A rerating of SA sovereign bond yields, a stronger ZAR, and sidestepping a fiscal slippage, have sparked optimism for a healthier national balance sheet. But structural challenges persist, impeding the potential for growth. In the latest episode of the No Ordinary Wednesday podcast, Investec Chief Economist Annabel Bishop and Treasury Economist Tertia Jacobs discuss the Finance Minister’s priorities ahead of the mini budget on 30 October.
As luck would have it, the industry suffered a negative swing just as Afrimat took a chance on the Lafarge deal
You need to be harder than cement to manage a business in this industry, as you simply never know when the cycle will bite you. Despite the uncertainty, you have to keep investing in new business lines and riding things out, hoping for decent returns when viewed with a long-term lens.
Historically, Afrimat has done a great job of this. That doesn’t mean that every period will be great, though. The six months to August 2024 are proof of this, with a low iron ore price and major infrastructure challenges locally, as well as pressure on local industrial customers and of course the losses at Lafarge in the early days of the turnaround.
Combine all these factors and you get the unusual outcome of revenue up 44.3%, yet HEPS crashing by around 80%. The jump in revenue is thanks to the Lafarge acquisition. The pain in HEPS was also driven by the Lafarge acquisition, along with a halving of operating profit in the Bulk Commodities segment. Although group operating profit increased 4% to R555 million, this was thanks to a bargain purchase gain related to the Lafarge deal of R263 million (the opposite of goodwill i.e. when you pay below net asset value for an acquisition). Bargain purchase gains, much like goodwill impairments, are excluded from headline earnings.
In terms of outlook, some of the challenges that hurt this period are looking better, like signs of life in the Lafarge turnaround strategy. They also expect local iron ore volumes to improve in the second half of the year. Notably, the GNU hasn’t yet resulted in an uptick in large infrastructure or development projects, a comment that echoes what we saw recently at PPC.
Anglo group companies released production and sales updates (JSE: AGL | JSE: AMS | JSE: KIO)
And yes, lab-grown diamonds continue to hurt De Beers
Let’s begin with Anglo American Platinum, currently the ugly duckling in the group although you would never say it with a 13.8% jump in the share price on the day! Any signs of life in the platinum sector will be met with celebration as everything has been so depressed. Even after that rally, the share price is down 21% year-to-date.
In terms of production, Anglo American Platinum managed 22% growth in refined PGM production for the third quarter despite a decrease in mined volumes. Sales volumes were up 16%, supported by higher production. Refined production guidance has been revised to 3.7 to 3.9 million ounces vs. 3.3 to 3.7 million ounces previously. That’s obviously good news. Further good news is that they are on track for the cost guidance range of R16,500 to R17,500 per PGM ounce, most likely at the upper end of the range.
Moving on now to Kumba Iron Ore, production fell 3% year-on-year but increased sequentially vs. the second quarter. Sales volumes increased 2% year-on-year but fell sequentially, so it follows a different shape to production volumes. That’s what happens when the logistics are so unreliable in terms of trains and ports. Not only is Transnet a source of uncertainty and usually disappointment, but the weather plays a role as well.
Despite Kumba literally curtailing its ambitions to align more with what Transnet is able to actually provide in infrastructure support, they still expect sales volumes to be towards the lower end of full year guidance of 36 to 38 Mt.
We end with the mothership – Anglo American itself. Aside from the obvious mentions of Anglo American Platinum and Kumba Iron Ore and how they roll up to group numbers, Anglo American is highly focused on copper at the moment (they are on track for full year guidance despite a planned closure in this quarter) and also highlighted another record quarter at Minas-Rio iron ore in Brazil.
As for De Beers, my thesis on rough diamonds continues to play out, with words like a “protracted recovery” and a reduction in rough diamond production in response to market conditions. Production fell by 25%. You can safely ignore the corporate spin here – the reality is that lab-grown diamonds have taken a chunk of market share, exactly as I expected.
Overall, there aren’t too many highlights in the Anglo group story right now. The share price is up 21% this year as the market has retained some of the gains linked to the excitement around a potential deal with BHP, even though it didn’t happen.
Cashbuild does indeed seem to have bottomed – there’s finally growth! (JSE: CSB)
I’m long Cashbuild and very happy to see this
I’ve written about Cashbuild extensively in Ghost Bites and elsewhere. The TL;DR is that the stuff that broke the business (high interest rates / poor consumer sentiment / prioritising loadshedding spending on solar) has all improved and should continue to improve. It therefore doesn’t require a leap of faith to think that Cashbuild should benefit.
In the first quarter of the new financial year, revenue is up 5%, with 4% from existing stores and 1% from new stores. Sales volumes were up 3%, so people are gingerly emerging from their caves of despair and spending on their properties once more.
Selling price inflation was 1.4% year-on-year, so that helps drive volumes as most people are getting increases ahead of that level.
Even battered P&L Hardware South Africa is up, with growth of 9%!
The share price is up 6.6%. More importantly, it’s up nearly 30% since the bonkers V-shaped drop in August that I treated like an early Christmas present. I love the markets, especially when they are kind to me.
Clicks looks incredibly strong (JSE: CLS)
Retail turnover growth and better margins have driven this outcome
In the results for the year ended August 2024, Clicks points out that the total shareholder return over the past 10 years has been a compound annual growth rate (CAGR) of 20.7%. That is extraordinary, which is why the group has a strong international shareholder base. As emerging market retail businesses go, Clicks is one of the best.
This is evidenced by growth in the dividend of a substantial 14.3% for this financial year, accompanied by return on equity of 46.4%. These are the kind of numbers that investors just love to see.
Growth is being driven by retail turnover, which increased 11.7% overall. Comparable store turnover was up 8.4%, with pricing up 6.3% and volumes 2.1%. This means that not only is Clicks expanding the number of stores and accelerating growth, but they are achieving excellent numbers in the existing store base as well.
Comparable retail costs grew 7.4%, so there’s margin expansion at store level. Total costs were up 12.5%, with store rollout and other costs running ahead of total turnover growth in this period.
The slower side of the business is distribution turnover, where UPD only grew by 3.3%. This highlights that much of the growth is in beauty and personal care products rather than pharmaceutical products. There’s nothing wrong with that for Clicks shareholders, as the better margins are made in the “front shop” anyway. At least there’s positive momentum in margins in medicine as well, with an increase in the regulated Single Exit Price and a resultant 70 basis points improvement in distribution margin.
With group trading profit up by 15.1% and headline earnings up 11.9%, these numbers are hard to fault. Clicks is a cash generating machine of note, with cash from operations of R6 billion and capital expenditure of R890 million. They plan to keep expanding in the 2025 financial year and I wouldn’t bet against another great set of results coming through, assisted by improved consumer spending as interest rates come down.
The share price spiked during the day and eventually closed only 1.6% higher. Year-to-date, the price is up 17.4%.
