Friday, December 27, 2024
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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

    Listen to the show using this podcast player:

    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 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.

    Novak Djokovic: pyramid-powered?

    Dominique Olivier
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    Novak Djokovic: pyramid-powered?

    Pyramids? In Bosnia? One man wants the world to believe it’s true – and a little pushback from the scientific community isn’t doing much to deter his growing band of enthusiasts. 

    If you believe one version of the story, then the area of Visoko in central Bosnia and Herzegovina is dotted with naturally-occurring (if slightly odd-looking) hills. If you believe the other version, then this area is actually home to some of the largest and oldest manmade pyramids in the world.

    The hills have lies

    Located just northwest of Sarajevo, the Visoko area boasts a rich history, having served as Bosnia’s capital during the Middle Ages. Atop the nearby Visočica hill, you’ll find the ruins of a medieval fortress, itself built on the remains of earlier Roman observation posts, which were built on even older settlements. It’s a classic case of history piling up like a stack of old books – except this time, with flatiron hills as the backdrop.

    According to geological experts like Paul Heinrich of Louisiana State University, these flatiron formations are nothing extraordinary, popping up all over the globe, from Vladivostok’s “Russian Twin Pyramids” to plenty of other spots in the region. But in 2005, a new and decidedly less academic narrative emerged, thanks to one Semir Osmanagić. A businessman with a flair for the dramatic, Osmanagić launched a media campaign claiming Visočica hill and its neighbors weren’t just natural formations, but part of a sprawling ancient pyramid complex. And not just any pyramids – these were, according to him, crafted by the Illyrians somewhere between 12,000 BC and 500 BC. Or, depending on which interview you catch him in, by a culture going back a staggering 34,000 years.

    Osmanagić’s claims don’t stop at the surface. He asserts that a network of tunnels – dubbed the Ravne tunnels – snakes beneath the hills, covering almost four kilometres. But the real pièce de résistance? Osmanagić believes the largest hill, which he’s dubbed the “Pyramid of the Sun,” emits “standing waves” that supposedly travel faster than light, providing evidence of a “cosmic internet” for intergalactic communication. Yes, you read that right – Wi-Fi for the cosmos.

    It’s not just the “Pyramid of the Sun” that’s been rebranded. Nearby hills now sport equally evocative names like the “Pyramid of the Moon,” “Love,” “Earth,” and “The Dragon,” courtesy of Osmanagić. If this sounds to you like something out of a fantasy novel rather than a geology textbook, you’re not alone.

    In 2006, Osmanagić shared that an international squad of archaeologists from Australia, Austria, Ireland, the UK, and Slovenia had joined his efforts to excavate and explore the pyramids. Several of the named archaeologists denied any involvement and said they had never set foot on the site. An “Oxford archaeologist” that Osmanagić mentioned turned out to be an unqualified undergraduate. His foundation’s website boasted the backing of a British Member of Parliament, though the named individual didn’t match any actual sitting MP.

    Speaking of sceptics

    The so-called “Bosnian pyramids” have faced sharp criticism from the academic community, with the European Association of Archaeologists branding the project a “cruel hoax”. Scholars are not just sceptical – they’re concerned about the harm being done to genuine archaeological and paleontological treasures in the area. Among the casualties are a medieval Bosnian castle, Roman fortifications, and other ancient remains that risk being overshadowed – or outright destroyed – by Osmanagić’s controversial digs.

    Since kicking off excavations in 2006, Osmanagić has gone so far as to reshape one of the hills to resemble a stepped pyramid, a move that hasn’t exactly won over experts. In fact, many academics have called for an immediate halt to government funding for the project, arguing that the ongoing disruptions are doing more harm than good to the region’s authentic historical resources.

    According to Nadija Nukić, a former employee at one of Osmanagić’s archeological parks, some of the “ancient carvings’ on stones at the site might not be quite as old as advertised. In an interview with a Bosnian newspaper, Nukić claimed that the carvings were added by Osmanagić’s own team after the stones were unearthed. Unsurprisingly, Osmanagić has denied the accusation, standing by the authenticity of the inscriptions and his interpretation of their origins.

