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Sibanye-Stillwater: huge profits, but risks have emerged

The Finance Ghost
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Sibanye-Stillwater: huge profits, but risks have emerged

Sibanye isn’t a company for investors with weak stomachs. Moves of over 4% in a single day are common. Of course, the longer-term story is what really matters.

Timing is everything in mining stocks. Here’s a crazy statistic: Sibanye is down around 2% in the past year and is up more than 200% over the past 5 years. It gets even more silly over 3 years, with a share price jump of around 375%.

To give an idea of the importance of cycles, the South African Platinum Group Metals (PGM) operations generated adjusted EBITDA of R51.6 billion in 2021, four times higher than the total acquisition cost of the assets!

The reason for the immense volatility in the share price is that the underlying commodities are also volatile, especially the PGMs. Gold also does its fair share of jumping around. Due to the fixed costs involved in mining, a move in the commodity price is amplified into a larger move in profitability and hence the share price.

Sibanye is making moves in its so-called “green metals” strategy, with several transactions in metals like lithium and nickel. Sibanye also invested in a significant minority stake in an Australian tailings company, as part of its strategy to have mining and tailings operations.

In the six months to 31 December 2021, profit attributable to owners of Sibanye increased by 13% and headline earnings increased by 27%. There was a wonderful 88% increase in free cash flow, which has supported a full year dividend yield of 9.8%.

A decrease in average basket prices for PGMs drove a significant drop in adjusted EBITDA margin for this six months vs. the preceding six months. Adjusted EBITDA margin dropped from 66% to 54%, as all-in sustaining cost increased at a time when metal prices decreased. This is a comparison of consecutive periods, not latter half of 2021 vs. the latter half of 2020.

The gold operations saw the increase in the average price offset by the increase in all-in sustaining costs, so adjusted EBITDA margin was consistent at 18% throughout the 2020 calendar year.

The group ended 2021 with R11.5 billion in net cash. Seeing low levels of debt in such a cyclical business is always comforting for shareholders. It hasn’t always been that way for Sibanye, as the group took on substantial debt when it executed multiple risky deals earlier in the cycle. They worked out beautifully in the end.

The group has refinanced $1.2 billion of the debt raised at the time of the Stillwater acquisition, achieving significantly better terms in the process.

It certainly hasn’t all been a bed of roses this year. The company experienced an abnormally high fatality rate, which makes for very sad reading. The US PGM operations experienced a rail collision safety incident in June 2021, which impacted production.

Other issues have come to the fore in recent days. There are media reports that strike action could be coming at Sibanye’s gold operations. There’s also noise around the potential legal action from Appian Capital, linked to Sibanye walking away from a deal for Brazilian assets that experienced a geotechnical event while the deal was being finalised. Sibanye is confident that Appian doesn’t have a case.

Sibanye has declared a dividend of 187 cents per share. The total dividend for the 2021 calendar year was 479 cents, a payout ratio of 35% of normalised earnings.

Yesterday’s closing price was R72.03 per share.

Disclaimer: the author holds shares in Sibanye

Murray & Roberts swings back to profitability

The Finance Ghost
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Murray & Roberts swings back to profitability

Murray & Roberts has released its results for the six months ended December 2021. The market seemed to enjoy them, as the share price closed more than 3% higher.

The order book of R61.1 billion is marginally higher than a year ago, although near orders (preferred bidder status) have dropped from R19.9 billion to R12.8 billion and so has the Category 1 project pipeline (tenders submitted with reasonable chance to secure), down from R94.7 billion to R74.3 billion.

Revenue from continuing operations has increased nicely from R10.8 billion to R13.3 billion, a jump of 23%. Thanks to the benefits of operating leverage, earnings before interest, taxes, depreciation and amortisation (EBITDA) has skyrocketed from R117 million to R337 million.

This has had a major impact, in that the group has swung from red to green. Attributable earnings came in at R55 million vs. a R167 million loss in the comparable period. Diluted headline earnings per share (HEPS) from continuing operations was 29 cents vs. a loss of 8 cents in the comparable period.

The company does not pay interim dividends and this period was no exception. A dividend will be considered after the financial year. With an improvement in net cash from R0.3 billion to R0.9 billion, the balance sheet is on the right path and that is obviously supportive of dividends. Notably, the group does expect some cash pressure in the second half due to expected delays in project payments.

Over the next three years, the group expects revenue and earnings to be driven by its Mining business as well as the Energy, Resources & Infrastructure platform. The group also hopes that renewable energy spending in South Africa could see the Power, Industrial & Water platform return to profitability. This is based on active engagements with Independent Power Producers who have been shortlisted for projects.

