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Innovative funding remains the charge powering SA’s energy transition

Hailed as one of the top renewable energy (RE) programmes globally, South Africa’s Renewable Energy Independent Power Producer Procurement (REIPPP) programme has matured and evolved since its launch in 2011, helping drive the country’s energy transition to an economically sustainable low-carbon future.

“Serving as a cornerstone of South Africa’s Integrated Resource Plan (IRP), the REIPPP programme aimed to address the country’s electricity supply challenges, secure a reliable energy supply and diversify the country’s energy mix to promote sustainable economic growth,” explains Taona Kokera, Director and Infrastructure Finance Advisory lead at Forvis Mazars in South Africa.

The early phases: wind and solar

The early phases of the REIPPP primarily focused on wind and solar power projects, with a competitive bidding process used to select independent power producers (IPPs) to develop and operate renewable energy projects. These projects were then connected to the national grid, providing a stable and renewable source of electricity.

The REIPPP primarily relied on a feed-in tariff (FiT) model to incentivize renewable energy investment, guaranteeing IPPs a fixed price for the electricity they supplied to the grid for a specified period. This provided a stable revenue stream, mitigating the risks associated with renewable energy projects.

The world-class programme attracted significant investment from local and international funders, with the government-guaranteed, inflation-linked real returns making projects bankable and reducing the cost of funding.

“Structuring the finance deals needed to fund large-scale RE utility projects in the early REIPPP rounds were a key component in managing costs and arriving at a competitive cost per kilowatt hour bid,” adds Johan Marais, Partner: Corporate Finance at Forvis Mazars in South Africa.

“The private sector led a large portion of these investments, with a large appetite from institutional investors like commercial banks, private equity and sovereign funds to fund these projects.”

These funding lines included a mix of senior debt funding in the form of long-term limited or non-recourse funding and direct equity investments. As risks declined and projects started to deliver stable returns, banks and equity partners have also sold down exposure via the secondary market.

Evolution in renewable energy

Over time, the REIPPP expanded to include other renewable energy technologies such as concentrated solar power (CSP) and biomass.

“However, projects that did not meet the REIPPP guidelines were not feasible due to existing regulations, as it was impossible to wheel the power,” explains Kokera.

As the programme advanced, the government made regulatory adjustments to address challenges and optimise its effectiveness by revising bidding rules, grid connection procedures, and financial regulations.

Coupled with improvements in the RE generation and storage technology, tariffs fell sharply over successive tender bidding rounds, to the point where round four projects were among the lowest-priced grid-connected RE projects in the world.

A major turning point in the country’s energy transition then came as South Africa’s energy crisis deepened, with demand far outstripping supply in 2022 and 2023.

“In an effort to incentivise industry innovation, the government took the bold decision to liberalise the RE sector in South Africa, which has ushered in the next phase in the country’s energy transition,” explains Kokera.

The government’s landmark decision to increase the embedded generation threshold from 1 MW to 100 MW, and later remove it, effectively lowered the major hurdle preventing mass private sector investment in RE projects in the country.

“By removing the licensing constraints and implementing tax incentives, the RE sector has seen rapid and sustained growth in private commercial and industrial (C&I) projects,“ elaborates Kokera.

Companies across the spectrum used the opportunity to leverage the dispensation, which coincided with a dramatic decrease in the costs of components like solar panels.

“The logistic networks that bring these products into the country also become more efficient, with more in-country manufacturing taking place, which also helped to lower costs,” adds Kokera.

The need for innovative funding

These companies, especially intensive users in the mining, manufacturing and agricultural sectors, turned to various innovative funding models to get these projects off the ground and make them viable, especially larger-scale embedded projects that require large capital outlays.

“While banks were unwilling to fund projects outside the REIPPP programme initially, commercial or alternative lenders have entered the C&I space en mass, funding on-balance sheet projects via a combination of property and asset finance,” elaborates Marais.

“Larger projects generally require a combination of equity, mezzanine finance and debt funding, with lower cost, longer tenor debt often preferred because it offers better investor returns and lowers the tariff.”

Companies that lack the sites or financial resources to efficiently self-provision renewable energy enter into off-take agreements with IPPs through long-term Power Purchase Agreements (PPA).

Typically, IPPs rely on project finance as there is no balance sheet behind these companies to fund transactions. As such, IPPs will generally look to equity to fund the construction phase and debt in the operational phase.

“Forvis Mazars is also engaged in numerous refinancing deals to give IPPs access to cheaper funding lines to support long-term project sustainability,” says Marais.

Driven by the rapid pace and scale of C&I projects in the country, South Africa has become the largest and most mature C&I solar market on the continent, according to Wood Mackenzie data.

“The country’s C&I solar boom is set to continue, with a strong expected pipeline of 18 GW through 2027 buoyed in the medium-term by a new wheeling mechanism, which the City of Cape Town is currently trialling,” adds Kokera.

“The REIPPP programme has played an instrumental role in driving the growth of the IPP industry in South Africa and paved the way for a flourishing C&I sector,” continues Marais.

“With C&I set to dominate the RE landscape going forward, ongoing innovation to adapt funding models and procurement processes will support a dynamic IPP market that leads the country into a more energy-efficient era of cleaner, more reliable and cost-effective electricity production,” he concludes.

About Forvis Mazars

Forvis Mazars is a leading global professional services network. The network operates under a single brand worldwide, with just two members: Forvis Mazars LLP in the United States and Forvis Mazars Group SC, an internationally integrated partnership operating in over 100 countries and territories. Both member firms share a commitment to providing an unmatched client experience, delivering audit & assurance, tax and advisory services around the world. Together, our strategic vision strives to move our clients, people, industry and communities forward.

Forvis Mazars is the brand name for the Forvis Mazars Global network (Forvis Mazars Global Limited) and its two independent members: Forvis Mazars LLP in the United States and Forvis Mazars Group SC. Forvis Mazars Global Limited is a UK private company limited by guarantee and does not provide any services to clients.

Visit the South African website here.

PODCAST: Top concerns for global financiers in today’s market

Listen to the podcast here:


Join Investec CEOs, Cumesh Moodliar (SA) and Ruth Leas (UK), as they share their key insights from the recent IMF and World Bank meetings in Washington. In the latest episode of No Ordinary Wednesday, they highlight the economic policies and market trends poised to influence investors and markets around the globe.

Hosted by seasoned broadcaster, Jeremy Maggs, the No Ordinary Wednesday podcast unpacks the latest economic, business and political news in South Africa, with an all-star cast of investment and wealth managers, economists and financial planners from Investec. Listen in every second Wednesday for an in-depth look at what’s moving markets, shaping the economy, and changing the game for your wallet and your business.


Also on Spotify and Apple Podcasts:

GHOST BITES (Clientele | MTN | Sasfin | Sephaku | Vukile)


Clientèle to acquire Emerald Life for R600 – R650 million (JSE: CLI)

This is a push into the mass market segment

Clientèle is one of those businesses that just gets on with it. The group trades on a dividend yield of over 10% and generally offers decent share price growth on top of that. Nobody ever talks about it, yet this is one of the more dependable stories on the local market.

They aren’t sitting back and just allowing the dividends to flow, either. Clientèle recently acquired 1Life Insurance and now they are buying Emerald Life, a micro-insurer focused on funeral insurance products. Emerald has over 18 branches nationwide with 380 permanent employees and around 3,500 independent sales advisors, so this is a substantial operation.

The embedded value of Emerald Life is R600 million and the purchase price will probably be closer to R650 million after adjustments. For context, Clientèle has a market cap of R5.5 billion. Emerald generated profit after tax of R50.2 million for the year ended February.

The purchase price is structured as a base amount of R597.5 million, along with various specific adjustments plus an agterskot amount of R50 million based on the number of funeral policies written and collected over the next 24 months. This is a typical earn-out structure and I think it’s great that they structured it based on sales volumes, as there can be no debate. A more common approach is to structure it based on EBITDA, which leads to all kinds of arguments down the line.

The one thing that concerns me is that by paying a potential premium to embedded value, they are getting the business on a P/E multiple of 12x to 13x. This is similar to Clientèle’s current traded multiple, so that’s a substantial price to be paying for an unlisted company. Hopefully the growth will make this an excellent deal.


Solid numbers for MTN Ghana (JSE: MTN)

As always, keep an eye on the capex

MTN Ghana has released results for the quarter ended September. It all looks good, with service revenue up 32% and EBITDA up 32.2%, so EBITDA margin improved ever so slightly to 56.2%. Profit after tax was up 35.5%.

One of the metrics to always look at in African telecoms is the capital expenditure, as you can easily be in a situation where most of the profits end up going into capex. In the prior period for example, they made GHS2.78 billion in profits and invested GSH2.85 billion in capex, so there was nothing left for shareholders. In this period, profits were GSH3.76 billion and capex was GSH3.69 billion. At least there’s a sliver of green there, but hopefully you get the point.

