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Contingent Value Rights: Bridging the valuation gap in public M&A

Vuyo Xegwana-Bandezi, Colin du Toit and Mncedisi Mpungose
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Contingent Value Rights: Bridging the valuation gap in public M&A

South Africa is not immune to the global mergers and acquisitions (M&A) valuation gap between the price sellers are willing to accept and that which purchasers are willing to pay. In a stretched financing market and a strained broader global economy, one solution to the valuation gap may lie in implementing a contingent value right (CVR).

The boards of target companies and purchasers have long been divided on the appropriate valuation for a takeover of a target company. The target board seeks to maximise shareholder value and will be reluctant to sell in a downcycle when valuations are low, even if the price is reasonable, given the prevailing economic circumstances. The purchaser’s board, on the other hand, will generally be looking to invest against the cycle or to merge for long-term strategic reasons, and is likely to be looking to do so at a time when the lower valuations favour its proposal or strategy. While the purchaser will likely be viewing the acquisition with a longer-term lens, it will nonetheless be concerned with overpaying in the downcycle, especially if the purchaser’s valuation (and cash flow) is also adversely affected by the cycle. The converse is equally true at the upper end of an upcycle (e.g. tech stocks).

When it comes to M&A, this can lead to a marked difference between the purchaser’s and seller’s price expectations, particularly at the deep end of a downcycle or the peak of an upcycle. Looking at the downside case, certain target boards will reject offers that they believe are too low or opportunistic, while purchaser boards may be reluctant to stretch the offer price or even make an offer in these circumstances. Ultimately, the heart of the disconnect between them is that neither party can be exactly certain where in the cycle they are, or how soon and how sharply the cycle will reverse. Each party risks judging this incorrectly, with potentially significant adverse impacts on their respective financial outcomes. Aside from the numbers, there is also the human psychological factor – since criticism outweighs praise, where there is material uncertainty on the merits of a proposal, the natural bias of both boards (but especially the target board) is towards a ‘safe’, status quo decision, which usually favours saying ‘no’ to the deal, rather than ‘yes’.

While various factors contribute to a widening valuation gap, the volatile political and macroeconomic environment in which we find ourselves is a significant factor. With over ten significant elections worldwide in 2024, as well as international upheaval due to ongoing wars in the Middle East and Ukraine, many deals hinge on the outcome of these uncertain geopolitical events.

The same is true for South Africa, where, aside from an uptick in M&A activity in 2021/2022, there has been a significant slowdown in the post-pandemic years. New listings are one measure of market activity and price confidence, commonly reflecting sell-side activity from private equity or a company positioning itself for acquisitive growth (and the corollary for delistings). South Africa has seen both an increase in delistings and a slowdown in new listings, accelerating in 2023 and 2024. On the political front, since the announcement of a Government of National Unity in June, South Africa has seen an uptick in investor confidence, with the JSE All Share Index returning 5.6% in Rand terms and 8.3% in US dollars, comfortably outperforming the S&P 500, the MSCI World Index, and emerging market peers. Yet, this has since slowed as the initial optimism has been tempered by the inevitable, but no less disappointing, teething issues that have emerged.

Considering these prevailing challenges, purchasers and sellers around the world are seeking different M&A strategies or looking to supplement existing approaches. For purchasers, these may include a strategy centred on direct engagement with key target shareholders in formulating their ‘bear hug’ price – an offer to buy a publicly listed company at a premium to ‘fair value’, or avenues such as CVRs to land on a price that will have clear shareholder support. With wide valuation gaps, more innovative deal structures are also being proposed, including the use of CVRs. A CVR is an instrument that commits purchasers to pay a target company’s shareholders additional consideration for their shares based on a future contingency, in addition to the initial baseline purchase price paid to them (reflecting a conservative valuation). As the triggering contingency can be any event, and the resulting consideration is similarly flexible in both amount and nature, CVRs offer the parties a flexible, highly customisable solution to the unknowns and risks contributing to the relevant valuation gap.

CVRs can generally be categorised as either price protection or event-driven mechanisms. Price protection CVRs can be applied in an exchange offer to guarantee or underpin the value of the purchaser’s shares that are issued as acquisition consideration in the transaction. This underpinning can take a variety of forms, including a top-up issue of shares (much like a payment-in-kind loan note), or a special dividend or series of dividends. Event-driven CVRs entail a commitment to pay additional consideration to the target shareholders, depending on the occurrence of future events. Typical examples include a value linked to future profits, the resolution of a material litigation claim, and profits realised from the on-sale of a specific asset or business of the target. The latter can be particularly relevant where the sell-side considers the asset to be significantly more valuable than the valuation attributed by the purchaser (e.g. a project in development) or where the asset is non-core to the purchaser or not one for which it is willing to pay an acquisition premium. The commonality among these scenarios is that the purchaser pays less upfront (and thus lowers the risk of its buy decision), and the seller exits with a reasonable, though not optimal price, but with an upside case should the factors which it feels justify a higher valuation come to pass (and thus lowers the risks of its decision to sell). Similar mechanisms, including earn-outs and/or deferred payment structures, are a staple of private M&A deals.

In some ways, a price protection CVR is similar to a Material Adverse Change (MAC) clause in an M&A deal, but focused on the purchaser and not the target. An event-driven CVR is the inverse of a MAC, with the triggering event being more focused on the upside rather than the downside. A MAC is a contractual mechanism that allows the purchaser to terminate the acquisition agreement and withdraw from the transaction if, before the deal is closed, a material adverse change occurs – one that has a significant, negative effect on the target’s business, assets or profits. A CVR reflects a similar idea, but instead of being a contractual condition that allows the whole deal to collapse, it enables the deal to proceed, but to be adjusted later, based on the relevant event occurring or not occurring.

A CVR can be structured and offered as a listed instrument tradeable on a securities exchange, or on a privately held basis (transferable or non-transferable). A listed CVR allows shareholders who have differing risk or time-value profiles to hold or exit their CVR to match their respective preferences. The value and price of a CVR at any given time will depend on several factors, such as the probability of the event’s occurrence by the expiration date, the remaining time to maturity (and thus payment), the performance and volatility of an underlying asset, and the risks of default and dispute.

While CVRs have increasingly been applied in mid- and small-cap life sciences and healthcare transactions in the United States, they are presently less common in the public M&A market in Europe. Although there has been a recent uptick in CVR negotiations in these markets, few have yet been implemented. We have not yet observed one being used in public transactions in South Africa.

Price considerations aside, a CVR will often also have to address two key considerations. The first is the risk of a dispute arising over whether the trigger event has occurred, or the extent to which it has occurred, and how such a dispute will be resolved. The second consideration is the degree of alignment (or misalignment or indifference) between the occurrence of the future event and the impact such an event will have on the purchaser. An earn-out style provision, for example, likely has a fair degree of alignment between the parties as it represents a win-win scenario for both. On the other hand, the successful resolution of a tax dispute may have no alignment, or even misalignment, between the parties, especially if the base acquisition price is already factored into the worse-case outcome or if the purchaser’s ongoing relationship with tax authorities is placed at risk. In such instances, the CVR will need to include appropriate terms (such as an all-reasonable endeavours undertaking), or a specific mechanism (such as appointing a neutral party to have carriage of the dispute), to address this.

Not only can a CVR be used to bridge a typical buy/sell valuation gap linked to market cycles, but it can also be used to close a deal when the valuation itself has a significant inherent uncertainty or complexity. Some examples of this include where the valuation is significantly influenced by:

  • the occurrence and value of an anticipated future disposal;
  • the success of ongoing research and development activities (e.g. a breakthrough medicine at its trial stage);
  • industry-specific events (e.g. regulatory reviews or approvals);
  • impending potential legislative changes or the timing and form of their implementation (e.g. National Health Insurance, emission standards, required rehabilitation provisioning); and
  • unresolved disputes or specific, but difficult to assess or quantify, risks with a wide range of potential outcomes (e.g. class action claims or significant tax disputes).

While, for many market participants, CVRs have mainly been a point of discussion rather than a done deal, increasing examples have been seen through to completion. We believe that a CVR can be an effective alternative mechanism for closing public M&A deals where valuation gaps exist or are dependent on specific, uncertain outcomes. Considering their flexibility, CVRs can be customised to best serve specific requirements of the deal, thereby helping to get more mutually beneficial deals over the line.

Vuyo Xegwana-Bandezi is a Senior Associate and Colin du Toit and Mncedisi Mpungose are Partners | Webber Wentzel

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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

Private equity and the shifting global order

Lisa Ivers and Tim Figures
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Private equity and the shifting global order

In the ever-evolving landscape of global trade and geopolitics, private equity (PE) firms are navigating a ‘new normal’ characterised by heightened uncertainties, shifting power dynamics, and an evolving geopolitical landscape, where the traditional norms of trade and investment are being reshaped.

As part of this new reality, emerging markets are becoming ever more important, particularly the countries in the BRICS group (Brazil, Russia, India, China and South Africa).

This ‘new normal’ has introduced opportunities, but also new risks when undertaking investments or managing a global investment portfolio. This means that private equity investors need to keep abreast of issues such as trade wars, sanctions, and regulatory changes that could impact the flow of capital and the stability of their investments.

Through recent analysis, we identified several ways in which recent geopolitical events are affecting the investment landscape; most notably:

  • Portfolio risk exposure: Among the 20 largest private equity (PE) fund portfolios, an average of 20% of assets are exposed to geopolitical and trade risk. Some funds have even higher exposure.
  • Due diligence: Individual investment decisions are increasingly subject to geopolitical, as well as economic, considerations.
  • Areas of risk: Companies face risk exposure in three main areas: cross-border value chains, strategic sectors, and climate regulation and policies.

Consequently, PE firms should adapt by integrating geopolitical risk analysis into their due diligence processes and portfolio investment strategies. This involves a thorough analysis of risk exposure, taking into account specific issues of the geographies, trade flows and sectors concerned.

The BRICS nations have been pivotal in giving the Global South a greater voice in world affairs and challenging the domination of existing institutions. With the potential expansion of the BRICS+ to include emerging economies like Egypt, Ethiopia, Iran, Saudi Arabia, and the UAE, the bloc’s influence on global trade and investment strategies is set to increase. While it is too early to tell how this group might develop, this expansion has the potential to establish global institutions parallel to Western-led ones, and to create new opportunities for economic cooperation.

Moreover, this expansion of the BRICS group is part of a wider shift towards a multipolar world, where emerging markets gain a stronger voice and the ability to shape international policies and institutions. This shift necessitates a strategic response from PE firms to capture the opportunities and mitigate the risks associated with a more fragmented and volatile global landscape.

With a changing world order, PE firms need to be agile and innovative. They need to build strong local networks, invest in on-the-ground expertise, and foster relationships with local partners. Additionally, they must embrace environmental, social and governance (ESG) criteria, which are becoming increasingly important to investors and can provide a competitive edge in these markets.

There are three key actions that PE firms can take to mitigate geopolitical risks:

  • Review overall fund strategy: PE firms should assess their portfolio for geopolitical and trade risk exposure. They need to identify companies that require attention, screen for at-risk industries, and evaluate potential changes in geopolitics, trade and regulations.
  • Create new portfolio value: While assessing high-risk companies, PE firms should estimate the impact by analysing revenue, cost drivers, value chains and sector exposure. This helps identify value creation levers.
  • Incorporate geopolitical perspective in due diligence: During due diligence for acquisitions, PE companies should actively apply geopolitical perspectives to assess target attractiveness and market outlook.

While the ‘new normal’ in geopolitics poses significant challenges for private equity firms, it also opens new avenues for growth. By understanding and adapting to the political risks and embracing the opportunities presented by emerging markets – including the expanded BRICS group – private equity firms can position themselves to thrive in this changing landscape.

