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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.

Northam Platinum: production down; earnings up

The Finance Ghost
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Northam Platinum: production down; earnings up

Northam Platinum released a trading statement and update for the six months ended December 2021.

The result at HEPS level reflects the joys of being at a favourable point in the cycle, with earnings up between 55.3% and 65.3%. Normalised HEPS is 47% to 57% higher. This was helped by a reduction of shares in issue of around 22.2% as the net result of the B-BBEE transaction restructure and the issuance of shares to Royal Bafokeng Investment Holding Company as payment for the stake in Royal Bafokeng Platinum.

The production result wasn’t great, with a marginal decrease in oz 4E production. Production at Zondereinde was lower due to the operation suffering two tragic fatalities and increased medical absences relating to the pandemic. The Booysendal operation was negatively impacted by production stoppages from regional community unrest.

When production goes in one direction and inflation goes in the other, the cash cost per unit of production can only increase. Group unit cash costs per equivalent refined platinum ounce increased by 18.6%, a combination of Zondereinde’s increase of 21.3% and Booysendal’s 19.1%. The Eland operation helped mitigate the impact, with an increase of only 7.9%.

Purchased material volumes increased by 34.2% and the cost of the materials increased by 21.7%, the net result of the mix of platinum and palladium in the materials and price movements in those metals.

The cost per refined ounce over the six months was R32,814. Full year guidance is a cost of between R33,000 and R34,000 per refined ounce, so further upward pressure is expected.

Despite all the pressures on production, sales revenue increased by 16.8%. With sales volumes lower than in the comparable period, basket prices (despite the stronger rand) saved the day. Average US basket prices increased by 22.5%. Iridium and ruthenium are minor metals but increased by 147.8% and 127.5% respectively, as both metals are important in the growing hydrogen economy.

Thanks to the commodity tailwind, the cash profit margin per platinum ounce is over 50%.
Northam sold 309,255 4E ounces in the six-month period and expects full-year sales volumes of between 720,000 and 740,000 4E ounces.

The net impact of the revenue and cost results was an increasing in operating profit of 12.7%. EBITDA increased by 19.1%. Despite this, cash from operations fell by around 6.5%.

Northam is comfortable with a net debt to EBITDA ratio of 1x and is currently running at 1.13x with deferred consideration on the Royal Bafokeng Platinum shares included. The company expects the ratio to normalise by December 2022, assisted by a juicy dividend from Royal Bafokeng.

After capital expenditure of just R1.3 billion in the comparable period during the pandemic, the restart of projects drove an increase to R2.3 billion. Full year guidance is R4.6 billion.

The SENS makes no mention of the Takeover Regulation Panel’s investigation into whether Northam will be required to make a mandatory offer to the other shareholders in Royal Bafokeng Platinum. The market is waiting patiently for a final ruling on that matter.

Northam’s share price closed 5.8% lower.

Balwin: decent growth and a better balance sheet

The Finance Ghost
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Balwin: decent growth and a better balance sheet

Residential property developer Balwin has issued a business update for the year ended February 2022.

Balwin sold 2,960 apartments in the 2022 financial year, up from 2,546 in the comparable year. New developments in Gauteng, KZN and the Western Cape contributed to sales this year. The 16% increase in volumes was achieved at a similar average selling price to the prior period.

The Green Collection developments offer a lower price point and have proven to be popular in this environment, now contributing 31% of volume and 19% of revenue. The Classic Collection is still the most important contributor, with 60% of volumes and 65% of revenue. The fanciest developments (the Signature Collection) contributed 9% of volumes and 16% of revenue.

Around 1,900 apartments have been pre-sold and not recorded in revenue in this financial year.

The successful implementation of the B-BBEE ownership transaction has taken Balwin to a Level 4 B-BBEE rating from Level 5.