    All those in favour

    Despite the skepticism of scientists and experts worldwide, the Bosnian Pyramid claims have found support closer to home. Local authorities have funded Osmanagić’s excavations and even arranged school trips to the hills, where children are introduced to this speculative version of their heritage. The site has also become a tourist hotspot, drawing curious visitors who are eager to see what all the fuss is about.

    Osmanagić claims the site got off to a roaring start, drawing in 200,000 tourists during its first year. Buoyed by this early interest, he sought funding from Malaysian investors in 2006 to build an archaeological park around the so-called pyramids. His ambitions didn’t stop there – he also pitched plans for similar parks around other “ancient monuments”, all of which scientists firmly identify as natural features. Say what you want about Osmanagić, but at least he knows how to stick to a theme. 

    While attendance at the Bosnian hills has dipped from its early heyday, the souvenir sellers stationed near the site still report steady business. And Osmanagić has doubled down on diversifying the experience, introducing events designed to heighten the site’s spiritual appeal. Meditation sessions in the Ravne tunnels are a regular feature. 

    In August 2016, Osmanagić claimed 5,000 visitors had come to the archaeological park since June of that year. In the same year, his foundation expanded the operation with Ravne 2 Park, which now attracts tens of thousands of visitors annually. The park has gained the support of both the Visoko municipal government and the Zenica-Doboj canton, with the Visoko municipal council officially designating it as a park of significance. It’s not just tourists who frequent the area; locals and visitors from nearby towns also make their way to Ravne 2. 

    Then of course, there’s a certain famous face that drops in quite frequently to draw from the pyramid’s mystic power. 

    Enter Novak Djokovic

    Over the past few years, tennis GOAT Novak Djokovic has become a regular visitor to Osmanagić’s archaeological park in Visoko, often turning to the site during both the highs and lows of his career.  

    In July 2020, during the pandemic backlash surrounding his Adria Tour (where several players tested positive for COVID), Djokovic visited the Pyramid of the Sun to find some mental reprieve. Just a few months later, after a dramatic disqualification during the US Open round of 16, he returned to the park for another reset.  

    By 2021, the Serbian tennis legend appeared to make the park part of his pre-tournament routine, visiting Ravne 2 in Visoko ahead of his victorious runs at the 2022 French Open and Wimbledon.  

    Perhaps the clearest indication of how much Djokovic values the site came in January 2022. After the highly publicised Australian visa debacle that saw him deported from the country, Djokovic sought solace once again at the archaeological park. For the record-breaking 24-time Grand Slam champion, it was a place to mentally and physically recharge after one of the most challenging experiences of his career, and he was often spotted meditating in the excavated tunnels under the hills. 

    In July 2022, the archaeological park unveiled two new tennis courts – one hard surface and one clay. Fresh off his 2022 Wimbledon victory, Novak Djokovic was there to mark the occasion, delivering a speech in which he shared his vision of a generation of “next level” tennis players who would be trained at the cosmically powered, pyramid-adjacent courts. 

    Does drawing strength from a cosmic pyramid count as doping? I’m not quite sure – but I’ll be keeping an eye on any superpowered tennis players making their debut out of Bosnia in the coming years. 

    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.

    UNLOCK THE STOCK: TWK

    The Finance Ghost
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    UNLOCK THE STOCK: TWK

    Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

    We are grateful to the South African team from Lumi Global, who look after the webinar technology for us.

    In the 46th edition of Unlock the Stock, TWK returned to the platform to talk about the recent performance and strategic focus areas for the group. The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.

    Watch the recording here:

    GHOST BITES (AECI | Growthpoint | HCI | Nampak | Pick n Pay | Sanlam – Santam – MultiChoice | Spar | Tharisa | Transaction Capital | Trematon)

    The Finance Ghost
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    GHOST BITES (AECI | Growthpoint | HCI | Nampak | Pick n Pay | Sanlam – Santam – MultiChoice | Spar | Tharisa | Transaction Capital | Trematon)

    AECI has stabilised its normalised EBITDA (JSE: AFE)

    The mining business is where the pressure currently sits

    AECI describes 2024 as a year of transition. They’ve released an update for the ten months to October, which tells you that they want to keep the market informed on how things are going. This is typical behaviour when a company is going through a turnaround.