It is a delicate balance of risk and reward, requiring a strategic approach that is both globally informed and locally attuned.

Lisa Ivers is Managing Director and Senior Partner; Head of Africa, and Tim Figures is a Partner and Associate Director, EU & Global Trade and Investment | Boston Consulting Group

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

The growing importance of ESG in large transactions

Pitso Kortjaas, Lydia Shadrach-Razzino and Virusha Subban
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The growing importance of ESG in large transactions

Global institutional capital is increasingly focused on sustainability, both as an investment opportunity and as part of investment criteria. This is driven by the forecasted (positive and negative) economic impact of the climate change mega-trend, regulation such as the EU’s Carbon Border Adjustment Mechanism, and societal pressure to address unsustainable corporate practices.

Africa presents fertile ground for scalable, high impact Environmental, Social and Governance (ESG) projects and programmes. The continent boasts some of the world’s richest renewable energy generation potential, and many of the resources needed to build green technologies. African countries’ unique developmental journeys also present a wide range of opportunities for corporate supported social interventions to have a real impact.

Sub-Saharan Africa has great potential for investments with material sustainability outcomes, and this is already being realised through higher transaction volumes and values in industries that are enablers of sustainability initiatives, such as renewable energy, copper, and other green tech minerals.

Sustainable, alternative investments are another key opportunity, with major African bourses listing green and sustainability linked bonds for several years, and the Johannesburg Stock Exchange’s (JSE) Socially Responsible Investment (SRI) index’s continuous innovation. Social impact investments by corporates are also on the rise, with the recognition that when properly designed and implemented, these projects and programs can have an exponential impact on an organisation’s sustainability credentials and, most importantly, the lived reality of the participants.

The sub-Saharan Africa region is witnessing a surge in ESG-focused investments, catalysed by an increasing awareness of, and appetite to pursue, the opportunities presented by sustainable investment in Africa. The importance of leveraging ESG for economic development has been recognised, not only in market led initiatives such as green finance and sustainable investment strategies, but also in state-led, multilateral initiatives like the African Union’s Agenda 2063. The market is seeing an increasing trend towards factors within the sustainability / ESG stable becoming central in large transactions. Capital is being directed towards value chains set to benefit from sustainability driven changes, like the electric vehicle value chain. Companies are driven to integrate ESG practices, not only to ensure continued social and regulatory license to trade, but as a strategic imperative to attract investment. Africa is well-positioned to attract large investments into its strategic sectors, and presents an opportunity for multinationals and other corporates to make investments that will have an exponential impact on their sustainability scorecard.

Climate change and increased scrutiny of corporates’ sustainability practices by the public and regulators has driven ESG high up the agenda of many institutional investors and major corporates, leading to an increase in sustainability-focused investments – either purely for the green credentials, or for the potential for returns from a value chain that will benefit from increased take-up of sustainability actions. The deployment of capex and opex budgets by corporates is also increasingly being influenced by factors such as the social and environmental impact of the spend. ESG factors are thus becoming important considerations in transactions, especially in sectors which are set to grow due to sustainability initiatives, or those that are either socially or environmentally sensitive.

ESG’s role as a major market force is undoubtable, with ESG-focused investments having surged and assets held surpassing US$30 trillion in 2022. The importance of ESG is emphasised by the significant rise in green and sustainability-linked financial service offerings, and ESG-focused spending by Corporates.

ESG’S MOMENTUM IN AFRICA

While sustainable investment is a global trend, Africa is seeing the manifestation of this shift through targeted initiatives and strategic investments that address both regional development and global sustainability goals. Indications of momentum include:

Strategic development initiatives: The African Union’s Agenda 2063 integrates ESG as a key factor for continental development, prompting initiatives such as Gabon’s “Green Gabon” for renewable resource regulation, Benin’s launch of green bonds, and Côte d’Ivoire’s mandatory CSR reporting since 2014.

Corporate strategy: a 2023 Oxford Business Group study revealed that 19.7% of African CEOs pursued ESG standards to enhance their reputation, alongside motivations like regulatory compliance and stakeholder demands. Companies adopt ESG principles to ensure their license to trade and attract capital, which is increasingly targeted at sustainable investments.

South African initiatives: South Africa is a leading African jurisdiction for sustainable investments with national measures. The Johannesburg Stock Exchange (JSE) was the first global stock exchange to introduce a SRI index and it has listed over 70 sustainability-linked bonds, raising approximately R11 billion in 2023. A 2024 review showed significant ESG adoption among JSE-listed companies, highlighting South Africa’s proactive role in promoting sustainable finance and ESG integration across the region. ESG has also been a priority from a regulatory perspective, with the introduction of amendments to the Pensions Fund Act and Public Investment Corporation Act regulations to drive sustainability requirements.

ESG AND SUSTAINABILITY ARE KEY THEMES IN RECENT LARGE AFRICAN TRANSACTIONS

ESG has been a key consideration in recent major transactions in Africa, including:

  • Proparco Group’s September 2024 investment of $15 million into Pembani Remgro Infrastructure Fund II (PRIF II), a leader in infrastructure investments in Africa with strong ESG credentials;
  • Vitol Africa’s recent acquisition of Engen for R37 billion, a significant investment into South Africa, with strong ESG underpinnings due to its impact on disadvantaged communities; and
  • a R9,3 billion loan provided by several lenders, including the Development Bank of Southern Africa Limited; Old Mutual Alternative Investments; Sanlam; and Stanlib Alternative Investments to fund Oya Energy, a hybrid energy project combining solar, wind, and lithium-ion batteries, expected to be the largest initiative of its kind in Africa.

Major corporate and investment banks with strong ESG focuses have also made a significant impact in the region. One South African bank has issued approximately R45 billion in sustainable financing and mobilised approximately R15,5 billion in green project finance and an additional R1,2 billion in social project finance to fund renewable energy, carbon projects, and basic infrastructure in Africa; and another has embraced numerous climate-related initiatives, such as their Green Private Power Tier 2 Bond, launched in 2023 with a notional value of R2,1 billion.

In addition, there are major renewable energy infrastructure projects being financed and coming online in Africa. For example, the Hive Hydrogen Project in Gqeberha – a $4,6 billion project that involves the construction of a green ammonia plant in the Coega Special Economic Zone – which aims to produce 780,000 tons of green ammonia annually, powered by renewable energy sources.

OVERCOMING THE CHALLENGES OF SUSTAINABLE INVESTING IN AFRICA

To successfully tap into the sustainable investment opportunities presented by sub-Saharan Africa, global corporates and capital must overcome the unique challenges of deploying capital and operating in the various jurisdictions on the continent, which requires an intimate and practical knowledge of the diverse regulatory frameworks in operation. In cases such as this, companies looking to invest will be best served by an adviser that understands their needs and priorities, as well as the intricacies of the African investment landscape.

Pitso Kortjaas, Lydia Shadrach-Razzino and Virusha Subban are Partners in Banking & Finance, M&A and Tax | Baker McKenzie (Johannesburg)

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

GHOST BITES (Exxaro | MAS Real Estate | Resilient | Super Group | Sygnia | Tiger Brands)

The Finance Ghost
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GHOST BITES (Exxaro | MAS Real Estate | Resilient | Super Group | Sygnia | Tiger Brands)

Exxaro suspends its CEO (JSE: EXX)

The Finance Director has been appointed as interim CEO

This is the kind of thing that you certainly don’t see every day: the suspension of a listed company CEO. Exxaro has announced that Dr. Nombasa Tsengwa has been placed on precautionary suspension, pending the outcome of an independent investigation by ENS into allegations relating to workplace conduct and governance practices.

They are talking about a need to “stabilise leadership” and if you do some research into this, you’ll find articles about recent resignations of several executives at Exxaro.

Riaan Koppeschaar, the current Finance Director, has been appointed as interim CEO.

It will be very interesting to see the outcome of the investigation!

MAS Real Estate’s share price has fully recovered from the wobbly around dividends (JSE: MAS)

Management’s conservative approach has paid off here

The management team of MAS Real Estate took the brave but necessary decision in mid-2023 to stop paying dividends. This was based on their forecasts regarding debt refinancing requirements and the state of capital markets for funds that don’t have high quality credit ratings, particularly in emerging markets.

As this chart shows, the share price has fully recovered since the sell-down in 2023 when the market panicked about the lack of dividend:

Those who simply held their shares throughout the noise haven’t done well, as they haven’t received dividends along the way and have simply recouped their capital value. The worst decision in retrospect was to sell after the panic, with the best decision being to buy into the panic. It doesn’t work out like this every time, obviously, or nobody would ever panic!

In a voluntary trading update, MAS indicated that the Central and Eastern European countries in which it operates have performed strongly. Like-for-like tenant sales increased 7% year-on-year for the four months to October. Occupancy rates are stable and so are occupancy cost ratios, so that all sounds good. This is driving diluted adjusted distributable earnings guidance for the year to June 2025 of 9.54 to 10.45 eurocents per share.

The management team has made a great deal of progress on the balance sheet, although there is still more to do. Also keep in mind the recent cautionary announcement regarding a potential acquisition of Prime Kapital’s 60% interest in the joint venture between the parties. This would give MAS better credit rating prospects, which would in turn assist with getting the balance sheet right.

Resilient gives slightly better guidance for full-year earnings (JSE: SPG)

The stake in Lighthouse seems to be the highlight at the moment

Resilient released a pre-close update for the year ending December. The South African retail portfolio hasn’t had the best time of things, with sales up 2.9% during the 10 months to October 2024 or 3.6% on a rolling 12-month basis. This is despite the exposure to malls in lower-income areas, which are generally seen as high growth opportunities.

Resilient has been busy with construction activities at several malls, so that impacts sales. A further challenge has been the mining industry performance, hurting malls in key mining areas. There have been some other delays as well, related to key tenant decisions and even labour unrest!

It seems like a scrappy period overall for the local portfolio, although at least lease renewals came in 4.7% higher and new leases were a juicy 15.9% higher.

The likeliest source of the slight uptick in guidance is therefore the performance of Lighthouse (JSE: LTE), as Resilient owns 30.4% of that group. Lighthouse released an update recently that shows exactly why a country like Spain is seen as lucrative.

When interim results were released, Resilient estimated that the full-year distribution would be 428 cents per share. They have upgraded this slightly to a range of 428 to 433 cents per share.

It’s go-time for the Super Group disposal of SG Fleet in Australia (JSE: SPG)

The Super Group share price jumped 15.6% in response

Towards the end of November, Super Group announced that a potential bidder was sniffing around SG Fleet in Australia. Agreeing to a really tight deadline for a due diligence and binding offer seems to have worked, as Pacific Equity Partners came through with a scheme implementation deed at AUD3.50 per SG Fleet share.

SG Fleet is separately listed, so that would’ve helped greatly with the due diligence. Here’s the SG Fleet share price chart, showing how well-timed the offer was:

And here’s Super Group, with this good news helping to reverse some of the damage from the poor performance of the German economy and other jitters around new car sales:

Of course, this deal doesn’t fix any of the other challenges being faced by Super Group. It’s just a really helpful value unlock. If the deal ends up being implemented, Super Group will receive R7,53 billion for its 53.584% stake in SG Fleet. They plan to use up to R1.96 billion to reduce debt, which will take the net debt to EBITDA ratio way down from 2.96x to 0.77x. That’s going to make a big difference!

The remainder of the selling price will be used for a special distribution to shareholders in Super Group of around R16.30 per share depending on exchange rates at the time.

This is a Category 1 transaction, so a circular will be issued and shareholders will vote on the deal. I can’t see them saying no.

