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Ghost Bites (Capital & Regional | Choppies | Grindrod | Hammerson | Metair | Raubex | Southern Sun)

The Finance Ghost
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Ghost Bites (Capital & Regional | Choppies | Grindrod | Hammerson | Metair | Raubex | Southern Sun)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Capital & Regional finally has news on the NewRiver offer (JSE: CRP)

At this point though, it’s still only a “possible” offer

This has been going on for a while now, with various extensions to the PUSU (Put Up or Shut Up) deadline. We finally have some idea of what an offer might look like, with each Capital & Regional shareholder able to receive 31.25 pence in cash and 0.41946 NewRiver shares, assuming the offer goes ahead. They stress that this is only a “possible” offer, so don’t count your money just yet.

If it goes ahead at this price, it’s a premium of 21% to the closing price before potential deal announcements started going out. It’s also a premium of 21% to the three-month VWAP. This isn’t an amazing premium by any means, justified perhaps by the fact that Capital & Regional shareholders would have 21% in the enlarged vehicle, so they aren’t losing all their exposure to the assets in the business they currently own. The fact that everything seems to be around the 21% mark is purely a coincidence!

As this is a partially equity-based deal, the rest of NewRiver is therefore important in this deal. Shareholders will need to get comfortable with that UK-based portfolio. The combined retail portfolio would be worth nearly £0.9 billion, with a particular focus on resilient tenants focused on essential goods.

Unsurprisingly, the announcement also notes potential cost synergies that the deal would achieve. That’s good news for shareholders and bad news for back office staff, with an estimated £7.3 million in savings. Something that is unusual though is the reference to “dis-synergy” – income that they think they would lose as part of the deal. This will offset some of those savings, as will the various transaction costs.

Another important term of the deal is that Capital & Regional shareholders would receive their interim dividend for the six months to June, as well as the interim dividend to be declared by NewRiver for the six months to September. If the deal isn’t done in time for the NewRiver dividend, there would instead be an additional dividend declared by Capital & Regional.

NewRiver has until 26 September to turn this possible offer into a firm offer. The critical point here is that Growthpoint as the controlling shareholder in Capital & Regional is in support of these terms, so I think there’s a good chance that the terms won’t change by much (or at all).

The rights issue at Choppies has led to a sharp drop in HEPS (JSE: CHP)

This is another reminder of why the number of shares in issue makes a difference

Choppies has released a trading statement dealing with the year ended June 2024. Although profit after tax from continuing operations is up by between 3% and 13%, the reality is that HEPS from continuing operations is down by between 16% and 26% because there are many more shares out there after the rights issue.

Choppies also notes that the Zimbabwe business is loss-making. If you exclude it, profit after tax was up by between 16% and 26% as well. I would ignore that completely though, as Zimbabwe is not even a discontinued operation. Every company looks better if you leave out the ugly bits.

Grindrod will become the sole owner of the Maputo dry bulk terminal (JSE: GND)

The remaining 35% in the business is being acquired

Grindrod has been telling a positive story around the Mozambique port infrastructure for a while now, assisted greatly by the deterioration in the South African infrastructure. That’s how capitalism works: the money follows the path of least resistance. If that path happens to be further away but more reliable, then so be it.

Grindrod currently holds 65% in Terminal de Carvão da Matola Limitada (TCM) and will be increasing that to 100% through the acquisition of 35% from Vitol Mauritius. This will give Grindrod complete control over this sub-concession to the Maputo Port Development Company’s main port concession, which means it can offer customers an integrated logistics solution with a pit-to-port theme. It sounds good to me.

The deal price is $77 million, with $55 million up-front and $22 million paid over sixteen equal quarterly instalments. Interestingly, if Grindrod sells any of the newly acquired shares within 12 months of the closing date, there’s an additional component of up to $15 million that would be paid to the seller. I doubt very strongly that Grindrod plans to flip this asset but you never know.

The asset has a net asset value of $116 million and achieved profit after tax of $9.2 million. The deal price implies a total value of $220 million, which is a pretty chunky number relative to the underlying financials. There are a large number of conditions precedent to this transaction, so it’s going to take a while.

Hammerson has unlocked more capital with a major disposal (JSE: HMN)

The interest in Value Retail is being sold for £600 million

Despite the name and the usual connotation for the word “value” in the retail world, Value Retail is a developer of luxury shopping destinations in the UK, Europe and China. Hammerson is selling its substantial minority stake in the fund to L Catterton, which Reuters reports is a private equity firm backed by LVMH. The LVMH link makes sense in the context of the luxury angle to the properties.

Hammerson is getting £600 million from the deal, giving them quite a piggy bank to help with strategic priorities across the group. There’s been some other positive recent momentum in the group, like an upgrade to the credit rating.

The management team describes this step as the delivery of a turnaround that was announced three years ago. If this share price is what a completed turnaround looks like, then thank goodness I haven’t been an investor in this company:

And now for the bad news at Metair (JSE: MTA)

They must have announced the Turkish deal first to soften the blow

Metair has released a trading statement for the six months to June that reflects a significant swing into losses. HEPS of 43 cents in the comparable period is just a distant dream now, with a headline loss per share of between 2.7 cents and 3.3 cents in this period.

Revenue was largely flat year-on-year, which is actually not bad when you consider the underlying pressures in the business. Sadly, due to the levels of debt in the business and the impact of borrowing costs, net finance costs increased by a nasty 45%.

At Hesto, one of the South African businesses accounted for as an associate (as Metair doesn’t control that business) revenue was up 7% and EBIT (Earnings Before Interest and Taxes) managed to cover finance costs. In other words, it sounds like they are working hard there just to feed the bankers.

In the Automotive Components Vertical, which excludes Hesto, revenue is down 14% and EBIT margins are between 5.5% and 6.0% vs. 6.8% in the comparable period. When you consider the extent of revenue pressure, that EBIT margin performance isn’t bad. They were clearly very strict on costs.

In the Energy Storage Vertical, which includes the Turkish business as well as the South African battery business and the operations in Romania, the segment could only manage break-even at EBIT level. That’s not helpful when there is so much debt in the group.

These challenges are why the market reacted so positively to the news of the Turkish business being sold, as Metair could desperately do with the capital for the purposes of reducing debt. Group EBIT margin was just 1.5% to 2.0% for this period vs. 4.2% in the comparable period. The deal to sell in Turkey is literally a life saver.

A bumper period at Raubex (JSE: RBX)

This group is just going from strength to strength

Raubex has released a trading statement for the six months to August 2024. With the share price up 170% over five years, the momentum has continued into this period with growth in HEPS of between 45% and 55%.

It sounds like the strong performance is happening across the board, with the Construction Materials, Roads and Earthworks and Infrastructure divisions all being noted as performing in a “more than satisfactory” manner – based on the group HEPS growth, I think we can all agree on that.

Southern Sun has put in a solid profit performance, but revenue growth was subdued (JSE: SSU)

Certain base effects and other issues led to an uninspiring revenue performance

Southern Sun hasn’t given us a revenue growth rate for the six months to September 2024, but they’ve told us enough to know that the top-line performance isn’t going to set your hair on fire. For the first five months of the financial year, occupancy has been 57.1%, which is 120 basis points ahead of 55.9% in the comparable year. Average room rates are only up by 1.7% though, so they are having to be aggressive on price to get the uptick.

There are some good reasons for this, like the BRICS Summit in the base period that gave a huge boost to accommodation in Sandton. They also closed two major hotels in this period for refurbishment. Finally, there’s been a slowdown in demand from the public sector.

Although revenue hasn’t done much in this period, HEPS is expected to be at least 20% higher than the comparative period. This is thanks to the substantial reduction in debt levels (and thus savings in finance costs), along with the positive impact of share buybacks.

Nibbles:

  • Director dealings:
    • There’s yet more selling of Bell Equipment (JSE: BEL) shares by members of the Bell family. This time, there’s a sale at R40.90 per share worth R105k and a sale at R39 per share worth R975k.
    • An independent director of Sibanye-Stillwater (JSE: SSW) has acquired shares worth R91.7k.

Ghost Bites (Capital Appreciation | Europa Metals | Hyprop | Metair | OUTsurance | Sanlam | Texton | York Timber)

The Finance Ghost
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Ghost Bites (Capital Appreciation | Europa Metals | Hyprop | Metair | OUTsurance | Sanlam | Texton | York Timber)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Capital Appreciation is still a tale of two divisions (JSE: CTA)

The software division is dragging them down

Capital Appreciation has released an update for the six months to September 2024. The recent trend in the group has been positive for the payments division and negative for the software division. It seems to be more of the same here.