    Turnarounds come with all kinds of non-recurring expenses as groups reshape themselves and make changes. It’s therefore also typical to see the use of normalised profit measures, as management teams try to tell the story excluding the once-offs.

    For the ten months, AECI’s revenue is down 4%. Mining is the biggest part of the business and was down 5%, while the Chemicals side saw revenue fall 4%. Despite this, normalised EBITDA fell 1% and normalised profit from operations is down 4%.

    In case you’re curious, profit from operations without the normalisation adjustments fell by 29%.

    On the balance sheet, the good news is that net debt fell from R5.2 billion to R4.8 billion. Gearing is therefore within the guided range. Free cash flow is a far less encouraging story, falling dramatically from R1.47 billion to just R82 million. It’s still positive, at least.

    The noise in the numbers isn’t over yet. They expect to recognise some substantial impairments on businesses like AECI Schirm and AECI Much Asphalt.

    Although normalised profits may have stabilised, the AECI share price is down 16% this year. That performance looks even worse when you compare it to the general exuberance in the market.

    Growthpoint is reworking its property exposure – especially in South Africa (JSE: GRT)

    Focusing on the right sectors is key to success

    Growthpoint has always been the scale player in the local property game, with a portfolio that gets you as close as possible to a view on property in South Africa as a whole. They also have substantial offshore interests. Thanks to the pandemic and the general trends in South Africa in particular, a broad portfolio needs to become a more focused portfolio to drive shareholder returns.

    The strategy in South Africa is to decrease exposure to the office sector, sell older industrial assets and get out of non-core retail assets in deteriorating CBDs. Sounds sensible, doesn’t it? I wouldn’t want to own any of those things either. They have targeted R2.8 billion in disposals and they expect to invest R2.2 billion (both numbers are references to FY25) in the core local portfolio, focusing on modern logistics and retail investments, especially in the Western Cape. Again, that’s very sensible.

    The V&A Waterfront is so important that it gets a separate mention, with Growthpoint predicting “significant growth” in the next 3 to 5 years. As someone who absolutely loves living in Cape Town, I couldn’t agree with this more.

    Internationally, Growthpoint is simplifying and optimising. A good example is the Capital and Regional deal that is being implemented in early December, giving Growthpoint exposure to a larger UK platform through NewRiver.

    The announcement also gives some numbers for the three months ended September. Vacancies have improved in South Africa from 8.7% to 8.2%. Renewal rates improved from -6.0% to -0.4%, so the negative reversions are nearly a thing of the past. This has come at the expense of the lease renewal success rate, though. Rental escalations are at 7%, so that protects Growthpoint against inflationary impacts in property operating costs.

    It says something about the long tail of unappealing properties in the Growthpoint portfolio that the retail portfolio had negative reversions of -0.5%. They’ve had some non-renewals as well as major malls in Gauteng. They have lots of cleaning up to do here.

    In the office portfolio, they note that this is the first quarter post-COVID where tenants haven’t reduced space. The return of traffic in the mornings certainly suggests that people are no longer Staying Home and Staying Safe from Monday to Friday. Rent reversions in the office portfolio were -4%, a significant improvement from -14.8% in FY24. They do expect this to worsen in coming months though to mid- to high-single digits, so be careful of getting excited about seasonal improvements here.

    In the logistics and industrial sector, vacancies are down to 4.5% overall. The coastal regions are popular, with extremely low vacancies. Here’s a great statistic for you: the Western Cape achieved positive reversions of 8.8%, while Gauteng and KZN are running at negative reversions of -1.8%!

    There are many more details in the announcement for those who want to read everything. I only have space for one more stat: a spectacular 20% growth in EBIT at the V&A Waterfront. The area is booming, with average daily rates at hotels in the area up 35% vs. the same period last year.

    Despite all the positive momentum, Growthpoint still expects distributable income per share to decrease by between 2% and 5% for FY25. They attribute this to prevailing high interest rates. Of course, the not-so-pretty parts of the Growthpoint portfolio aren’t helping either, but at least they are doing something about that.