Strong numbers at Sygnia (JSE: SYG)

The group now has over R350 billion in assets under management

Credit where credit is due: 10.1% growth in assets under management and administration at Sygnia is impressive. It’s especially impressive when some other players in the industry have thrown their hands in the air and claimed that they simply cannot grow assets due to South Africa’s savings culture. It’s amazing what a bit of innovation can achieve, with Sygnia having achieved net inflows in the retail business of R3.1 billion for the year.

This performance has driven revenue growth of 12.1% and profit after tax growth of 15.6%. Diluted HEPS came in 15.9% higher, which is excellent.

The disappointment is surely the dividend, which for some reason is up just 3.3%. A capital-light business like this should have a consistent and high payout ratio, so I found this rather odd. I couldn’t find any commentary in the report that gives a satisfactory explanation for the decrease in the payout ratio.

It’s certainly not due to any underlying worries about the business, as they sound very confident about exceeding R400 billion in assets under management soon!

More of a meow than a roar at Tiger Brands – yet the market liked it anyway (JSE: TBS)

The share price is up roughly 30% year-to-date

Tiger Brands released results for the year ended September. The underlying metrics aren’t going to blow your socks off, with revenue up just 1% and HEPS up by 4%. The total dividend for the year is 4.3% higher. None of these percentages provide a good explanation for the share price move this year, which tells you that the market is baking in some strong assumptions around growth and the ongoing recovery.

Within the revenue story, we find price inflation of 7% and volume declines of 6%. Consumer affordability is clearly still an issue. The price increases did good things for gross margin though, up from 27.7% to 28.3%. This was further boosted by manufacturing efficiencies.

Operating income was pretty flat for the year. Income from associates increased 4% thanks to Carozzi. On the downside though, net finance costs jumped by a nasty 25.6% thanks to higher debt levels and interest rates in the first half of the year.

The sale of non-core businesses resulted in Tiger banking a substantial non-operational profit on those disposals. This is the major reason why earnings per share (EPS) increased 13% and headline earnings per share (HEPS) only increased by 4%. HEPS excludes stuff like profit on sale of businesses.

The market is looking for things to like about this turnaround, so a metric that probably stood out for investors was the volume performance in the second half (-2%) vs. the first half (-9%). I must point out that price inflation was 5% and 8% respectively, so it’s not as though there was a volume recovery with prices held equal. When inflation is lower, one would expect volumes to do better.

Another potential highlight is in cash operating profit, which increased from R4.3 billion to R4.8 billion. Together with working capital improvements, this took the group to a net cash position vs. a net debt position at the end of the comparable period. This will make a big difference to HEPS in the coming year.

Looking deeper, the more staple products are particularly competitive, as evidenced by the milling and baking division suffering a 10% revenue drop and a 7% decline in operating income. There are a lot of bakeries out there selling bread. On the more unusual stuff, like in the Culinary division, revenue was up 5% and operating income was 51% higher.

Over the short- to medium-term, Tiger expects volume growth of 1% to 3% and revenue growth ahead of inflation, with operating margin in the high single digits.

Nibbles:

  • Director dealings:
    • Adding to the recent slew of derivative trades and forced sales under collar structures, we have more trades by Adrian Gore at Discovery (JSE: DSY). The forced sales were worth R137 million. He’s also added another collar structure, buying puts (downside protection) with a strike price of R164 per share and selling calls (giving away upside) with a strike price of R278 per share. The current share price is R194 and these options expire in 2027.
    • An executive member of the board of directors of Richemont (JSE: CFR) sold shares worth R11.2 million.
    • The CEO of Growthpoint (JSE: GRT) sold shares worth just over R7 million.
    • A prescribed officer of Omnia (JSE: OMN) received share awards and seems to have kept the whole lot, with a value of R2 million. This is towards achieving the minimum shareholding requirement in accordance with Omnia’s policies though, so I’m not sure it counts as a bullish signal in the traditional sense.
    • A director of Clicks (JSE: CLS) has bought shares worth just under R1 million in terms of the minimum shareholding policy at the group. As with Omnia above, I’m not sure how much flexibility the directors have in terms of timing to achieve this, so it’s not the strongest bullish signal around.
    • A director of a major subsidiary of The Foschini Group (JSE: TFG) sold shares worth R700k.
    • A prescribed officer and director of a major subsidiary of Mpact (JSE: MPT) sold shares worth just over R200k.
  • You might recall that Nampak (JSE: NPK) had to jump through a few hoops to get the share incentivisation package for its key turnaround execs across the line. The issuance of shares has finally settled, so Nampak shareholders should feel good about the level of management alignment here.

GHOST BITES (Capital Appreciation | Exxaro | Fortress | Lighthouse)

The Finance Ghost
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GHOST BITES (Capital Appreciation | Exxaro | Fortress | Lighthouse)

Capital Appreciation hit by poor profitability in the Software division (JSE: CTA)

Thankfully, the Payments division is doing extremely well

If you just looked at the revenue line and nothing else, Capital Appreciation’s numbers for the six months to September would look lovely. Revenue increased by 10.4%, with great underlying drivers like 13% growth in the terminal estate (the number of POS devices out there). Alas, group EBITDA fell by 3.1% and thus the EBITDA margin fell by a nasty 260 basis points to 18.6%. Sadly, you can’t just look at revenue.

The culprit is the Software division. It grew revenue by just 2.4%, with 9.7% growth in South Africa and an 18.6% decline in the international segment as a large contract reached maturity. This is nowhere near enough revenue growth for the underlying cost base, with Capital Appreciation insisting that they need to retain the skilled staff for when revenue picks up. We’ve been hearing this story for a while now. If the skills are so rare, shouldn’t work for them be flying through the door? With the Software division now in a loss-making position, this approach surely cannot continue for much longer. They note improvements to the sales pipeline and an expected recovery in profits in the next year or so. Let’s hope so.

The net result is an 8.3% decline in HEPS to 5.96 cents. The group increased the payout ratio, so the interim dividend is up 5.9% to 4.50 cents. This is despite cash from operations only coming in at R11.6 million, way down from R159.9 million in the comparable period. It seems that receivables were settled after period-end and that much of the investment has been in inventory, with current demand for devices giving Capital Appreciation the confidence to increase the dividend despite earnings pressure.

This financial year isn’t going to be a pretty one for Exxaro (JSE: EXX)

Core metrics have headed in the wrong direction

Exxaro has released a pre-close update ahead of the financial year-end of December. It paints a picture of a group struggling with a difficult market for its products.

For example, the average benchmark API4 Richards Bay Coal Terminal export price is expected to be down 12.5% year-on-year. The iron ore fines price is expected to come in 11.6% lower. On top of this, sales volumes are down 2%. When prices are volumes are down, you can’t expect happy news.

At least there’s plenty of firepower on the balance sheet. With capital expenditure coming in 11% lower than last year, that’s given some relief in a tough market. The group had R16 billion in net cash at the end of October and intends to retain cash of R12 billion to R15 billion, which suggests that there will be dividends for shareholders despite a difficult year. Time will tell.

Fortress has revised its distribution guidance higher (JSE: FFB)

Revised guidance for FY25 reflects adjusted 14.7% year-on-year growth

Fortress Real Estate has a directly held logistics portfolio of R20 billion in South Africa and Central and Eastern Europe, a South African retail portfolio of R10 billion and a stake in NEPI Rockcastle of R16 billion. This gives you important context for the update released by the company dealing with the period since June 2024.

The logistics space continues to enjoy strong demand by tenants, with 75% of current developments already pre-let. On the retail side, like-for-like tenant turnover of 4.5% is decent, although certainly not spectacular. At least October looked better, with sales up 6.5%. This gives Fortress some confidence heading into the festive season.

Still, the narrative throughout the announcement suggests that Fortress’ heart lies in the logistics portfolio. It’s therefore not surprising that proceeds from the disposal of non-core properties have been mainly recycled into logistics developments, along with some strategic retail redevelopments and extensions. They have locked in proceeds of R746 million since year-end and there’s another R257 million in properties held for sale. The office portfolio is squarely in the firing line for potential disposals, which is to be expected when the vacancy rate is up at 27.9%!

Although the industrial portfolio barely gets a mention, the joint portfolio co-owned and managed by Inospace saw net operating income growth of 15% year-on-year. This comes after achieving growth of 17.5% in FY24, so that’s a demanding base and a really impressive result.

With all said and done, the important update is that distributable earnings guidance for FY25 has been revised higher from 146.99 cents to 147.80 cents. This represents 14.7% adjusted year-on-year growth, which is great. The adjustments relate to the way in which the NEPI Rockcastle shares were used to sort out the dual-class share structure.

With 45% share price growth this year, life-after-REIT is going just fine for Fortress.

Lighthouse isn’t the only group that has noticed Iberia (JSE: LTE)

That’s the beauty of capitalism – great opportunities attract competition

Lighthouse Properties has released a pre-close update dealing with the period ending December 2024. It’s been a busy year for the fund, particularly thanks to recent acquisitions in Portugal and Spain – collectively known as the Iberian Peninsula or Iberia for those of you who didn’t take geography. Wikipedia tells me that the technical definition actually includes a tiny part of France as well, although nobody really means that when they say Iberia!

Since June, Lighthouse has acquired a mall in Portugal for €177.8 million and one in Spain for €168.2 million. In both cases, the net initial yield after transaction costs is 7.2%. On the disposal front, Lighthouse sold Planet Koper in Slovenia for net proceeds of €47 million after the settlement of €21.8 million in debt.

After these deals, the Iberian portfolio now comprises six malls and contributes 81% of Lighthouse’s direct property investments. This looks set to increase, with exclusivity to acquire a further mall in Iberia (expected close in 1Q25) and negotiations underway for another mall. Lighthouse notes that there is more competition for these acquisitions now. Although they don’t say it bluntly, this could put the brakes on the Iberian expansion strategy if they can’t get malls at attractive prices.

How are they paying for this? Well, there was a huge R1 billion accelerated bookbuild in September, with shares issued at less than a 2% discount to the NAV per share. Holds of 73% of shares elected to receive the interim dividend in scrip rather than cash. On top of this, Lighthouse sold its remaining Hammerson shares for around £100 million. There’s also a new 5-year debt facility of €76 million that will become effective in December. The group takes advantage of every possible source of capital out there, as it should.

Looking at performance by country, the Spanish portfolio saw sales growth of 8.4% for the nine months to September, way above the 1.5% inflation rate. Portugal managed sales growth of 3.9%, above inflation of 2.6% but certainly nowhere near as lucrative as what we are seeing in Spain.

The situation isn’t nearly as promising in France, where sales fell 0.5% for the period. The biggest economies in Europe are having a tricky time at the moment.

Of course, what really matters is the distribution per share. Guidance for FY24 is 2.50 EUR cents per share. They expect strong distribution growth in the coming year if the current deals on the table close. The year-to-date share price performance is just 4.5% though, impacted by the strong rand and the way the market tends to react to significant capital raising activity.

