the share price. There’s even a special dividend of USD20 million to top it all off.

2021 saw record-breaking auction revenues at Kagem Mining in Zamibia (emeralds) and Montepuez Ruby Mining in Mozambique (rubies, just in case that wasn’t obvious). Faberge (a jewellery manufacturer famous for its egg-shaped creations) also achieved record revenues, so 2021 was the group’s best-ever year for revenue.

If you really want to see how the other half lives, you should check out the Faberge website. When timepieces say “price on application” then you know you’re competing with oligarchs and oil barons to buy them.

There are other investments in the group, like a 6.54% stake in Sedibelo Platinum Mines and a 75% stake in Nairoto Resources, a potential gold resource in Mozambique.

Revenue increased by 646% vs. 2020 which is a reminder of the disaster that Covid caused. Compared to 2019, revenue is up by a more sensible 19%. Operating profit is up by 18% vs. 2019 and net profit is 66% higher than 2019.

Looking at net profit and loss over the three-year period tells quite a story: a profit of USD39 million in 2019, a loss of USD93.2 million in 2020 and a profit of USD65 million in 2021. This is an aggregate of nearly USD11 million in net profit over three years. Covid caused chaos for many businesses and Gemfields was hit harder than most.

After slipping into a net debt position in 2021, Gemfields has swung sharply into such a positive cash position that the special dividend of USD1.7 cents per share is possible.

Headline Earnings Per Share (HEPS) in 2021 was 5 USD cents. Friday’s closing price of R3.52 means that the company is trading on a Price/Earnings multiple of below 4.9x (which would fluctuate based on the share price and the exchange rate).

The market treats this one with caution, not least of all because of the underlying exposure to Mozambique. Provided there are no disruptions to operations, Gemfields seems to be in a strong position.

Jubilee is playing the long game

The Finance Ghost
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Jubilee is playing the long game

Jubilee Metals has released its results for the six months ended December 2021. This was an important period to the group, as the benefits of the commodity cycle were realised and the integrated Inyoni chrome and PGM facility was completed.

With Inyoni completed, Jubilee is one of the world’s largest chrome processors in operation. The increase in PGM production capacity doesn’t hurt either.

Inyoni got the lion’s share of capital expenditure in this period: R442 million out of R750 million. The remainder of was invested in Jubilee’s copper projects in Zambia. The impact of this capital allocation strategy is that chrome revenue contributed 48% of the group total in this period vs. 22% in the comparable period.

Group revenue increased 18% to GBP63 million and cash increased to GBP21.5 million, a 7.5% increase since June 2021. Jubilee’s liquidity is strong, with short-term assets covering 199% of short-term liabilities. Equity increased by 34% in the past six months.

The short-form version of the SENS doesn’t make any mention of profitability. A dig through the full result reveals that attributable earnings fell sharply from GBP30.9 million to GBP19.5 million. The decrease was experienced in the PGM operations, with a significant drop in sales volumes and a small drop in revenue per ounce. The decommissioning and re-commissioning of the Inyoni Facility skewed the PGM result as production was impacted.

Diluted headline earnings per share (HEPS) fell from 0.89 pence to 0.31 pence. Based on the group’s strategy, this was a short-term pain for a long-term gain.

Since the end of the period, Jubilee settled its long-term debt balance. The balance sheet now has no long-term debt and is ready to be leveraged with debt funding on significant better terms. This will be used in delivering the Northern Zambian copper strategy, which should more than double copper production and introduce cobalt production.

2022 will be a critical year for Jubilee.

Remgro rebounds

The Finance Ghost
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Remgro rebounds

Remgro has released results for the six months ended December 2021 and has declared a dividend.

This group was established in the 1940s and is spearheaded by the famous Rupert family. There are numerous investments made across nine sector platforms. These platforms are healthcare, consumer products, financial services, infrastructure, industrial, diversified investment vehicles, media, portfolio investments and social impact investments.

The most significant investments are a 44.6% stake in Mediclinic, 30.6% in RMI, 57% in Community Investment Ventures Holdings (CIVH), 31.7% in Distell, 80.4% in RCL Foods, 3.3% in FirstRand, 100% in Siqalo Foods, 50% in Air Products South Africa, 24.9% in TotalEnergies South Africa and 43.5% in Kagiso Tiso Holdings. These investments contribute around 92% to Remgro’s intrinsic net asset value (INAV).

An increase in HEPS of 139.4% is clearly due to the base effect of a pandemic-ruined comparable period. Given Remgro’s position as an investment holding company, the increase in INAV per share is more important. This metric increased by 14% since June 2021 to R202.47.

Yesterday’s closing share price of R147.50 reflects a discount to INAV of 27%, which is typical of these structures on the JSE. Remgro specifically highlights this discount in the SENS by referring back to the closing price on 31 December 2021 which matches the end of the reporting period. The discount based on that price was 35.2%, a similar level to the discount as at 30 June 2021.

Investors love to see cash land in their bank accounts, so an increase in the interim dividend per share of 66.7% to 50 cents will be met with happiness. This is a tiny yield though, so don’t pile your money into Remgro if dividends are your primary focus.

There are some significant corporate actions being executed by investee companies.

One of the high-profile deals is Heineken’s acquisition of Distell and the carve-out of Capevin. Remgro will roll into the new structure in both entities, so Remgro shareholders will retain exposure to the Distell group.

Another important one is RMI’s unbundling of Discovery and Momentum Metropolitan. Remgro supports the unbundling but doesn’t indicate what it will do with the shares once received.

Remgro invested over R2.1 billion in CIVH in July 2021. In November 2021, a deal with Vodacom was announced that will see significant assets and cash contributed by the telecoms giant to a subsidiary of CIVH that holds the existing investments in Vumatel and Dark Fibre Africa. Although Remgro is diluting its holding to make space for Vodacom, the resultant entity is much larger and bringing in a telecoms partner can only be a good thing.

In November 2021, Remgro disposed of its investment in Grindrod Shipping for R1.19 billion. Remgro isn’t shy to take advantage of market cycles.

Invenfin, Remgro’s venture capital platform, is selling its 50.5% interest in Ad Dynamo. Another transaction by Invenfin that will be of interest to many is the disposal of one third of its Bolt investment for R179 million. This approximates the total investment by Invenfin in Bolt to date, so the remaining two-thirds of the investment is now “free” – the return is 3x money and counting!

This group is huge and always busy, so there were other transactions as well. This is in addition to the ongoing news in the various portfolio entities, many of which are listed.

Remgro’s share price is up 11.5% this year but still has a long way to go to reward long-standing shareholders, with a 28.5% decrease over the past 5 years.

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