    HCI sees a huge knock to earnings – and the oil and gap business is only part of it (JSE: HCI)

    The group hasn’t enjoyed the SA Inc returns that were on offer this year

    Hosken Consolidated Investments is the mothership for a portfolio that touches many different sectors. Some of the underlying exposures are listed, like eMedia, Frontier Transport, Deneb and Tsogo Sun. Others are unlisted, like the oil and gas prospecting business.

    The six months to September won’t go down as a happy time for HCI. HEPS tanked 46% from 971 cents to 529 cents. Even a dividend of 50 cents per share (vs. nothing in the comparable period) won’t make anyone feel better. HCI’s share price is down 12% this year, missing out on the upswing that many local groups have enjoyed.

    The major culprits? Well, oil and gas prospecting is certainly the worst segment in this period, with a headline loss of R264 million vs. a loss of R31 million last year. That’s obviously an extremely risky business that will either lose a lot of money or make an absolute fortune. It’s more of a gamble than the gaming business itself, with Tsogo Sun’s results having prepared the market for a drop in that segment at HCI. Leaving aside the other listed exposures, the other drop worth noting is in coal mining, with headline earnings of R38 million vs. R133.5 million in the prior year.

    I must highlight that HCI’s share price is up 93% over five years, which means vs. a pre-pandemic base. You just wouldn’t say so by looking at these specific numbers. They are playing the long game.

    Nampak gives further details after its trading statement (JSE: NPK)

    Major shareholders requested more information ahead of full results

    Nampak released a trading statement earlier this week that indicated a substantial swing into profitability for the year ended September. It was light on any other details though, which seems to have frustrated major shareholders.

    After major shareholders put in a request to Nampak to release more information before the results presentation on 2 December, the company has put out another announcement that gives more information on the second half of the year in particular.

    The first half included a once-off gain of R290 million on a restructure of post-retirement medical aid benefits, so that obviously flattered the first half relative to the second half. There were also some non-recurring costs in the second half, ranging from cybersecurity costs and financing fees through to the delay in commissioning of the Springs Line 2. Whilst some of the costs are non-recurring in nature, others sound very much like the risks of doing business as a complicated group across several countries.

    The share price has been on quite the rollercoaster ride, initially dropping sharply based on the trading statement and then clawing much of it back after this announcement. Any investors who expect a smooth path at Nampak with no major operational issues need to do some serious thinking about how unrealistic that expectation is, given the complexities involved in manufacturing.

    Pick n Pay’s two-step recapitalisation is complete – now they have to stop losing money! (JSE: PIK)

    The hard work starts now

    In the past nine months, Pick n Pay has tried to fix several years worth of mistakes. The thing is, nothing is actually fixed yet – they’ve simply raised enough money to give them a fighting chance.

    Step one in the plan was the rights offer, which was strongly supported by the market. I must point out that when institutional investors are that deep in the hole, persuading them to roll the dice one more time isn’t the most difficult task. People thrive on hope.

    Step two was the Boxer IPO, which was a resounding success because the shares in Boxer were priced in such a way that the IPO couldn’t possibly fail. This is proven not just by a common sense look at the implied multiples, but by the sheer demand for the shares from institutional investors in the pre-IPO raise and the general market on the first day of trading. Things have played out in line with what I’ve been writing in Ghost Bites since the IPO pricing was first announced.

    I did enjoy Pick n Pay commenting that they can now repay all their long-term debt and “convert interest costs to interest earnings” – investors definitely didn’t put in capital in the hope of earning interest. They want to see the capital deployed into the business in a way that generates an adequate return on capital.

    My view remains that the easy part of the turnaround is behind them at Pick n Pay. The real work starts now. It will not surprise me to see Pick n Pay selling more shares in Boxer once the initial lock-up period concludes. On the plus side, they need to achieve this turnaround in a vastly more favourable macroeconomic environment in South Africa than anything we’ve seen in the past decade, so at least they have a chance.

    Sanlam and Santam: each playing to their strengths in the MultiChoice insurance transaction (JSE: SLM | JSE: SNT | JSE: MCG)

    Sanlam is taking the life insurance side and Santam the general insurance

    Back in June this year, Sanlam announced that its subsidiary Sanlam Life would be acquiring 60% in MultiChoice’s insurance business NMS Insurance Services for R1.2 billion in an upfront payment and R1.5 billion in potential earn-outs. The earn-out is based upon the gross written premium that will be generated in the year ending December 2026.