Group HEPS is only expected to increase by between 2% and 7% for this financial year as the B-BBEE transaction carried a significant accounting cost under IFRS 2 accounting rules. To adjust for this, Balwin also discloses “core HEPS” which is expected to be 12% to 17% higher.

The cash position at the end of February of R659 million is an increase of R328 million year-on-year. The balance sheet has been further supported by R560 million in term loans from Stanlib and Sanlam during the year, so Balwin has broadened its funding base.

As we enter a rising interest rate cycle, Balwin will need a keep a close eye on the financial health of consumers. The flexibility in the business model of different price points (the various “collections”) is useful going forward.

The share price has fallen nearly 30% in the past year. Balwin sells many apartments but struggles to generate the same love from the market.

PPC has decreased debt by R500 million

The Finance Ghost
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PPC has decreased debt by R500 million

PPC has been on the radar of many investors in recent times. The share price has increased over 150% in the past year, yet longer-term holders are still in the red as the company is down over 14% in the past three years.

2022 hasn’t been kind to the share price, with a sell-off of around 20% this year.

PPC has now released an operating update for the twelve months ending March 2022. Total cement volumes are expected to increase by between 4% and 8% in this period. South Africa and Botswana have only seen low single digit growth, while Zimbabwe and Rwanda have achieved strong double-digit volume growth.

It doesn’t help the local industry that imported cement accounts for around 10% of South African cement sales. Imports increased by 11% in this period and are running ahead of pre-Covid levels. Naturally, PPC spends a lot of time lobbying government for relief against “unfair competition from imports” and the impact on local jobs.

In response to input cost inflation, PPC increased prices by between 4% and 7% year-on-year.

Of concern to shareholders will be the news that PPC has not experienced a meaningful uplift in sales from the government’s designation related to the use of locally produced cement on government projects. I remember that when the news of that designation broke in the market, punters got very excited about PPC. This is the cement version of “buy the rumour; sell the fact” I suppose!

Having said that, PPC believes that it is well-positioned to benefit from a boost in demand once the infrastructure programme gathers momentum.

Moving on to materials, the readymix and aggregates businesses reported an uptick in volumes. Readymix volumes are up by between 5% and 10% and aggregates are 10% to 14% higher. Fly ash sales volumes are down 14% to 18% due to an unusually high base year.

Importantly, group debt reduced from R1.7 billion at 30 September 2021 to R1.2 billion at the end of February 2022. This improvement was driven by strong cash generation and the sale of PPC Lime and the Botswana aggregates business.

Mac Brothers is now Grand Parade’s biggest headache

The Finance Ghost
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Mac Brothers is now Grand Parade’s biggest headache

Grand Parade Investments (GPI) has released results for the six months ended December 2021.

This was a watershed period for the group, as the sale of Burger King South Africa and Grand Foods Meat Plant was finally completed on 3 November 2021 after a horribly protracted process with the Competition Commission. The sustainability of that business looks encouraging, with a profit of R4.15 million after a loss of R7.35 million in the comparable period, so the buyer will be pleased with that. The sale led to a special dividend of 88 cents per share, the largest dividend ever declared by GPI.

Burger King and Grand Foods have been presented as discontinued operations in the latest result. The focus for investors must be on continuing operations, which includes the gaming businesses (GPI’s stakes in SunWest, Sun Slots and Worcester Casino) and the remaining food investments (Spur and Mac Brothers).

Interestingly, revenue from continuing operations went in the wrong direction (down 16%) and profit after tax went the right way (up by R8.8 million).

Mac Brothers is where the pain is being felt, with the company’s revenue down 25% due to the slow recovery of the construction and manufacturing sectors. I know Mac Brothers to be a catering equipment business, so I’m not entirely sure how those sectors have such an impact. I even tried to check the Mac Brothers website to improve my understanding, but it doesn’t work – it says that the domain has been suspended!

Well, perhaps a working website is a good place to start in executing a revenue recovery.

Mac Brothers contributed a loss of R13.7 million to headline earnings in 2021, a significant deterioration from the loss of R5.5 million in 2020.