Nibbles:

  • Director dealings:
    • Regular readers will know that the founding shareholders of Discovery (JSE: DSY) regularly enter into collar transactions to hedge their exposure as part of funding arrangements. Due to the recent performance of the share price, a few tranches have matured at spot prices above the strike price on the call option, hence the directors are forced to sell. The latest sales by Barry Swartzberg come to a whopping R155 million! Remember, this is a forced sale rather than a reflection of the director’s view on the Discovery share price.
    • An associate of a non-executive director of Afrimat (JSE: AFT) sold shares worth R10.2 million.
    • A prescribed officer of Thungela (JSE: TGA) sold shares worth R2.6 million.
    • A prescribed officer of Capitec (JSE: CPI) bought shares in the company worth R1.7 million.
    • The ex-CEO of Italtile (who is still on the board as a director) has sold shares worth R783k.
    • A director of Boxer (JSE: BOX) has bought shares worth R496k at a price of R65.00 per share. Here’s another example of a Boxer director happy to buy shares at the post-IPO price.
  • Coronation (JSE: CML) announced that its B-BBEE transaction has fulfilled all conditions precedent and will now be implemented, with shares issued to the trusts on 3 December.
  • Those who are happy to accept further shares in Vukile Property Fund (JSE: VKE) in lieu of a cash dividend can do so at a price of R18 per share. This is a 2.2% discount to the spot price on 2 December and a discount of just 0.04% to the 30-day VWAP.
  • Following the passing of Tito Mboweni, Accelerate Property Fund (JSE: APF) has announced that James Templeton has been appointed as interim chairman of the board. He also already been on the board since February 2022.
  • The circus that is Kibo Energy (JSE: KBO) continues. The latest is that the company has now terminated the term sheet for the proposed reverse takeover, instead deciding to complete and publish the audited accounts to December 2023 and June 2024. This will enable the suspension of trading from AIM to be lifted. They will then look for an alternative project portfolio to proceed with a revised transaction. The arranger of the reverse takeover, Aria Capital Management, has agreed to put a loan facility in place for Kibo with multiple potential tranches of £500k. They have had to revise the existing loan facility with Riverfort accordingly. I genuinely don’t know how much equity value (if any) will be left in this thing once the corporate restructuring is completed and the mezzanine funding providers have been paid.
  • Labat Africa (JSE: LAB) is still catching up on its financial reporting, hence the release of a trading statement for the year ended May 2024 after the release of one for the year May 2023. Whichever year you look at, it all looks pretty bad with headline losses as the theme. The loss for FY24 was -3.74 cents, which was at least better than the loss of -7.19 cents in FY23.
  • Crookes Brothers (JSE: CKS) is moving its listing to the General Segment of the JSE, joining the many other small- and mid-cap companies to have done so in search of less onerous listings requirements.

WEBINAR: Last minute Section 12B solar investment

Jaltech
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WEBINAR: Last minute Section 12B solar investment

Jaltech is launching its final Section 12B investment for the 2025 financial year. This investment is designed for investors who have realised late in the year that they need to reduce their tax liability before the end of February 2025.

Taxpayers (individuals, companies, and trusts) with an income tax or capital gains tax liability are invited to join Jaltech’s webinar. During the session, Jaltech will provide an in-depth breakdown of the Section 12B solar investment incentive and introduce its February 2025 Refinance Section 12B Solar Investment.

Investment highlights include:

  1. 100% to 150% tax deduction
  2. Projected IRR of 22% – 24%
  3. Projected annual yield of 16% – 17%
  4. Annual income distribution to investors for 10 years
  5. Minimum investment: R500 000

The webinar will take place on 11 December at 12h00. To register, click here. If you can’t attend, register, and Jaltech will send you the recording.

Why Jaltech?

With a track record of superior performance, Jaltech leads the Section 12B investment market by raising and committing over R700 million R700 million across 185+ solar projects and is currently generating double-digit IRRs for investors.

GHOST BITES (Alexander Forbes | Aveng | Nampak | Naspers – Prosus | Standard Bank | Transaction Capital)

The Finance Ghost
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GHOST BITES (Alexander Forbes | Aveng | Nampak | Naspers – Prosus | Standard Bank | Transaction Capital)

Alexander Forbes: good stuff at the top of the income statement, but what about HEPS? (JSE: AFH)

At least the underlying operations are doing well

Alexander Forbes has released results for the six months to September. Apart from lots of bullish commentary on how the two-pot system is just the greatest thing ever (can they even afford to have a different view?), there are also lots of numbers to consider.

The top half of the income statement looks solid, with operating income up 12% and operating expenses up 11%. Profit from operations increased 13% year-on-year. All of that sounds really good, except it’s a lot less exciting once we reach the bottom of the income statement where we find HEPS from total operations up by just 3%.

Although a higher number of shares in issue have played a role here, the impact of finance costs and a higher tax rate is also relevant.

Encouragingly, the group increased the payout ratio to achieve a 10% increase in the interim dividend.

Aveng sells a property stake to Collins (JSE: AEG | JSE: CPP)

This unlocks capital for Aveng’s core business

Aveng is selling its 30% stake in Dimopoint to Collins Property Group, which already owns the other 70%. The Dimopoint structure goes back to 2015, when Aveng sold its property portfolio to Dimopoint in what was effectively a sale and leaseback. This means that the main tenant in the portfolio was Aveng and they are still exposed to the head lease, an issue that this transaction solves.

Aveng will receive R96 million in cash for the 30% stake, so they are unlocking plenty of capital here. Notably, Aveng received dividends from the Dimopoint stake of R31 million for the year ended June 2024, so it seems as though Collins has picked up this stake for a great price.

Nampak’s revenue growth was blunted by the Diversified South Africa segment (JSE: NPK)

But the real story lies in the improvement to profitability

Nampak has released results for the year ended September. The share price is down 8.5% over 30 days, with the market reacting negatively to the recent trading statement and now these results. Although the turnaround is coming through really strongly at Nampak, it’s all about market expectations baked into the share price vs. the pace of delivery.

Nampak’s revenue from continuing operations grew by just 1%. Within that, you’ll find growth of 4% in Beverage South Africa and 7% in Beverage Angola, with an unfortunate decline of 7% in Diversified South Africa. The struggles in that segment were due to volume declines based on slower customer demand and other issues like an extended plant shutdown by a key customer.

When you reach the profit lines though, all the segments are up spectacularly. Beverage South Africa increased EBITDA by 38% to R806 million. Beverage Anglo jumped from R43 million to R276 million. Even Diversified South Africa saw EBITDA rocket from R15 million to R325 million despite the revenue pressure. It says a lot about the underlying performance that Nampak recorded impairment reversals rather than net impairment losses in this period!

Cash is what really counts of course, with cash generated from operations more than doubling from R741 million to R1.6 billion. This helped drive a decrease in net finance costs of 24% to R926 million.

With all said and done, HEPS from continuing operations for the year came in at R33.61. The share price is all the way up at R425, so perhaps there’s where the market concern has come in. There’s still far more improvement priced into the group.

If you include all the discontinued operations, then Nampak reported HEPS of R13.78. This shows just how important the asset disposal plan has been to get the discontinued operations out of the group.

The impact of new management is clear to see at Naspers – Prosus (JSE: NPN | JSE: PRX)

The entire narrative has changed – and for the better

I remember listening to the call that introduced Fabricio Bloisi to the market as the new CEO at Naspers / Prosus. I liked him immediately. Clearly, this was someone who had owned and operated businesses, not just written up pretty PowerPoints and convinced people to part with their capital. Winds of change were blowing.

The narrative at the group has shifted completely, with focus now on creating a profitable group rather than just growth for the sake of growth. When the focus is on metrics like EBIT rather than market share, you’re on the right track to clean up the portfolio.

Speaking of cleaning up, Prosus hasn’t been shy to sell down certain exposures. They have sold the stakes in Trip.com and Tazz, as well as Swiggy after the IPO. They only invested $290 million in external M&A in this period vs. a whopping $6.2 billion at the peak in 2022. This is no longer an approach of throwing everything against the wall to see what sticks.

Perhaps most encouragingly, the six months to September reveal profitable growth in the eCommerce business. They expect the full-year results to reflect revenue of $6.2 billion in eCommerce and adjusted EBIT of $400 million, which is a huge improvement on just $38 million in the prior year.

One of the highlights in the group includes order growth of 29% at iFood and an increase in adjusted EBIT of 85%. This is the business that Bloisi previously acquired, scaled and sold to Prosus, so it no doubt has a special place in his heart. With numbers like that, shareholders will feel the same love for it.

There are obviously hits and misses in a group this size, with other parts of the business not necessarily doing as well. The trajectory is clearly positive though, with this group giving us a great example of the difference that a CEO can make.

Within the Naspers numbers, I always look out for how Takealot is performing, as this is so relevant to South Africans. Takealot grew revenue by 11% in this period and Mr D was up 12%. They are facing a very competitive environment in South Africa.

The Prosus share price is up 34% year-to-date and Naspers is up 36.5%. Bravo Bloisi!

Standard Bank impacted by currency devaluation in Africa (JSE: SBK)

Reported earnings growth is in the low-to mid-single digits

Standard Bank has an impressive business in Africa. Sadly, the performance of African currencies is far less impressive, including against the rand. This means there’s quite a gap between constant currency results and reported results.

In a voluntary update for the 10 months to October, Standard Bank has flagged earnings growth in the mid-teens on a constant currency basis. That’s all good and well, but the weakness of African currencies means that this dilutes down to low- to mid-single digits when reported in rands.

There are some other reasons for the slowdown in earnings growth, like balance sheet growth that is lower than expected and non-interest revenue decreasing by low- to mid-single digits based on a high base for trading revenue that more than offset growth in fees and commissions.

For the full-year, they still expect revenue growth in the low single digits in rands, with an improvement in margins suggesting that earnings growth will be slightly higher. Group return on equity is in the target range of 17% to 20%.

Transaction Capital’s Road Cover disposal is in doubt (JSE: TCS)

The parties have extended the long stop date – for now at least

Transaction Capital’s disposal of Road Cover is subject to a resolutive condition. This is very different to a suspensive condition, which is what you see far more often. With suspensive conditions, a deal doesn’t close until the conditions are met. With resolutive conditions, the deal closes and then there’s a test later on to see if conditions were met. If they weren’t, you have to try unscramble the egg and restore the parties to the situation they were in before the deal. Not a fun process and hence a less common deal structure.

The resolutive condition refers to certain negotiations that are taking longer than expected. The parties have agreed to extend the long stop date to 13 December. If they miss that deadline, then it either needs to be extended again or the parties will look to be restored to the positions they were in before the disposal.

There’s never a dull moment at Transaction Capital!

Nibbles:

  • Director dealings:
    • A director of RFG Foods (JSE: RFG) sold shares in the company worth just over R4 million.
    • Of the five Oceana (JSE: OCE) directors and executives who received share awards, only one retained shares after paying taxes. The rest sold all the shares worth a total of R2.2 million.
    • A director of Standard Bank (JSE: SBK) has sold shares worth R1.9 million.
    • A senior executive of Nedbank (JSE: NED) sold shares worth R1.2 million.
    • An associate of a director of Boxer (JSE: BOX) has bought shares worth R445k at R63,50 per share. The price is especially important here given the recent IPO activity, as here we have an insider willing to buy shares at the post-IPO price. The same individual also bought shares in Pick n Pay (JSE: PIK) worth R300k, which is even more interesting.
    • An associate of a director of Trematon (JSE: TMT) bought shares worth R130k.
  • Zeder (JSE: ZED) has declared a special dividend of 11 cents per share based on the recent asset disposals by group companies that subsequently declared the proceeds up to Zeder as dividends. This allows Zeder to pass the benefit on to its shareholders.
  • Unsurprisingly, Sasfin (JSE: SFN) shareholders have jumped at the opportunity to take the money and run at R30 per share. Sasfin’s listing on the JSE will be terminated on 30 December after shareholders receive a lovely Christmas pressie on 23 December in the form of their buyout consideration.
  • Labat Africa (JSE: LAB) is in discussions with a party looking at a potential corporate deal with the group. One of the conditions is that the company secretary needed to be changed, which is particularly odd. Although there’s no guarantee of a deal going ahead, Labat Africa has changed its company secretary as requested. I guess the trading statement released on the same day makes it pretty clear that Labat isn’t sitting on tons of options, with the headline loss deteriorating by 26.14% to 7.19 cents. Keep in mind that the share is suspended from trading and the last share price was 7 cents. They aren’t exactly negotiating from a position of power here.
  • I still don’t really understand the numbers behind Mantengu Mining’s (JSE: MTU) acquisition of Sublime Technologies, as it looks like a deal that is far too good to be true. It looks to be going ahead though, with the Competition Commission approving the transaction. The only remaining suspensive condition is that the sellers must ensure that Sublime’s bank account has at least $1 million in it.
  • Trematon (JSE: TMT) announced that the conditions for the Aria Property disposal have been met, so the disposal of the 60% stake in that group is being implemented and they expect to receive the proceeds on 2 January 2025.
  • Redefine (JSE: RDF) announced that holders of 42.81% of shares elected the share re-investment alternative instead of the cash dividend. This helps Redefine hang onto R668 million in cash. Of course, it also means that lots of new shares have been issued, so watch out for the dilutive effect over time here.
  • Powerfleet (JSE: PWR) has had to file a prospectus with the US regulators regarding a potential sale of the shares received by the sellers of Fleet Complete and the shareholders who supported the private placement. There are up to 24.8 million shares that these shareholders will look to sell. With only 134 million shares in issue, this is a meaningful percentage of the Powerfleet register.
  • If you would like to understand more about how property funds execute on their strategies and assess properties in a given area, Hammerson (JSE: HMN) has released a presentation on one of its properties that goes into great detail on how they think as a property asset manager. You can find it here.
  • Castleview Property Fund (JSE: CVW) has absolutely no liquidity in its stock, so results for the six months to September just get a passing mention here. The distribution per share has decreased by 14.9% to 9.084 cents.
  • AfroCentric (JSE: ACT) has announced the appointment of Thato Moloele as CFO designate. This comes after the resignation of Hannes Boonzaaier.
  • Ascendis Health (JSE: ASC) has appointed Lihle Mbele as permanent CFO. She’s been the interim CFO since July 2024, so everyone was obviously happy with how that went and they pulled the trigger on making it a permanent placement.
  • Numeral (JSE: XII) has acquired to acquire 51% in a biotechnology business called Longevity. It must be a tiny deal, as no further disclosures are required for the deal. With a market cap at Numeral of just R24.8 million, this gives you an idea of how small a deal needs to be to fall below disclosure thresholds.
  • Sebata Holdings (JSE: SEB) has moved its listing to the General Segment of the JSE, following several other small- and mid-caps who have done so.

GHOST WRAP – Five insights from November 2024

The Finance Ghost
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GHOST WRAP – Five insights from November 2024

In a new format for the Ghost Wrap podcast, I looked back on five important insights in the South African market from November 2024.

Listen to the podcast to get the details on these topics:

  • The per-share numbers are what count in the property sector
  • The market is hungry for quality IPOs
  • Poultry businesses are making money again
  • Murray & Roberts is a catastrophe
  • MultiChoice really, really needs the Canal+ deal to go ahead

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.

Listen to the podcast here:

Transcript:

1. The per-share numbers are what count in the property sector

Property is back and in a big way, driven by decreasing interest rates and other very helpful trends like the return to office. The local property funds are focusing on optimising their local exposure (in many cases towards the Western Cape), while some of the European focused funds are back at it with capital raising activities – and that’s how you know things are getting better in the sector.

One of the ways to raise capital is to hang onto it. Yes, I’m talking about scrip dividends – giving shareholders the ability to choose to receive shares instead of cash. This is effectively a miniature rights issue, something that property funds just love doing.

The way that Sirius Real Estate has been raising capital is the good old fashioned way: accelerated bookbuilds, in which the advisors get their phones out and test the appetite for shares among institutional investors. At NEPI Rockcastle, recently activity has been the scrip dividend alternative. Regardless of which approach you look at, the net result is that there are more shares in issue than would otherwise be the case. Unless the capital can be deployed timeously into strong opportunities, this creates a near-term drag on performance.

For example, Sirius Real Estate grew funds from operations by 14.5% for the six months to September. That sounds fantastic on paper, but some of that is due to the deployment of capital. In other words, they went and bought some of this performance. The right metric to look at is always the per-share performance, because that’s what you care about as a shareholder. It’s easy to raise money and buy revenue, but was the money spent in the right way? Funds from operations per share actually fell by 5.5%. This is because of two substantial recent capital raisings and how long it’s taking to deploy the capital, particularly as Sirius is so popular with investors that they can raise money ahead of actually needing it. This is more common in the tech sector than the property sector. A war chest creates a cash drag effect on returns, so be cautious of that in this sector.

Over at NEPI Rockcastle, a business update for the first nine months of the year shows net operating income up 12.3% overall. On a like-for-like basis, it’s up 8.4% – so there’s a chunky gap there due to acquisitions. And here’s another chunky gap: the difference between net operating income growth and the expected increase in distributable earnings per share for FY24, which is just 5.5% – again, much lower than the rate at which the total group is growing.

Moral of the story: be wary of dilution at property funds. Just because the fund is doing really well over time doesn’t mean that your shares are doing well. In fact, if you held an equally weighted basket of NEPI Rockcastle and Sirius Real Estate this year, you would be feeling very disappointed with the lack of overall share price growth:

Those share price performances largely offset each other, which would leave you with only dividends to show for yourself.

2. The market is hungry for quality IPOs

This got so much attention during November that we don’t need to go into tons of detail here. Still, it would also be wrong not to mention it at all, so here’s the quick reminder that November was the month of Boxer’s listing as the most important story on the JSE.

Pick n Pay priced the capital raise for success, frankly because they couldn’t afford for it to fail under any circumstances. As the second step in the two-step recapitalisation plan, with the first step being a rights issue in the market, Pick n Pay needed to raise money efficiently from the sell-down of the Boxer stake, even if this meant leaving money on the table. That’s typically how IPOs work – the initial raise is priced competitively to create loads of interest among investors. Then, on the first day of trading, the share price tends to go up and the headlines are positive. That’s exactly what happened at Boxer, with Pick n Pay ticking its box of raising R8.5 billion and reducing its stake to 65.6%, while the Boxer management team ticked their box of getting a high-quality shareholder register and a successful listing.

Of course, all eyes will now be on Pick n Pay to see if they can actually turn the business around. Thanks to the lack of load shedding and the general improvement in SA Inc. sentiment, the share price has actually done very well this year as the market started to believe in a turnaround:

But if you look over 5 years, the story is completely different. The deviation in performance vs. Shoprite is breathtaking, showing the power of stock picking even in a market that might seem a little boring to you, like grocery retail:

The really fun chart to draw a year from now will be Boxer vs. Pick n Pay and Shoprite. I think that the current price for Boxer is a pretty decent reflection of fair value, so I wouldn’t expect it to return much more than around 8% to 10% a year from here. Perhaps I’ll be pleasantly surprised.

3. Poultry businesses are making money again

This is very good news in a country that depends on chicken!

In a structurally low margin business like poultry, it makes a huge difference when things start to go well. Just consider Astral for a moment, with revenue up just 6% for the year ended September and yet a massive swing from a headline loss per share of R13.24 to HEPS of R19.20!

Thanks to cost containment and generally better operating conditions in the sector, a modest uptick in revenue dropped to the bottom line (as they say) and created a much healthier income statement.

Over at Quantum Foods, where there has been plenty of noise around shareholder activism and the behaviour of the board, revenue for the year ended September decreased by 8.9% – very different to Astral and on paper that’s a poor result. Despite this, HEPS swung from a loss of 17.4 cents to a profit of 80.4 cents – like at Astral, a huge positive swing. When you look at the segments, you see some other wild swings, like the eggs business which suffered a revenue drop of 35% and yet moved from an operating loss of R42 million to an operating profit of R140 million!

In these businesses with such tight margins, revenue isn’t always the best predictor of performance. Sure, it helps when revenue goes up, but here we have Astral and Quantum with two different revenue shapes in the past year, yet both registered a substantial improvement in profits. It’s more about what happens in margins further down the income statement. All you need is decent cost control or a little bit of luck and things can go well. Conversely, some bad luck, a change in input costs or, of course, load shedding, and things can go really badly.

4. Murray & Roberts is a catastrophe

Murray & Roberts is now suspended from trading. This is because the company is now in business rescue, based on forecasts of underlying performance and the immense debt burden that needs to be addressed by January 2026.

There are a lot of factors at play here, not least of all key client De Beers scaling back on its capex and leaving the Cementation business in crisis. One of the biggest risks in any business is key client dependency. Who would’ve guessed that the threat of lab-grown diamonds and the impact that is having on De Beers would then drive such a profound negative hit to Murray & Roberts?

The overall balance sheet pressures at Murray & Roberts has been a mess for the Optipower division, which has been incurring substantial losses that Murray & Roberts simply cannot afford. They currently owe R409 million to the banking consortium and that amount is due in January 2026. There is no room for subsidiaries to be making losses.

The share price chart this year really tells the story, down 25% year-to-date and with a terrible peak-to-trough. It has been suspended from trading at 110 cents per share and the 52-week high is around 330 cents per share, as recent as August 2024. That’s a horrible outcome for those who punted at this thing and have watched it wash away, with no guarantee that there will be equity value left at the end of the business rescue process.

It really is a mess.

5. MultiChoic really, really needs the Canal+ deal to close

MultiChoice released an interim trading statement that called the current conditions the most challenging environment in the group’s history, setting the scene for the release of full results. With pretty decent numbers coming out of media sector peers eMedia (part of HCI) and African Media Entertainment (with a bunch of radio assets), I’m not sure that’s because the media industry is inherently broken. If anything, I think it’s because MultiChoice is betting everything on building a business for sale, not for profitability.

There’s a big difference between those two concepts. When building for sale, you’re chasing scale in a way that will be appealing to an international buyer. The investment in building out the African streaming technology is certainly relevant here, which is part of what attracted the eye of Canal+. Contrast this to a group like eMedia, which focuses on building slowly and surely within South Africa (rather than an empire across Africa), keeping costs at bay and being well prepared for an improvement as load shedding disappeared.

The problem at MultiChoice is that spending more and winning more subscribers aren’t the same thing. In my opinion, they are not getting the basics right. Subscriber numbers are down 5% in South Africa and 15% in Rest of Africa. That is a pretty scary statistic when you consider the extent of investment in Rest of Africa. The group now finds itself in a negative equity position and achieved adjusted core headline earnings of a paltry R7 million in the latest period – they are barely profitable!

At this stage, I have no idea what they will do if the Canal+ deal falls through. When you consider what Vodacom and Remgro have been through to try and get the Maziv fibre deal approved, I wouldn’t want my investment case to depend on regulators saying yes. More importantly, whether they say yes timeously, because MultiChoice doesn’t have a lot of time here based on current performance.

GHOST STORIES #51: MIC Khulisani Ventures is looking for entrepreneurs

The Finance Ghost
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GHOST STORIES #51: MIC Khulisani Ventures is looking for entrepreneurs

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Raising equity funding is not easy for small businesses in South Africa, but thankfully the Mineworkers Investment Company’s (MIC) Khulisani Ventures initiative is an early-stage funding vehicle that provides capital for businesses that are ready to aggressively grow.

If you are a Black-Owned business in South Africa and you meet the criteria for this investment, then listen carefully to this podcast because your application needs to be in by the end of January 2025. This whole thing will be wrapped up just a couple of months later, with funds expected to flow by March 2025.

If this sounds interesting to you, check out the website for more information and to apply for investment. This podcast is brought to you by I Am an Entrepreneur and the Mineworkers Investment Company, represented on this podcast by Keitumetse Lekaba and Nchaupe Khaole respectively.