Although construction peer WBHO has had a torrid time in Australia, Murray & Roberts seems to be doing just fine on that side of the pond. Australia is continuing to invest in resources and infrastructure development, which benefits the Energy, Resources & Infrastructure platform. An acquisition by that platform in the US market is also looking promising.

Locally, Murray & Roberts has interesting competencies in the water sector and our country is in desperate need of investment in that space, which is the company is hoping will drive the order book.

As a final nugget of information, Murray & Roberts holds a 50% stake in the Bombela Concession Company. Yes, the Gautrain! The train had around 20,000 passengers per day in February vs. 16,000 per day in December, as staff return to offices and air travel picks up.

Cashbuild’s negative sales momentum continues

The Finance Ghost
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Cashbuild’s negative sales momentum continues

Cashbuild released its interim results for the six months ended 26 December 2021. The company operated 317 stores by the end of the period, including 54 P&L Hardware stores. Customers range from DIY enthusiasts through to contractors and farmers.

People are having to pay up for these products thanks to inflationary pressure, with selling price inflation running at 8.8% in December 2021.

One would think that the riots were a net positive for the group given the opportunity to sell building materials for rebuilds, but one would be wrong. It’s taken a long time to reopen all the stores and get over the associated disruptions. Revenue fell by 12% in this period. I’m up nearly 12.5% in my Cashbuild position anyway, despite the sales pressure.

This negative impact was cushioned ever so slightly by an increase in gross profit margin from 26.4% to 26.6%, so gross profit fell by 11%. Despite a significant drop in operating expenses, operating profit still fell by 14%.

The impact on headline earnings per share (HEPS) is even larger, down 27% from the prior period.

The group paid a final dividend despite this environment, contributing to a 33% drop in cash. Insurance payments related to looted stores have not yet been received. These will obviously help significantly with the balance sheet.

The momentum into the period since year-end hasn’t been pretty, as is expected when lapping such a substantial revenue base. Revenue for the six weeks since 26 December is down 10% year-on-year.

Nevertheless, Cashbuild has declared an interim dividend of 587 cents per share. This is an interim dividend yield of 2.15% on yesterday’s closing price.

The share price is up nearly 7.3% this year and down almost 10.9% in the past 12 months.

Note: I hold shares in Cashbuild

Woolworths won’t miss 2021

The Finance Ghost
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Woolworths won’t miss 2021

Woolworths has released results for the 26 weeks to 26 December 2021. The share price rallied 6% despite a fair share of negative commentary on Twitter.

In the introduction of the SENS announcement, Woolworths discloses the movements in seven measures of income and profitability and every single one is negative. Turnover and concession sales have fallen 2.1% and headline earnings per share (HEPS) is down 35.6%. Adjusted HEPS fell by 16.3%.

On the plus side, a net debt position of R6.8 billion has improved substantially into a net cash position of R258 million. This gives Woolworths breathing room to fight back. There’s also an interim dividend of 80.5 cents per share, despite the obvious pressures on the business.

The surprising dividend news is that David Jones has declared a special dividend of AUD90 million to Woolworths, which will be used to reduce debt in South Africa. After years of that hurtful relationship, David Jones is finally buying flowers to say sorry. This would’ve helped in Woolworths’ decision to pay an interim dividend.

Delving deeper into the details, we see that sales momentum improved in the last six weeks of the period, with sales up 3.5% in constant currency terms. This is the all-important Black Friday and festive season period, which was helped along by the lifting of restrictions in Australia.

Online sales grew 22.4% and now contribute 13.7% to group turnover.

In Fashion, Beauty and Home (FBH) in South Africa, online sales grew 19.2% and contributed 4.4% of sales. In Food, online sales increased by a whopping 55.8%, contributing 3.1% of sales. In David Jones, online increased 44.2% and contributed 28.1% to sales. In Country Road, online sales increased 3.6% and contributed 33.8% to sales.

FBH reduced its footprint by 6.1%, a deliberate strategy to rationalise the footprint and improve trading densities. Turnover and concession sales increased 4.7% in comparable stores and inflation was 5.4%, so volumes declined. When taking into account the decrease in space, sales in this segment only increased by 4.2%.

The good news story in FBH is that gross margins increased by 40bps to 46.3%, as the group focused on full-price sales. I’m starting to wonder if there is a rebellion being staged against Black Friday by listed clothing retailers, as the narrative over this trading period has been similar in other companies as well.

Woolworths Food, a business that has played a key role in preventing higher emigration from South Africa, could only grow turnover by 3.8% over the full period and 5.8% in the last six weeks. Compared to the same period in 2019, sales have grown by a total of 15.2%.