Datatec’s earnings are much higher and there’s a dividend (JSE: DTC)
This is despite a 5.5% dip in revenue
Datatec is a lesson in the importance of gross margin. Although revenue was down by 5.5%, a significant improvement in gross margin from 15.1% to 16.6% means that gross profit was up 3.5% on a net basis. Along with efficiencies in the expense base that led to EBITDA margin increasing from 2.9% to 3.9%, this was enough to drive EBITDA 27.2% higher and HEPS a beautiful 66.7% higher.
Now, some of this is due to accounting changes in products, in which only the gross profit is recognised on a net basis vs. the revenue and the cost of sales. That is why Logicalis International, by far the biggest part of the group, saw gross margin jump from 24.4% to 28.5% despite revenue being 10.9% lower.
Either way, EBITDA growth looks fantastic and the group declared an interim dividend of 75 cents per share, compared to no interim dividend last year.
That’s a great set of numbers that will no doubt have investors smiling!
Mantengu Mining is ever so slightly profitable – and angry about its share price (JSE: MTU)
This is an extremely odd narrative to be pushing
Mantengu Mining expects to report positive HEPS of between 1 and 2 cents for the six months to August. That’s a huge improvement vs. the loss of 10 cents in the comparable period, driven by a substantial uptick in chrome concentrate production.
Things are certainly looking better, with the company expecting production to get even better going forward.
This is a great story to be able to tell, so why is management saying outlandish things about the share price? This is worth repeating verbatim from the announcement:
“The Board continues to be of the opinion that its shares are being manipulated downwards and thus the company is pursuing both civil and criminal legal action. Mantengu’s wholly owned subsidiary, Langpan Mining Co (Pty) Ltd, has a JSE approved Competent Person’s Report with a valuation of R851 million using December 2021 market prices. This computes to R3.88 per Mantengu share and excludes Mantengu’s recent acquisitions of Meerust Chrome (comparable size) and Blue Ridge Platinum (Pty) Ltd, yet the current share price is trading at approximately R0.80 cents per share.”
If they can prove market manipulation, then all well and good. Personally, it sounds to me like someone needs to sit them down and explain that (1) markets aren’t fair and (2) companies trade at discounts to the directors’ valuation all the time, especially smaller companies on the market that are barely profitable.
If the shares are so wildly undervalued, then why not calm down on the capex and pursue share buybacks instead?
Comments like these bring the entire market into disrepute. If they don’t have absolute proof of manipulation, then the JSE should be stepping in here.
And by the way, since it closed 35% higher on the day, is that also manipulation? Or is it only manipulation when the price goes down?
A decent second half at Nu-World (JSE: NWL)
Here’s another sign of improved consumer sentiment
Nu-World isn’t a business that you’ll hear about very often. The group is focused on consumer goods, specifically of a more durable nature like appliances. Things got a lot better in the second half of the year, with durable goods sales improving for the first time since mid-2021 based on retail statistics. This can only get better from here as lower interest rates start to have a meaningful impact in the economy.
For the full year ended August, Nu-World managed revenue growth of 8.3% and HEPS growth of 7.1%. When you consider that HEPS was down 5% for the interim period, that’s a huge positive swing in the second half of the year.
This confidence resulted in an 8.3% increase in the dividend and thus a higher payout ratio. Although there are international businesses in the mix here and this isn’t a pure-play on South Africa, these are encouraging signs regarding local sentiment.
Spear sees positive leasing momentum (JSE: SEA)
Tenant sentiment seems to have improved
The positive impact of the GNU is slowly making its way through the economy. It will take longer to land in an uptick in construction projects (as discussed in Afrimat further up), but it has at least had an impact on general business confidence. This leads to more positive decisions on things that are less daunting than large construction projects, like simply entering into a lease. Spear REIT has highlighted optimism in the tenant base and the conclusion of leases where tenants were uncertain before the GNU and then felt inspired to put pen to paper.
This was also a major factor in the group achieving positive reversions of 3.57% for the six months to August, which means new leases are at higher rental rates than the expired leases. Notably, reversions were still negative in the commercial (office) portfolio at -2.19%. Occupancy rates in the office portfolio improved considerably though, so positive reversions can’t be far away.
Overall, Spear managed growth in distributable income per share of just over 2% for the interim period. The distribution per share is up 3.1%, so the payout ratio increased slightly to 95%.
The loan-to-value was under 24% as at the end of August but that was before the Emira deal closed. As Spear announced earlier in the week, this has increased to between 31% and 33% now that the Emira deal has concluded.
The interim distribution represents a six-month yield of 4.1%. You have to be careful just doubling this as an annual yield when there are so many changes to the underlying Spear portfolio, but it gives you an idea at least.
Nibbles:
Director dealings:
The CEO of Fortress Property Fund (JSE: FFB) has pledged shares worth R30.6 million for a loan facility with a limit of R23 million. This isn’t a trade in the traditional form, but can lead to trades if the debt facility is used and something goes wrong. It also shows you how listed company executives use their shares to gain access to financing.
A director of a major subsidiary of OUTsurance (JSE: OUT) acquired shares worth nearly R5 million.
A senior executive of British American Tobacco (JSE: BTI) and a close associate of that executive sold shares worth £73k (roughly R1.7 million)
It would be nice to see better disclosure from DRDGOLD (JSE: DRD) on director dealings, as the company pools share awards, sells shares and allocates the sale based on how much each director wanted to sell. This doesn’t tell us to what extent directors sold only the taxable portion of each award or the entire thing.
Vukile (JSE: VKE) released a cautionary announcement that subsidiary Castellana Properties has entered into negotiations to acquire a shopping centre in Spain. The growth story looks set to continue there, although there’s no certainty of this particular deal going ahead of course.
Salungano Group (JSE: SLG) is currently suspended from trading and expects to release interim results by the end of the month. They won’t be pretty, with a headline loss per share of between 88.04 cents and 91.96 cents, much worse than 19.64 cents in the comparable period.
Pat Quarmby is stepping down as chairperson at KAP (JSE: KAP), with Johan Holtzhausen stepping up from lead independent director to chairperson.
If you are a South32 (JSE: S32) shareholder and looking to learn as much as possible about the company, then they have released the CEO and chair addresses from the AGM over SENS. It won’t give you much in addition to the financial results that the AGM relates to, but by all means give them a read for additional information.
HOSTAFRICA has made its fourth investment in West Africa, announcing the strategic acquisition of Nigerian web hosting provider, webmanager.ng. for an undisclosed sum.
Kenyan electric bus solution provider, BasiGo, has raised US$42 million in a combination of debt and equity. The US$24 million Series A equity raise was led by Africa50 and included Novastar Ventures, CFAO Kenya, Mobility54, SBVI Investment, Trucks VC, Moxxie Ventures and Susquehanna Foundation. The Series A unlocked a US$10 million loan facility from the U.S. Development Finance Corporations and an additional US$7,5 million debt facility from British International Investment.
Morocco’s Colis.ma has closed a pre-seed funding round of US$300,00. The startup, which specializes in cross-border logistics, received the funding from Witamax.
Madica has invested in Nigerian climate tech startup, Earthbond. The company’s marketplace connects SMEs with solar providers and financing options, while generating carbon credits to further reduce costs and support sustainability.