The argument in favour of the capex is that these African subsidiaries are growth assets and MTN must keep investing in order to realise the best long-term returns. It’s a perfectly reasonable argument, but it also hopefully helps you understand why MTN’s balance sheet can get into trouble sometimes. The African subsidiaries aren’t exactly sending much cash to the mothership to help deal with debt. The South African business is the cash cow that funds the expansion.


Sasfin has released the circular for the take-private (JSE: SFN)

This relates to a conditional offer of R30 per share

As you probably know by now, Sasfin hasn’t been a great story for investors. As you also probably know, key investors Wiphold and Unitas are now helping the group go into the private space where they can hopefully fix up the best bits and sell the rest (like the banking operations).

The structure is that Sasfin Wealth will make the offer to shareholders. It’s a conditional offer with a really unusual condition: holders of not more than 10% of shares in issue must accept the offer. This is because Sasfin Wealth cannot legally hold more than 10% of the shares in the holding company. They’ve de-risked this situation by getting irrevocable undertakings from holders of 90.14% of Sasfin shares to not accept the offer.

The structure is that Unitas and Wipfin will each subscribe for 8.8% in Sasfin Wealth for a total of R107 million. This enables Sasfin Wealth to make an offer at a premium of 66% to the 30-day VWAP for the 30 day period ended 12 July, the business day before the terms announcement was released. So, we have an odd situation where they need to offer a premium to get enough shareholders to say yes, but also not too many shareholders. The independent expert has opined that the terms of the offer are fair.

The expenses for this deal come to a whopping R13.5 million, including R7 million payable to Rothschild & Co. In my opinion, the fact that Sasfin managed to incur 12.7% of the deal subscription value in costs is reason enough for shareholders to take the money and run.


Sephaku expects a juicy jump in profits – for now (JSE: SEP)

This supports the year-to-date share price growth of nearly 70% – or does it?

Sephaku Holdings has released a trading statement dealing with the six months to September. HEPS is expected to be 72% to 87% higher, so that’s an excellent jump year-on-year. Dangote Cement South Africa had “improved” performance and Metier Mixed Concrete put in a “flat” performance, with negative sentiment in the construction sector despite the improved overall climate in South Africa.

As you read further though, it gets more interesting. Due to differences in reporting periods, these results include the Sephaku Cement results for the six months to June. So, it’s still six months’ worth of numbers, just ending on a different date. Now, it turned out that those six months at Dangote Cement PLC happened to be really strong, but here’s the problem: the subsequent three months to September suffered unplanned kiln stoppages for repairs that “neutralised” the solid numbers in the first six months of that company’s year.

If I understand this correctly, Sephaku is trying to tell the market that the full-year numbers won’t be nearly as good as these interim numbers. With the share price barely reacting on the day, I’m not sure that the market picked up on this.


Vukile’s latest deal in Spain is on hold – and with very good reason (JSE: VKE)

The horrific flash floods have made this necessary

In case you’ve missed the news about just how terrible these floods in Spain are, I thought this set of photos in CNN tell quite the story.

Vukile is invested in Spain through its subsidiary Castellana. At this stage, no assets within Castellana have been affected by the flash floods, so they seem to have gotten very lucky. Perhaps the luck didn’t extend to Bonaire Shopping Centre in Valencia, with the deal to acquire that asset on hold as the impact of the flooding will need to be assessed.

If there was no impact at all, I suspect that they would make that statement.

If you’ve ever wondered why material adverse change clauses exist in legal agreements, now you know.


Nibbles:

  • Director dealings:
    • A prescribed officer of ADvTECH (JSE: ADH) sold shares worth nearly R1.9 million.
    • The director of CMH (JSE: CMH) who has been selling shares recently has gotten rid of yet another tranche, this time to the value of R1.9 million.
  • Something might be up at Accelerate Property Fund (JSE: APF), with the group issuing a bland cautionary announcement. As the name suggests, such an announcement has no additional details and simply suggests that shareholders exercise caution when trading in the company’s securities, as there might be a major announcement in the near future.
  • AYO Technology (JSE: AYO) recently announced that Sizwe Africa IT Group (in which AYO holds 55%) had entered into an agreement to sell its 70% stake in Cyberantrix to Mustek (JSE: MST) for R20 million. There were potential related party considerations here and AYO went to the JSE for clarification. The JSE has ruled that it is not classified as a related party transaction, which makes things easier in terms of getting the deal across the line.
  • Sabvest Capital (JSE: SBP) has completed the sale of its direct and indirect interests in Rolfes. That deal was first announced on 1 August.
  • Transaction Capital’s (JSE: TCP) previously announced disposal of Nutun Transact, Accsys and Nutun Credit Health to Q Link Holdings has now become unconditional i.e. has been implemented. It was first announced in mid-August.
  • Adding to the list of completed deals, Sasfin (JSE: SFN) has implemented the disposal of the Capital Equipment Finance and Commercial Property Finance businesses to African Bank.
  • AfroCentric (JSE: ACT) will change its year-end from 30 June to 31 December, thereby aligning its reporting calendar with Sanlam.

How to know if you’ve been brainwashed

How many of our ideas and traditions are our own – and how many have been implanted in our brains in an effort to improve the bottom line of some business?

The world of advertising has a unique and slightly unnerving ability to shape our habits, rituals, and even our mental images of beloved cultural icons. Through various campaigns, clever brands have embedded certain ideas into our minds – often without us even realising.

Coca-Cola: A red and white suit 

Quick – think of Santa Claus. What’s the first image that comes to mind?

If the picture you’re imagining involves a portly gentleman with a big white beard, rosy cheeks, and a red suit with white trim, then you’ve been unknowingly influenced by one of the most successful ad campaigns of all time. 

Coca-Cola didn’t invent Santa Claus, but their series of ads between the 1930s and 60s went a long way to create a singular, widely-accepted vision of what he looks like. In 1931, the brand approached Michigan-based illustrator Haddon Sundblom to design a warmer, jollier Santa than the one portrayed in their ads in the 1920s (that one looked a bit like a strict school teacher, so a change was clearly due).

World domination via the North Pole was never Coca-Cola’s goal (as far as I can tell) – they simply wanted a better mascot that would help them sell more cola over the festive season. However, Sundblom’s illustrations were so effective at capturing the “ideal Santa” that Coca-Cola continued to roll out ads with that version of Santa for the next three decades. In no time at all, the Santa image created by Sundblom and broadcast by Coca-Cola was adopted by other illustrators as if it were the law. Where Santa had previously been illustrated wearing a variety of colours and garments, the 1930s saw him switch up his wardrobe to exclusively red and white – Coca-Cola’s brand colours, of course.

Sundblom’s Santa ads evolved each year, showing Santa delivering gifts, sharing a Coke with his elves, and even sneaking treats from refrigerators. These playful scenes quickly won over the loyal readers of the magazines they appeared in, who noticed even the smallest changes. When Sundblom once accidentally painted Santa’s belt backwards, fans wrote in, curious about the oversight (as it turned out, Sundblom had modelled for that painting himself and his backward image in the mirror had confused him). Another time, when Santa appeared in a Coke ad without his wedding ring, fans demanded to know what happened to Mrs.Claus.

Sundblom created his final Santa ad for Coca-Cola in 1964, but the company continues to lean on the image that he created to this day – and so does every greeting card company, children’s book, and ornament maker in the world. 

Gillette: The concept of a hairless woman

American brand Gillette scored a major deal way back in 1901, shortly after they were founded: they were contracted to supply one safety razor to every soldier in the US Army. In no time at all, this contract made them a household name – but only with men. Not satisfied with winning over only one half of the market, Gillette set its sights on women.

The trouble with that plan was that back in those days, women didn’t shave. Since all dresses of that time had long skirts and sleeves, their body hair simply wasn’t exposed. Now, this may sound odd to you, but the very fact that you are (possibly) a little grossed out when you think of a woman not shaving her legs and underarms is proof of how effective Gillette’s advertising campaign was. In the early 1900s, however, women’s body hair was perceived to be as natural and unproblematic as men’s body hair is today.

Fortunately for Gillette (and unfortunately for every woman who has ever despised having to shave her legs), trends in fashion were shifting. By 1910, sleeveless dresses were becoming the norm, and Gillette pounced on the opportunity to make women feel guilty about having underarm hair. They launched their debut women’s razor, the Milady Décolleté, in 1915, driving it home with an ad campaign that framed underarm shaving as “modern”, while hairy underarms were framed as an “embarrassing” problem that needed a “discreet solution”.

By the 1920s, as women’s skirts got shorter and swimsuits showed more skin, Gillette’s ads evolved to emphasise underarm and leg hair removal as “refinements” for modern, fashionable women. Harper’s Bazaar and other magazines picked up on this, running ads that implied leg and underarm hair needed to be removed to keep up with trends. This subtle but powerful messaging worked; by the 1940s, the majority of body hair removal ads in popular magazines referenced leg shaving for women specifically.