The payments division secured a couple of important multi-year contracts that will add substantially to the existing estate of payment terminals already out there. There are 357,000 devices out in the field and these contracts could add another 200,000 devices over three to five years. These devices generate revenue for Capital Appreciation on an ongoing basis, so growing the installed base by this extent is very positive indeed. The benefit will only be felt in periods to come though, with a fairly subdued narrative related to this six-month period under review.

Notably, the trend within the business has been to see more annuity income rather than up-front fees, as clients are looking to lease terminals rather than purchase them. This provides a useful income base for the group but it does come with working capital considerations as well.

Another growth driver is the decision by the South African government to deprecate the 2G and 3G networks in 2027, driving another round of investment in devices.

In the software division, they are struggling with overcapacity, which is a nice way of saying that they have too many expensive people and not enough work. They are choosing to hang onto the people though, hoping for an uptick in demand and finding other uses for them in the development of group intellectual property. I’m really not sure how much longer they can carry a team this size though, so improvement does need to come through. Profitability in this division is down year-on-year for the six months.

In other news, GovChat’s exit from business rescue has resulted in minor operating expenses and limited expected credit loss provisions.

The group also announced the retirement of the group CFO at the end of this calendar year. Sjoerd Douwenga, ex-CEO and CFO of Metair, will take over as CFO.

There’s a lot going on at Europa Metals (JSE: EUZ)

The group is going to look completely different in future

There’s basically no liquidity in Europa Metals, so the share movement (or complete lack thereof) in response to these updates isn’t a fair reflection of the economics. In a liquid stock, there would be plenty of activity after announcements of a major disposal and a reverse takeover!

Let’s start with the disposal of the Toral Project to Denarius Metals. It’s not an exit from Toral for Europa though, with the deal being to sell 100% in Europa Metals Iberia (the subsidiary that holds Toral) for CAD3.5 million, settled by the issuance of shares in Denarius to Toral. In other words, this transaction gives Europa exposure to the rest of the Denarius projects in Spain and Columbia.

In a separate announcement, Europa delivered the news that Viridian Metals Ireland will be injecting its assets into Europa in a reverse takeover. You can go years without seeing any reverse takeovers, yet you can see two in the same week like we’ve seen this week on the JSE (the other is Kibo Energy). There are still numerous regulatory hurdles to get over of course, but the idea here is that Europa would then be the vehicle housing the Tynagh Pb/Zn/Cu/Ag project in Ireland, along with the various assets in Denarius (including Toral after that deal concludes).

If both deals go ahead, Europa will suddenly have a far more interesting portfolio of assets, achieved virtually overnight!

Hyprop’s dividend is back (JSE: HYP)

There’s a decrease in distributable income though

After Hyprop had a small panic around its interim results with the potential impact of the Pick n Pay troubles, it’s nice to see that the dividend is back. It’s smaller than before though, coming in at 280 cents per share and thus 6.4% lower than the previous year. This is because distributable income per share fell by 8.6%.

The interesting thing is that net operating income from the properties themselves increased by 61%, so the pressure was felt below that line. The properties have a good news story to tell, with improvement in key metrics in both South Africa and Eastern Europe.

Below that, the first challenge is that the net interest expense jumped by 27.9%. If you eyeball the actual numbers, the jump in finance costs of nearly R240 million offset a big chunk of the roughly R315 million uplift in operating income. We then get to the next problem for distributable income per share: the number of shares in issue. Property funds love dividend reinvestment programmes as they are basically miniature rights issues. With the number of shares in issue increasing by around 5.8%, the modest uptick in earnings after finance costs was no match for the number of people sitting at the table waiting to eat those profits,

They expect distributable income per share to be between 4% and 7% higher for the year ending 30 June 2025. There’s some positive momentum there at least.

Metair isn’t very Istanbullish on Turkey (JSE: MTA)

The Turkish business is being sold and the market likes it

Metair, also known as the unluckiest company on earth, is simplifying its exposure and therefore giving itself one less place to get hurt by the fickle finger of fate. The business in Turkey is being sold to Quexco, a private holding company with a number of industrial assets (mainly lubrication) across several regions.

Metair’s Turkish business is focused on batteries, not lubricant, although the end customer for the batteries is the automotive sector and perhaps that’s where the synergies lie. With a loss for the year ended December 2023 of R70.6 million and net assets of R2.9 billion, I don’t think Metair shareholders care too much about whether Quexco is doing a smart deal here. They are just happy to see it go for R1.95 billion, unlocking a substantial amount of capital to reduce the debt in South Africa.

There are material adverse change clauses in the agreement related to incidents like earthquakes, floods, military attacks or other acts of God, which in most cases would be a formality but based on Metair’s luck you actually just never know. Hopefully nothing will happen while the deal is being finalised!

This is a Category 1 deal, so Metair shareholders will need to vote on it. Value Capital Partners have already given their support to the deal and they hold 19.64% in Metair. I think the market has already voted with its feet on this one, with the share price up nearly 10% in late afternoon trade.

Investors are getting plenty OUT with this special divi (JSE: OUT)

OUTsurance is doing really well

OUTsurance is putting in some strong numbers at the moment, with normalised earnings for the year ended June up by 20.3%. Cash quality of earnings is extremely high, with the ordinary dividend up 29.4% and a special dividend of 40 cents on top of the ordinary dividend of 174.4 cents. For reference, the special dividend in the comparative period was 8.5 cents.

Normalised earnings growth has been excellent across the board. OUTsurance SA grew 17.4%, OUTsurance Life 47.9% (admittedly off a much smaller base) and Youi Group (the Australian business) 12.8%. OUTsurance Ireland is the startup that they are currently incubating, so it’s not surprising to see the losses there climb from R56 million to R180 million. Before you get worried, remember that OUTsurance has a track record of global expansion in the good old fashioned way: hard work and market penetration rather than fancy acquisitions that make bankers rich and shareholders poor.

They call the Irish strategy a “disciplined scale-up” – and in these numbers, you can see the benefit of that approach at OUTsurance over the past couple of decades.

The share price closed more than 8% higher.

Sanlam’s deal for Assupol has met all conditions (JSE: SLM)

The deal worth over R6.5 billion is going ahead

In February this year, Sanlam announced the intention to acquire all the shares in Assupol through a scheme of arrangement. In case that didn’t work, a standby offer was also on the table. They didn’t need the offer in the end, with the scheme being approved by shareholders and the scheme becoming unconditional.

The original price of R6.5 billion was subject to adjustments related to dividends and an escalation rate. The final price is therefore R6.57 billion, payable in cash to Assupol shareholders.

That’s good news for Assupol and Sanlam shareholders, but not such great news for the Cape Town Stock Exchange which now loses one of its precious few listings.

Another UK disposal at Texton – and confirmation that distributable income has dropped (JSE: TEX)

The fund has reduced its direct property exposure in the UK substantially

Hot on the heels of a recent announcement regarding the disposal of a UK property, we have yet another disposal by Texton. This time, it’s the North West Industrial Estate in Peterlee, which is well-tenanted but in a less-than-ideal location.

The price on the table is £8.3 million and the buyer is a REIT listed on the London Stock Exchange. Texton had valued the asset at £7.9 million as at 30 June 2023. That valuation is more than a year old, but at least the disposal is for a higher amount.

Included in the announcement was a trading statement that noted an expected decrease in distributable income of between 14% and 24% for the 12 months ended June 2024. This helps explain why they are reducing exposure and trying to simplify things.

York Timber swings into profits – but watch the cash (JSE: YRK)

The biological asset valuations are a regular source of volatility in earnings

Due to accounting rules, York Timber recognises fair value moves on the trees in the ground before they are cut down and sold. Whilst it would be unreasonable to ignore an asset that is quite literally growing every day, it does also lead to a volatile story in profits and a mismatch between earnings and cash.

Given York’s historical difficulties, I always think that earnings excluding those fair value moves are the important thing to focus on, along with cash generation.

For the year ended June, York expects to swing from a headline loss of 75.89 cents to HEPS of between 28.22 cents and 32.02 cents. They also disclose core earnings per share excluding the biological assets adjustment, with that number deteriorating from a loss per share of 8.04 cents to a loss of between 10.61 and 11.01 cents. That’s a negative move of between 32% and 37%!

Another important disclosure is EBITDA before fair value moves, which fell by between 15% and 20%. Finally, cash generated from operations is expected to be 75% to 80% lower than the comparative period, a particularly worrying trajectory.

Much like its earnings, York’s share price has been all over the place in the past few years.