Vantage Capital has fully exited its investment in Egyptian hotel owner and operator, PickAlbatros Hotels. Vantage provided the hotel group with US$18,4 million in December 2020 during the Covid-19 pandemic when the hospitality industry was under sever strain.
Aya Data, a Ghanian B2B AI solutions provider has announced an oversubscribed seed round raise of US$650,000 in equity and US$250,000 in debt. The round was led by 54 Collective and included several angel investors.
In Morocco, Globex has acquired 100% of Logic Transport, with Amethis providing financial backing. The deal marks Globex’s expansion in the road transport and transit segment.
Nigerian B2B ecommerce firm, OmniRetail Technology, has acquired Traction Apps, a payment solutions provider for small merchants in Nigeria. Financial terms were not disclosed.
Raya Holding for Financial Investments announced a US$40 million investment in its portfolio company, Raya Foods. The investment, in partnership with Helios Investment Partners, will see Helios take a 49% in Raya Foods, the largest exporter of frozen strawberries in Egypt.
Nampak Southern Africa Holdings subsidiary has announced the sale of its 51.43% stake in Nampak Zimbabwe to TSL for up to US$25 million.
This article is provided and brought to you by Investec Structured Products
As the global economy shifts from a high inflation and high interest rate environment into the next interest rate cutting cycle, global investors are casting their net wider in their search for returns.
Stock valuations in the U.S. are at all-time highs despite the higher interest rate environment, with momentum crowding and stock market concentration at multi-decade extremes. Developed markets (DM) outside the U.S. also face headwinds on multiple fronts, with a sluggish eurozone recovery and structural constraints in the UK.
In this environment, investors need to look outside these markets for better returns, with many boosting allocations to emerging markets (EM) following positive shifts in the global growth momentum story.
Supportive tailwinds have brought EM equities back in favour, despite the inherent risks, with a weakening U.S. dollar (USD), global monetary easing, rising income levels and the associated increased demand for products and services supporting corporate earnings.
These regions also constitute a larger share of economic activity and are forecast to deliver higher GDP per capita growth than the developed world.
Consequently, EM equities outperformed DM equities in the third quarter (Q3) of 2024, gaining 8.7% versus 6.4%. This marked two consecutive quarters of EM outperformance for the first time since 2020.
Asia (ex-Japan) was the top-performing major region, returning 10.6% over the quarter. The positive shift began as the Federal Reserve (Fed) cut rates in mid-September, and outperformance accelerated in the final week of the quarter as China unleashed a series of stimulus measures.
However, a significant shift has occurred in the Asian market, with India rising as the next regional powerhouse amid the structural and regulatory challenges that have hamstrung the Chinese economy in recent years.
India’s value proposition boasts numerous facets. For starters, it is one of the fastest-growing EM economies in the world. India’s quarterly real GDP growth has averaged 6% year-on-year over the past decade, which is higher than the global (3%) and emerging market (4.2%) averages over the same period.
The International Monetary Fund (IMF) projects that GDP growth in India will hit 7% in 2024/2025 and average 6.1% over the next five years. This growth rate will make it the world’s third-largest economy by 2027 after the U.S. and China, with current annual GDP expected to double from $3.5 trillion to $7 trillion by 2030.
The Reserve Bank of India (RBI) has also kept inflation in check by expanding fiscal policy and implementing proactive monetary measures that have stabilised the economy. The RBI is expected to prioritise growth with additional rate cuts in early 2025, alongside additional economic reforms aimed at improving the business environment.
The other prolific regional growth driver is rising consumption among the world’s largest population. According to the United Nations, India officially surpassed China as the world’s most populous nation in April 2023, with around 1.43 billion citizens.
This population dividend includes a young (average age of 28), educated and expanding workforce, offering a source of cost-effective labour that will help sustain economic growth.
Moreover, the thriving Indian economy supports diverse industries, including growth sectors like technology and IT services, health care and pharmaceuticals, and renewable energy. Robust and highly competitive manufacturing and business process outsourcing sectors make the country globally competitive while abundant natural resources provide a strong foundation for industrial development and export-oriented industries.
These supportive factors have helped the Indian equity market grow steadily over the past decade. In 2024, the market capitalisation of the National Stock Exchange of India (NSE) surged past $5 trillion, making it the fourth-largest market worldwide and the second-largest emerging market after China.
On the back of strong economic fundamentals, the Indian stock market has emerged as a top global performer. For instance, since the low of the pandemic in March 2020, the blue-chip NSE Nifty 50 has climbed over 200%.
Much of the recent momentum in the Indian equity market is attributed to increased liquidity, with local flows rising due to increasing affluence and access among domestic retail investors.
Rising foreign capital inflows have also bolstered market performance, with small-cap inflows driven by a strong IPO boom among Indian SMEs over the last five years, and record inflows from foreign institutional investors.
The Indian government has supported foreign direct investment by facilitating greater trust and certainty in the local stock market with a series of financial policy adjustments and reforms in recent years. For example, the listing rules of Indian exchanges have been improved to enhance the disclosure of financial information of listed companies.
Additionally, the Indian government has continued to relax restrictions on foreign investment in securities, including the relaxation of foreign shareholding ceilings, industry restrictions, and foreign exchange control, among others.
When considered in totality, India offers a compelling proposition for investors looking to boost their EM exposure and catch the upside potential, with a new Structured Product launched by Investec offering efficient access to the Indian stock market.
The JSE-listed Investec Rand India Accelerator offers 1.5x geared exposure to growth in the iShares MSCI India ETF over a 3.6-year term, capped at 40%, for a maximum return of 60% in rand.
The ETF tracks the large and mid-cap Indian market, covering 85% of India’s listed equity universe, and provides a high degree of capital protection to address the inherent risks associated with investing in EMs.
For more information on the Investec Rand India Accelerator, listen to the podcast with The Finance Ghost and Brian McMillan of Investec Structured Products below, or access the full transcript at this link.
In this episode of The Trader’s Handbook, Shaun Murison from IG Markets South Africa joined me once more to explore the fascinating and often misunderstood world of forex trading.
We broke down the complexities of currency pairs, leverage, and volatility while dispelling common misconceptions about the risks involved.
Whether you’re a seasoned trader or just starting out, this episode offers valuable insights into technical analysis, hedging strategies, and how to effectively trade forex using IG’s platform.
Listeners will also learn about the importance of building a solid trading system and why starting with a demo account is key to success.
Listen to the episode below and enjoy the full transcript for reference purposes:
Transcript:
The Finance Ghost: Welcome to episode nine of the Traders Handbook, my podcast collaboration with IG Market South Africa. As you’ve guessed, considering this is episode nine, there are eight other episodes that you should totally go and sink your teeth into. There really is a lot of great content we’ve talked about a lot, Shaun. We’ve done all kinds of things, from all the risk stuff – because obviously we try quite hard to remind people that trading is not easy. Of course, we’ve covered the opportunities as well. We’ve covered how this stuff works with CFDs etc.