During World War II, a nylon shortage made stockings rare, pushing even more women to bare their legs. Remington quickly introduced the first electric women’s razor, positioning it as a quick, easy way to maintain smooth legs, even without stockings. By then, the trend was well ingrained, and smooth legs and underarms were solidly associated with femininity and grace.

By 1964, an overwhelming 98% of American women ages 15 to 44 were shaving their body hair. Advertisers continued to use subtle shaming tactics to maintain and grow this norm, implying that smooth skin equated to class, beauty and desirability. What began as a desire to sell more safety razors had, by the mid-20th century, turned into a widespread, lasting expectation for women.

De Beers: An expensive commitment 

It might surprise you to learn that before 1947, diamonds were not the first choice when it came to creating engagement rings. While they did feature, they shared the stage with other gemstones like emeralds, rubies or sapphires. In fact, until the 1930s, only about 10% of brides received a diamond ring. It wasn’t until De Beers came onto the scene that the idea of a diamond and a lasting commitment became eternally entangled. By the 1990s, more than 80% of engagement rings contained exclusively diamonds.

The company’s iconic campaign, “A diamond is forever,” was coined in 1947 by a young copywriter named Frances Gerety and changed the diamond industry, creating a lasting cultural association between diamonds and romance. De Beers ads suggested that a diamond was not merely a gift, but the ultimate proof of love, enticing men to spend lavishly on these stones. A distinct correlation between the amount spent on the diamond and a young man’s ability to provide for his new wife was created, with taglines encouraging men to spend “two to three months’ salary” on the ring. The bigger the ring, the better perceived the salary.

The campaign’s effect on De Beers’ business was staggering: from 1939 to 1979, their US diamond sales rose from $23 million to $2.1 billion. Advertising spending leaped from $200,000 to $10 million per year, proving to be an extraordinary investment in establishing diamonds as the premier choice for engagement rings.

Ad Age later recognised “A diamond is forever” as the greatest advertising slogan of the 20th century, cementing its place as a pivotal influence on the diamond industry. This slogan not only shaped the modern diamond market but also created a tradition that endures to this day – for better or for worse. 

Sunkist: A drinkable orange

It’s a summer morning and you’re ordering breakfast at a nice restaurant. You don’t feel like a hot drink like coffee or tea; you want something cold and refreshing instead. What do you order?

Orange juice, of course. And you have Albert Lasker to thank for that idea. 

In the early 20th century, California orange growers had a big problem. Overproduction had driven prices down, and they needed a way to boost demand. Enter Albert Lasker, an advertising aficionado. His first move was to rebrand the cooperative’s complex name to the simple, memorable “Sunkist” – but his real innovation lay in changing how people consumed oranges.

Realising that getting people to buy the same-old-same-old oranges wasn’t going to work, Lasker introduced the concept of drinking orange juice, a new idea at the time. He went on to specifically market orange juice as a fresh, invigorating morning drink, positioning it as the “perfect start to the day.” This move cleverly linked orange juice to breakfast, establishing a ritual that would endure through the ages.

Thanks to Lasker’s efforts, orange juice became the most popular juice in the world, and Sunkist became a household name in the United States. Orange juice reshaped daily habits and created renewed demand for oranges, not only in California but eventually all over the world – even here, at the tip of Africa, where orange juice can be found on practically every breakfast menu in the country. 

About the author: Dominique Olivier

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

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

Dominique can be reached on LinkedIn here.

GHOST BITES (Adcorp | AB InBev | MTN | Oceana | Pan African Resources | Renergen)


Adcorp takes short-term pain for hopefully long-term gain (JSE: ADR)

Restructuring costs ruined the interim period’s trajectory

Adcorp has released results for the six months to August. Revenue increased by 4.8% and gross profit was up just 3.3%, so the top-line story is positive but nothing to get excited about. Operating profit fell by 28.9% from R59.5 million to R42.3 million, which clearly isn’t what shareholders want to see. You need to read carefully though, as the group incurred once-off restructuring and other costs of R25.6 million, so that explains why profits fell.

The resourcing space is difficult and has been through plenty of changes, leading to the decision to restructure the business. These things are never easy, but are often necessary.

As a silver lining, cash generated from operations was positive R97.6 million. That’s a vast improvement from negative R57.7 million in the comparable period!

Despite the strong cash balance and the once-off nature of the cost pressures, the dividend per share followed the earnings trajectory, down 16.8% year-on-year.


AB InBev banks higher margins, despite beer volumes dropping (JSE: ANH)

No-alcohol beer is growing quickly

It always amazes me how consumer preferences change. My dad has some choice views on Castle Lite, preferring to stick to his old school Castle Lager. I don’t have the heart to tell him that no-alcohol beer is the star of the AB InBev portfolio in terms of growth, up by mid-30s this quarter. I’m especially not going to tell him that Budweiser Zero grew in the low 20s, or he may need a week to deal with the trauma of that combo.

In some ways, AB InBev is similar to British American Tobacco. It’s not as obvious or severe, but they are also needing to find ways to grow beyond the original business of selling a product with an unhealthy undertone. With total volumes down 2.4% in the quarter, you can see that the overall picture is one of decreasing demand for alcoholic beverages.

This is why Corona Cero – a no-alcohol product – was the brand they went with as the official beer partner of the Olympic Games. In case you think it’s a health thing from the Olympics Committee, might I remind you that McDonald’s is frequently a partner of such events. This seemed to have knock-on benefits for the entire Corona brand, which grew 10.2% outside of its home market for the quarter.

Thanks to pricing increases, AB InBev managed to deliver revenue growth of 2.1% this quarter despite the dip in volumes. This is slower than the 2.5% growth achieved year-to-date, with three quarters out of the way now.

Normalised EBITDA increased 7.1% for the quarter, also slower than the year-to-date performance of 7.6%. They expect full-year EBITDA to grow by between 6% and 8%, so they are on track for that.


Margins are still in bad shape at MTN Nigeria (JSE: MTN)

But there are some signs of life in the latest quarter

Results at MTN Nigeria are important for MTN shareholders. The Nigerian subsidiary has been the cause of much pain over the years, with the ongoing currency problems in the country driving the MTN share price lower. In fact, Nigeria is the reason why MTN had to extend MTN Zakhele Futhi, as the MTN share price had taken such strain from the pressure in Nigeria.

MTN Nigeria has now released results for the quarter and nine-months ended September 2024. For the nine months, things still look awful – EBITDA has dropped by 5.3% despite service revenue being 33.6% higher. The loss after tax is a huge N514.9 billion for the nine months. If you adjust for forex losses, profit after tax is N118.5 billion, down 59.2%.

Remember, these are forex losses actually incurred by MTN Nigeria is relation to its own forex exposures. We aren’t even talking about the impact on MTN of translating the MTN Nigeria results into rand. These forex losses within MTN Nigeria should calm down going forward, as US dollar exposure has been reduced dramatically from $416.6 million in obligations to $57 million.

There are at least some positives in the third quarter, like renegotiated tower lease contracts with IHS Towers that had a positive impact on EBITDA margin of 230 basis points. This isn’t exactly a solution to the broader problems, when you consider that EBITDA margin fell 14.9 percentage points to 36.3%. It would’ve been 34% without the tower renegotiation.

The one piece of good news is that EBITDA for the third quarter was 6.5% higher. Although margins went sharply in the wrong direction, top-line revenue growth was 35.4%, so the net result was an increase in EBITDA.

For the full year, MTN Nigeria expects revenue growth in the high-20% to low-30% range and EBITDA margin between 35% and 37%. Previous guidance was 33% to 35%. It’s still a mess of note, with management doing their best to navigate a situation that is made very difficult by the weakness of the Nigerian naira.


Oceana’s exceptional first half didn’t translate into an outstanding first-year result (JSE: OCE)

Still, this growth rate is strong

Oceana managed to grow HEPS by 84.6% in its interim period ended March 2024. That was a mega result that set the group up for a strong full-year performance. Alas, the oceans are nowhere near as predictable as that, with a disappointing second half that led to a far lower growth rate for the full year.

For the year ended September, Oceana reckons that HEPS was up by between 15% and 19%. Goodness knows that’s still a great growth rate. It just looks tame compared to the interim growth.


Pan African Resources successfully commissioned the Mogale Tailings Retreatment operation (JSE: PAN)

Under budget and ahead of schedule – the magic words

In a capex-heavy industry like mining, being able to deliver major projects on time and on budget is a major bonus. Beating those key metrics is even better and almost unheard of, yet here we have the Pan African Resources team with exactly that outcome at the Mogale Tailings Retreatment plant.

The inaugural gold pour was in early October and they are now ramping up the $135.1 million project. The life-of-mine is more than 20 years and they will produce at an all-in sustaining cost of $1,000/oz.

The management team of Pan African Resources recently joined us on Unlock the Stock to talk about the business, this plant and the general prospects. You can watch it here:


Renergen looks ahead to its planned Nasdaq listing (JSE: REN)

And much more importantly, the delivery of the first container of liquid helium

Renergen has released its financials for the six months to August. Given where the company is in its life-cycle, it really shouldn’t be a surprise that there are losses. Revenue was just R25.6 million and the total loss was R67.6 million.