Underlying product inflation was 3.7% and price movement was 2.6%, which means Woolworths is having to suck up some cost pressures. This comes through in gross margin, which fell 70 basis points to 24.1%.

Expenses grew 6.3%, driven by investment in online capabilities and higher energy costs. This is higher than revenue growth, so adjusted operating profit fell by 8%.

David Jones may have returned cash to Woolworths but sales went in the wrong direction, down 9.2% for the full period but up 3.2% in the final six weeks (and up 7.7% adjusting for the shift in Boxing Day sales). Trading space was reduced by 5.8%. Adjusted operating profit fell substantially, down 44.6% on the prior period.

Country Road saw its sales drop 3.1% over the period. They were up 1.7% in the last six weeks. Trading space decreased by 7.4% and adjusted operating profit fell by 48.9%, a horrible result reflecting the lockdowns in Australia.

Woolworths will be very happy to see the back of this period. Covid lockdowns are hopefully a thing of the past, not least of all because the world has much bigger problems right now.

Online clearly remains a substantial growth area and trading space rationalisation is likely to continue. The key line to watch is gross profit, as a higher proportion of online sales can put pressure on margins.

Capital Appreciation on the deal train

The Finance Ghost
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Capital Appreciation on the deal train

The business development and executive team at Capital Appreciation Limited (or CAPREC) has been busy, that’s for sure. The company has announced the acquisitions of three technology companies in South Africa and a 20% stake in a company in the Netherlands.

The market showed some appreciation to Capital Appreciation, pushing the share price 5.8% higher on the day.

From my perspective at least, the most impressive thing about the announcement is that CAPREC is paying for the assets partially with its own shares. This is great to see, as listed companies have struggled tremendously to do share-based deals in the aftermath of scandals like Steinhoff, EOH and Tongaat.

CAPREC primarily looks for acquisitions that are asset-light and playing in the FinTech space with mainly institutional clients. These are bolt-on acquisitions that fit into the existing strategy of the group with some potential for synergies.

The three companies in South Africa are part of the same group, so this isn’t quite the swashbuckling run of dealmaking that the headline of the SENS announcement suggests. There would’ve been just one negotiation process for the local companies.

CAPREC is acquiring 100% of Responsive Tech (Pty) Ltd, 100% of Responsive Digital (Pty) Ltd and 71% of Rethink Digital Solutions (Pty) Ltd, collectively called the Responsive group. The stakes are being acquired from the founders for a total price of R48.68 million. The effective date was 1 March 2021.

The initial purchase price for Responsive Tech and Responsive Digital is R19.89 million, settled with R8.15 million in cash and R11.74 million in CAPREC shares. There’s also a profit warranty related to these companies, which would lead to a maximum further consideration of R14.2 million settled partly in cash and partly in shares.

The price for the stake in Rethink Digital is R12.56 million, settled with R5.15 million in cash and an allotment of shares worth R7.41 million. The profit warranty can result in a maximum further payment of R9 million, once again partly in cash and partly in shares.

Responsive designs and develops digital applications for clients in several countries. It’s been around for over a decade and has done work for leading names in the financial services industry. Within the Responsive group, Rethink Digital focus on user experience and user interface work for these applications. It’s not difficult to see why these companies belong in the same group.

The deal in the Netherlands is a 20% stake in Regal Digital, with a sticker price for that stake of EUR0.5 million. This works out to R8.5 million at the forward covered exchange rate. The company trades as Firelava, a rather exciting name.

Firelava is a consulting business focusing on Web 3.0 technologies, non-fungible token (NFT) and blockchain solutions. It also offers cloud and solution architecture services.

Firelava has an 80% stake in Flamelink (you can see the naming trend here), which is a software-as-a-service (SaaS) business offering a content management system for Google’s Firebase. Firebase is a platform developed by Google for creating mobile and web applications and must have been the inspiration for the names of these companies.

CAPREC is clearly on the move. The willingness of the sellers to take shares as part of the deal is highly encouraging.

JSE Limited: a cash cow in a shrinking field

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

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

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

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

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

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

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

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

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

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

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

PSG Group and the Great Value Unlock

The Finance Ghost
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PSG Group and the Great Value Unlock

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

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

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

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

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

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

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

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

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

Alviva: 20% revenue growth excl. Tarsus

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

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

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

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

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

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

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

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

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

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

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

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

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

Liberty Two Degrees: reversions continue to bite

The Finance Ghost
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Liberty Two Degrees: reversions continue to bite

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

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

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

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

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

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

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

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

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

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

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

Bidvest: strong trading profit growth in every division

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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