Nibbles:

  • Director dealings:
    • I’m not sure who the seller was in this off-market deal, but Carl Neethling of Ascendis Health (JSE: ASC) bought R19 million worth of shares at 80 cents per share.
    • Johan van der Merwe (yes, of ARC fame) is a non-executive director of Attacq (JSE: ATT). He sold shares in Attacq worth R6.6 million.
    • A director of Bell Equipment (JSE: BEL), who also happens to be a member of the Bell family, sold shares worth R1.98 million. Given the recent attempted scheme of arrangement, the price is important here. They were sold for an average price of R39.58, which is well below the R53 at which the same family tried to buy out all remaining shareholders. Odd.
    • The CFO of Metrofile (JSE: MFL) bought shares worth R322k. That’s a bullish signal, although the recent results were anything BUT bullish.
  • Labat Africa (JSE: LAB) began its quarterly update in an unenviable way: “First and foremost, the company wishes to reassure its shareholders and stakeholders that Labat remains a going concern.” That’s all good and well, but it’s also an ongoing concern that the shares are suspended from trading because the 2023 and 2024 audits haven’t been concluded. They are still trying to appoint new auditors to get it done.
  • Sebata Holdings (JSE: SEB) has appointed joint chief executive officers, with the current CEO and interim CFO becoming non-executive chairperson. There’s no mention made of the appointment of a full-time CFO.

Declutter and Spring-Clean Your Portfolio

Satrix
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Declutter and Spring-Clean Your Portfolio

Spring has sprung and emerging from winter hibernation usually drives most people to do some spring-cleaning around the house. Sometimes, it can be quite awkward to realise you have three of the same thing, an item of clothing in your cupboard that you don’t even recognise, and many sets of socks without a matching pair!

This tends to happen with investments too. You may question your previous decision to buy into a certain investment, or after conducting more research, you find you have exposure to the same asset class but in a different investment vehicle. Even more awkward is finding an unfamiliar investment in your portfolio!

Does It Still Fit?

A good starting point is to understand your portfolio better. Knowing how it should be organised makes cleaning and decluttering a space easier. As an investor, this is achieved by aligning your portfolio holdings with your goals and risk tolerance. Similar to an outfit from your wardrobe that may not fit your style anymore, some of your holdings may have served their purpose already, or you simply wish to make some adjustments to them.

This could be the result of a change in your life circumstances, like a decision to retire sooner than planned, meaning possibly reducing exposure to high-risk positions and preserving your capital. Or, you may be welcoming a little bundle of joy who will probably be in Matric in 2042. Parents most certainly want to consider long-term growth assets for their little one’s future education. Similar to the garments in your wardrobe, investments are not a one-size-fits-all approach. There needs to be an understanding of why a certain allocation to a certain investment product is needed.

The Diversification Effect

Optimum diversification has no exact measure, so it is possible to hold positions that serve the same purpose, which detracts from the very point of diversification. It becomes trickier when you have a mix of shares, Exchange Traded Funds (ETFs) and unit trusts in one portfolio. The balancing act here is to ensure you hold just enough products to optimise diversification, with no overlap.

The advantage of investing in funds like those offered by Satrix, whether through an ETF or a unit trust, is that all of them have minimum disclosure documents (MDDs) which are available online. This allows investors to understand the risk profile of each of the funds they’re invested in, and have sight of the sectors and regional exposures offered by the funds. With all this information, investors can assess the countries or sectors they’re exposed to, through the weightings of each of the products held in their portfolio. This allows investors to spot any market, regional, sector, or asset-type concentration, thereby identifying how much risk their strategy carries to assess whether it matches their investment goals and terms.

Staying the Course, Through a Winter Storm

In the first week of August the Nasdaq 100, the S&P 500 and the MSCI World indices all hit their lowest level since May this year. Sentiment remained negative following the continuation of the market fall in July (as featured in our August newsletter). Markets rebounded significantly in the same month, and by the end of August, the Nasdaq 100 Index was up 1.2% in dollar terms, after losing almost 8% in just five working days.

In this period the rand strengthened by 2.4% to the dollar, which would mean some of the offshore investments would have experienced a net loss in rand terms. As a result, during August the Nasdaq 100 and S&P 500 indices declined by 1.3% and 0.1% respectively, with the MSCI World Index up 0.2%, all in rand terms. The MSCI Emerging Markets Index was down 1.3%, as the MSCI China and MSCI India indices were both down 1.4% in that period. The MSCI Euro Index was up 1.4% and the MSCI UK Index was up 0.8%, while the Bloomberg Barclays Global Aggregate Index (Global Bonds) was down 0.1% for the month.

In local markets, the FTSE/JSE Capped SWIX Index returned 1.4% return for the month, largely led by the Listed Property sector as the SAPY was up 8.3% for the month, while Financials was up 5.7% and Industrials up by 4.0%. Resource stocks battled through the month of August, falling 9.7%, while the JSE All Bond Index was up 2.4%.

Judging by the returns of these different asset classes and regions, August continued to carry the July winter storms, with some asset classes recovering well later in the month. August also proved that trying to time the market is not a good idea. Investors should rather stay invested through the sometimes short-lived market volatility to ensure they’re able to participate when markets rebound – which they always do.

This article was first published here>>>

Disclaimer

Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

Ghost Bites (African Rainbow Capital | Finbond | Gemfields | Kibo Energy | Life Healthcare | Metrofile | Oceana | Spear REIT)

The Finance Ghost
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3
Ghost Bites (African Rainbow Capital | Finbond | Gemfields | Kibo Energy | Life Healthcare | Metrofile | Oceana | Spear REIT)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

African Rainbow Capital managed an 8.5% uptick in INAV per share (JSE: AIL)

The focus is increasingly on the high growth assets

African Rainbow Capital Investments released results for the year ended June 2024. The key metric is intrinsic net asset value (INAV) per share, which increased 8.5% over 12 months. Total INAV was up 21.5%, but this included an equity injection, hence the difference to the per-share growth rate.

8.5% certainly isn’t setting anyone’s hair on fire, yet there are some great underlying assets like TymeBank that achieved breakeven in December 2023 and is en route to sustained profitability. They recognised a fair value gain of nearly R1.2 billion on that asset. Rain is the other one that gets a lot of attention, with R2.5 billion in EBITDA and fair value gains of just under R600 million.

High growth businesses now contribute 54% of the portfolio. In the more traditional financial services side of things, they are focused on synergies achieved through integrating businesses that have been acquired, or collaborations between existing businesses.

Kropz remains a challenge though, requiring an addition R602 million in support in this period. Compared to the investments in this period in the far more exciting businesses like Rain and Tyme of R126 million and R169 million respectively, is that a case of throwing good money after bad?

Despite achieving just 8.5% growth in INAV per share, the performance participation hurdle for management was met and a provision of R154 million was raised. I would also love to earn a performance fee for achieving growth that is lower than what government bonds offered in the past 12 months. If you can believe it, this is the restructured performance fee system that makes it harder to earn fees than before!

Finbond deepens its exposure to North American (JSE: FGL)

The stake in Americash and CreditBox.com is being taken to over 90%

Finbond has announced that its American subsidiary will be increasing the stake in Americash Holding and CreditBox.com through the acquisition of a further 27.78% interest. This will take the total holding to 90.57%.

These US businesses operate through 18 branches and an online offering in South Carolina, Wisconsin and Missouri. They offer instalment loans up to $2,500. The business has faced some tricky regulatory changes in recent years, with Finbond noting a “proven ability to steer through regulatory changes” as being part of the investment case!

Finbond will pay just over R29 million for the equity, which tells you that 100% of the business has been valued at just over R100 million. The net asset value is $28.6 million and net profit before tax is $4.55 million (R508 million and R81 million respectively), so it seems like Finbond is getting this tranche for a steal!

A disappointing auction result at Gemfields (JSE: GML)

At some point, the economic headwinds had to hit Gemfields as well

It’s felt for a while now like the diamond industry was bearing all the brunt of the economic challenges across the globe caused by high interest rates. Although the lab-grown diamond phenomenon is a highly relevant part of that story, it didn’t seem likely that Gemfields could entirely avoid the troubles.

Indeed, they couldn’t, with the latest auction of commercial-quality rough emeralds yielding disappointing results. Aside from the economic factors, they faced the challenge of a competing emerald producer having an auction at the same time and at lower prices, with Gemfields suggesting that the prices weren’t fair or sustainable. This led Gemfields to withdraw certain lots from the auction, with only 61% of lots offered for sale actually being sold.

Although one must be careful in comparing auction results due to differing quality in the underlying lots offered for sale, the price per carat of $4.47/carat is slightly better than $4.45/carat seen at the auction in March this year. In both cases, they are way down on the levels of over $7/carat achieved in 2023, or over $9/carat in 2022.