The balance sheet is much more important right now, although that won’t be the case for much longer as Renergen needs to show the market that they can profitably produce helium. For now, there’s strong support from key lenders and other cornerstone investors who have various instruments including debentures. The CEO of Renergen has plenty of investment banking experience and knows how to structure a balance sheet in anticipation of an IPO – in this case, on the Nasdaq.

Such an IPO will not be predicated on the production of LNG, which is little more than a sideshow at Renergen. It’s all about the helium, with a number of teething issues having been experienced thus far. With much excitement over Phase 2 and what the entire project could achieve, they need to successfully deliver the foundational building block: a full container of helium to a customer.

They also need to manage the headache around Springbok Solar, a developer who is busy with construction activities on a parcel of land that Renergen says is subject to its existing production right. This fight has now gone to court.


Nibbles:

  • Director dealings:
    • A director of Bidvest (JSE: BVT) sold shares relating to share awards worth R5.4 million. The announcement isn’t explicit on whether this was just the taxable portion, so I always assume that it isn’t.
    • A director and associate bought shares in Afrimat (JSE: AFT) worth nearly R1.7 million.
    • Des de Beer is back on the bid for Lighthouse (JSE: LTE) shares, with the latest purchase worth R296k.
  • It seems as though BHP (JSE: BHG) made some comments at the AGM that skirted with danger from a takeover law perspective in relation to Anglo American (JSE: AGL). After setting off media speculation, the company confirmed that the comments were not meant to fall within the ambit of UK takeover rules and should not be interpreted as such.
  • Kore Potash (JSE: KP2) released its quarterly operational review. Full focus is of course on the Engineering, Procurement and Construction (EPC) contract with PowerChina International. A date of 19 November has been set for a signing ceremony with the Minister of Mines and other officials in Brazzaville. Once that is done, they hope to wrap up the financing terms with the Summit Consortium within three months. To keep things ticking over, Kore Potash is planning a small capital fund raise in November to finance working capital. The share price is up a rather bonkers 356% this year, reflecting just how much uncertainty there was around the contract.
  • MC Mining (JSE: MCZ) has released its quarterly update. This is a tale of a sharp decrease in production and ongoing depressed thermal coal prices. At least premium steelmaking hard coking coal prices remained at elevated levels, albeit down from the levels a year ago. The future looks brighter at least, as you may recall that MC Mining has reached an agreement with Kinetic Development Group (listed on the Hong Kong Stock Exchange) for that company to take a 51% stake in MC Mining. The Makhado Project, rather than the existing collieries, is the reason for the investor interest. The first tranche of the Kinetic investment has already happened and the rest is subject to various conditions precedent.
  • Europa Metals (JSE: EUZ) released its results for the year ended June. The group is still in the mining development phase, so there’s not much point in focusing on earnings at this stage. Much more importantly, Europa recently announced the sale of Toral to Denarius in exchange for shares in Denarius. They are also looking to acquire Viridian metals, owners of a project in Republic of Ireland. On completion of the deal, Julian Vickers will become CEO of Europa. He has been instrumental in the project held by Viridian.
  • The results for Rainbow Chicken (JSE: RBO) for the year ended June have been available for a while, as they were included in the RCL Foods (JSE: RCL) report. This is because the unbundling of Rainbow only happened after year-end. They’ve realised that this isn’t an ideal situation, so Rainbow has now released a separate set of financial statements for those wanting to dig through in more detail without being distracted or confused by RCL Foods numbers.
  • Jubilee Metals (JSE: JBL) announced the appointment of Jonny Morley-Kirk as Interim CFO and Dr Reuel Khoza as a director on the board.
  • If you’re following Accelerate Property Fund (JSE: APF) closely, then be aware that the disposal of the Pri-Movie Park and Charles Crescent buildings now has new counterparties. The ultimate beneficial shareholders of the purchasers are the same, so this isn’t a material commercial change.
  • AYO Technology (JSE: AYO) announced that Thawt has resigned as joint external auditor, citing an “increase in their own firm-level continuance risks” – and they will be replaced by Crowe JHB. These aren’t exactly household names.
  • Orion Minerals (JSE: ORN) announced that another tranche of the shares issued for the Okiep Copper deal has been released from escrow. In other words, they could now be traded on the market if the holder wished to sell them.
  • I very strongly doubt you are a shareholder in Deutsche Konsum (JSE: DKR). Just in case you are, the group is receiving a loan repayment in excess of what was expected from another entity, leading to a sizable gain in this financial year of €28.2 million.

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

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Mantengu Mining has acquired Subline Technologies from Sintex Minerals and Services, a US-based company. Subline manufactures and distributes silicon carbide, a hard chemical compound which is produced in both powder and crystal forms. The deal is in line with the company’s strategy of unlocking new value in the mining services sector. Mantengu will pay US$100 million for the sale shares, total assets acquired were R240 million, liabilities assumed R35 million and the bank balance US$1 million.

Delta Property Fund has disposed of five properties ranging in price from R2,8 million to R23 million for an aggregate c.R63 million. The properties based in Boksburg, Marshalltown, Silverton, Nelspruit and Durban were acquired by five distinct purchasers.

The Foschini Group, through its UK subsidiary TFG Brands (London), has entered into an agreement to acquire White Stuff, a British fashion and lifestyle retailer. The retailer has 113 stores and 46 concessions in the UK and operates six stores and 25 concessions across Europe. Online sales contribute 43% of total sales. The purchase price was not disclosed but the business achieved revenue of £154,8 million and EBITDA of £8,6 million as at its financial year to 30 April 2024.

The Competition Commission has recommended that the Competition Tribunal prohibit the December 2023 announced, R3,2 billion acquisition of Peermont by Sun International (South Africa). At the same time, the Tribunal has prohibited the proposed merger by Remgro and Vodacom of their fibre assets into an entity named Maziv in which Vodacom was to hold a 30% stake. The companies will review the Tribunal’s detailed reason for the prohibition once it has been released and may appeal the decision in the Competition Appeal court.

Weekly corporate finance activity by SA exchange-listed companies

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Further details on the Boxer Retail listing have been released by Pick n Pay. The listing on the JSE and A2X is expected in the latter part of 2024. The group intends to raise, via an offer to select investors, close to R8 billion. The offer is expected to include an overallotment option which is unlikely to exceed R500 million and will be settled by the issue of additional newly issued shares.

Anheuser-Busch InBev has announced a US$2 billion share buyback programme to be executed within the next 12 months which will result in the repurchase of c.31,7 million shares. The shares will be acquired as treasury shares to fulfil future share delivery commitments under the group’s stock ownership plans.

Hammerson plc continued with its programme to purchase its ordinary shares up to a maximum consideration of £140 million. The sole purpose of the buyback programme is to reduce the company’s share capital. This week the company repurchased 720,929 shares at an average price per share of 307.04 pence per share.

South32 announced in its annual financial statements released in August that it would increase its capital management programme by US$200 million, to be returned via an on-market share buy-back. This week 1,275,592 shares were repurchased at an aggregate cost of A$4,75 million.

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 449,118 shares at an average price of £26.64 per share for an aggregate £11,96 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 21 – 25 October 2024, a further 2,663,265 Prosus shares were repurchased for an aggregate €104,36 million and a further 248,234 Naspers shares for a total consideration of R1,03 billion.

Two companies issued profit warnings this week: enX and Transaction Capital.

During the week, two companies issued cautionary notices: Finbond and Astoria Investment.

Who’s doing what in the African M&A and debt financing space?

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AgDevCo, the specialist agriculture investor, has made a US$10 million long-term investment in Ghanaian tilapia fish producer Tropo Farms. The investment will finance the construction of a modern processing facility and other production equipment, increasing the company’s capacity to 30,000 tonnes within five years.

Kenyan-based Geneplus, a company that specialises in high-quality livestock genetics, has been granted a US$500,000 CAPEX loan by Sahel Capital from its Social Enterprise Fund for Agriculture in Africa (SEFAA).

Ghana’s Oyster Agribusiness has raised US$2 million to expand operations. Pangea Africa led the fundraising processing for the agri-tech company that specialises in climate-smart agriculture. Root Capital, RDF Ghana and Sahel Capital’s Enterprise Fund for Agriculture in Africa (SEFAA) all supported the raise.

Silverbacks Holdings has made an investment in Nigeria’s largest traditional boxing promotor, African Warriors Fighting Championship (AWFC). The private investment firm has taken a significant minority stake and secured a seat on the board with the goal of boosting AWFC’s efforts to elevate African traditional combat sports. Financial terms were not disclosed.

Moniepoint (formally TeamApt), a Nigerian fintech, has announced a US$10 million Series C equity raise led by Development Partners International’s African Development Partners III fund. Other investors included Google’s Africa Investment Fund and Verod Capital.