Full transcript:

Introduction: Raising equity funding is not easy for small businesses in South Africa, but thankfully the Mineworkers Investment Company’s Khulisani Ventures initiative is an early-stage funding vehicle that provides capital for businesses that are ready to aggressively grow. If you are a Black-Owned business in South Africa and you meet the criteria for this investment, then listen carefully to this podcast because your application needs to be by the end of January 2025. This whole thing will be wrapped up just a couple of months later, with funds expected to flow by March 2025. If this sounds interesting to you, check out the website for more information and to apply for investment. This podcast is brought to you by I Am an Entrepreneur and the Mineworkers Investment Company.

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It’s nice and late now in 2024, but business doesn’t stop and it certainly doesn’t stop in South Africa where I think there’s a lot of excitement about what’s going on out there. I’m really looking forward to tapping into some of that today and bringing you an interesting opportunity if you are a qualifying company and we’ll obviously get into some of that a little bit later. It’s really, really exciting stuff, so listen carefully to whether this is going to be something that you can take advantage of even this late in the year.

Nchaupe Khaole and Keitumetse Lekaba, thank you so much for joining me. I think let’s start with just getting to know the two of you as the guests on this podcast – where you’re from and the companies that you represent here today.

Keitumetse, I’m going to start with you. Give us the elevator pitch on I Am An Entrepreneur. I think the name does say a lot. It does somewhat do what it says on the tin, as the joke goes. Tell us about the type of work that you do with I Am An Entrepreneur.

Keitumetse Lekaba: Thank you very much Ghost. My name is Keitumetse Lekaba. I am the Managing Director of a company called I Am An Entrepreneur – a mouthful I know, but we are specialists in enterprise and supplier development programs and initiatives for entrepreneurs across South Africa. We work with multi-national and national corporates in implementing programs that help entrepreneurs build and grow their businesses. So on a day-to-day we live, we breathe, we eat helping entrepreneurs build and grow their businesses.

The Finance Ghost: Yeah, lovely. That’s a topic that is certainly very close to my heart and it’s something we need more and more of in South Africa every single year, honestly.

Nchaupe, you’ve had quite the career. You’ve been in a number of major investment and advisory houses. You’ve got some board representation in some pretty big places. You are also the CIO at Mineworkers Investment Company, or MIC, and that is the focus of our chat today. I think because we could fill a whole podcast with all the stuff you’re involved in, we’ll have to keep it a little bit focused today. The question really is: can you just give us an overview of Mineworkers Investment Company, what the backstory is and I guess what its purpose in this world is?

Nchaupe Khaole: Thanks, Ghost. Really a pleasure to be on the podcast with you. As you said, I am the Chief Investment Officer of Mineworkers Investment Company. Mineworkers Investment Company was started almost 30 years ago by the National Union of Mineworkers. The intention was to create a sustainable capital base that would be for the benefit of NUM’s members and their families and the communities from which they come. Our operations are aimed at creating the sustainable capital base. We do it by investing in a very diverse portfolio. We have interests in a number of investments that cover quite a number of the sectors operating in South Africa.

The opportunity that we gathered here to discuss is really our early stage investing platform. We call it MIC Khulisani Ventures. And MIC Khulisani Ventures looks to support highly scalable, highly innovative Black-Owned businesses with risk capital. We provide them with the growth equity they need. We’re very excited to have opened this third window of application and look forward to getting applicants that are really going to blow our socks off in terms of some of the offerings and the solutions they come to market with.

The Finance Ghost: Thanks for referencing the different windows here, because you have actually done this before and I think as we dig into more of what you’re doing now, it’ll be really good to understand how this window is comparable to what you’ve done before and maybe a bit different. We’ll park that for now and we’ll certainly get there.

I think what’s clear from what the two of you are busy with every day, if you’ll forgive a terrible pun in the context of Mineworkers Investment Company, you are at the coal face of what is going on in South Africa literally every day. Businesses of all sorts of sizes and shapes trying to grow, trying to raise money, trying to make it work. I think we are in quite an exciting time in South Africa. I’m an optimist about this place. I love living here and I get very excited about what the future holds for it.

Load shedding has gone away. That definitely helps with the optimism. The Springboks can’t stop winning. Even Bafana Bafana seems to be able to win these days! So it really is changing. Interest rates are dropping. It’s all happening here. The winds of change are blowing, in theory.

In practice, though, is that something that’s happening? So, Keitumetse, I’m going to pose this one to you. In terms of local entrepreneurs, are you seeing an improvement in sentiment? Are people actually feeling better about this place? Are they growing? Are they investing? Are they taking risk?

Keitumetse Lekaba: I think it’s a refreshing time to see so many positive developments in South Africa. The winds of change, as you call it, are indeed uplifting and they carry a lot of potential for our local entrepreneurs. Let’s start with the load shedding thing, right? I think now that load shedding has been reduced or is no longer in a lot of areas around the country, entrepreneurs can now operate more consistently productively and also without the burden of alternative power solutions. This is definitely a morale booster for them. From a Springboks winning streak perspective, I think we all know – and Bafana Bafana coming up as they have been – this is a nation-booster for a lot of people. And when there’s a national boost from sports, people feel good, consumers have confidence, and then entrepreneurs often see a spike in sales, particularly ones in retail, entertainment and possibly hospitality. Interest rates are slowly going down. I think it also helps particularly those entrepreneurs that rely heavily on debt funding to run their businesses, they can also get a little bit of a relief from there.

I think overall there’s a lot of resilience paired with optimism, but also a lot of work still that needs to be done by entrepreneurs. A lot of challenges that entrepreneurs are still facing from a market perspective, from a global economic pressure perspective. With all the positivity that has been going on, I think going forward we probably need to sit and still do quite a lot of strategic work around entrepreneurs and businesses.

The Finance Ghost: Yeah, I think people underestimate the benefit of positivity. And you reference the sport and it sounds like a silly thing, but it’s actually true. It absolutely is. Obviously the load shedding even more so, but I mean South Africa’s got a very proud history around how sport has united us, you just have to look back to obviously the country’s history and the role the Springboks have played in that post everything – it would be nice if the Proteas did their bit at some point as well!

But sport aside, the reality is that stuff like load shedding going away really makes a big difference, unless you’re selling generators obviously, in which case it’s not a happy time for you! That’s the one group of people who don’t have a great story to tell this year. I think moving on to Nchaupe from your side, from an investment perspective, these recent developments in South Africa must have also made you feel better about allocating capital here. I would imagine that Mineworkers Investment Company’s mandate is very strongly South African anyway in some respects – you know, maybe not? Maybe you have been doing some offshore stuff? It’d be fascinating if you have been. But at least with this kind of growth in front of us now and people feeling better and just improvement on the ground, I’m guessing that’s helping you feel better as well about more money flowing into South African assets?

Nchaupe Khaole: Definitely. I couldn’t agree with the positive sentiment more acutely inasmuch as we spoke about there being no load shedding, I think we had day 250 and long may it continue, and the fact that there is positive consumer sentiment, I think an additional aspect which maybe we haven’t discussed enough is that the GNU in and of itself has also created a very enabling business environment which has made it easier for capital allocators to start considering South Africa as a safe destination for their capital and a destination where one can make the kind of returns that we’re looking for.

We are a predominantly South Africa focused investment house, but we do diversify our asset base. Naturally, given who our constituents are and who our beneficiaries are, it is important for us to keep trying to find very innovative ways of creating a sustainable return. That does include looking at offshore assets. But certainly South Africa accounts for easily in excess of 80% of our net asset value. That’s why South Africa is important for us. The positive business environment that we’re currently operating in, the fact that interest rates are coming down, the fact that there is policy stability finally, and in the past we had this mistrust between government and business. I think in many respects the current administration has done a great deal in terms of building an even greater bridge between business and government. And hopefully all this positive sentiment will start resulting in ticking up in GDP growth rates, which is what we’re all after.

The Finance Ghost: Yeah, absolutely. That is exactly what we are all after. And I mean hot off the press is the results of the Boxer IPO. I was literally reading it this morning. Aside from the fact that it was completely oversubscribed at the top of the range that they were looking for. And I do think they priced it a bit light. They did also mention in that announcement that they’ve got a good mix of local and international interest, which is really nice to see – international investors looking at a South African retail group and saying, hey, this thing looks interesting. So yeah, things do seem to be getting better. There are some debt rating outlook improvements, some of the banks announced that last week. It does feel like the good news is starting to flow.

This leads us very nicely into why we are doing this podcast, which is not just to talk about this country we love, but it’s also to talk about this opportunity related to MIC Khulisani Ventures. I’m going to kick that over to you, Keitumetse and just ask you in terms of the criteria of the Black-Owned businesses you’re looking for here, the types of businesses that you want to get applications from for investment from the MIC – and we’ll dig into what that investment looks like and the structure and what kind of partner the MIC is and all of that shortly. But just to quickly get it out the way of who qualifies and who doesn’t, what are you looking for in terms of qualifying businesses?

Keitumetse Lekaba: From a criteria perspective, like we already said, we’re looking for at least 51% Black-Owned and managed South African companies. We encourage Black Women-Owned companies to also apply and we want innovative products and service offerings, disruptors within sectors with scalability.

I think scalability becomes important because we want to see these businesses grow and we want to see these businesses scale and we want them to have quite a high growth potential. This means the companies must also be post-revenue with positive cash flow and strong financial reporting. We all know the story of business is told in numbers, so you have to validate the story with the numbers. We want to see that through strong financial reporting.

Obviously compliance is non-negotiable. The businesses must be compliant with statutory requirements as well as industry regulations. We want to see businesses with strong corporate governance and leadership. We always hear the saying: funders back the jockey. We want people that have strong leadership, who are teachable and who we can work with. Then from a sector perspective, the sectors that are excluded from the fund are fast food franchises, seed stage investment and primary agriculture. I think for those type of businesses, they don’t qualify, that’s an automatic outright disqualification.

But any other sector, any, they are more than welcome to come and apply for the funding for as long as they have the requirements that I have just listed.

The Finance Ghost: Now I want to ask you something about the fast-food franchises because that’s super interesting. Does it only exclude someone who wants to open a franchise, or if someone comes to you and says, hey, I have an idea for the next Steers and here are the five restaurants running already, does that qualify or is it just that sector just out for this?

Keitumetse Lekaba: I think buying a franchise, that is out. But if you come with an idea to say I have this idea, I’ve been running this shop for this long, this is my growth potential, this is what I’m looking at, we will look at that application. We will consider that application.

The Finance Ghost: Yeah, that makes sense. In terms of just being a revenue generating, cash flow positive business, is there a minimum revenue number you’re looking for here in terms of size?

Keitumetse Lekaba: You know, we do have a sweet spot. Obviously depending on the type of business and their scalability and the potential of growth, we will look at revenues. Our sweet spot is R5 to R8 million per annum from a revenue perspective. That’s the sweet spot that we are really looking for.

The Finance Ghost: Okay, fantastic. That is super helpful, thank you. So back to you Nchaupe, what form does this investment then actually take? Are you looking to take ordinary equity in the fund? Are you looking to put in some kind of supplier development loan type structure? Basically, what does the structure actually look like? And then based on that, what role would you seek to then play in these businesses? Is it quite a passive mentorship role, or is this something where someone from the MIC is going to be on the board and actually playing a more active role?

Nchaupe Khaole: Thanks Ghost. The idea is for us to take up or purchase ordinary shares in the business. We look to provide growth equity. What would be ideal would be if the companies that we are investing in issue us additional shares and we give them an investment that can be used to fund their growth.

Scalability is a very important consideration. And in order to make these businesses more scalable, they need not only access to capital, they also need access to skills and access to market as a company. Given the fact that we have a portfolio of existing established entities that we’re invested in, the likes of Tracker, Metrofile, PrimeMedia, FirstRand, we can give businesses access to market as well.

What does that mean? We can facilitate an introduction to some of the businesses that we have an interest in for these Khulisani entities that we invest in. Through those introductions, we can help with the business or corporate development of these entities, which is very, very important.