Now we know what the plan is at Kibo Energy (JSE: KBO)

After some to-and-fro with changes to management, the reasons for that are now clear

Kibo Energy’s SENS announcements might become a little more interesting going forward. Admittedly, that isn’t difficult when what we’ve been used it is a flurry of announcements about every little thing that Mast Energy Developments gets up to on a monthly basis.

The news is that there’s a reverse takeover on our hands, which means a group of assets will be injected into Kibo as a listed shell. Although Kibo isn’t actually a shell, the existing assets are pretty close to worthless, so it may as well be one.

ESGTI AG, a Swiss registered company, is the counterparty to this deal that will see the Kibo listed vehicle acquiring a portfolio of renewable energy projects across Europe and Africa – 36 development projects in all, spanning 15 countries. The assets are worth €400 million. Kibo is worth just R61 million (and possibly less – it trades at R0.01 per share so it might be lower if the share price could mathematically decrease), so existing shareholders will be diluted way down to nothingness. In fact, a share consolidation of 1 share for every 5,000 shares held is part of this deal.

There will also be a raising of €30 million, arranged by ESGTI at its own cost through the appointment of placing agents to get out their little black books and phone institutional investors.

A renewables group is no place for legacy coal assets, with the Kibo Mining (Cyprus) Limited subsidiary needing to be sold as a condition precedent to this transaction. In addition to the coal stuff, it also has the waste-to-energy and biofuel projects, so it’s rather interesting that those weren’t of interest to the new partner. The 19.52% stake in Mast Energy Developments won’t be part of the disposal, so ESGTI is clearly interested in MED at least.

The reverse takeover rules mean that there will be extensive disclosure around the assets coming into Kibo. It’s a quicker process than a brand new listing, but not by much.

Life Healthcare released a capital markets day presentation focusing on Life Molecular Imaging (JSE: LHC)

If you wanted to know more about that investment, here’s your chance

Life Healthcare is about more than just the hospital down the road. A big part of the investment case is the Life Molecular Imaging (LMI) business, which brings significant international exposure and three revenue streams.

Their flagship product is an Alzheimer’s Disease opportunity related to the diagnosis of the disease. There have been some major recent developments that will boost the business, like Medicare Administrative Contractors in the US now reimbursing patients for the diagnostic scan. The business is well positioned for growth in profits from here on out, with the worst of the fixed costs having been incurred already.

If you want to dig into the story in detail, you’ll find the presentation here.

Metrofile has suffered a significant drop in earnings (JSE: MFL)

I’ve always struggled to understand the bull case here

Metrofile is one of those companies that always seems to have someone telling the world that it’s a great investment at a cheap price. Over three years, the share price is down 30%. Over five years, it’s flat. “Cheap” can always get cheaper.

The problem is that the main offering of the business strikes me as a race to zero at best or a sunset industry at worst. Physical document storage isn’t high on anyone’s list of exciting services to offer. Although they also offer digital storage solutions, this very much strikes me as the disaster that faced media houses when going from newspaper into digital only. The economics are different and a cost base that was created for one model may not translate well into another.

Even where they can find growth, the relative lack of moat and differentiation means that margins are likely to come under pressure. This is exactly what is happening in the business in the Middle East, where operating profit tanked by 90% despite revenue increasing 21%.

Looking at the group numbers, revenue growth of just 1% for the year ended June 2024 means that my sunset industry thesis is alive and well. Operating profit fell 22% and HEPS was down 49%. Normalised HEPS was down 38% and the dividend per share was 22% lower. Pick your poison in terms of which percentage to focus on – they all suck.

Highlights? Cash generated from operations increased by 12%, leading to a 9% decrease in net debt (excluding lease liabilities). Alas, net finance costs were 17% higher due to higher interest rates.

If you’re happy to work with the normalised HEPS number of 20 cents, then a share price of R2.16 at time of writing looks anything but cheap.

Oceana has given an update for the 11 months to 25 August (JSE: OCE)

As is always the case in a diversified seafood group, the fish aren’t biting everywhere

Oceana had a fantastic interim period, with the dividend jumping by 50% year-on-year. Even in that period, there were challenges in areas like the Wild Caught Seafood segment. The company has now released an 11-month update to the market and it looks like performance has taken a knock in the latter part of the year.

Starting with the Canned Food and Fishmeal (Africa) segment, Lucky Star saw volumes decline 2% for the period. This was off a base of record volumes, so keep that in mind. The first half was impacted by a decline in production due to the decision to close the West Coast plants earlier than usual for factory upgrades. The second half saw a major recovery in production, with inventory closing at similar levels to the comparative period. Africa fishmeal and fish oil sales volumes fell 16%. Decent pricing of fishmeal and fish oil helped offset some of the decrease.

The Fishmeal and Fish Oil (USA) segment, which is the Daybrook business, enjoyed better volumes and record prices in the fish oil business, plus the benefit of a weaker rand when translating the results. It sounds like this segment was the highlight of the period. On the fishmeal side, volumes and prices were down on the comparative period. They are also dealing with pressure on catch volumes due to weather in the Gulf, with higher fish oil yields helping to mitigate some of the impact.

In Wild Caught Seafood, horse mackerel sales volumes in South Africa were down 84% due to a major mechanical failure on the key boat. In Namibia, they also struggled with the horse mackerel business, with volumes down and operating costs moving much higher. At least hake saw a significant increase in volumes, with better catch rates and improved pricing to add to that story. Finally, the squid part of this segment had higher volumes but lower sales prices.

After a massive increase in HEPS in the first half, the lack of a trading statement here suggests that the full year result won’t be nearly as strong. This isn’t to say that a trading statement won’t still come. It just seems like this was a good opportunity to tell the market that HEPS will still be at least 20% higher than the comparable period.

Fishing is basically an impossible industry to forecast with any accuracy.

Spear REIT part-funds the Emira portfolio acquisition with an issue of shares (JSE: SEA)

The issue price represents a negligible discount

Spear REIT has managed to raise just under R458 million in new equity through a vendor consideration placement. The issue price is R9.10 per share, which is a 1% discount to the 30-day VWAP.

The proceeds will partially settle the R1.15 billion purchase price for the substantial portfolio being acquired from Emira Property Fund. They expect this deal to close during October 2024, well ahead of the initial expectation of December 2024.

After the deal and this equity placement, the loan-to-value ratio is expected to be between 33% and 34%.

Nibbles:

  • Director dealings:
    • Aside from the usual sales of shares to cover tax obligations, various directors of Shoprite (JSE: SHP) and subsidiaries sold shares to the value of around R30 million. The cash is raining down from the skies in that place, which is what happens when a company outperforms!
    • A prescribed officer of Sibanye-Stillwater (JSE: SSW) bought shares through the US structure worth just over R1 million.
  • NEPI Rockcastle (JSE: NRP) is considering an acquisition of a shopping centre in Poland. The centre is found in Wroclaw, the third largest city in Poland by population. If the deal goes ahead, it will be a category 2 transactions, which means details will be released to the market but shareholders won’t be asked to vote. They hope to execute formal written agreements in the next few weeks, thereby triggering the disclosure.
  • Sasol (JSE: SOL) announced that Muriel Dube has been appointed chairman of the board, with her previous role being as lead independent director. Dr Martina Flöel is the new lead independent director.

Ghost Wrap #80 (Sibanye-Stillwater | Truworths | Finbond | Barloworld)

The Finance Ghost
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Ghost Wrap #80 (Sibanye-Stillwater | Truworths | Finbond | Barloworld)

Listen to the show here:

The Ghost Wrap podcast is proudly brought to you by Forvis Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Forvis Mazars website for more information.

This episode covers:

  • Sibanye-Stillwater has had a great day, but the share price move needs some context.
  • Truworths is riding the GNU-phoria, even though the best performing part of the business is in the UK!
  • Finbond has secured an excellent deal in the US.
  • Barloworld scared the market with a cryptic announcement about Russia.

Ghost Bites (Barloworld | Choppies | Kore Potash | MTN | Nampak)

The Finance Ghost
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0
Ghost Bites (Barloworld | Choppies | Kore Potash | MTN | Nampak)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

A very odd turn of events at Barloworld (JSE: BAW)

The market panicked on Friday

Barloworld’s share price fell 12.5% in just one day – and traded volumes were nearly 3x higher than the average day. The intraday move was even more severe, with an initial drop of 24% in response to a worrying SENS announcement. Believing that the move was overcooked and hoping that the gap would close, some punters bought in the afternoon and reduced the extent of the pain on the day.