Kenyan clean cooking appliance manufacturer BURN has secured a US$15 million investment from the European Investment Bank to fund the distribution of BURN’s ECOA Electric Induction cooker to households across East Africa.

FG Gold has secured a US$20 million equity investment from Fundo Soberano de Angola (the Angola Sovereign Fund) for its Baomahun Gold Project in Sierra Leone.

GHOST BITES (Astral Foods | Impala Platinum | Lewis | Santova | Tiger Brands)


No cluck-ups at Astral Foods (JSE: ARL)

Things are just so much better in the poultry sector

The poultry sector is a wild thing. The margins are thin and the risks are extensive. Like a toxic relationship, the bad times are terrible and the good times are great.

For the year ended September, the love has been flowing at Astral Foods. HEPS has swung spectacularly from a loss of R13.24 per share to positive earnings of between R18.53 and R19.85 per share.

Detailed results are due on 18 November. You can expect to read about the benefits of no loadshedding, better prices to consumers and far less in the way of Avian flu disasters.


A drop in first quarter production at Impala Platinum (JSE: IMP)

The group has maintained full-year guidance though

Although things remain difficult in the PGM market, Impala Platinum is telling a more positive story based on discussions with the core customer base. One can only hope for improvement in PGM prices, especially after positive momentum in the share price this year – Impala Platinum is up 39% year-to-date.

The production numbers for the first quarter don’t look great though, with 6E group production down 5.5% year-on-year. Gross 6E refined and saleable ounces fell by 8.8%. Finally 6E sales volumes were down 4.5%.

At this early stage in the year, full-year guidance for volumes, cost and capital expenditure has been maintained.


A monster result from Lewis – and the market celebrated (JSE: LEW)

Sometimes, it’s the least sexy companies that make the money

Lewis sells furniture (and some other stuff) on credit. It’s really that simple. This isn’t exactly on your “what I wanna be when I grow up” hall of fame list, but it’s a business that can make serious money when things improve in an economy.

For the six months to September, Lewis has enjoyed much better sales growth at stable gross margins. To add to the happiness, operating costs were within the target range. The chef’s kiss? Collections are at near record levels, so the credit book quality looks good.

The net result of all this good news is that HEPS grew by between 45% and 55% for the six months to September. In morning trade, Lewis was up 11% as the market celebrated these numbers. It eventually closed 7.3% higher for the day.


Santova is coming off the boil (JSE: SNV)

Aah, the joy of cycles

Throughout the pandemic, Santova registered great growth in revenue. In fact, revenue more than doubled from 2018 to 2023, which is excellent. At some point, they needed to have a wobbly – it’s just how cyclical businesses work. The six months to August have proven to be one such wobbly, with revenue and net interest income down 5.8% and HEPS down by a nasty 19.9%.

There are reasons to believe that the second half of the year could be better, with decreasing interest rates and Chinese stimulus that may lead to increased global trade. It’s very hard to forecast though, which is why Santova just focuses on making the most of each period and riding the cycle.

The share price is down 6.5% year-to-date, a modest drop when you consider the underlying earnings. Santova took advantage of this share price pressure to repurchase shares representing 1.3% of shares in issue.

One of the metrics to always keep an eye on here is cash generated from operations, as Santova’s business is working capital intensive. This metric fell sharply from R25.3 million to just R6.2 million for this period.

Those who bought five years ago are still smiling broadly, with the share price up 325% over that period!


Modest profit growth at Tiger Brands (JSE: TBS)

The focus has been on margins rather than top-line growth

Tiger Brands has released a voluntary trading update for the year ended September 2024. The backdrop has been tough, especially with consumers looking for ways to bring their grocery spend down and retailers responding with strong private label offerings. This is one of the main reasons why I struggle to form a bullish long-term view on Tiger Brands.

Still, the improved South African sentiment has led to a 19% share price gain year-to-date, so well done to those who locked this in. You will struggle to justify that trajectory based on the underlying results, with marginally higher revenue and a modest recovery in gross margins. Tiger Brands has prioritised pricing and margin over volumes, supported by cost saving initiatives.

HEPS only increased by between 3% and 5%, so this is a rather tame Tiger. This is HEPS from total operations rather than continuing operations, so we have to be patient to see that difference. We also have to be patient around some of the other reconciling items, like income from associates and the receipt of insurance proceeds related to the value-added meats business.

For now, we know that some of the earnings pressure came from Home and Personal Care in the second half, attributable to increased competitor activity – a nice way of saying that FMCG is a tough way to make money. The Deciduous Fruit business was also a drag in the second half, impacted by global fruit puree pricing.

The Listeriosis class action remains an overhang here. They are in pre-trial preparation mode at the moment, which will lead to a trial date to determine liability. In the meantime, Tiger Brands is aiming to agree on relief to qualifying individuals with urgent medical needs, as this is likely to still take a long time to be resolved.


Nibbles:

  • Director dealings:
    • The ex-CEO of Italtile (JSE: ITE) sold shares worth R11.4 million.
    • The CEO of AVI (JSE: AVI) received share awards and sold the whole lot worth R3.9 million.
    • There’s yet more selling of shares by the same CMH (JSE: CMH) director, this time worth R606k.
    • A director of Momentum (JSE: MTM) bought shares worth R284.5k.
  • In case you wondered whether shareholders of Metair (JSE: MTA) are excited to see the back of the Turkish business, the deal has achieved unanimous approval from shareholders who voted at the meeting. It’s very rare to see all shareholders saying yes to something, especially with 87.28% of shares represented at the meeting!
  • Transaction Capital (JSE: TCP) is in the process of selling Road Cover, with the deal structure including what is known as a resolutive condition – an unusual structure in which the deal goes ahead and then various conditions need to be met for things to stay that way. The more common structure is suspensive conditions, which need to be met before a deal is finalised. The resolutive conditions were set up with a long stop date of 31 October. The parties have agreed to extend this to 30 November, so there’s clearly some deal risk here.
  • There are a couple of important board developments at Telemasters (JSE: TLM), with Professor Brandon Topham’s interim CFO position becoming permanent CFO and Advocate Miller Moela appointed as lead independent director of the company.

GHOST STORIES #49: Shari’ah-compliant Investing (with Yusuf Wadee of Satrix)

Listen to the show using this podcast player:

Shari’ah-compliant investing is a fascinating area in the world of finance. For those of the Islamic faith who choose to invest in this way, these products offered by Satrix are an excellent way to diversify a portfolio – especially with the launch of the Satrix MSCI World Islamic ETF which listed on the market on 22 October 2024.

For those who aren’t familiar with the Shari’ah rules and for those who want to brush up on them, this discussion with Yusuf Wadee of Satrix is a great way to understand the technical process behind identifiying companies in an index that must be excluded to make it compliant with Shari’ah principles. Of course, this leaves a different sector exposure mix and a fund with far less underlying debt, so that’s an interesting topic as well.

This podcast was published on the Satrix website here.

Full transcript:

Introduction: This episode of Ghost Stories is brought to you by Satrix, the leading provider of index tracking solutions in South Africa and a proud partner of Ghost Mail. With no minimums and easy, low-cost access to local and global products via the SatrixNow online investment platform, everyone can own the market. Visit satrix.co.za for more information.

The Finance Ghost: Welcome to another episode of the Ghost Stories podcast. It’s another one with the team from Satrix and I’m very excited today because there’s a new face on my screen recording, there’s a new voice – not to say there’s anything wrong with all the expert voices we’ve had before from the Satrix team, but of course it’s so nice to get different perspectives on the markets and to cover different topics.

And on this specific podcast, we will be jumping into Shari’ah-compliant investing, which is a really interesting topic that I would like to know more about. I know a little bit about it, but nowhere near enough. So, thanks for listening to this show and joining us for this journey.

Yusuf Wadee, thank you so much for making the time to do this. You are the Head of Exchange Traded Products at Satrix. We were talking before we came online about how you were right at the coalface in the global financial crisis in an equity trading role at a different financial services business. You’ve got tons of experience, you’ve seen the markets dish out some good stuff and some bad stuff, no doubt. And I’m really excited to tap into that expertise today. Thank you for doing the show with me.

Yusuf Wadee: Thanks Ghost. Yeah, thanks for having me. It’s quite a pleasure to be here with you and your listeners and I’m looking forward to an interesting conversation.

The Finance Ghost: Yeah, absolutely. I think, just for a moment, let’s dive into some of that background before we jump into the Shari’ah-compliant stuff just because I think it’s interesting. You were an equity trader during the global financial crisis and I think for a lot of people listening to this, they might have either still been studying at that stage or just weren’t in a financial markets role at the time. Speaking for myself, I only finished university in 2010. Like I was saying to you before we got on the show, I’ve literally only ever known post-global financial crisis banking environments, which is just a completely different thing. You know, back then there were prop trading desks in the banks, etc. And then everything changed in the aftermath of the crisis, didn’t it?