    There are two separate classes of shares. The ordinary shares are linked to the life insurance products and the A1 ordinary shares are linked to the general insurance products.

    It therefore makes sense that Santam (in which Sanlam is the controlling shareholder) has agreed to acquire Sanlam’s 60% interest in the A1 ordinary shares for an initial amount of R925 million and a potential earn-out, although the expectation is that the earn-out on this part of the book will be limited. This leaves Sanlam with the life insurance exposure only, which is sensible, while allowing Santam to focus on device insurance into the MultiChoice subscriber base.

    This is a small related party transaction, so an independent expert needed to opine that the terms are fair to Santam’s shareholders. Ernst & Young has provided such an opinion.

    What is the true cost of the SAP disaster at SPAR? (JSE: SPP)

    At least the business (excluding Poland) is heading in the right direction

    Spar has released results for the year ended September 2024. They have been impacted by a number of underlying factors, ranging from own-goals like the SAP implementation disaster in KZN through to macroeconomic shifts like the stronger rand the impact this has on translation of offshore results.

    Focusing just on continuing operations for now (i.e. excluding Poland), group turnover was up 4%. Operating profit thankfully jumped 15.1% and HEPS came in 11.1% higher. Despite the obvious improvement here, there’s still no dividend. This tells you something about the struggles being faced.

    The big win is that group net borrowings reduced by R2 billion from R11.1 billion to R9.1 billion. This includes the R2 billion bridge facility needed to get the Poland disposal across the line. In case you’ve forgotten, they are basically paying someone to drag that business away. When you consider that Poland made a loss before tax of R1.27 billion for the year, it makes a lot more sense.

    To give context to the sizes of the other businesses in the group, Southern Africa made profit of R1.1 billion, Ireland came in at R925 million and Switzerland is much smaller at R84 million.

    Switzerland is the next worry for me. There’s debt of R2.8 billion in that thing, which looks huge compared to profits. For context, Ireland is over 10x bigger in profit and has R2.15 billion in debt. The Swiss business has been under pressure and I hope it doesn’t turn into the next Poland. A drop in turnover of 6.2% in local currency isn’t encouraging.

    Southern Africa is being impacted by the SAP issues, with gross margin down from 8.7% to 8.5%. At least market share has stopped going backwards, impacted by stock availability issues and of course the strength of a key competitor like Shoprite. At a time when SPAR should’ve been feasting on the carcass of Pick n Pay, they’ve been worrying about their own system issues. The true cost of the SAP implementation must be enormous.

    Will there be further corporate activity to simplify the group? They are busy with a strategic review in Europe where they are focused on return on capital, so anything is possible here.

    Tharisa’s earnings are nearly flat despite the agony in the PGM sector (JSE: THA)

    The exposure to chrome really helps

    To understand Tharisa’s results for the year ended September 2024, you need to view them in the context of PGM price movements: platinum -3.9%, palladium -37.1% and rhodium -50.3%. In contrast, chrome price increased 13.6%. These price movements are all quoted in US dollars.

    Miners focused purely on PGMs have had an horrendous time, whereas Tharisa saw HEPS drop by just 0.7% to US 28.1 cents. This is thanks to the exposure to chrome, which generated $133 million in gross profit in this period vs. just $43.2 million from PGMs. Fascinatingly, the gross profit margins are similar: chrome at 27.1% and PGMs slightly higher at 28.0%!

    This shows how lucrative PGMs can be if things improve. It’s just very helpful to have the buffer of chrome along the way. Tharisa is also seen as a solid mining operator, with PGM production relatively flat year-on-year and chrome sales volumes up 15.7%. They are growing in the right commodity.

    Transaction Capital has flagged challenges at Nutun (JSE: TCP)

    This is worrying – Nutun is all they have left!

    After the collapse of Transaction Capital, my brokerage account reflects my highly enjoyable stake in WeBuyCars (and long may that good news continue), as well as the Transaction Capital shares as an eternal hangover in my portfolio. I’m keeping them as reminder of why I do sometimes need to sell things at silly valuations, although it really is hard to walk away from such a winner. I think the trick is a simple business model, something that WeBuyCars has and Transaction Capital certainly doesn’t have. When a simple model runs hard, you can see whether that run is justified. On the trickier stuff, the risks get exponentially higher.