Our last show was actually on index trading and why indices are quite popular choices for traders looking to take a view on the market and make some money along the way – hopefully! And this week we’re going to do another asset class, actually a different asset class because indices are really just a collection of stocks and we’ve been focused on stocks for a few shows – an index is just a way to buy a basket of stocks in one shot – but now we’re doing something different. We’re doing a completely different asset class this week, and that is the wonderful world of forex, which is probably the asset class that gets the most abused on social media by, shall we say, unscrupulous individuals advertising all kinds of dicey forex courses and trading signals and all these little things ranging from outright scams through to just questionable things, but at least done maybe with good intentions.
I’m not sure why they do so well, I think it’s because maybe people are just familiar with what a rand is and what a dollar is, so it’s easier to get them to believe they can make money from that. I’ve never seen anyone driving around in a Mercedes that says on the side: “Index trading – follow me for tips” or Telegram signals on indices, on stocks. I’ve literally never seen it. So I don’t know what it is about forex, but it does drive me mildly insane to see people getting scammed out of money and promised these crazy returns.
If you’re listening to this podcast, you are hopefully already very aware that life is not that easy and that IG Markets South Africa is a proper, reputable shop where we focus on a lot of educational stuff on this podcast. And you can go and then sign up for a demo account on the IG Markets platform, get started in trading and learn what it’s all about.
So, Shaun, welcome to episode nine. Thanks for doing this again with me. Pretty excited to do forex today.
Shaun Murison: Great being here.
The Finance Ghost: I think forex is probably one of the harder asset classes to trade, or at least that’s my perception coming in, which might just be a relative lack of understanding versus my understanding of how equities behave. I think at one point when I was studying, it could have been one of the CFA exams, I actually can’t remember, but I distinctly recall reading that forex goes on what they call a random walk statistically, which kind of tells you that it’s not so easy to guess where currencies are going. I would imagine that makes it quite a hard thing to trade, although maybe it just makes it hard to invest in and maybe it’s not so hard to trade.
I’m keen to start there. From your perspective, how hard is forex relative to some of the other asset classes that are on offer at IG?
Shaun Murison: Look, I don’t think it’s hard or easier. I think when you start looking at forex, a lot of people have the misconception that forex is a lot more volatile. But if you actually look at individual equities and shares, they’re going to move – remember we talked about volatility, that range of price movement – they move a lot more than a forex pair will move over the course of a day or an hour, most of the time.
So, it’s a misnomer that the forex market is more volatile. But where the risk comes from in the forex market is that it carries a higher degree of leverage. We’ve talked about leverage in the past, the amount that your profits or losses are magnified in the market. When you’re trading products like indices and forex, what happens is those profits and losses are magnified by a lot more than they are in the stock market when you’re trading them as derivatives, like CFDs, which we’re talking about today. If you don’t have a handle on understanding your exposure in the market, how big your position is, and that when you’re putting down a deposit, it’s just a fraction of that actual position size, then you can get yourself into trouble in the forex market.
But I think if you can get yourself a handle on understanding leverage and exposure in the market, then I think forex is quite an interesting one to trade because forex markets – we talked about random walk earlier on, but I think for me it’s really just about looking at the interest rate differentials and the outlook towards interest rates across the different regions, which is going to cause directions within those currency pairs.
The Finance Ghost: Yeah, exactly, that’s an interesting point, right? It’s less volatile in terms of the range of moves. That makes sense. You’re not going to see a currency pair move 10% in a day. It’s just not going to happen, whereas stocks can easily do that, actually. But to your point, if there’s more leverage, then bearing in mind your deposit is effectively your exposure, the money you’ve actually put into the market, then a smaller move with higher leverage is effectively still quite a big range, right? I mean, that’s basically what you’re saying in terms of the risk.
So, there must be advantages, obviously, to trading forex, because otherwise it really wouldn’t be nearly as popular as it is. Obviously you can go long or short like equities. You’ve got to be very careful on these pairs because long the dollar would be short the rand, on a US dollar rand pair. Actually, I’m quite keen to understand that, are you trading the pair? How does that actually work on the platform? I haven’t done forex trading myself, so I’m curious to understand the long and short dynamics of a traded pair. And then of course, you’ve got 24 hours trading as well here, right? That’s another difference to equities, is you can technically do this whenever you want.
Shaun Murison: So like any other trading – equities, indices – you can take long or short positions, so you can take a view of whether the market is going to rise or fall, like you correctly said. Where it becomes a little bit trickier, is that you’re trading two things. So, I mean, if we look at something that’s familiar, I mean, the dollar versus the rand, in that pair you always look at the first currency as the base currency. So if we say USD ZAR, the base currency would be the dollar and the paired currency would be the rand. So if you’re taking a long position on that, essentially what you’re saying is you’re expecting the dollar to strengthen and the rand to weaken. I think the easy way of looking at it is that it’s really always about taking that base currency so the dollar and viewing that as one. And then it’s how many rands is it costing to buy $1? If you think it’s going to cost more rands to buy $1, then you’re taking a long position because the value of the dollar is going to go up in rand terms. If you think it’s going to cost less rands to buy $1 in the future, then you take a short position. So if that moved down, then your rand would be strengthening and your dollar would be weakening.
Sorry, you asked about the 24 hours market. So that is the interesting thing about the forex market is that, yes, it does trade very close to 24 hours, close to six days a week. You have your Asian session that starts in Australia on a Sunday and a Sunday afternoon or Sunday evening, and then all the way through to the end of the US session, which is about 10:00, 11:00 our time, depending on daylight saving.
The Finance Ghost: So just on those currency pairs, just to finish the point around long shorts. So is it the same trade if I’m long USD/ZAR as short ZAR/USD, if you mirror the pair and you’re long one and short the other, is it the same trade?
Shaun Murison: Effectively that would be the same trade, but most platforms, including IG, would only quote the major currency first. So it would be USD/ZAR. But yes, in theory what you’re saying is correct.
The Finance Ghost: Okay, so that makes sense because otherwise I thought you’ve got all these different options, but actually it’s the same trade. You’re going to quote the pair in one style, stronger, I think you said stronger currency first, so it would be USD/ZAR and then you either go long or short depending on what you want.
Shaun Murison: Yeah, the major currency.
The Finance Ghost: Yeah, okay, that makes sense. We can only dream of a world in which the ZAR is the major currency! It’s going to take more than the GNU to get us there, unfortunately. USD/ZAR is going to be the way it is forever, unfortunately.
So moving on from that, are you still actually trading CFDs in this case when you are doing forex trading, or do you end up owning the foreign currency itself, as opposed to like a CFD play on it? How does that actually work?
Shaun Murison: Okay, so everything IG offers is a type of CFD. You’re not actually taking delivery, essentially like you would of an asset if you’re trading the futures market or something like that. Or if you’re trading shares, you wouldn’t take ownership of the actual shares, but you’re benefitting from the price movement. When we talk about the DMA side of things, remember that the forex market doesn’t have a formalised exchange, like the stock market. When you have direct market access, it’s DMA to the orders on an exchange, like on the Johannesburg Stock Exchange, or on a US stock exchange. On the forex market, that exchange and that forex market is actually dictated by an interbank market, but it’s not a formalised exchange. So most brokers won’t offer a DMA-type offering where you can actually see the market depth for currencies. So it is slightly different and it’s mostly traded OTC.