Yusuf Wadee: Yeah, certainly was a very interesting time. You know, it felt like, I guess as far as banking goes, it feels like a “before 2008” and a “post-2008” – you know, back then there was a much more free sense of capital, certainly sitting inside a bank. The type of things that banks would probably get up to and be part of was super interesting. You’d see weird and wonderful things that would possibly take place in the bank that doesn’t happen now. I imagine a lot of hedge funds have stepped into the type of activity that banks would have played in that space, whereby they would play in a lot of different markets and fulfil lots of liquidity holding gaps. Being a price-maker has kind of evaporated to a large extent since. And that’s possibly why you see such a big hedge fund business and that market has developed as a result. But it’s not to say that skill isn’t there, it’s just moved, right? I think whatever existed in banks, a lot of that skill and background has moved to hedge funds. So yeah, it certainly was an interesting time back then.

The Finance Ghost: Yeah, I would agree with that. Banks these days are very much flow trading, it’s basically just execution on behalf of clients. They don’t really take much market risk. Back then, prop trading, the bank was using its balance sheet to actually try and generate trading profits, very much like a hedge fund would do now. So yeah, the world is a little bit different.

And of course over that time period, what we’ve also seen is the proliferation of exchange traded funds, ETFs, which is where you are now. Out of interest, what was the driver of moving from that equity structuring environment and trading and all that kind of thing into the ETF environment, which many see as a more vanilla sort of offering? Although I think on these podcasts we’ve tried quite hard to show that ETFs are a lot more interesting than most people realise, there’s actually a lot going on in them.

Yusuf Wadee: Yeah, so I think it was a natural move and it’s exactly to your point. ETFs aren’t just buy side instruments. Well, they are, we’re kind of managing buy-side third party investment portfolios. But in many ways, an ETF embodies a few parts of the capital market system, we’re listing stuff on the stock exchange and that kind of feels like a corporate finance, debt, capital markets type activity because we’re taking, you know, we’re taking structures and we’re listing them on the stock exchange. So it has an element of that that probably never used to sit in a buy side environment prior to ETFs. Right. So the, there’s an element of origination, there’s also an element of being super JC centric. So you’ve got to be close to your stockbrokers, you’ve got to understand the concept of market making, you got to understand the concept of JC trading. And so a lot of these things are directly resonates with an ETF house, possibly not so much with a traditional buy side house that wouldn’t focus as much on, let’s say the capital market aspects. That is quite unique to etf. So it was an exciting move for me, you know, certainly, you know, to put in practice a lot of the stuff that I’ve dealt with for many years prior on the sell side to now, you know, put that in place on the buy side, etc. And it’s been an exciting journey ever since.

The Finance Ghost: Yeah, it’s always interesting for me to see where people have come from and where they’ve gone and why they’ve done it. And I think moving on now to basically what the focus is on this show which is Shari’ah-compliant investing. I’m quite excited to actually come in here and learn about this, although it’s been great to get more of your background. When I saw it on LinkedIn, I thought, no, I have to ask you about what it was like to be an equity trader in the global financial crisis.

Let’s move into the Shari’ah-compliance stuff and I think let’s just start with why these products exist for your Islamic clients. What is it about the Shari’ah rules that make it important that these things exist? This whole Shari’ah-compliance side is very interesting for me. I think let’s just start right at the beginning which is why do these things exist for Islamic clients?

Yusuf Wadee: So if you look at the universe of investments available to, let’s say, Islamic clients or Muslims or followers of the Islamic faith, probably 90% of what’s out there is not suitable for them should they wish to follow and invest in line with the Islamic faith and in line with Shari’ah principles. Whether they’re looking to save for retirement, looking to contribute to their tax free savings accounts, or whether they’re just looking to have a discretionary savings investment portfolio, a lot of what’s out there is not suitable when they want to invest in line with the Shari’ah-compliant lens.

I guess that brings us to the question: what is Shari’ah investing? In a nutshell, it means investing in a way that abides with Islamic law. If you look at the Islamic faith, apart from just being a faith and having certain tenets of faith, Islam also prescribes to Muslims how to live their lives, how to spend their money, how to earn wealth. It’s a full lifestyle, it’s a religion that really describes a complete holistic life for Muslims.

So what actually happens, and this is sort of where Islamic finance kind of originated because you’d have these scholars, these Islamic scholars who would spend many years learning about Islamic law and studying Islamic law, effectively Islamic jurisprudence, they would, based on Islamic law and based on what is permissible and not permissible, apply that lens to many facets of a Muslim’s life. So, let’s take investments as an example.

These Islamic scholars, let’s call them Shari’ah advisory boards, based on the principles and the basic tenets of Islamic law, they would apply that to the investment universe. If I take an example, let’s take the MSCI World Index, it’s a great index. It’s an index that describes the entire world. It’s the large cap stocks from the 23 biggest developed markets in the world. It’s probably the single most overarching index building block, right? Let’s take this index.

There are 1,400 stocks in this index. I’m using this as an example. What would happen for a Shari’ah advisory board is they would take that universe and they would actually screen those 1400 stocks and they would go through those 1400 stocks and go, okay, what is it about these 1,400 stocks that makes them permissible or not permissible? They would look for certain things. The first thing they would try and screen is business activity. For example, they would look at alcohol. Are any of these companies involved in the manufacture of alcoholic beverages? This is not allowed in Islam, so those stocks would not qualify.

Tobacco. Are any companies involved in the manufacturing of tobacco? This is something which is not seen in a positive light from a Shari’ah perspective, so those stocks would be omitted.

Pork. Pork related products. Companies that are involved in the manufacturing or in the distribution of pork related products would be omitted.

Conventional financial services. Companies that are involved in interest, certainly in the payment of interest and earning of interest or trading of interest, they would largely exclude all conventional banks,  life insurance companies would be omitted because strictly speaking, interest, that is usury, is not permissible in Islam.

Gambling. Companies that are involved in gaming, gaming companies or hotel groups that have significant gaming portfolios or parts of income derived from the gaming sector would be excluded.

Adult entertainment, obviously that would be excluded.

So that would be the first level of screening that a Shari’ah board would actually do. They would screen business activity. Then of course, there’s something called financial ratio screening. They would look at the companies that satisfy each of those things I’ve just mentioned. Then, they would be further screened. They would look at the income statements and their balance sheets and they would look at what percentage of their balance sheets are exposed to interest. How much gearing do they have? How much interest are they earning or paying? Clearly this has the effect of removing companies with excessive leverage or interest exposure. This goes back to the fact that usury or interest is not permissible.

In a nutshell, this is effectively what Shari’ah investing is. You start with the universe of stocks. You’ve got the basic set of Islamic laws that a Shari’ah scholar or Shari’ah advisory board would apply their mind to. They would screen everything. And what you’re left with at the end is a collection of stocks or portfolio that’s very much in line with Shari’ah investment principles.

The Finance Ghost: It’s incredibly interesting, right? Another example of a framework that gets used, but that I’m always very dubious on, is ESG. In Shari’ah finance, I think there are just these really well-established practices and you can’t really get around them. I think of some of the ESG stuff out there and how a company like British American Tobacco features very prominently in an ESG index. That just tells me logically those rules are not working.

Logically speaking, if someone thinks, okay, I’m buying an ESG product, I’m buying stuff that’s good for society, and then British American Tobacco is in there – it’s all good and well if you go and buy shares in British American Tobacco, that’s fine, it’s a personal choice, but why is it in an ESG index?

What I quite like about the Shari’ah stuff is it feels like you can’t just use some understanding of the rules and then wriggle your way around them. I think a lot of that happens in ESG. People talk about greenwashing and that kind of thing. I’ve never seen anyone talk about “Shari’ah washing” so I’m guessing that’s not a thing. I feel like these rules are applied pretty well.

Yusuf Wadee: You’re spot it. I mean, I guess when it comes to financial metrics and ratios, it’s always at the whim of creative CFOs, right? You could get a CFO somewhere that could dress up their financial statements in a myriad of ways. They could try and game a lot of downstream filters. But in many ways, the Islamic Shari’ah principles are pretty steadfast, there’s not much grey, there’s not much leeway in terms of what is permissible. I guess it’s less likely to have, like you said, the big tobacco type example.

But, yeah, these indices for instance, if I look at the fund that we’ve just launched, we’ve partnered up with MSCI and they do have a Shari’ah advisory committee. This is what they do, they’re constantly looking at the indices, they’re constantly looking at the stocks, they’re constantly screening. There are always new companies coming on board and over time, they may need to tighten up or polish up a filter or revisit a financial statement or look at it more closely. So I guess it’s an ongoing, evolving process, but the idea is always, after all is said and done, land on a portfolio that’s in line with Shari’ah investment principles.

The Finance Ghost: 100%, I think it’s the old – it’s either Munger or Buffett, I think it’s Munger who said: show me the incentive, I’ll show you the outcome. And I think that’s a problem for a lot of the ESG stuff is if you can get your ESG score up, you can go and do all kinds of things like raise finance related to ESG metrics, etc.