The rest of the investments have recovered and resumed dividends. The gaming assets contributed R50.7 million to earnings in 2021, a sharp increase from R33.6 million in 2020. SunWest is still trading well below pre-pandemic levels and Sun Slots has almost recovered to 2019 levels.

Investors will be pleased to note that debt has decreased substantially. Debt / Equity is just 2.4% now, way down from 13.8% in June 2021.

Headline earnings per share (HEPS) from continuing operations was 3.84 cents per share.

The share price closed 5.2% lower at R2.55 per share. The price is down slightly over the past year but the special dividend would need to be added back for a full analysis of shareholder returns. The special dividend was over 34% of the current share price.

Merafe signs off on a bumper year

The Finance Ghost
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Merafe signs off on a bumper year

Merafe has released results and declared a dividend for the year ended December 2021. The company is firmly on the radar of many small cap enthusiasts, although it is far less of a small cap than a year ago. The share price has jumped over 130% in the past year and is now in mid-cap territory with a market cap of just below R4.5 billion.

Growth in stainless steel production and conditions in China were key to the strength of the ferrochrome market in 2021. That comes through clearly in Merafe’s numbers.

Merafe achieved a 43% increase in ferrochrome production and a 69% increase in revenue in 2021. Production costs per tonne fell by 5%. With numbers like that, it shouldn’t surprise you that EBITDA came in 14.5x higher than in the previous year!

The joy of operating leverage means that EBITDA margin increased from 3.5% in 2020 to over 30% in 2021.

The net effect on profitability is staggering, with a loss in 2020 of 0.8 cents per share now a distant memory after headline earnings per share (HEPS) of 67 cents in 2021.

Net cash increased from R278 million to R972 million, so Merafe was able to declare a final dividend of 22 cents per share after not declaring a dividend in 2020. This takes the full year total in 2021 to 29 cents per share.

Merafe expects a slowdown in global growth from the highs in 2021. Concerns around sustainability of the 2021 result have been the driver of Merafe trading at a Price/Earnings multiple of below 3x.

Other than focusing on efficiencies in its ferrochrome operations, the company is also busy with initiatives in platinum group metals (PGMs) with its partner Glencore.

Stor-Age picks up another four UK properties

The Finance Ghost
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Stor-Age picks up another four UK properties

Stor-Age is continuing its expansion in the UK, a market that the company first entered in November 2017. Over that time, the UK brand Storage King has grown from 13 properties to 30.

This time, there’s a deal on the same terms as the existing joint venture arrangement between Stor-Age and Moorfield, which means that the latter will take a 75.1% interest and Stor-Age will take a 24.9% interest in the latest acquisition.

That acquisition is a group of four properties, collectively called Storagebase, for GBP59 million. The properties will be branded and managed by Storage King.

The three mature properties in the portfolio boast an occupancy of more than 90%. They are larger than most properties of this type, which is good for operating margins. These three properties represent a forward yield of around 6.3% and an equity yield of around 13.2%.

The fourth property is only scheduled to open in April 2022. This property is even bigger than the others, so there is significant valuation upside if a mature occupancy level can be achieved.

With this property included, the forward equity yield is 11.6%.

Importantly, Stor-Age has a right of first refusal over any of the properties in case Moorfield wants to exit.

Stor-Age needs to contribute GBP7.5 million in equity to this transaction for its share of the deal. Loan funding will come from Aviva Investors and will be sustainability-linked, so meeting “green” metrics is part of the deal. The debt is for a five-year term and only interest is payable until the eventual maturity date. The loan to value is 55% (so the loan is worth GBP30.8 million) and the cost of a debt is a 225bps margin above the five-year UK gilt rate.

This implies a cost of funding of around 3.53%, which is how a forward yield of 6.3% for the mature properties translates into a much higher equity yield.