IG does actually have a product where you can see that interbank market, something called forex direct. But the default way that most people trade is OTC.
We’re just looking at the primary bid and offer, you see the quoted price movement. You’d look at the base currency, that first currency, and you generate a profit and loss in the second currency. If you’re trading the USD/ZAR, you are generating profit or loss in ZAR, that second currency. If you’re trading something like the EUR/USD, the euro is the base currency, the dollar is your paired currency. You’d be generating a profit or loss in that paired currency.
The Finance Ghost: Okay, that makes sense. Thank you for the additional details there. It makes a lot more sense then in terms of how all these pairs work and what you’re actually buying, etc. Now, obviously, when you’re trading equities and maybe even indices, you’ve got a whole lot of things to choose from. Tons, actually. I would guess in the forex world, you’ve got very, very liquid pairs, and there will be pairs that are particularly popular, but people are probably not going and trading really unusual forex pairs on the platform, I would imagine. This is not like foreign currency when you’re traveling and you need to go and buy some of whatever the local currency is in whatever interesting little frontier market you’re traveling to. In the world of trading, I would imagine that it’s a set number of pairs with very deep liquidity, very tight spreads. And that’s the appeal, right?
Shaun Murison: Yes. So very, very liquid market. The size of the forex market actually dwarfs that of stock markets. I think I had a stat here – when you look at something like the forex market in particular, I know it’s over 6 trillion. You look talking about trillions and when you’re looking about stock exchanges, you talk about billions. So substantial difference in size, and obviously that equates to a substantial difference in liquidity. Most popular traded currencies are generally the majors, the currencies that represent major economies around the world, those majors include things like the US dollar, the British pound, euro, Japanese yen, Australian dollar, and the Swiss franc. Now, other currency pairs that are also quite popular is when you take those majors and you cross them against other exchange rates.
Minor currency pairs are also quite popularly traded. And the minors are generally taking one of those major currencies, like the dollar or the yen or the British pound and crossing it with decent sized currencies like the rand. So, USD/ZAR would be considered a minor currency. EUR/ZAR would be considered a minor currency pair.
The Finance Ghost: Interesting. Okay, cool. So the rand itself just makes it a minor pair immediately, even though we’re such a liquid emerging market currency?
Shaun Murison: Yeah. And obviously, we are the most developed economy in the African continent.
The Finance Ghost: Yeah, absolutely. Moving on to just the reason why you might want to be doing forex trading. Obviously, there’s the speculative side, which is you’re looking to make a profit. You are looking to take a view on a currency pair moving in a particular direction. And if you get your long or your short right, you make some money. That’s the sort of 101 of trading.
I would imagine that there’s a hedging element as well. If you’re sitting with, I don’t know, big offshore exposure in equities, for example, that’s going to move for two reasons. It’s going to move because of the underlying equity price in that market, and then it’s going to move again because of what happens to the currency on translation into where you are sitting, which in this case is likely South Africa. So that’s where the forex trading can also be a hedging mechanism. And there you’re not trying to make a quick buck here or there. You’re actually taking a longer-term view of trying to protect a position or lock in some kind of profit and stop it changing based on forex moves, right?
Shaun Murison: Yeah, I think you’ve explained that quite well. But you know, it doesn’t have to just be stock markets. Most traders are speculative traders when it comes to forex, the retail traders. But that hedging aspect is a definite use and a common use for the currency. So, you know, if you wanted to buy something in US dollars at a future date, let’s say you wanted to – whatever the product is – and you’re worried about the rand weakening up until the time that you might have to pay for that product, then you might actually just take a currency position, a long USD/ZAR position of equal size. It’s not there to benefit from the change in the currency price, but it’s really just to protect that future spend. So yeah, hedging out possible weakness within the currency.
The Finance Ghost: When we spoke about index trading last week, we talked about the efficiencies across leverage and costs. I think you’ve already mentioned on the show that forex has more leverage built into it in terms of the way trading it actually works. I think let’s go into the detail there just on number one, what are the costs of trading forex? Is it cheaper than trading equities and then how does it compare to trading indices?
Shaun Murison: So if you’re for example taking a EUR/USD mini-contract, every point that it moves is four decimal places to the right, referred to as a pip. One pip is worth $1. The cost of that trade is 0.9 pips, so not even a full $1 for the trade. It’s 90 cents for the trade, entry and exit costs combined. On a mini-contract, the value of your position is 10,000 of your base currency, in this situation the EUR, so the cost of 10,000 EUR exposure would be just $1. That’s cheaper than indices and certainly cheaper than single stocks.
If you hold positions overnight, there are interest rate calculations, which is the differential between the two currencies, interest rates, which is one of the reasons why we don’t hold for extended periods of time, any of the short-term trading, any of the CFD-type trades, but it’s not a high cost unless you’re holding on for months to years on a position. Yeah, very, very appealing in terms of costs.
The Finance Ghost: And then secondly, just how extensive is that leverage so that people are aware of what they are buying?
Shaun Murison: In terms of the leverage restrictions, a lot of regulators in different jurisdictions, like European regulators, the ESMA and FCA and that, have clamped down on leverage because sometimes it got a little bit irresponsible. We had some providers at some stage offering 500:1 times leverage and even more than that. Now, the standard is generally 30:1. If you’re trading stocks and your deposit requirement for a trade is 10%, then on the currency position it’s just over 3%. Your profits and losses are magnified by 30 times, whereas in shares, while it does vary between shares, your profits or losses will be magnified by, let’s say, ten times.
The Finance Ghost: The costs are relatively low compared to equities, and the leverage is relatively high, so you need less money in order to make money. That’s basically why this is appealing. And maybe that takes us all the way back to what I mentioned at the start of the show, which is, why does forex appeal to people? And, you know, even in a context where it’s not done in a positive way and not explained in a positive way, I guess it’s that ability to do well. And it’s the one or two stories of people who have done well, whether by luck or design, it kind of encourages other people to have a go. But I think it is just so important to understand what you’re actually buying and the best way to do that.
We keep encouraging people to try out a demo account first. I think on the forex side, even more so, because you’ve got to try and figure out how these things move. I would imagine there’s lots of technical analysis that goes with it. Yes. Interest rate differentials and all of that, absolutely, they give you a good idea of long-term where a currency pair is heading, but trading is not long-term, it’s short-term stuff. It’s going to be news driven, it’s going to be risk-on, risk-off, it’s going to be all that kind of stuff, right? And lots of technicals I would think, Shaun.
Shaun Murison: Yeah, I agree. I think good technicals reflect the fundamentals. So I think if you do a top down approach where you compare the different trends of these currencies, you can see what’s the strongest and you can see what’s the weakest, and essentially it will reflect what’s happening with interest rates anyway. When we talk about things like the news, like you’ve had mentioned, obviously a lot of the news, like when you start looking at inflation, interest rate announcements and GDP, the major types of news events, they change sentiment around what to expect from interest rates going forward. So you’ll see those reflecting on this currency markets as well. And like I said, I’m a technical trader predominantly myself, and I think those good technicals will reflect what’s happening, will summarise that information for you if you’re using them correctly.