The great irony of it is that I’m not really sure there’s a huge incentive for corporates to try and dress up stuff purely from a Shari’ah perspective. You can’t go and, by design, raise finance based on Shari’ah principles. There’s no incentive around that, it’s just different. I think it’s an important lesson for financial markets. We’ve both worked in financial markets, you for longer than me, and you know how it works in terms of incentivisation and outcomes and clever structuring and everything else. I have a lot of respect for that from a Shari’ah perspective that there are just these very well-established principles. It’s in or it’s out and that’s it. There are various tests, starting with what does the company do and then getting all the way down to these financial ratios etc. and I would imagine that the product that gets spat out on the other end is an index that obviously has a lot less financial leverage in it.

So in a period of high interest rates, it probably outperforms an equity index that hasn’t had the Shari’ah lens applied to it. Without the Shari’ah lens, there are a lot of overindebted companies in there, companies that get themselves into serious trouble in a high interest rate cycle or that just end up working really hard so their bankers can have a better life. The Shari’ah funds wouldn’t have any of that. It’s quite interesting.

I would imagine for non-Islamic clients, they can invest in this stuff, right? You don’t have to be of the faith, or do you?

Yusuf Wadee: Yeah, our ETFs are totally available for anyone. ETFs are listed on the stock exchange. It’s available on all our platforms, the Satrix Now platform, on all our downstream LISP platforms. And so anyone for whom this product resonates can buy this ETF.

It’s exactly as you mentioned, at Satrix we started out with market cap indices back in 2000 and we started off with the Satrix 40 and then the RESI and FINI and INDI. These are all sector, market cap-based index portfolios. And if that story resonates with people, then they buy the market cap indices. And then following on from that, we launched the range of factor indices, we had the value, momentum etc. – and again, for investors that resonate with a style-based investment approach, if that’s their flavour, then we’ve got those ETFs. And then of course this spills over into the more recent years where we’ve come up with the country-based indices. We’ve got Satrix China, Satrix India, if you like country stories then you buy that.

Where the Shari’ah product fits is under the broader banner of let’s call it SRI, Social and Responsible investing where you know, there’s kind of a different lens to investments, not just financial ratios. In this cluster you’ve got ESG, Environmental, Social and Governance type investment portfolios, you’ve got Shari’ah. I guess the whole point is that for investors out there, where it’s not just about the financial metrics, it’s just not about the financial ratios, it’s about where your money goes, you actually care about where your capital goes and where your capital gets deployed in the capital markets. If that’s important to you, and again you don’t have to be of a certain faith or you don’t have to be of a certain creed, if you’re just someone who feels that you’d like your capital and your cash to contribute to a sector of the market you think is productive in its nature, then spot on – certainly this fund is not just for Islamic or Muslim investors.

The Finance Ghost: Great. And in terms of those sort of returns, do you have a sense of what they look like versus some of their traditional counterparts without the Shari’ah lens? Obviously it all depends on starting dates and all that kind of thing. But just high level, are the returns comparable? Are they roughly comparable over a period of time or is there actually a noticeable difference?

Yusuf Wadee: Yeah, so you mentioned debt and that’s an interesting thing. There’s clearly not a significant element of debt in the Shari’ah investment funds and that’s because these funds get screened for debt. Any companies that are leveraged to the hilt in debt or significantly trading in interest products would be excluded. The point is debt can be double-edged and we’ve seen this in the property market as an example. Pre-2018 property markets were running super hard. These are all generally, if you look at average rate, these are all highly leveraged companies, significant portions of debt, high LTVs, some higher than others. I’m just using property as an example. What you find is that when the going is good, the debt works for you, as long as you’ve got rental escalations and you’ve got high occupancies, it’s a great story. But if you look at post-2018 where some of these companies started with a bit of a wobble and that wobble kind of sped up going into Covid, all of a sudden you got an environment with low occupancy rate. There’s an environment of being unable to push through rental escalations. Then you start having high debt servicing costs and debt becomes a problem. And then all of a sudden that you realise that debt is a double-edged sword.

Shari’ah funds probably wouldn’t benefit, I don’t know if that’s the right word, but wouldn’t be exposed to companies that are significantly leveraged. But whether that’s a good thing or bad thing, I guess time will tell.

If I just look at some of the numbers, If I take 2023, the calendar year as an example, if I look at the new fund we’re about to launch, which is the MSCI World Islamic ETF, this fund would have yielded 32% in that year versus let’s say the MSCI World which would have returned 33%, it’s very close and it’s coincidentally close. These are very different funds, they’re very different indices. For instance, MSCI World has 1,800 stocks, the Shari’ah ETF only has 300 -odd stocks. These are very different ETFs.

We can chat about the sector exposures just now, but the performance has been remarkably similar. And again, it probably talks to what we’ve seen in the market in the last couple of years. The rising tide kind of rises all boats. There’s a little bit of that if I take a slightly longer-term horizon. If I take five years, so the last five years annualised return per year would have been 14% for the Sharia ETF, 14% every year which is not too shabby versus the MSCI World of 16%. Sure, it’s lagging a little bit behind the MSCI World, but not by a lot. And you know, this maybe talks to your point, the exposure to companies with a little bit of debt could play a part, but also maybe not. You know, they are very different sectors. But it is very comparable to other global indices that we’ve launched and I think investors would find that quite exciting, as South African investors looking to obviously diversify away from South Africa.

The Finance Ghost: It’s really going to depend on the time period, right? If it’s a time in the world where technology companies are driving this in a big way, I imagine the tech companies would pass the Shari’ah tests. They generally are not over-indebted, they’re not selling impermissible products. If that’s a big part of the index, it’s going to be in both. And I think that’s part of what you’re seeing there in how close that performance is.

In South Africa it might be a bit different. You would have been quite happy to avoid the local banks. actually for many years in South Africa they really were not necessarily great performers at all. You would have been very happy to avoid companies with too much debt because that’s the other thing in the South African market, companies are borrowing at structurally high interest rates relative to the equity returns that they can generate. It’s not the case in the developed world. You know, a lot of high growth companies can get their hands on debt finance quite cheaply. So it’s just interesting and I think it’s important if you are able to weigh one against the other. Again, the whole point of this is that if you need to invest in Shari’ah-compliant funds, you’re not sitting there going, oh well, I could alternatively have the other index. You’re looking at this and saying, within the Shari’ah-compliant basket, what’s available to me and what am I looking for?

I don’t need to invest in Shari’ah-compliant funds, but it’s just interesting for me to understand the differences between them. It’s fascinating to see how finance really works in practice. I really do love it, obviously, otherwise I wouldn’t do what I do.

I think let’s maybe claw it back from my little intellectual curiosity down to something a bit more practical, which is for investors who are looking for Shari’ah-compliant funds, what does the basket look like from a Satrix perspective? What’s on offer? You’ve already mentioned the World Islamic Feeder ETF, which is the new one, but I think there’s other stuff in there as well, right?

Yusuf Wadee: Let’s spec this ETF. It’s a super interesting ETF. The way we structure it is as a feeder. We will not be replicating the index ourselves. We do feed into an iShares BlackRock ETF and there are lots of benefits of that. We achieve scale pretty quickly. We get the benefit of a larger investment team right off the bat. That’s a model that works for us. A lot of our ETFs are structured as feeders, so that works well.

The other thing I want to mention is that we do purify the dividends. What happens is these funds generate cash, so they do pay a distribution. What our index partner MSCI does, they maintain a tally of stocks, or let’s call it unpurified dividends or components of the distribution whereby let’s say it happened to be derived from an illicit source. What MSCI will do is they’ll publish that and they’ll maintain a tally of what that is and Satrix will dispose of that in a Shari’ah-compliant fashion. Investors receive purified dividends out from our fund and our side. That’s a hallmark of all Shari’ah-compliant funds in South Africa. Our funds will be structured the same way and is no different in terms of sectors. This is where I think it becomes quite interesting.

You talked about the sectors. We’re launching the MSCI World Shari’ah ETF, chosen from the MSCI World from large- and mid-cap stocks globally. It’s a super big universe and from the 23 biggest developed markets in the world. You’re literally choosing from the cream of a crop, really super high quality blue chip companies that exist globally.

Yusuf Wadee: So after screening, what we’re left with is the sector exposure and I think this is quite interesting. The sector exposure for the Islamic ETF is we’ve got tech at about 38% which is quite interesting vs. the MSCI World MSCI world of 32%. It’s got a little bit more tech. And I guess this talks to your point that tech does sort of qualify a little bit easier…

The Finance Ghost: Kind of as expected.

Yusuf Wadee: Right, exactly, exactly. What is interesting though is that there’s a bit more broad-based tech. 18% of the tech is in broad-based tech that sits outside of the Magnificent Seven. And that’s not the case in the MSCI world, you’ve only got 13% that sits outside of the Magnificent Seven. So there is a tech play, there’s an upweighting effect of tech, but you’re getting stuff that’s longer in the tail of tech, which I think is interesting. Tech’s run hard and this could be an interesting play for investors in this portfolio. You’ve got a bigger tech play, but the upweight has come from stuff that’s further down than the Magnificent Seven.