The reason for this chaos? A voluntary self-disclosure to the US Department of Commerce, Bureau of Industry and Security regarding potential export control violations relating to sales of certain goods to the Russian subsidiary.

When the Russian sanctions came out, Barloworld (which is not an American company of course) took the practical approach of trying to manage the situation in a way that doesn’t leave the Russian employees high and dry. Unlike US firms that basically had to donate their businesses to oligarchs, Barloworld did the smart thing and managed the problem. This is of course a very technical issue though, with potentially severe outcomes if something is wrong, hence why the market panicked on the news of even a potential violation.

For now, there are more questions than answers. The market hates that.

Choppies is selling a hot potato to related parties (JSE: CHP)

Throwing good money after bad is rarely advisable

Choppies has announced the disposal of Mediland, a medical equipment and consumables distribution business in Botswana. Mediland is owned by Kamoso Group, which in turn is 76% held by Choppies. There are a number of other related party triggers going on here, including the Chief Compliance Officer of Choppies being one of the parties willing to take Mediland off the group’s hands.

Choppies acquired Kamoso in July 2023 and thus Mediland on an indirect basis as well. Mediland has been suffering losses for so long that Choppies doesn’t see a path to profitability and won’t be investing new capital in the entity. The most recent annual loss is BWP 8 million.

The current CEO of Mediland and the Chief Compliance Officer of Choppies will buy Mediland for a nominal amount, as the equity is worthless. More importantly, they will take over the revolving trade credit facility obligation of BWP 40 million and settle it over five years.

The buyers have also agreed not to retrench any staff, so good luck to them trying to turn the business around.

The problem is that the BWP 40 million is owed to Kamoso, not an independent bank, so any hope of recovering that amount rests with the buyers finding a way to improve the business. While the facility is outstanding, no dividends can be paid by Mediland.

There’s a very dicey paragraph in the announcement that in my view doesn’t reflect the reality of the deal. If Choppies is lucky, Kamoso may receive repayments on the BWP 40 million facility, partially or in full. This paragraph makes it sound like there’s an up-front payment, which there isn’t:

Kore Potash is close to getting the EPC agreement signed (JSE: KP2)

The company is valuing its exploration and evaluation assets at $173 million as at June

Kore Potash has released its financial report for the six months to June. If you’ve been keeping even half an eye on the group, you’ll know that the focus has been on trying to conclude an Engineering, Procurement and Construction (EPC) contract with PowerChina. This has been going on since 2022!

Construction companies can literally go bankrupt if they get contractual terms wrong, hence why we are here two years later and still reading about the conclusion of this contract. PowerChina has put maximum effort into avoiding getting it wrong, including an extended period of having representations on the ground with Kore Potash to develop the project plan.

After recent meetings in Beijing and Dubai, the agreements are now sitting with legal counsel of both parties for finalisation. Once that is complete, a signing ceremony will need to be arranged in Brazzaville, with the Minister of Mines of the Republic of Congo as a key signatory.

This process should give you insight into both the risk and potential reward at junior mining groups. Kore Potash values its exploration and evaluation assets at $173 million as at the end of June and is sitting on cash of just under $1 million.

They are close now, with the share price up around 220% this year in appreciation of their efforts. Of course, nothing is guaranteed until there’s a signature.

MTN releases the circular to extend MTN Zakhele Futhi (JSE: MTN)

This deal is a great example of why B-BBEE deals need to be structured more carefully

MTN’s B-BBEE deal was designed to give investors exposure to the entire group, not just South Africa. This is why MTN Zakhele Futhi holds shares in the listed group.

History has shown us that this probably isn’t the best way to do things. For comparison, MultiChoice’s B-BBEE structure (Phuthuma Nathi) is based on the South African subsidiary only, which means those shareholders aren’t subjected to all the volatility in Africa. It also means that the MultiChoice deal isn’t based on a listed share price that can be thrown around. Finally, the MultiChoice deal doesn’t have an expiry date, whereas the MTN deal does – and this simply adds to the risk when referencing listed shares that might be going through a rough patch as that date approaches.

So, for quite a few reasons in the end, here we are: the MTN Zakhele Futhi structure is being extended for three years to avoid it expiring worthless or close to worthless later this year. They estimate the break-even point (i.e. where the shares held in the structure can cover the debt) to be R88 per MTN share. The group is trading at R94 per share but has recently been below R73 per share.

The costs of restructuring these deals is no joke, with nearly R22 million in fees for MTN, of which R10 million will be going to RMB as financial advisor, as well as a gigantic R33 million in fees incurred by MTN Zakhele Futhi, with Tamela Holdings making R18.6 million as financial advisor and sponsor – in addition to the R2 million they made from MTN group as lead sponsor. MTN Group is going to bear all the fees anyway, so that’s a cool R55 million in fees just to keep the deal alive.

One day, someone with time on their hands should do a study on the fees earned by investment bankers vs. the value actually created for B-BBEE scheme shareholders over the past two decades in South Africa. I suspect that the results would be shocking.

Nampak wants to incentivise its key executives – but the share price ran away from them (JSE: NPK)

The company has released a circular to deal with this issue

Nampak has been under new management for the past 12 months. Due to the need to recapitalise the company, followed by a cybersecurity issues that caused further delays, they haven’t been able to finish off the plan to incentivise and align top executives Phil Roux and Glenn Fullerton.

Last year, the directors complied with the initial requirement to acquire R4 million worth of shares each at R175 per share. The problem is that the share price has gone a little nuts recently, currently trading at R435. To incentivise the directors at that price wouldn’t be fair, as they would lose out on the upswing from the first year of the turnaround.

To get around this problem, Nampak wants to issue further shares to the two directors at a price of R175 per share. This looks like a huge discount to the current price (and it is), but I also understand the arguments why. The share subscriptions will be funded by loans from the company of R16 million to Phil Roux and R10 million to Glenn Fullerton.

You can read the circular here.

Nibbles:

  • Director dealings:
    • A prescribed officer of Standard Bank (JSE: SBK) sold shares worth just under R3 million.
    • Titan Premier Investments, one of Christo Wiese’s main investment vehicles, bought another R755k worth of shares in Brait (JSE: BAT).
    • Associates of a director of Brimstone (JSE: BRT) bought shares worth “N” ordinary shares worth R270k and ordinary shares worth R59k.
  • Mondi (JSE: MNP) has confirmed the exchange rate for its interim dividend, with South African shareholders due to receive 459.48435 cents per share.

Like looking into a furry crystal ball

Dominique Olivier
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Like looking into a furry crystal ball

The global pet sector is set to boom by 2030 – and if we peer carefully beneath its furry surface, we are being given a few clues about what the family photos of the future will look like.

Not too long ago, someone told me a joke about the so-called “hierarchy of Millennial dependents”. It goes like this: for Millenials, plants are like pets, pets are like babies, and babies are like those rare exotic animals that some people keep that require them to spend vast amounts of money and basically reconfigure their entire lifestyle. I laughed at the joke, which struck me as a wry assessment of my generation’s spending preferences. But then I went home and thought about my peer group, and how many of them actually have children versus how many have animals… and the joke became slightly less funny.

Case study: my friend Jane

I have a friend named Jane* who is a single parent to a busy two year old. Jane is 32 years old and has a tertiary qualification from a respected South African university. She works as an IT technician for a company with an international footprint and earns well for a woman of her age. Her car is paid off and she is currently living in a rental property.

Jane spends a lot of her expendable income on her two year old, who requires a special diet and regular specialist checkups due to digestive issues. Jane pays out of pocket for these specialist checkups, as they are not covered by the medical aid plan that she chose. Although Jane works remotely, she still pays for her child to attend a daycare five days a week. On weekends, she can usually be found at a birthday party for one of her child’s daycare friends. These parties always feature custom-made cakes and party packs, as well as themed snacks and decor.

You may never have guessed it from the description that I just gave you, but the two year old in Jane’s life is actually a Dalmatian named Charlie. Not the grandchild that Jane’s mother envisioned, no doubt, but since Jane has made the decision to not have any (human) children, this is her reality.

For someone like Jane’s mom, who was married and had three children by the time she was in her mid-twenties, I’m sure this is a confusing divergence from what she believes to be the norm. Yet I’m seeing this same story unfold in the lives of about two-thirds of my friends and colleagues. As someone with a toddler, I am more often than not the exception among my peers.

The dog days are coming

This is and will always be an opinion column, informed by my views and personal experiences. However, I do think a closer look at projections from the global pet industry supports what I’ve been seeing on the ground.