The Finance Ghost: Perfect. So let’s get into the technical section of the show. As we’ve done for the last few episodes, we kind of end off with doing some techs because it’s just too much to do in one show. It’s a bit overwhelming to listen to. And this week it sounds like we are sponsored by a shampoo brand because we are doing “head and shoulders” – but it means something completely different in the world of trading. It’s a pretty interesting chart pattern. And what’s particularly interesting with it is you can use it in the normal way or you can invert it actually and then use it to give you the opposite signal. It’s quite a lot harder to spot it on an inverse basis. We’ll obviously talk about that now. But if you just use it in the sort of traditional head and shoulders manner, then this is a way to identify potential trouble, right? This is something going from bullish to bearish, and this is a way to guess how that might play out, isn’t it?
Shaun Murison: All right, so head and shoulders. Very, very commonly recognised pattern in technical analysis terms. I think the important thing here is that I think we’ll give the listeners a link to the article when they can actually visualise what we’re talking about.
But if I can just cover the principles of what we’re actually looking at here – we talk about markets that move in trends, and when we talk about a head and shoulders, it’s a pattern that generally comes after a trend, and it’s a warning sign that that upward trend – it comes after an upward trend – is changing direction.
So if you’re trading that type of pattern and you start to see that, you might see that pattern as a warning. If I’m long in the market, maybe that’s a signal that I could be looking at exiting my position. And if I was looking to short the market, maybe I’d wait below a break of a neckline or key support level, because it’s showing you when the market’s actually moving into a new downtrend to possibly short that market. But the key point is it’s a reversal pattern. And what is it reversing? It’s showing you that an uptrend is now reversing into a downtrend which can inform your sort of trading direction in the market.
The Finance Ghost: Okay, fantastic. And then if you use it on an inverse basis, it’s telling you the opposite thing, right? You’re basically flipping it on its x axis and then looking for that pattern in reverse.
Shaun Murison: Yeah. So again, it’s still acting as a reversal pattern. So that shape, that head and shoulders shape, is showing us that a market that’s moving in a downtrend, a series of lower highs and lower lows, has now started to change direction, started to make higher highs and higher lows. So, moving from a downtrend into a new uptrend. Again, if you’re short into the market and you saw this inverse head and shoulders, which is that pattern upside down, you might consider looking at exiting some positions. And, you know, when we break above that neckline or the key resistance point, we might consider taking new long positions within that market in line with the new trend which is developing.
The Finance Ghost: And then just a general question around these trading strategies. It’s something that I’ve learned from you and from this show, which I’ve started to apply even when I’m doing normal equities now, you know, non-CFD type stuff, because it’s really, really helpful, is to what extent do you wait for confirmation instead of trying to be a hero and trying to be a little bit early. To what extent do you wait for confirmation that something is playing out before you actually have a go? Because I think that’s something traders are quite good at. They’re not trying to always get 100% of a move. They’re just happy to get a piece of a move and to nail that more often than not. And then your win ratio is great.
Shaun Murison: Yeah. So I think you’ve got to have a defined set of rules and criteria for your trading, especially in the short term game. For me, it’s something as simple as you have a lot of intraday activity, let’s say you were waiting for a breakout, a market moving above a key level might go up and down and up and down through that level. I like to see it settle there, I wait for a close. It might be different for different people, but I think you need to be consistent in what you’re doing rather than pre-empting your signals, because sometimes your signal that you’re waiting for doesn’t actually confirm and so you’re actually just trading on a hunch, trading with your gut.
You need to set out some mechanical rules with your trading: when to get in, what are your confirmations? For me, it’s if I’m looking at key price levels, it’s a close above, I’d like to see the price settle above a particular level if I’m looking for a long, or settle below a certain level if I’m looking for a short. If I’m looking at stocks, I’d like to see strong volume accompanying a breakout, showing that there’s a lot of momentum to that directional move.
That subject is quite broad, but I think for the listeners, I’d say that just set out definite criteria and try stick to the rules of those criteria that you place for your trades rather than pre-empting what you think might happen.
For example, another one would be a lot of people like to trade moving average crossovers, and the moving averages look like they’re going to cross over, and that could be a buy signal, but then they don’t actually cross over. You’re actually trading not on a strategy, but on a whim.
Set out some rules for yourself would be the advice there.
The Finance Ghost: Yeah, absolutely. Trading is about building a system. I think that’s been the one consistent piece of feedback that’s really been a feature of these podcasts. Thank you for that.
Shaun, I think that brings us to a close on this one. We’ve done some good stuff here on forex, obviously highlighted the head and shoulders pattern, and in the show notes, I’ll ensure that the links are there. It’s really important to actually go see this with your own eyes. You can’t just listen to that and try and understand what that is. The idea of mentioning the technicals on these shows is really just to highlight that these things exist and to point you in the direction to go and actually engage with those examples and charts and the excellent content that gets put out on the IG Markets academy. Go and check it out.
And of course, as we keep saying, go and open your demo account. Go and give it a try. See if it’s for you. Rather go figure that out with monopoly money than real money, go make your mistakes with monopoly money rather than real money. It’s always better to do that. It really is.
Shaun, thank you for another great show and I look forward to welcoming you back for the next one where we will be dealing with commodities as another example of an asset class that can be traded on the platform, adding to the suite of equities and indices and forex that we’ve now done. Thank you and we’ll do this again soon.
AB InBev in a deal driven by geopolitics (JSE: ANH)
Russian exposure is being swapped for a business in Ukraine
AB InBev announced in December 2023 that Anadolu Efes had agreed to acquire AB InBev’s non-controlling interest in AB InBev Efes BV. Various regulatory approvals were required and were not obtained, so that deal is dead.
There’s a new plan on the table, with Anadolu Efes (a Turkish group, by the way) now acquiring the Russian business out of AB InBev Efes BV, a change from acquiring shares to acquiring assets. This must make a technical difference to the approvals required. As a further step, AB InBev will acquire Anadolu Efes’ interest in the business in Ukraine.
So, a Belgian company loses exposure to Russia and gains exposure to Ukraine by effectively swapping assets with a Turkish company. And you wonder why geopolitical shifts make a difference in markets?
EOH’s revenue is lower and gross margin has dipped (JSE: EOH)
I still can’t find a reason to be invested here
The EOH share price closed 9% higher on volumes in excess of double the average daily volumes. Why? Honestly, I don’t really know. I can’t see the appeal here.
For the year ended July 2024, group revenue dropped 3.1% from continuing operations, or 0.3% if you exclude the sold Nextec legacy entities. Either way, it’s down. There are pockets of growth like the international business, but there are also other areas that are down by double digits.
EOH describes gross profit margin as being steady at 27.3% vs. 27.9% the previous year. Personally, I wouldn’t describe a 60 basis points decline as “steady” but maybe that’s just me.