This deal is too small to require a shareholder vote or even a detailed terms announcement, so this was a voluntary update to shareholders.

Master Drilling’s results aren’t boring

The Finance Ghost
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Master Drilling’s results aren’t boring

Master Drilling provides drilling solutions to clients worldwide, which is why results are presented in USD as the reporting currency. These are mining and hydro-electric drilling solutions, not my frequently disappointing attempts to put up a picture for Mrs Ghost.

Naturally, the company benefits from a strong commodities cycle. This has been a feature of the market in recent times. Importantly, the company is also exposed to metals like copper and nickel, which are all the rage as we head towards a future of electric vehicles.

Record revenue in USD has been achieved for the year ended December 2021, up 40% from the prior year. Over 26% of revenue landed in cash from operating activities, so the result was backed up by what all shareholders want to see: money in the bank.

Headline earnings per share (HEPS) measured in USD increased by a whopping 396.2% to 12.9 cents. In ZAR, HEPS was up 349.9% to R1.90. Based on yesterday’s closing price, Master Drilling is trading on a Price/Earnings multiple of 7.8x.

From a free cash flow perspective, cash from operations of USD32.5 million were used to fund USD19.4 million in capex. This is a fairly heavy capex burden, with 43% of the capex invested in expansion and 57% on sustaining the existing fleet.

Debt decreased from US42.1 million to USD32.1 million and the gearing ratio (including cash) improved from 10.3% to 5.8% in 2021.

Moving to a segmental view, the South American business were all between 20% and 30% higher on the revenue line than in the prior year. Utilisation rates improved which also had a positive impact on profitability.

Things are also looking good in Central and North America and the teams in that region are sourcing work in other geographies as well. For example, the North American entity will be used to execute a project in Saudi Arabia.

The most important region remains Africa, with operations in several countries. Again, things look positive overall, and the company is expanding into African countries that meet the investment criteria. There are important technologies being developed and tested in South Africa on certain projects.

The narrative is positive across other markets that Master Drilling operates in, like Scandinavia and India. Master Drilling is investing heavily in Australia and those operations have required more cash than expected.

Master Drilling has erred on the side of caution when it comes to a dividend. Despite this strong result and a solid pipeline of work, no interim dividend has been declared. The company notes the conflict in Ukraine as the major driver of this decision and has indicated that a special dividend may be on the cards once there is more certainty over global conditions.

With fleet utilisation at 70%, Master Drilling is running below the “required benchmark” of 75% but is nearly there. Critically for investors, the company believes that it can capitalise on this commodity cycle without requiring additional capital investment.

The share price closed 3.6% higher yesterday.

An urgent need to Attacq office vacancies

The Finance Ghost
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An urgent need to Attacq office vacancies

Attacq is best known for its strategy in the Waterfall precinct between Johannesburg and Pretoria. I think the node makes sense in terms of its location, so I bought shares in Attacq towards the end of last year based on that view and the substantial discount to net asset value per share. So far, so good for my return.

The fund has now released results for the six months ended December 2021. After distributable income per share fell by 57.5% in the same period in 2020, it increased by 33.6% in this period. You don’t need to get the calculator out to figure out that it hasn’t returned to pre-pandemic levels.

Of concern is that the distributable income growth came from the “Other Investments” segment and reflects a dividend received from MAS Real Estate. The Waterfall City distributable income fell by 6% and rest of South Africa fell by 13.5%. The core business is still struggling.

It’s a similar story for the net asset value (NAV) per share, down 26.6% in the prior period and up 7.1% in this period, so it is well below pre-Covid levels. The NAV per share is R16.83, so yesterday’s closing price of R7.37 is a 56% discount to the NAV. One should always treat that NAV with scepticism and assess the underlying assumptions for reasonability, but a large margin for error (i.e. discount) certainly helps and that’s part of why I bought shares in Attacq last year.