There’s no financials versus the MSCI world, which has got 15% financial. So there’s 15% that needs to find a home. You can kind of see where it goes in the Shiri’ah fund. It goes into healthcare, which gets bumped up from 11% in the MSCI World up to 13%, a 2% bump in healthcare.

Energy gets a big bump. Energy goes up to 13%, where energy is only 4% in the MSCI World. I do think you’re left with quite an interesting portfolio. I wouldn’t want to say it’s more value based, but clearly you’ve got whatever was in the Magnificent Seven spread down into the tail of the tech, which I think is interesting. And healthcare and energy gets, gets a bump, which I think makes for an interesting fund.

If I look at some of the stocks, they are the who’s who of global blue chips. You know, you’ve got companies like Microsoft, Tesla, Exxon, Procter & Gamble, Johnson & Johnson in there. Certainly all the big pharma is there represented in this fund. You’ve got the car manufacturers, the likes of Suzuki, Toyota. You’ve got beauty companies like L’Oreal.

Intel, Rio Tinto, tyre companies like Bridgestone, Continental. This is certainly a very blue chip fund that is looking quite exciting for Islamic investors.

The Finance Ghost: So Yusuf, listening to you talk about what happens with distributions and the different weightings is really interesting. Does that mean that the dividend yield is probably lower on a Shari’ah-compliant fund, or do some of those sector exposure differences then make up for it? Because it sounds like there are some bigger dividend payers sitting there like energy potentially, healthcare, the value-based sectors that you’ve mentioned.

Yusuf Wadee: Yeah, we wouldn’t expect dividends to be too different from some of the global headline indices like the MSCI World. It will be very comparable. If you’ve got MSCI World at 1.5%, 1% odd or just slightly more than that, we would expect this ETF to be very similar.

That’s because whatever you are foregoing in the financial stocks, you’re probably topping up in pharma or you’re topping up in energy and these are also big divi payers. I think it would be very comparable from a distribution perspective. And again, it’s because it’s kind of what we see for most global stocks.

South Africa is a big divi player and that’s just because of where our P/Es are and our multiples are, so South African stocks have traditionally been big distribution payers globally though. And yeah, these markets have run hard, so whilst there’s still lots of growth potential, you generally find the scale of the distribution, the dividends that you’d earn from these global indices aren’t directly comparable to what you would earn locally. But having said that, again, we wouldn’t expect there to be a penalty or anything like that on this ETF.

The Finance Ghost: Absolutely. The components of returns internationally are just so different. High multiples, multiple expansions and more capital growth, so dividends are a smaller part of the total return. Whereas to your point, in South Africa, because of where we’ve been for the last 10 years and how low sentiment has been and how poor it’s all been, the dividend’s actually been quite a big component of what’s going on. So again, it helps to understand these different markets.

That brings me to the second last question, which is that I know you also have a Shari’ah Top 40 ETF as part of the Satrix offering, which would track the JSE Top 40, but again in a Shari’ah-compliant manner. I would imagine no British American Tobacco, no banks, no AB InBev. I would think those would be some of the obvious differences. Right?

Yusuf Wadee: Yeah, spot on. This was a fund we acquired from ABSA. A few years ago Satrix bought out ABSA’s exchange traded funds business. We acquired about 19-odd exchange traded funds. We pretty much bought all the ETFs except the commodity ETF, that stayed with ABSA. In and amongst the funds that we bought, this was one of the funds, the Satrix, or rather at the time it was the New Funds Shari’ah Top 40 ETF. It’s been in existence for a good few years, so we took it over and we rebranded it, it’s one of our new funds in our stable.

We’re looking to try and support it and see where we can take this fund from here. A little bit about this fund, it’s constructed using a FTSE/JSE index. There’s a company called Yasaar, an independent Shari’ah advisory committee out of the UK. They provide Shari’ah services for global multinationals out of the UK. They’ve partnered with FTSE to come up with the FTSE/JSE Shari’ah index. That’s the licence for this ETF. It tracks the Top 40, but it’s a Shari’ah-compliant version of the Top 40. It is quite interesting, there are only 18 stocks in this portfolio. It’s very different to what we’ve just been discussing, there are only 18 stocks in this portfolio.

The Finance Ghost: It’s because of the South African market, right? Lots of property and all that kind of stuff which has got to come out because of the leverage.

Yusuf Wadee: No, exactly, exactly. The South African stock market, I mean the universe isn’t that vast, right? There’s only so much in this universe and I guess it talks to the challenges of trying to launch a broad based, robust Shari’ah ETF in South Africa. It’s much easier to do globally, the sandpit is so much bigger, but locally it is a bit restricted.

Just for comparison, this ETF like I said only has 18 stocks in there, which I think is a nice mix. To give you a sense of the biggest sector in the Top 40, I’m talking about the generic Top 40, is financial services at 32%. For the Shari’ah version, the biggest sector is metals and mining at 57%. It’s exactly to your point, after you kick out financial services and a lot of the REITs, you are kind of just left with a mining play. And I think that’s been a story with a lot of local Shari’ah funds. They do tend to become resources-centric and again it’s just a function of a limited universe that’s available.

The Finance Ghost: Interesting. So last question, Yusuf. This has been such a great show. I’ve really enjoyed this.

The fees on these ETFs compared to the non-Islamic funds, are they more expensive? Because I mean someone in this whole process needs to make some money for doing all of the Shari’ah work. Are the fees a little bit higher on these ETFs?

Yusuf Wadee: Yeah, so certainly, Shari’ah investing has been around in South Africa for a few years. There’s certainly a few players that play in this space. Traditionally, Shari’ah product has been offered between 1% and 2% a year total expense ratio. That’s really been where Shari’ah product has been priced at. However, at Satrix as you know, our ethos is all about index-tracking and low cost and efficient portfolio management, and so our global ETF will come in at 55 basis points, so we think that’s super competitive.

The Finance Ghost: That’s very good!

Yusuf Wadee: Yeah, so this is the equivalent of 35 basis points for the non-Shari’ah version. The normal MSCI World is 35 basis points, this version is 55 basis points. You know, the additional 20 points is exactly to what you said, there’s a little bit more administration, there’s a little bit more screening and Shari’ah-licensing services that we need to incur on our end. That’s possibly where the additional 20 basis points can be attributed to. Likewise for the local version, the local Satrix Shari’ah Top 40 comes in at 40 basis points. This is in keeping with where we’ve priced our other sector and specialised indices, around 40 basis points.

Our headline indices are super efficient and cheap. We’ve got Top 40 at 10 basis points, we’ve got the All Share, roundabout there 15 basis points, the Satrix Global Investor. But those are very different, those are the broad-based, low-cost front-facing funds that we’ve got. The Shari’ah ETF is in keeping with our other sector funds – RESI, FINI, INDI, DIVI at the 40 basis points mark, which we think is super competitive for clients.

The Finance Ghost: I mean for context, the difference between I think you said 55 basis points on that fund and then going and investing in some kind of actively managed Shari’ah-compliant fund at 1.5% to 2% a year, that fund manager has got to do 100 basis points or more outperformance every year just for you to be in the same place. And it doesn’t sound like much, but it’s a lot. Some of the rockstar investors in the world are that because they’ve built, or rather because they’ve beaten the index by maybe 100 or 200 basis points over a long period. And that’s the difference between someone who no one’s ever heard of and someone who’s world famous. So it’s a huge difference. And that’s the benefit of low cost. That’s exactly the point.

Yusuf Wadee: I mean in a long-term game, that’s exactly what this is, right? This is a 20-year, 30-year game. You’re investing for very long-term horizons. It becomes a game of inches. These 50 points, 1%, you know, they add up and they become super significant over time. Spot on, investors are well advised to consider what they pay for financial services product and review these things from time to time.

The Finance Ghost: Yusuf, thank you, this podcast is actually quite a bit longer than I originally planned, but it’s been so interesting that I was very keen to just keep on digging into this with you. So thank you so much for everything that we’ve talked about on the show. And for investors who want to learn more, go check out the Satrix website or you’ll be able to navigate there to the various Shari’ah compliant funds.

Good luck with this MSCI World Islamic Feeder ETF. It sounds like a super interesting product. I think anything that lifts South Africans heads to the broader global opportunity set is always worthwhile. As lovely as it is to have such positive sentiment at the moment locally, let’s not forget that diversification is a huge part of portfolio management. To your point on that top 40 ETF, I think you said 18 stocks for it to be Shari’ah-compliant, for true diversification you need more than that and that’s why this Islamic feeder ETF on the Satrix MSCI World is now coming in. Congrats on that and all the best with it. And thank you for the time today.

Yusuf Wadee: Thank you.

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. The information above does not constitute financial advice in term of FAIS. Consult your financial advisor before making an investment decision. Past performance is not indicative of future performance. For more information, visit www.satrix.co.za. 

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