Operating profit fell 17% including once-off restructuring costs. Adjusted EBITDA was down slightly to R307 million.
Highlights? Well, net finance costs decreased by 28% to R118 million but that’s no real surprise as EOH had to raise money from shareholders to reduce the debt. The headline loss per share reduced tremendously from -21 cents to -0.21 cents (read that carefully again), so EOH is nearly break-even. Yay.
The reality is that revenue went backwards and they have net debt of R644 million vs. EBITDA of R307 million, so the group still has too much leverage in my view and is experiencing margin pressures.
They talk about major cost savings into FY25 and the resumption of “investment for growth” rather than having to focus on legacy items. This must be what got the market excited.
EOH will ask shareholders for approval to change the name to iOCO Limited at the AGM. Given the absolute mess that EOH went through as a brand, that’s probably a good idea.
Famous Brands seems to be in defensive mode (JSE: FBR)
The narrative is very different to rival Spur, which is in growth mode
For the six months to August, Famous Brands tells a story of a group that is inwardly-focused and concentrating on rationalisation and efficiencies rather than outright growth.
Revenue is up just 2% and operating profit was flat, yet HEPS increased by 9.5% and the dividend per share was up 9%. That’s a totally different vibe to Spur at the moment, a group that is busy with acquisitions and exciting growth plans.
Although they are both restaurant groups, the underlying business models are actually really different. Just compare your local Spur to a Steers for example, or one of the more upmarket brands operated by Famous Brands. Spur’s brands are hitting the sweet spot right now, whereas Famous Brands finds itself in a competitive bloodbath among takeaway players at one end and a difficult situation at the other end with consumer affordability issues.
Much of the focus at Famous Brands is on debt reduction, with borrowings down from R1.265 billion to R1.148 billion. Finance costs dropped by 3.2%, leading to the improvement in HEPS relative to such a tame top-line story.
Looking deeper, Leading Brands saw revenue growth of 0.8%, with system-wide sales up by 3.2%. This suggests that the underlying franchisees paid a lower percentage of revenue to Famous Brands in this period vs. the previous period. Signature Brands is the more upmarket offering and saw revenue fall by 10.4%, with restaurant closures impacting the business.
They talk about Signature Brands remaining subscale, which could be a subtle way of inviting bidders for that business.
The SADC region saw revenue grow by 3.8%. AME was up 105% but this was driven by an acquisition of 10 restaurants in Mauritius, so don’t treat that as growth you can extrapolate. In the UK, Wimpy fell by 17% and they blame uncertainty in the election period along with a cost-of-living problem in the UK.
In the supply chain side of the business, manufacturing revenue was flat but operating profit increased by 10.3%, with the group doing a great job there in terms of finding efficiencies. Logistics revenue was also flat, with operating profits down as they couldn’t achieve the same costs miracle in that business as in the manufacturing business.
Finally, retail revenue (the sauces on the shelves at your local supermarket) fell by 8.3%. This actually had little to do with sauces and more to do with frozen potato chips, with a major competitor sorting out stock shortages and the introduction of discounted imported chips in the local market.
Here’s the chart that matters:
Grindrod finally unlocks cash from the KZN property investments (JSE: GND)
This has been a long-standing headache for the group
Grindrod’s exposure to KwaZulu-Natal property has been a cautionary tale of the dangers of non-core assts. The group is a lot more focused these days and thank goodness for that, with the situation about to improve even further thanks to a deal with African Bank.
Although I’m also not sure that African Bank should really be dabbling here, it’s at least a more natural fit to see property deals sitting in a banking group than a logistics group.
African Bank will acquire loans, profit share agreements and equity interests held by Grindrod in respect of certain properties on the KZN North Coast. The total price is a lovely round number of R500 million, unlocking considerable cash for Grindrod to use in the right place: the freight services business.
Suspensive conditions for the deal are expected to be fulfilled by 31 December 2024, which feels a bit ambitious. Let’s see how they do with the regulatory approvals.
Harmony is happy to see the end of a streaming agreement at old gold prices (JSE: HAR)
There’s also good news on one of the projects
Harmony has confirmed that final delivery has been made into the streaming agreement between Franco-Nevada and Mine Waste Solutions (MWS), which mean’s that Harmony’s MWS business will now be able to achieve current market prices for its gold rather than the historical contractually agreed prices.
It makes a big difference – more than R1 billion in annualised free cash flow if the current spot price continues!
In other good news, Phase 1 of the Kareerand tailings storage facility expansion project has been commissioned and delivered on time and on budget, the magic words for any major capex project. This will extend MWS’ life of mine by 15 years, with broader plans to add more processing streams at the operations now that they can get the market price.
In case you’re wondering, the streaming contract originated in 2008 and Harmony assumed the obligations as part of a broader acquisition in 2020. The price was set at the lower of spot or $400 per ounce, so it had become incredibly punitive in recent years.
Nampak to sell its stake in Nampak Zimbabwe (JSE: NPK)
The deal is worth up to $25 million
Nampak previously identified Nampak Zimbabwe as part of the asset disposal plan, so this day was coming. Huge progress has been made on Nampak’s turnaround, but there’s more to do.
The sale of the 51.43% in Nampak Zimbabwe has been agreed at a price of $23 million payable practically immediately and $2million payable in two equal annual tranches. The deal has been denominated in dollars, which is no surprise given the underlying exposure in Zimbabwe.
The net asset value of the 51.43% stake was R292.5 million and attributable audited profits after tax was R84.8 million, so it seems that Nampak got a strong offer here from TSL Limited.
Not that it makes any different to Nampak, but the purchaser is required to make a mandatory offer to all other shareholders in Nampak Zimbabwe once this deal closes.
This is a category 2 deal, so Nampak shareholder won’t have to vote on it. There are of course various other conditions that need to be met before the cash will flow.
Zeder moves another step closer to a special dividend (JSE: ZED)
The Theewaterskloof disposal has been completed
Hot on the heels of the completed Applethwaite disposal, Zeder has now completed the Theewaterskloof disposal. This adds another serious chunk of cash to the Zeder balance sheet and means that a special dividend to shareholders can’t be far away.
Zeder received R283 million for Theewaterskloof, plus agricultural inputs on hand of R1.18 million and 2025 season costs of R22.8 million. It’s a very similar valuation methodology to that used at Applethwaite.
Combined with the Applethwaite deal, Zeder has received just over R500 million for these disposals. For context, Zeder’s market cap is nearly R3 billion.
Nibbles:
Director dealings:
Michiel Le Roux of Capitec (JSE: CPI) fame is never shy to do some serious derivative trades over shares in the financial services group. He has entered into an option trade with a put strike of R2,950.01 and a call strike of R5,572.24 for shares with a value of R736 million. The current share price is R3,204.42. This structure is a hedge related to a legacy financing transaction and it’s interesting to note how close the put strike price is to the spot price.
A director of CMH (JSE: CMH) sold more shares to add to recent sales, this time worth R355k.
The company secretary and a director of a major subsidiary of AVI (JSE: AVI) received share awards and sold the whole lot worth R204k.