According to the Pet Economy report from Bloomberg Intelligence, the pet industry is on a great growth trajectory, projected to increase from $320 billion today to nearly $500 billion by 2030. What’s driving this growth? A combination of more pets worldwide and the trend of treating pets like family, leading to higher-quality food and services.

The US will remain the biggest pet market, with sales expected to reach around $200 billion by the end of the decade. A big factor here is the increase in spending on pet healthcare – things like medical aid for pets (pedical aid?), vet visits, diagnostics, and medications. There’s also a growing need for senior pet care, which can get pricey. With pets living longer, more money is being spent on advanced treatments like monoclonal antibodies, which are used to treat arthritis in animals. Driven by more and more advanced medications, the pet pharmaceutical market could hit $25 billion by 2030. Plus, as preventive care becomes more common, diagnostics could become a $30 billion global market.

Europe has the biggest growth potential in this space, with a market valued at $12 billion but only an 8% penetration rate – talk about a growth runway! Pet ownership in Europe has already increased by over 50% since 2020 in European countries such as the United Kingdom, Germany and France.

So, is this a great time to invest in pet-related stocks? I’ll suggest it to the Ghost for a Magic Markets research piece at some point. But between the lines of the pet industry growth story, there’s a second story unfolding – and one we should probably be paying attention to.

So people love their pets. So what?

The issue is not that people love their pets. It’s that people love their pets so much that they aren’t creating more people.

Replacement fertility is the number of children women need to have, on average, to keep the population steady, assuming mortality rates don’t change. If this level is maintained long enough, each generation will essentially replace itself. As of 2023, that magic number is 2.1 children per woman.

The problem becomes clear in the data: industrialised countries are all falling below replacement-level fertility. In the US, Census data shows that the percentage of women aged 30 to 44 (aka Millennials) who have never had children is at an all-time high since 1960, contributing to a fertility rate of just 1.8 children per woman. Remember, we’re talking about averages here – which means that the US fertility rate is that low despite the fact that some midwestern families (you know you’ve seen them on TikTok) have eight children or more.

Canada is even lower, with only 1.3 children per woman in 2022, according to Statistics Canada. Europe is also seeing record lows – 2022 had the fewest babies born since 1960. The UK’s fertility rate is 1.6, Germany’s is 1.4, and Italy’s is just 1.2. Asia isn’t faring much better. Even after lifting its one-child policy, China reports just 1.2 children per woman. Japan stands at 1.3, and Korea has hit a striking low of 0.8 children per woman.

In South Africa, our national fertility rate is currently 2.29 children per woman. While this may seem like a healthy number when compared to that magic 2.1 that we discussed before, a zoomed-out view of the stats shows that this figure is down from a high of 2.48 in 2019. So we are also declining – just very slowly.

Why the baby blues?

It’s simple, really – having children has become extraordinarily expensive. The more developed a country is, the more expensive it becomes to live there, which explains why developed countries are the ones feeling the majority of the baby blues. The trend is echoed beautifully in the numbers – Niger, one of the poorest countries in the world, has the world’s highest fertility rate, currently sitting at almost 7 children per woman.

Millennials, who are currently in their baby-making prime, are feeling the brunt of the economic pressure. On the one hand, there’s the crisis of “delayed adulthood”, brought on by the fact that this generation has been too broke to meet traditional milestones like graduating from tertiary education, getting married or buying a house. Those who have managed it have done so nearly a decade older than their parents’ generation.

On the other hand, many of these Millennials are faced with the prospect of looking after their Baby Boomer parents, a retiring generation that is not only living longer than anyone expected but doing so on precious little savings. In 2019, the World Economic Forum estimated that retirees from six countries with advanced economies, such as the US and Europe, will outlive their retirement savings by a full decade. I recommend that you don’t do yourself the disservice of trying to imagine how that same story will play out in South Africa, which has historically had a terrible savings culture.

In the face of these bleak statistics, it makes sense that people like my friend Jane are opting for pet rearing rather than child rearing. And while Jane does this to a high standard and therefore pays a premium for everything her dog needs, from food to daycare to dog-safe birthday cakes, she is probably still only spending a quarter on her dog of what she would spend on a child.

On the flipside, I hope Jane is taking those rands that she’s saving through pet ownership and investing them smartly. Say what you will about dogs being good companions – I’ve yet to hear of one that supported its parent in retirement.

For more on this topic and how it affects consumer trends, I wrote on what tiny pineapples can tell us about our future back in May 2024. It was a popular article that you’ll find here.

*not her real name

About the author: Dominique Olivier

Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.

She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.

Dominique can be reached on LinkedIn here.

Ghost Bites (Bell Equipment | Brimstone | Capital & Regional | Discovery | FirstRand | Lesaka | RFG | SA Corporate Real Estate | Sibanye-Stillwater | Truworths)

The Finance Ghost
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2
Ghost Bites (Bell Equipment | Brimstone | Capital & Regional | Discovery | FirstRand | Lesaka | RFG | SA Corporate Real Estate | Sibanye-Stillwater | Truworths)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

The Bell take-private is dead – for now at least (JSE: BEL)

Shareholders have voted down the scheme at R53 per share

Based on what I’ve seen on X from influential minority shareholders, I’m not super surprised to see that the Bell Equipment scheme of arrangement was not approved by shareholders. The voting class of non-conflicted shareholders was small in the greater scheme of things, making it easier for large minority shareholders to block the deal.

In the end, it was supported by around 52% of voting shareholders. A special resolution requires 75% approval, so this was way off the required levels.

I think this is brave stuff, especially as the latest Bell earnings weren’t outstanding. Goodness knows Bell has come a long way in the past couple of years, especially since the first highly opportunistic attempt to take it private, but an offer of R53 per share didn’t feel silly to me. To get something higher than this won’t be easy, especially since it would either need to come from the family (third time lucky) or from an independent third party willing to buy out the entire thing.

The share price fell by over 13% to trade at around R40 per share. It was trading at around R30 per share before this buyout offer was put on the table, so watch this one carefully.

That’s a tough day for the minority shareholders who did want to take the money, as the scheme of arrangement is an all-or-nothing mechanism. Even if the family did make a general offer to shareholders at R53 and achieve a decent number of acceptances, it would just create an even thinner voting class for an eventual take-private.

Brimstone isn’t serious about closing the discount to NAV (JSE: BRT)

Investing in minority stakes in private companies simply won’t do it

Brimstone has an intrinsic net asset value (INAV) per share section on its website that discloses the INAV per share as being R11.44. This is essentially the per-share value of what the directors reckon the place is worth, based on a roll-up of underlying investments. Brimstone is currently trading at R5.70, so the market has a less bullish view. Whilst discounts to INAV are nothing new for investment holding companies, the quantum varies based on the way capital is allocated.

I’m afraid that taking R50 million and pouring it into FPG Property Fund to increase the minority stake from 10.1% to 11.5% really isn’t going to close the gap anytime soon. The best way to do it is simply to buy back shares at the discounted share price, sending a signal to the market that the directors firmly believe in the INAV per share. As this is a small related party deal with an associate of a non-executive director of Brimstone, my view is that this deal sends a negative signal instead.

FPG is described as having strong growth prospects. I have no reason to doubt this, particularly with the focus on convenience retail properties and where we are in the cycle. The problem is that investors can get similar assets elsewhere in the market without having to be exposed to the layered costs of Brimstone, hence the persistent discount to INAV.

Another extension at Capital & Regional (JSE: CRP)

It would be very helpful for Growthpoint (JSE: GRT) if an offer did come through here

As the release of results by Growthpoint earlier this week showed us, they are still dealing with a difficult environment for rental reversions and the cost of debt has been a strain. Selling the stake in Capital & Regional won’t fix the former issue, but it would do a lot of good for the latter as they could reduce debt considerably.

For that to happen, one of the potential bidders sniffing around Capital & Regional needs to bite. Praxis has pulled out of the race, leaving just one likely source of an offer at this stage: NewRiver REIT. They’ve been negotiating directly with Growthpoint since May, which makes sense as Growthpoint is the controlling shareholder and there’s no point in putting an offer on the table that won’t be accepted by them.

In the hope of an offer coming through from NewRiver, there is yet another extension to the PUSU (Put Up or Shut Up) deadline, this time to 26 September. For such a strongly-named concept, there seems to be no issue in getting it extended time after time.

Most of Discovery’s businesses grew, but not all (JSE: DSY)

The share price is at 52-week highs but hasn’t delivered exciting returns in recent years

Discovery’s results aren’t usually filled with excitement and fireworks. There are some growth engines in the group, but it’s usually a case of relatively sideways travel for both the group and the share price. Recent momentum has been strong though, with Discovery now hitting 52-week highs after releasing much better growth in normalised profit from operations.