The role that we will look to play is an active role, but not an operational role. So we, as Keitumetse rightfully said earlier, we look to back teams, we look to back leaders who in and of themselves give us the comfort that we need to invest our capital in their businesses. Those teams are teams that we would back. But the role that we would play would be to take up more often than not, non-executive roles in terms of the board and governance structures of the entities we invest in. Notwithstanding that we would be non-executive directors in the business, we don’t keep the meetings to just quarterly board meetings.

We meet very regularly with our founder teams. We look to help them with any bottlenecks they may have in terms of their businesses. We are very active in terms of the strategy development and we also try find innovative financing solutions to help with the growth of these businesses. So that’s really been the secret to the success of MIC Khulisane and we hope to see it continue even with this new cohort.

The Finance Ghost: And just to be clear, they need to be 51% Black-Owned before your investment? Your investment can’t facilitate them getting to that level? I just want to be super clear on that.

Nchaupe Khaole: That’s correct. In a very exceptional circumstance, we might be in a position to consider whether our investment helps them get to being Black-Owned. However, the preference is to invest in 51% Black-Owned businesses. And to Keitumetse’s earlier point, we do encourage Black-Women Owned or managed businesses in particular to apply.

The Finance Ghost: Okay, fantastic. Just one more question on that before we go back to Keitumetse, around the percentage stake that you would typically look to have in the business – when all is said and done, what percentage do you actually want to own in this thing? I’m guessing it would be a minority stake. I doubt you’re looking for control?

Nchaupe Khaole: That’s correct. We want to be a significant minority shareholder in the businesses, so anything between 25% to 49%. It’s important to have an aligned founder team and to have them have a substantial interest in the business. Hence we wouldn’t look to take up a control position.

The Finance Ghost: Yeah, that absolutely makes sense. It’s a great opportunity. It’s obviously aimed at companies of a specific size and it’s very hard for companies like that to actually raise finance normally.

So to be clear, when we say raising finance here, this is not something directly comparable to getting money from a bank because that would come in as debt, this would come in as equity. The MIC would be your partner. You would have to get used to Nchaupe being at your board meetings potentially and coming and hanging out with you. Luckily, he brings loads of experience – and Keitumetse being involved as well, she also brings tons of experience, so it’s only good stuff here.

But just understand that what this is, is an equity investment. This is not going and raising debt from the MIC instead of a bank. I think we’re all clear on that and hopefully those listening to the podcast understand that properly.

Keitumetse, back to you, just in terms of companies that do meet the criteria here and are keen to throw their hat in the ring, you’ve already mentioned some of the criteria there – compliance etc. and some of the sectors that are out, which is great, but what does the process actually look like to reach out and apply? Do they need to have a polished PowerPoint presentation or is it a little bit less formal than that in the beginning?

Keitumetse Lekaba: It is a little bit less formal than that. We do go through an online application platform where it is thorough but it’s still accessible. Initially we want you to submit a high-level overview of your business, including what you do, what your revenues are looking like, so that’s stage one. Then based on what has been submitted in stage one of the application, we would then move you to stage two where you give us quite a comprehensive overview of business model and we go deeper into the questions that were addressed in phase one, because we also don’t want to waste entrepreneurs’ time. If you don’t initially qualify, then we don’t want you to go through the process of the comprehensive application on our platform. So, that’s why we have the two phases.

From phase one, the qualifying entrepreneurs move into phase two where you give us the comprehensive answers. And then from phase two we would then do quite a detailed due diligence on the business, which could even include a site visit to your organization as well as interviews with the owners of the company.

And once we’ve gone through stage two together, between I Am An Entrepreneur and MIC, we would then choose the entrepreneurs and the businesses that go into the last phase of the application process, which is the pitch deck and actually pitching your business to the investment committee. So once you have passed phase two and been selected, you would then go through to presenting your business to the investment committee.

But we are here to help entrepreneurs build and grow their business, so we will help you with your pitch deck and making sure that you have the right information and you have covered the understanding of your business, the market, your plan to grow so that you don’t get disadvantaged because you don’t know how to put together a pitch deck. We’ll take you through that process, we’ll help you with putting together your pitch deck.

You obviously know your business and then together we can then make sure that your pitch deck is ready and your presentation is ready for investment committee. And it would essentially be the entrepreneur or the founder’s responsibility to present the business to investment committee, from which MIC and I Am An Entrepreneur and the investment committee members would make the decision of investment or non-investment.

The Finance Ghost: It sounds like a super interesting process and one where founders will also learn a lot along the way, so that really does sound good. There’s a solid amount of support there through the process because raising money is not easy. My background is in investment banking and corporate finance, so I’ve been there, done that and got all the T shirts and the scars for much larger numbers than these.

But the process is still the process. It actually almost doesn’t matter how big the check is. At the end of the day, you’ve got to go through this long process. I think last question, maybe to help the applicants win some favour here from Nchaupe’s team, what is the main thing you are looking for? Maybe this is a good opportunity to ask you if anything’s different to some of the other windows that you’ve had for investment by this fund? What have you learned from that? What’s different now? What’s going to stand out for you and win you over?

Nchaupe Khaole: Well, let’s go back to the sports analogy, right? We spoke about how winning teams inspire confidence and really that’s what we’re looking for. Being Black-Owned is a ticket to the game. Now that you’re in the game, you need to show us what makes you the Rassie Erasmus of your industry or the Siya Kolisi of your industry.

We’re looking for teams that can demonstrate that they have an edge in terms of the market that they serve. We’re looking for innovation in how they look to address the opportunity set that they have before them. We’re not looking for businesses that are necessarily perfect or have everything figured out. We’re happy to walk this journey with our investee companies because we will be your partner.

However, it’s important to give us a sense that you do understand the industry inside out. You have a team that can definitely take advantage of the opportunity that’s been presented and you are aware of what is missing to really have this business take off. That is what we’re looking for – innovation, scalability, the ability to work with an institutional equity partner like ourselves to create value. Any team that brings that to bear will definitely find favour in terms of this process.

To answer your other question around what is different this time around and what we’ve learned, it’s great that this is the third iteration in terms of our application window, because we do have key learnings from the past two cohorts which we can apply this time around. One of them is that scale is important. The sweet spot that Keitumetse spoke about earlier is a very important consideration.

Entrepreneurs shouldn’t feel anxious about the fact that this is an investment vehicle that looks at businesses that are post-revenue. It’s important that before you convince us to invest in your business, you must have convinced someone to buy your product or services. It’s a very important equation.

Having strong – or a member of the team with strong – financial skills is something we learned is equally important because if you are to be taking on capital in the range of between R15 million to R30 million, then it is important that someone in that team can be accountable, understands how to budget, how to forecast accordingly, and if there’s a need to pivot, what the implications of those pivots would be.

Lastly, I keep speaking about teams because one thing we’ve learned is inasmuch as it’s good to back a good founder, it’s even better to back a team of founders because, not too different to even the Bafana Bafana analogy that we used earlier, it does take a team to get over the winning line and that’s what we’re looking to back.

The Finance Ghost: Perfect. I think that’s great. And I’m just on the website now, so for those who do want to go and get their application in, it’s https://khulisani.mic.co.za/. So go and check it out, it’s got all of the criteria on there, it’s got the application form, it’s got the whole story.

I think to bring the podcast to a close, I’m just going to ask you the most important question perhaps: what is the closing date for these applications? It’s quite late in the day now in 2024, so people need to listen to this, get excited, do some thinking over the December holiday – if entrepreneurs take a holiday, people who are raising money at this end of the market and hustling like that are probably not taking a spectacular holiday, in my own experience – but assuming they do or they don’t, when do they need to be ready to actually get their applications in? And then when would this money actually be invested? When is the whole process done?

Keitumetse Lekaba: The application window started on the 18th of November 2024 and closes on the 31st of January 2025. Entrepreneurs still have the whole of December and January to put in their application and ideally we will be done with the process by 31st March 2025.

The Finance Ghost: Perfect. So that is nice and quick.

Keitumetse Lekaba: From a date perspective, nice and quick. Entrepreneurs, you don’t have to wait six months or 12 months for things to start happening. We are looking at those timelines. You just have to make sure that your application is in by 31st January 2025.

The Finance Ghost: Excellent. Keitumetse and Nchaupe, thank you so much. It’s been lovely to get to know both of you. Good luck with this and to the listeners, if this is something that grabs you or if you know a business that you think this is relevant to, then forward the podcast, send it on. Let’s get the word out there. It’s not every day that money is available for South African businesses, so don’t waste that opportunity.

If you meet the criteria, if you have a plan for the capital and you want to go through the motions here – to be quite honest, it sounds like it’s such a good process to go through that even if you don’t get the money at the end, you’re going to learn a lot, you’re going to get to meet some really good people. Go through this investor process, a little bit of Dragon’s Den vibes, but with a lot more hand-holding and support, which I think is really good.

Thank you to my guests today. Good luck to those who are planning to apply for the funding and yeah, go out there and make things happen. So, Keitumetse, Nchaupe, thank you so much for your time today.

Keitumetse Lekaba: Thanks, Ghost.

Nchaupe Khaole: Thanks for having us, Ghost. Much appreciated.

GHOST BITES (Acsion | African Media Entertainment | AYO Technology | Copper 360 | Fairvest | Finbond | Mahube | PBT Group | Quantum | Reinet)

The Finance Ghost
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GHOST BITES (Acsion | African Media Entertainment | AYO Technology | Copper 360 | Fairvest | Finbond | Mahube | PBT Group | Quantum | Reinet)

Acsion: profits down, dividend up (JSE: ACS)

This is one of the more obscure property groups on the JSE

Acsion is a property developer, not a REIT that manages a mature portfolio of properties and passes the rentals through to shareholders. This doesn’t mean that Acsion doesn’t act as landlord, though. It just means that they are focused on growth in the net asset value (NAV) rather than just the dividend yield.

Property development is a risky model, not least of all when spread across different property types and even different countries. Of the three new developments highlights in the results for the six months to August 2024, two are in the Western Cape and one is in Greece! In fact, 32% of assets can be found internationally, so the group is more complicated than its low levels of liquidity in the stock would suggest. There’s a market cap of R2.8 billion here, yet an average daily value traded of just over R80k.

The latest results reflect revenue growth of 8%, yet a decrease in HEPS of 8%. The NAV increased by 6%, which is what they seem to care about most. Despite not being a REIT, the interim dividend is 9.8% higher, so they do value the dividend to some extent. The difference to a REIT is found in the low payout ratio: an interim dividend of 18 cents vs. HEPS of 65 cents.

Another clue to how different Acsion is to a REIT can be found in the loan-to-value ratio of just 8%. Property developers simply cannot run at the same levels of debt as a REIT or they will get themselves into huge trouble.

African Media Entertainment proves that radio still has a place in this world (JSE: AME)

Strong media assets can do well as the economy picks up

African Media Entertainment has released results for the six months to September. I always pay special attention to these numbers, as my business obviously sits in the media sphere as well. I understand some of the opportunities and challenges that they face!

Overall, the results have gone the right way. Revenue increased by 8% to R154.1 million and operating profit improved by 22.7% to R24.3 million. At HEPS level, the increase is by 19.1% to 246.9 cents.

Cash conversion was solid, with cash from operating activities of R27.6 million. Plenty of this flows to shareholders, with dividends of R26.9 million paid in this period.

Although African Media Entertainment has a number of underlying brands (like Algoa FM and Moneyweb), the segmental report is split based on radio broadcasting and media services, rather than by brand. Profitability in both segments went up.

If general sentiment can continue to improve in South Africa, media assets tend to get some of that benefit as brands feel more confident to spend on marketing.