    Personal learnings and the benefit of hindsight aside, the latest news from Transaction Capital is a trading statement for the year ended September 2024. The numbers are all over the place, with multiple corporate transactions in this period and loads of restructuring costs. They’ve guided a headline loss from continuing operations of between -R147 million and positive R9 million. The midpoint of that range is clearly negative, so we can safely assume a loss here.

    Including all operations (like catastrophe SA Taxi), the headline loss is R2.3 billion to R2.5 billion. I will never stop being astounded by how that business collapsed.

    What worries me more than these numbers is the narrative around Nutun, the core business process outsourcing business that will be the only thing of any value left behind in Transaction Capital. They’ve had a poor year it seems. There’s a new management team in place and they have great ambitions for this business, but we’ve heard that before from Transaction Capital and we all know how that turned out.

    A poor year for Trematon – and a significant drop in value at Generations (JSE: TMT)

    The intrinsic net asset value per share has decreased substantially

    Trematon is an investment holding company with a wide range of business interests. The right metric to look at is therefore the intrinsic net asset value (INAV) per share, or management’s view on what the group is worth. This is far more useful than metrics like revenue or operating profit, which are impacted by the size of the underlying stakes and how they are accounted for.

    Of course, you can always just follow the cash. The total distribution per share is down 28% for the year ended August. That gives you a clue about what might be coming next.

    The INAV per share has dropped by 19%. One of the contributing factors is that a large distribution to shareholders was paid in December 2023, contributing to a R42.5 million decrease in cash. For context, the INAV in 2023 was R992 million. We still have to explain almost another R160 million worth of decrease, so there are clearly challenges in the underlying businesses.

    The largest contributor to INAV is Generation Education, where the INAV dropped by R60 million due to lower student number growth estimates in the valuation. Ouch. ARIA Property Group is down R35 million to align to the price at which that stake is being sold. There are negative moves in other businesses as well, generally due to diminished valuations based on performance.

    The INAV per share is R3.55 and the current share price is R2.20. Although there’s still a significant gap there (as is typical of investment holding companies), the trajectory is a concern.

    Nibbles:

    • Director dealings:
      • A director of Capitec (JSE: CPI) exercised options and received 923 shares in the process. This works out to over R3 million in shares. They are net equity settled and the option strike prices were way below the current market price. Capitec has created many rich employees along the way!
    • Brikor (JSE: BIK) has released its results for the six months to August. Although revenue increased by 18.1%, EBITDA fell by 37.6% and HEPS took a 59.3% knock. The problem is the coal segment, which slipped into a slight loss-making position vs. operating profit of R9.8 million in the comparative period. The bricks segment also went backwards, with operating profit of R16.5 million vs. R17.1 million in the prior period.
    • Altvest (JSE: ALV) has released its first set of interim results as a listed company, dealing with the period ended August. Revenue was just R3 million and the loss attributable to ordinary shareholders was R6.2 million. These are early days, with the company aiming to list between two and four new investment instruments annually. There are currently three classes of issued preference shares in addition to the ordinary shares.
    • AYO Technology (JSE: AYO) has released a trading statement for the year ended August. The bad news is that the company is still making losses. The good news is that the losses have gotten smaller. For the year ended August, the headline loss per share is expected to be between -89.46 and -54.16 cents, compared to -176.46 cents in the prior year. They attribute this to cost-cutting initiatives and better margins. Alas, on a share price of R0.49, this puts the company on a P/E of worse than -1x!
    • At a general meeting to vote on the proposed B-BBEE deal, Coronation’s (JSE: CML) shareholders gave an almost unanimous approval for the transaction. They will therefore move forward with meeting the remaining conditions and implementing the deal.
    • Murray & Roberts (JSE: MUR) chairman Suresh Kana has resigned, as has Jesmane Boggenpoel. Clifford Raphiri has been appointed as interim chairman of the board. Given the path that Murray & Roberts now needs to walk, that’s going to be a challenging role.
    • After the latest cancellation of shares that were repurchased over the past 18 months or so, Sabvest (JSE: SBP) has pointed out to the market that the current number of shares in issue is 26.7% off the peak number of shares in issue. Buyback strategies can be powerful things when they are executed properly.