Of course, it depends on which line you look at. HEPS disclosed in the way that everybody does it shows growth of 4% to 9%. If you are willing to work with normalised HEPS, that number is much stronger at growth of between 12% and 17%. The segmental guidance given by Discovery is based on normalised profit from operations, with the group up by between 15% and 20%.

Discovery South Africa grew 13% to 18% on the basis of normalised profit from operations, with Discovery Invest and Discovery Insure offering the best growth rates. Discovery Bank continues to reduce its losses. Discovery Health was up by between 4% and 9% which is pretty decent, while Discovery Life grew between 6% and 11%.

Vitality UK has a far less enjoyable story to tell, with earnings down by between 11% and 16%. The claims experience in VitalityHealth was the biggest issue, as premium increases lagged claims. They expect margins to recovery in 2025.

Vitality Global did really well, with a positive narrative across the board and especially at Ping An Health Insurance, which has started paying dividends.

Detailed results are due on 19 September.

FirstRand’s earnings took a knock from a UK provision (JSE: FSR)

Without that, they grew by double digits

FirstRand has released results for the year ended June. Although HEPS only grew by a rather sad 4%, the major impact here was an accounting provision (R3 billion) raised in the UK as a result of the motor commission review, as well as related legal and professional fees (R300 million). Without that, normalised earnings would be up 10% and return on equity would’ve been 21.3%. Whilst I’m always nervous of normalisation adjustments, the reality is that a provision of this nature severely skews earnings trends. Importantly, FirstRand was still in the green despite the provision.

The dividend was up 8%, which gives some support to the notion that normalised growth was 10%.

The more traditional banking operations led the way here, with net interest income (NII) up 10% and non-interest revenue (NIR) up by 6%. Kudos to RMB for a 16% uplift in NIR, with structuring and advisory mandates delivering a 44% increase and trading income up 9%.

Geographically, it’s encouraging (and in contrast to what we’ve seen at some peers) that the Africa portfolio delivered strong growth. Although the UK segment looks like a winner in this period, it’s because they recognised the provision at the centre. Ignoring all the costs related to that matter, earnings were up 34% in the UK.

Going forward, recognising that FirstRand is a complex group operating in various regions, they expect a weaker NII performance and a stronger NIR performance. They believe that ROE will continue to trend into the upper end of the target range of 18% to 22%.

FirstRand is the best of the local banking groups and the multiple reflects that, with a share price of R86 and a net asset value per share of R34.85.

Lesaka will look back on 2024 as a landmark year (JSE: LSK)

The group reported positive operating income and gave better guidance for FY25

Lesaka Technologies is busy building an impressive fintech group. The platform needed to scale and they’ve been doing exactly that through major acquisitions. Although the group isn’t at the stage of net profitability yet, they are expecting a major uptick in adjusted EBITDA in the next year.

For the full year ended June 2024, revenue was up 11% and operating income swung from a loss of $15.3 million to profit of $3.6 million. Group adjusted EBITDA came in at R690.9 million, an important number to keep in mind when we get to the FY25 guidance.

At divisional level, the Merchant Division saw revenue increase by 12% and adjusted EBITDA by 4%, so there are some questions around the margins there. The Consumer Division increased revenue by 15% and adjusted EBITDA by a rather ridiculous 361% – that’s the joy of hitting an inflection point for profitability!

Net debt to group adjusted EBITDA improved from 4.5x to 2.5x.

Looking ahead, revenue guidance initially looks light at between R10 billion and R11 billion, as they achieved R10.6 billion in FY24. If you read carefully, there’s a substantial change to the way revenue on prepaid vouchers is recognised, which is why the revenue growth looks non-existent at first. The big jump is in adjusted EBITDA, with guidance of between R900 million and R1 billion vs. R690.9 million in FY24.

The stock is fairly illiquid unfortunately, with a return over the past year of 27%.

RFG’s international business was a major drag on growth – but the cause is to be found locally (JSE: RFG)

Port infrastructure is letting our companies down

RFG Holdings has released a trading update for the 11 months to August, with group revenue up by only 1.4%. The international segment is to blame, with softer global pricing and a drop in volumes due to shipping delays out of the Cape Town and Durban ports – another good example of local infrastructure letting the private sector down. With overall selling price inflation of 5.4%, you can see that group volumes were firmly in the red. This makes it harder to maintain the 10% medium-term operating profit margin target, as a drop in volumes usually means a less efficient manufacturing environment.

Looking in more detail, the regional segment achieved revenue growth of 5.3%, with price increases of 8.1% and a volume decline of 2.5% (spot the consumers under pressure locally). The mix effect was a decrease of 0.3%. The international segment can only dream of such numbers, with revenue down 11.3% due to prices falling 3.5% and volumes down 10.4%. The mix benefit of 1.2% couldn’t offset that impact. RFG is being severely hampered by the shipping situation at the ports, with lower opening stock levels also not helping.

As a silver lining, the volume decline in the regional segment has at least improved since the -5.5% reported for the six months to March. The pie category apparently did well, with a cold and wet winter surely helping.

Annual results are due on 20 November.

SA Corporate Real Estate grew distributable income (JSE: SAC)

Don’t let the name fool you – there’s plenty of residential property in here

SA Corporate Real Estate has released results for the six months to June. They reflect net property income growth of 4.8%. In the retail portfolio, it grew by 2.9%. The industrial portfolio was up by 6.3% and the residential portfolio in Afhco managed 7.0%. It’s pretty interesting to note that the retail portfolio was therefore a drag on growth!

Funds from operations per share, a key metric in the industry, grew by 6.7%. Distributable income per share was up by 6.3% and the payout ratio was kept consistent, so the distribution was up by the same percentage.

This is a decent growth outcome, with the loan-to-value ratio staying steady at 41.9% and leaving the REIT in a decent position for what will hopefully be a further improvement in South African trading conditions.

Sibanye-Stillwater is only slightly profitable – excluding impairments (JSE: SSW)

When will the pain in PGMs end?

Sibanye-Stillwater has lost 42% of its value in the past year. If the PGM sector was my kids, it would have a “big owie” and kisses better wouldn’t be helping.

Thanks to depressed commodity prices, operational issues and frankly just some bad luck as well, Sibanye’s headline earnings came in at just R137 million for the six months to June. It’s profitable, but not by much. If we include the impairments, then the loss came in at R7.5 billion – still much better than the six months to December 2023 but way down year-on-year.

The trouble is that the South African PGM operations are still much larger than the other parts of the group. Although Sibanye has been on a diversification drive (with very debatable success), much of it is just noise.

There was negative free cash flow of R7.3 billion in this period, which is obviously a concern. Despite this, debt ratios are still at manageable levels. They’ve put a lot of work into the balance sheet (including the covenant negotiations with banks) and have restructured the operations in an effort to weather this storm in the PGM sector.

At least the gold business saw an improvement in adjusted EBITDA, despite a decrease in production. Another small positive in this result was a swing into profitability in the US PGM operations.

It sounds silly and simple, but the reality is this: PGM prices have to increase for any good to come from an investment in Sibanye.

On a comparable basis, Truworths showed very little growth (JSE: TRU)

The share price has still had a decent year as Truworths wasn’t priced for growth – but what about going forward?

Truworths has released results for the 52 weeks ended 30 June 2024. Sales were only up by 3.9%, with all of that growth coming from the UK (up 18.7% in rand). Truworths Africa, which is mainly South Africa, saw sales drop by -3.9%.

The biggest divergence in performance was on the profit line, where Office (the UK business) increased its trading margin dramatically from 18.3% to 34.6%. As for Truworths Africa, the same metric fell from 18.1% to 13.3%. Clearly, the local business is struggling. One of the reasons for this is in the supply chain, with port-related issues impacting not just the imported apparel (55% of merchandise), but also the locally manufactured stuff that depends on imported materials.

Delays in inventory had a negative impact on gross margin, as stock was on the shelves too late and this led to more end-of-season promotions. Gross margin fell from 55.4% to 54.9% in Truworths Africa. Conversely, in Office, gross margin increased from 45.2% to 47.0%.

Without important adjustments for once-offs in this period and in the base period, diluted HEPS fell by 6.5%. The “pro-forma” disclosure captures the various items that limit comparability, on which basis diluted HEPS actually increased by 0.9%.

Either way, it’s a disappointing result. With diluted HEPS of 805.8 cents for the year, the current Truworths share price is a Price/Earnings multiple of 11.8x. Not for me, thanks – that isn’t cheap anymore.