Vacancies are important here and Waterfall City has headed firmly in the wrong direction in the past six months. Occupancy in the Collaboration hubs (office properties) was 93.8% at the end of June 2021 and this dropped sharply to 81.6% by the end of the year. The Retail-experience hubs improved slightly, the Logistics hubs remained fully-let and the same is true for the Hotel segment.

Just 9.9% of clients with expired leases were retained in the Collaboration hubs with a rental reversion of -10.1%, which means that the clients who stuck around scored cheaper leases. On the retail side, the retention rate was 79.8% but the rental reversion was -8.1%.

The problem child is clearly the office portfolio, which represents 36.7% of the total portfolio. There’s more space under construction, which isn’t ideal. The longer-term pipeline focuses on residential and logistics properties and is clearly more in line with what the market wants.

Having said that, companies are pushing staff to return to the office and a well-located, mixed-use precinct like Waterfall offers an attractive environment for staff – in my opinion at least!

The gearing has improved considerably, down from 46.3% to 38.0%. A reduction in debt is a good thing in this environment. This was made possible by the sale of the Deloitte head office (R850 million) and the and sale of 50% in various distribution centres to Equites for R444.5 million.

As the property market recovers from Covid, it is encouraging to note a decrease in Covid-related rental discounts of 84.3%. Weighted average trading density has increased by 8.7% after dropping 6.5% in the comparable period, so it has increased to slightly above pre-Covid levels.

The portfolio in Rest of Africa is held with co-shareholder Hyprop Investments and both funds want to sell the portfolio and get the cash back to South Africa.

Despite the substantial increase in distributable income per share, there’s still no interim dividend. Attacq continues to take a conservative approach to its balance sheet. This remains a rather speculative play and I’m holding on.

Disclaimer: the author holds shares in Attacq.

Thungela: the lump of coal you wanted for Christmas

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Thungela: the lump of coal you wanted for Christmas

This year, Thungela is up over 84%. In early March, it was trading 8x higher than the levels after the unbundling in June 2021. For those who were happy to invest in coal, this has been far more lucrative than the lump Santa leaves under the tree for the naughty kids. This is the lump you wanted!

The maiden dividend per share is R18.00, which is particularly ridiculous when you consider that Thungela closed below R22 per share immediately after the unbundling. Those who bought in right at the beginning will have almost the entire investment returned to them through this dividend.

The empowerment partners to the structure (the SACO Employee and Nkulo Community Partnership Trusts) will receive R273 million in dividends. This could be life-changing stuff for those involved and I hope that the cash will be applied in such a way that it has a lasting impact.

To describe this business as “cyclical” would be the understatement of the decade. Even with pro-forma numbers for 2020 (which is important as the 2020 numbers on an unadjusted basis aren’t comparable at all as they only include one out of seven operating mines), revenue jumped 45% year-on-year.

Adjusted EBITDA margin was 38% in 2021, as the group managed to cut costs by R3 billion despite adding R8 billion to revenue.

Profit for the year ended December 2021 was R6.9 billion and the balance sheet had R8.7 billion in net cash at the end of 2021.

The scary thing is that it could’ve been even better, but Transnet Freight Rail continues to let the team down with poor performance. It doesn’t help us much to mine all the coal in the world unless our government can help the private sector take the stuff to the ports and export it. In response, Thungela prioritised higher quality coal so that it could send the highest margin product on the trains that were available.

Thungela describes the Transnet problem as being “transient” which sounds far too similar to Jerome Powell describing inflation as “transitory” and we all know how well that is working out in the US.

The company expects thermal coal prices to remain juicy in 2022 thanks to supply-demand imbalances in the market. With a cash-flush balance sheet, Thungela is able to either invest in internal projects or make external acquisitions. Sustainable capital expenditure for 2022 is expected to be between R1.6 billion and R1.8 billion. Strategic projects will need between R100 million and R200 million in 2022, increasing to between R700 million and R900 million by 2024.

We can only imagine what might be possible if we had a working railway system.

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