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

    Marylou Greig
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    0
    Who’s doing what this week in the South African M&A space?

    Exchange-Listed Companies

    In June, Sanlam Life (Sanlam) acquired a 60% stake in MultiChoice’s insurance business – NMS Insurance Services (NMSIS) – for an upfront payment of R1,2 billion and an earn-out payment of up to R1,5 billion. The NMSIS shares comprise two separate classes of shares, the Ordinary Shares and the AI Ordinary Shares, which entitles the holder to distributions related to the life insurance products. Santam has entered into an agreement to acquire from Sanlam Life its 60% interest in the A1 Ordinary Shares in NMSIS for an initial R925 million in cash with a potential deferred earn-out payment of R1,5 billion in respect of both the A1 Ordinary Shares and the Ordinary Shares.

    Old Mutual Private Equity (Old Mutual) has concluded a deal with UK retail sport group Frasers plc, which trades predominantly under the Sports Direct brand. OMPE along with management will exit its investment in Holdsport for an undisclosed sum. Holdsport has a total of 88 stores across South Africa and Namibia and a rapidly growing e-commerce offering. Holdsport’s network will act as a platform to expand Sports Direct across the region. Financial details were undisclosed.

    Anglo American has agreed to sell its remaining steelmaking coal portfolio in Australia to Peabody Energy for up to US$3,8 billion. The purchase consideration comprises an upfront cash consideration of $2,05 billion at completion, $725 million deferred over the next four years and a potential $550 million in a price-linked earnout. The deal follows Anglo’s recently announced disposal of its stake in Jellinbah for c.$1,1 billion.

    Pamstad, a Botswanan subsidiary of CA Sales, has received the Competition Authority of Kenya’s approval to acquire Trapin, a Kenyan company involved in trade marketing, branding services and distribution of various FMCGs. The proposed transaction will, according to the parties, provide growth capital to the target to expand its business operations in Kenya and Africa.

    Rex Trueform has increased its stake in Belper Investments, an unlisted property fund focused on the acquisition, ownership and management of industrial properties within the Western Cape. The Group has acquired a 6.99% stake for R4,7 million increasing its shareholding in Belper to 79.02%.

    Equites International, a UK subsidiary of Equites Property Fund, has concluded and agreement with Amazon UK Services to dispose of a distribution centre in Peterborough for a cash consideration of £38,5 million. This equates to a transaction yield of 5.17%. The property is currently let to Amazon with 12 years remaining on the lease.

    Suspended Conduit Capital has disposed of its 51% interest in Century 21, South Africa for R7,2 million to other shareholders of Century 21. Operating under an international franchise agreement with Realogy Group, Century 21 is a South African property agency franchisor with 51 franchises.

    MAS plc has issued a cautionary note to shareholders advising that it has entered into negotiations with Prime Kapital regarding the acquisition by MAS of Prime Kapital’s 60% interest in PKM Development (DJV). This would give MAS full ownership of the commercial assets in the DJV. If concluded, the acquisition will effectively terminate the DJV arrangements, with MAS and Prime Kapital continuing their respective investment strategies independently.

    In its interim results, Deneb Investments disclosed that it had acquired an 80% shareholding in Puretech, a company based in the UK for a purchase price of £800,000. The sellers have the option to sell the retained 20% before end-December 2029.

    Zeda has disposed of its interest in Vuswa Fleet Services for proceeds amounting to R2,3 million.

    The suspensive conditions in the agreement between Accelerate Property Fund, Fourways Mall Shopping Centre developer Azrapart and MN Georgiou in respect of claims by Accelerate against the parties, were not fulfilled on time. The parties will engage to conclude a new agreement on similar lines.

    Unlisted Companies

    Harith InfraCo, a strategic partnership between Harith General Partners, Zungu Investments and Mergence Investment Managers, has acquired stakes in a range of energy, digital infrastructure and transport assets from the Pan African Infrastructure Development Fund (PAIDF). Stakes include shareholdings in assets such as Lanseria International Airport and the Kelvin Power Station. The assets were acquired for an aggregate $360 million (R6,5 billion).

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

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