AYO Technology is still making huge losses (JSE: AYO)

But at least they are less severe than before

AYO Technology released results for the year ended August. Revenue fell by 17%, so you might expect the losses to have gotten even worse. Instead, the loss before tax actually improved from a loss of R653 million in the prior year to a loss of R229 million in this financial year! An improvement in the gross margin percentage from 16% to 19% would’ve helped a lot here, clearly indicating a significant change in revenue mix.

It works out to a headline loss per share of 71.81 cents, which is still huge in the context of a share price of 41 cents!

There are literally two pages worth of litigation updates in the financials, which tells you much of what you need to know here.

Copper 360 is a reminder of the early-stage losses that are a feature of the mining industry (JSE: CPR)

The near-term focus is now on steady state production at Reitberg

Copper 360 is an excellent example of why mining companies need loads of capital in the early days of their journey. Even once the exploratory digging and related feasibility studies are completed, there are still losses to be incurred once the mine starts operating.

For the six months to August, Copper 360 achieved revenue from copper sales of R70.1 million. Operating expenses were R173 million though, so you don’t need to get the calculator out to conclude that they made a huge loss in this period.

There was also capital expenditure of R118 million in this period, so that adds to the cash flow burden. This is why the mining sector contributed so strongly to the development of the JSE over the years, as these companies need access to capital.

Looking ahead, the focus at Copper 360 is now on the steady state production at Rietberg Mine. They also need to deliver better grades and therefore more profitable copper production.

Dividends on the up at Fairvest (JSE: FTA | JSE: FTB)

And that’s the case for both classes of shares

Fairvest has released results for the six months to September. This is an old-school REIT structure with two different classes of shares. Interestingly, the percentage growth in the dividend per share for the A shares and B shares was similar: 4.4% and 4.8% respectively. This is a sign that things are normalising in the property sector, as the A shares are linked to inflation and the B shares reflect what is left for investors after the A shares. Seeing them deliver similar growth means that property funds are doing what they should do: generate growth that is roughly in line with inflation.

Underneath all this, there’s an increase in net property income of 7.2% and the loan-to-value has been maintained at 33.3%. As is the case for pretty much all property funds, further decreases in interest rates will help.

Looking ahead to the year ending September 2025, the distribution per A share will increase by the lesser of 5% or CPI as per the terms of those shares. The distribution per B share is expected to be between 4.0% and 6.3% higher.

There are still headline losses at Finbond (JSE: FGL)

This is despite important metrics improving

Finbond has released results for the six months to August. Revenue increased 7.5% and loans and advances increased 8.4%, so the important top-line numbers look decent. Profit before tax moved from a loss of R1.5 million to a profit of R4.8 million, which is encouraging albeit still very marginal.

As for the headline loss, this was unfortunately only slightly improved at R9.1 million vs. R9.9 million in the comparable period. There is therefore no dividend again.

It’s interesting to note that the narrative around the South African business is firmly one of growth and branch expansion to increase the loan book, whereas North America is more about restructuring and right-sizing the business.

Mahube Infrastructure benefits from fair value gains (JSE: MHB)

Lower interest rates cause renewable energy projects to go up in value

Renewable energy projects have long-duration cash flows, which means their value is very sensitive to the discount rate used in the valuation. When interest rates decrease, the value of these projects therefore goes up.

This is certainly what we’ve seen at Mahube Infrastructure for the six months to August. The net fair value gain was R32 million, much higher than R10 million in the comparable period. This did lovely things for HEPS, up 41%.

Cash is what really counts of course, with the dividends from portfolio companies down from R23 million to R13 million. This was due to a special dividend in the base period. Although the cash flow performance hasn’t repeated, Mahube has declared an interim dividend of 20 cents per share. For context, HEPS was 67.6 cents but most of that was due to fair value gains.

A flat year for PBT Group (JSE: PBG)

The growth boom during the pandemic has clearly plateaued

PBT Group has released results for the six months ended September. I remember being frustrated that I had missed that incredible run in this stock during the pandemic. I’m always nervous of chasing winners though, so I thankfully didn’t jump in at around R10 where the stock traded for a while. Today, it’s down at R5.62 as the market has realised that the pandemic growth can’t carry on forever.

The share price is down 24% in the past year and the latest results are unlikely to change that momentum. Revenue increased by just 0.3%, gross profit fell 2% and normalised HEPS increased by 0.9%. It’s a stable and strong business, but these sort of numbers lead to an ex-growth valuation and that inevitably means a mid-single digit P/E multiple on the JSE.

The silver lining is that the interim dividend is up 3.8%, so they’ve increased the payout ratio to try give the investment case some support. The cash generative nature of the group does come through here, with normalised HEPS of 31.7 cents and an interim distribution of 27 cents. There is a scrip dividend alternative for those who would prefer to receive more shares rather than cash dividends.

Non-billability in the data and analytics division was a significant challenge in this period, which means they simply had more staff available than needed for the level of demand. There are only two ways to fix that. The less painful way is to find more demand, which is hopefully what will happen.

Governance weirdness aside, Quantum Foods has seen a strong uptick in profits (JSE: QFH)

This is despite a decrease in revenue

Quantum Foods has been in the headlines this year for all sorts of reasons that are unrelated to the sale of eggs. There were some major disputes between the board and shareholders, as well as within the board. As things stand, these issues are still ongoing, including legal action.

Focusing on the numbers for the year ended September, Quantum Foods suffered an 8.9% decrease in revenue and had to deal with significant impacts of avian flu. Despite this, HEPS swung around spectacularly from a loss of 17.4 cents to a profit of 80.4 cents. One of the reasons is that although the HPAI virus was a feature once more, the losses were vastly lower than in the comparable period.

The main reason for this strange shape to the income statement is the performance of the eggs segment, where revenue fell by 35% and yet the division swung from an operating loss of R42 million to an adjusted operating profit of R140 million. Other areas of the business saw a significant improvement in profits as well, like the farming operations that reported revenue growth of 2.1% and an adjusted operating loss of R11 million – much better than the loss of R80 million in the comparable period.

It really is a difficult set of numbers to try and extrapolate going forward, but that’s a feature of this sector. The good news is that some improvements seem to be here to stay, like the savings from no load shedding. Others, like input costs to feed the chickens (e.g. yellow maize), are volatile and based on numerous factors in global agriculture markets.

Combined with structurally low margins in the chicken game, this is why the profitability of a group like Quantum can bounce around like this.

Reinet’s NAV boosted by British American Tobacco (JSE: RNI)

Largest exposure Pension Insurance Corporation was flat

Reinet has released results for the six months to September. They compare the net asset value (NAV) per share to the end of March, so keep this in mind when you see growth in the NAV of 6.6% for the period. Also remember that this is reported in euros, so that’s a hard currency return – something that used to be a lot more impressive before the rand had a great year thanks to the GNU!

Of course, those invested in Reinet are interested in a far longer-term view than just this year. The company reminds the market that it has achieved a total compound return of 9% per annum since March 2009, again in euros. That’s impressive, as we all know what the rand looks like over those 15 years.

The cornerstone asset is Pension Insurance Corporation Group, contributing 52.6% of the NAV. The next largest is British American Tobacco, which had a fantastic six months in terms of share price growth, increasing its contribution from 22% to 24%. The rest of the exposure is spread across various private equity partnerships around the world.

The best way to think about Reinet is as Johann Rupert’s personal asset management company. Over time, it has done very well.

Nibbles:

  • Director dealings:
    • We still find ourselves in a world where Mr Price (JSE: MRP) executives sell their share awards as quickly as they receive them. The CEO sold shares worth R25 million, the CFO sold shares worth R2.5 million and the company secretary sold shares worth almost R2.7 million.
    • Acting through Titan Premier Investments, Christo Wiese has bought further shares in Brait (JSE: BAT) to the value of R7.8 million. He’s been doing this a lot lately!
    • An executive director of Motus (JSE: MTH) sold shares worth R5.2 million.
    • An associate of a director of STADIO (JSE: SDO) sold shares worth R2.04 million. The announcement notes that this was for the purposes of settling debt and that this sale is a small percentage of his total holding.
    • A non-executive director of KAL Group (JSE: KAL) bought shares worth R987k.
    • A director of Purple Group (JSE: PPE) has bought shares worth R470k.
    • The spouse of a director of Mantengu Mining (JSE: MTU) bought shares worth just under R100k.
  • Choppies (JSE: CHP) released a cautionary announcement regarding the possible sale of Choppies Zimbabwe. They have 30 stores in the country and they have been struggling, with a huge shift to informal retail in the country. This is what happens in a failed country: people go backwards. At this stage there are only discussions about a potential deal rather than confirmed terms, so there’s no guarantee of a transaction being announced.
  • Given how incredibly aggressive the initial timeline was for this due diligence, I’m not surprised at all that Super Group (JSE: SPG) has announced an extension of the exclusivity period by one week for the deal that could see Pacific Equity Partners acquire SG Fleet in Australia. Whilst there’s still no certainty of a deal happening here, at least things are still alive and moving forwards.
  • Speaking of deal timelines, we already know that Remgro (JSE: REM) and Vodacom (JSE: VOD) will be appealing the decision by the Competition Tribunal to block the Maziv fibre deal. Personally, as someone who loves South Africa and wants to see it actually work, I hope their appeal wins. The lawyers now need to stay on top of things like longstop dates in the agreement, as they need to keep extending them to stop the deal from lapsing. The latest extension is from 29 November to 9 December 2024. The parties clearly want to keep their options open, based on this extension being for just a few days.
  • MTN (JSE: MTN) announced that CEO Ralph Mupita’s employment agreement has been extended for 5 years. It was originally going to expire in September 2025 and will now only expire in 2030. Although it’s been an unhappy time for MTN, this has been more due to macro factors than issues at the company. I haven’t seen anyone attributing the disappointing performance to the CEO, so it makes sense to have consistency of leadership going forwards.
  • Spear REIT (JSE: SEA) has implemented the disposal of 100 Fairways for R160 million. As there was no debt against the property, the full proceeds have been used to reduce existing debt facilities. This takes the loan-to-value ratio down to between 28% and 29%.
  • Lighthouse Properties (JSE: LTE) has concluded the disposal of the Planet Koper mall in Slovenia. The deal was announced back in July 2024 and transfer has now taken place.
  • In another sad reminder that mining is still dangerous, Harmony Gold (JSE: HAR) reported a loss-of-life incident at the Moab Khotsong mine due to a fall of ground. The affected area has been temporarily closed for investigations.
  • African Dawn Capital (JSE: ADW) has a market cap of R3 million, so you’ll forgive me for only giving the results for the six months to August a passing mention. Revenue was R6.3 million and the loss before tax was R8.8 million. The headline loss per share was 11.9 cents.
  • Although I don’t usually mention changes in non-executive directors, it’s worth highlighting that Hulamin (JSE: HLM) has appointed three non-executive directors to fill vacancies on the board. This comes after another non-executive director resigned. That’s quite a lot of change all at once.
  • African and Overseas Enterprises (JSE: AOO | JSE: AON) and Rex Trueform (JSE: RTO | RTN) have added their names to the growing list of small- and mid-cap companies that have transferred their listing to the new General Segment of the JSE Main Board to take advantage of a simpler set of rules. I’m mentioning them together as they are in the same group of companies. Also, Rex Trueform is looking for a new CFO after Damien Franklin resigned as CFO of the company. The resignation is effective immediately and the lack of a named successor suggests that it came as a surprise to the company.
  • Salungano Group (JSE: SLG) is currently suspended from trading due to failures to publish financial results. They intend to publish FY24 results by March 2025, so they will be suspended for a while still. On top of this, they are also dealing with a creditors’ compromise proposal at wholly-owned subsidiary Keaton Energy Holdings.
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