Nibbles:

  • Director dealings:
    • Aside from a fair bit of restructuring activity across various entities, an associate of two directors of Astoria Investments (JSE: ARA) bought shares worth R5.6 million and also entered into a CFD trade over R3.8 million in shares.
    • Two directors of a major subsidiary of RFG Holdings (JSE: RFG) sold shares worth over R6.35 million in aggregate.
  • Although not a traditional director dealing in my eyes, it’s worth noting that several Lighthouse Properties (JSE: LTE) directors have elected to receive shares under the scrip dividend alternative. I also have to mention that Des de Beer’s share of this is a massive R78 million! This is how huge balance sheets create wealth over time.
  • Schroder European Real Estate Investment Trust (JSE: SCD) is still a sideways story, with a NAV total return of 0.4% for the quarter and -9.9% for the nine months year-to-date. They’ve declared their third quarter dividend of 1.48 euro cents per share. The loan-to-value ratio is 25% (net of cash).
  • The Quantum Foods (JSE: QFH) shareholder meeting showed significant dissent among shareholders when it comes to the current management team. The resolutions to remove three directors of the company were voted down by the narrowest of margins – just over 50% of shareholders!
  • Universal Partners (JSE: UPL), a highly illiquid investment holding company, released earnings for the year ended June. There’s a small headline loss per share, leading to the NAV per share being ever so slightly down over the last 12 months. As is pretty much the case every time they release numbers, portfolio company Propelair has “reinvented the toilet” and is “significantly behind its original business plan” – so perhaps the toilet didn’t need reinventing? Much more importantly, the investment in PortmanDentex has been impaired by 17.5% as market valuations have decreased in the sector.
  • In case for some reason you are following Kibo Energy (JSE: KBO) and its far-too-regular updates on subsidiary Mast Energy Developments, the company has confirmed that it is achieving average revenue per month of £21k per MW. The recent gross profit margin is 57%.

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

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

Exchange-Listed Companies

AngloGold Ashanti and Centamin Plc have agreed to a deal that will see, subject to shareholder approval, AngloGold acquire Centamin and thereby control of the Sukari Mine in Egypt. The deal valued at $2,5 billion (R44,5 billion) represents a premium of 37% to Centamin’s closing price on the day prior to the announcement and at a time when the gold price is at record highs. The transaction will involve a share and cash deal with Centamin shareholders receiving 0.06983 new AngloGold shares and $0.125 in cash per Centamin share – with 82,711,292 AngloGold shares to be issued. Following the transaction, AngloGold shareholders will hold 83.6% of the company with Centamin investors owning 16.4% of the enlarge share capital.

Manufacturer and distributor of branded and private label consumer packaged goods Libstar, has disposed of its interest in Chet Chemicals to Mithratech SA, a subsidiary of the Morvest Group, for an undisclosed sum. The disposal of the business, which forms part of its Household and Personal Care category, is aligned with Libstar’s stated strategy to simplify and reposition its portfolio to value-added food categories.

Texton Property Fund’s UK subsidiary had disposed of a property located in the Heapham Road Industrial Estate in Gainsborough in the UK to Banafa Properties for a disposal consideration of £7,3 million.

Trematon Capital Investments has entered into an agreement with Aria Property Group in terms of which Trematon subsidiary Tremgrowth will dispose of its entire 60% interest in Aria for a cash consideration of R293 million. The transaction is structured as a repurchase by Aria of the 180 ordinary shares held. The transaction is a category 1 disposal and as such requires shareholder approval.

Castellana Properties, Vukile Property Fund’s 99.5%-held subsidiary, has concluded an agreement with Suitable World Unipessoal, a Portuguese company ultimately owned by Harbert European Real Estate Fund V, to acquire a blue-chip tenanted shopping centre portfolio comprising three assets, two in Lisbon and one in Porto. The acquisition will be acquired by ‘Newco’ which will be owned 80% by Vukile and 20% by RMB Investments and Advisory (FirstRand). The aggregate purchase consideration of €175,5 million will be settled in cash. The portfolio is being acquired at an initial net income yield of c.9%.

Shareholders at the meeting held to approve the offer made in July by the Bell family (IAB) to buy out minorities of Bell Equipment have rejected the move. Shareholders holding just 15.05% of the shares were eligible to participate in the offer of R53 per share, representing an 82% premium to the 30-day VWAP at the time. IAB and shareholders related to the founding family hold the remaining 70.13%. This is not the first time the Bell family (IAB) have had their offer rejected. In October 2021, the offer to acquire the remaining 29.45% interest in the company was priced at R10 per share. The offer price was found to be not fair nor reasonable.

To allow for further discussions with NewRiver REIT in relation to a potential offer to acquire the entire issued share capital of Capital & Regional, the C&R Board has requested, and the UK Panel on Takeovers & Mergers has once again consented, to extend the deadline by which time NewRiver is required to either announce a firm intention to make an offer or announce that it do not intend to make an offer for the company. The new deadline is 26 September 2024.

Unlisted Companies

South African Valhalla Capital Partners, Finnish wastewater treatment technology pioneer EPSE, Johannesburg-based water treatment company Prosep and Texas-based mining consultancy Titan Resources have formed a joint venture to disseminate EPSE’s innovative water treatment technology across Africa. The technology can be applied to all wastewater containing dissolved metals – a typical by-product of mining and diverse industrial sectors. The activities of the JV will consist of projects where samples from individual mines will be processed using the EPSE method and solutions will be implemented locally in partnership with Prosep. Valhalla Capital Partners will raise financing for the expansion of the JV in South Africa and across the continent.

Computer Mania, the Cape Town-headquartered technology retailer has acquired gomaxx. a certified pre-owned Apple retailer. The deal enables Computer Mania to scale its Apple service and product offerings by providing a wide selection of pre-owned Apple devices and in-demand services such as repairs and upgrades. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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

In a move integral to its objective of demerging its 78.56% stake in Anglo American Platinum (Amplats), Anglo American has successfully completed an on-market offering of 13,94 million Amplats shares at R515.00 per share. The shares which represent a 5.3% shareholding will reduce Anglo’s stake to 73.26%. Anglo’s remaining shares are subject to a lock-up of 90 days. The R7,2 billion proceeds from the placing will be used to reduce Anglo’s net debt as the group focuses on copper, premium iron ore and crop nutrients in a drive to achieve sustainable attractive returns.

Vukile Property Fund has raised R1,5 billion in equity following the placement of 88,2 million shares in an accelerated bookbuild, representing approximately 7.7% of the company’s market capitalisation. The shares were placed at a price of R17.00 per share representing a 4.63% discount to the 10-day VWAP on 9 September 2024. The proceeds from the equity raise will allow Vukile to pursue value-accretive opportunities in South Africa and Europe.

Following the results of the scrip dividend election, Lighthouse Properties plc will issue 41,972,049 ordinary shares in the company in lieu of an interim dividend, resulting in a capitalisation of the distributable retained profits in the company of R325,7 million.

Brimstone Investment Corporation has subscribed for 1,59 million shares amounting to a R50 million investment in FPG Investments. The company’s principal investment is an 86.4% shareholding in FPG Property Fund, a property-owning entity with a focus on the convenience retail sector.

AVI will pay shareholders a special dividend of 280 cents per share, payable on 21 October 2024.

AltVest Capital, a platform providing alternative investments by offering fractional ownership of bespoke investment opportunities, is to move its listing from the Cape Town Stock Exchange (CTSE) to the JSE’s AltX. The company listed on CTSE in May 2022 taking a secondary listing on A2X in September of that year. Prior to listing on the JSE, the company will undertake a capital raise, offering up to 1 million Ordinary shares, 3,924,674 A shares, 718,844 B shares and 29,833,894 C shares, subject to a minimum subscription amount of R6,5 million in respect of the Ordinary Shares, of which R2,5m has been underwritten by WGW Capital. The price at which the ords, A, B and C shares will be offered for subscription will be R6.50, R1.80, R11.00 and R3.20 respectively. Each of the equity offerings (A-C shares) are linked to an investee company. These are Umganu Lodge, Bambanani Family Group and Altvest Credit Opportunities Fund. The shares will commence trading on AltX from 14 October 2024.

This week the following companies repurchased shares:

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 417,823 shares at an average price of £29.42 per share for an aggregate £12,29 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 2 – 6 September 2024, a further 2,302,976 Prosus shares were repurchased for an aggregate €76,64 million and a further 184,929 Naspers shares for a total consideration of R671,11 million.

Three companies issued profit warnings this week: Clientele, Mustek and Hyprop Investments.

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

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