Spear REIT (JSE: SEA) has implemented the acquisition of a large portfolio from Emira Property Fund (JSE: EMI). Post the acquisition, Spear’s gross asset value is R5.36 billion and the loan-to-value is between 31% and 33%.
Southern Palladium (JSE: SDL) has completed the Merensky Reef Mineral Resource Estimate, with the Indicated Mineral Resource having increased by 17%. This means there’s a 54% increase since the last Mineral Resource Estimate. This is obviously really helpful news for the mining group as they work to finalise their Pre-Feasibility Study by the end of this month.
Orion Minerals (JSE: ORN) announced drilling results at Flat Mine South. I’m certainly no geologist, but the management team sounds happy with them.
Vunani (JSE: VUN), Ascendis Health (JSE: ASC) and Texton Property Fund (JSE: TEX) have taken advantage of the opportunity to move their listings to the general segment of the Main Board of the JSE, adding their names to the list of small- and mid-caps who recently did the same.
Labat Africa (JSE: LAB) has finally found an auditor, appointing Khumalo Xaba Xulu Auditors as the new independent auditor of the company.
Adcorp’s business seems to be doing better than the earnings would suggest (JSE: ADR)
HEPS has been impacted by once-off costs
Adcorp has released an update for the six months to August. The numbers aren’t fantastic, with HEPS expected to be down between 9.7% and 19.7%. If you read further, you’ll see that once-off restructuring costs of R25.6 million were the major driver of the drop, particularly in the context of operating profit of R59.5 million from continuing operations in the comparable period.
Looking deeper into the businesses, the Staffing Solutions and Contingent Staffing operations achieved growth in both revenue and gross profit vs. the prior year. This is more of a blue-collar offering, so it is less impacted by trends like AI and the increasing use of LinkedIn to connect employers and potential employees directly.
The Professional Services side of the business is facing those headwinds, leading to a need to really specialise in specific sectors. Hopefully things will improve in South Africa thanks to better sentiment, as it’s very hard for this business to do well if the broader economy isn’t growing and people aren’t hiring.
The Capital & Regional CEO isn’t hanging around to see what happens (JSE: CRP)
In case you wondered where some of the synergies will come from, here’s one already
Capital & Regional has released the circular for the NewRiver deal that will see the groups combined to form a stronger UK property business. As I explained earlier this week, Growthpoint will accept the offer and become a major shareholder in the enlarged entity, plus they will take cash off the table.
Normally, executives would wait for the deal to be approved by shareholders before the changes start to be made at management level. Not so in this case, with Capital & Regional CEO Lawrence Hutchings already resigning and immediately going on gardening leave – a wonderful outcome for top executives where they are paid to sit at home and not work for anyone else for a period of time.
The group finance director of Capital & Regional has been appointed as Acting CEO in the meantime. This will be the case until the offer by NewRiver has been completed.
Oasis Crescent banks double-digit growth – and without using leverage (JSE: OAS)
The cycle just keeps getting better for property
Oasis Crescent is a Shari’ah compliant property fund, which means they aim to beat inflation without the use of any leverage as debt is impermissible under Shari’ah rules. As you’re probably aware, debt is a key feature of the business model for traditional REITs, so that’s quite a challenge!
They just managed to grow the distribution including non-permissible income (the rules are complex) by 11.5% for the six months to September, so they are doing a solid job here. The net asset value per unit in the fund increased by 13.8%.
The underlying property portfolio has 75% exposure to the Western Cape and 25% to KwaZulu-Natal. Only around 8% of the rentable area is in office properties. Overlaying the regional and sector exposure shows why the fund has performed well.
Sasfin is trying to shrink into success (JSE: SFN)
The Wealth and Rental Finance businesses are core – everything else isn’t
The sad and sorry tale of Sasfin is likely to finish playing out in the private market, as the group is in the process of trying to delist from the JSE. Investors really won’t be missing much in my view, as Sasfin has struggled to produce decent performance relative to the other banks. In the latest period, HEPS has collapsed into a loss thanks to the administrative sanctions related to alleged forex non-compliance, as well as other pressures in the business.
To be fair, return on equity was only 6.8% in the prior period, so this is hardly a single year of underperformance. Things have just gone from bad to worse.
They are deliberately reducing the size of the business, with Gross Loans and Advances down by 7.2% and Total Core Funding down 1.6%. This has increased net available cash by 10.5%. Whilst I understand the importance of preserving cash for the take-private deal and to support core businesses, they need to be very careful here. Sasfin hopes to sell its banking business and if they allow it to shrink too much, there won’t be anything left worth buying. As it is, Business and Commercial Banking made a loss of R156.09 million in this period, worse than R137.7 million last year.
If you’ve been following the recent news at Sasfin, then you’ll know that there have been major corporate actions like the disposal of Specialised Finance and Commercial Solutions as well as Commercial Property Finance. This is part of the strategy to focus on Asset Finance and Wealth.
Sadly, Asset Finance also went backwards in this period, with operating profit down from R197.7 million to R158.7 million. In Wealth, assets under management decreased from R67.4 billion to R65 billion but at least operating profit increased from R117.3 million to R139.8 million.
Even with the offer on the table at a premium price, the share price is flat over 5 years. When a bank can’t do well in a period of favourable interest rates, then buckle up for the next part of the cycle.
Gloria Serobe, founder and CEO of Wiphold, will have a front-row seat by being appointed as chair of the board of Sasfin Wealth. Wiphold is core to the take-private plan, so they must see opportunities in there somewhere!
A poor day for Sasol investors (JSE: SOL)
The share price has dropped even more based on a production update
Sasol’s share price is down 40% year-to-date. It’s well on its way to having lost three-quarters of its value since the peaks of 2022. Things really aren’t good, with problems ranging from external factors like the chemical markets through to other issues like Transnet.
In a production and sales update for the three months to September, the narrative is negative. Refining margins are down and global chemical markets still have more supply than demand, leading to pressure on prices. There are various internal headaches, like coal quality in the South African business and margin pressure in the international chemicals business despite an improvement in average sales basket prices.
In terms of market guidance, Natref has been revised downwards due to start-up delays after the planned shutdown and other operational issues. They somehow expect Chemicals Africa to achieve FY25 volumes that are 0% – 4% higher than the prior year, despite the year kicking off with a 9% drop in the first quarter.
It’s going to require a significant improvement in the chemicals market to stem the bleeding in this share price. There’s little sign of momentum to the downside slowing.
Vunani’s earnings have gotten worse (JSE: VUN)
This is another perennial underperformer on our market
With a share price down 12% in the past 5 years, there hasn’t been much for Vunani shareholders to smile about. Things don’t seem to be getting better unfortunately, with the company releasing a trading statement flagging a drop in HEPS of between 53% and 73%.
Detailed interim results are expected to be released on 29 October, so we won’t have to wait long to see why this happened.
WeBuyCars: a victim of pie cut into too many pieces (JSE: WBC)
At least core earnings are up
WeBuyCars has released a trading statement for the year ended September 2024. This was obviously a massive year for them in terms of corporate activity, with all the costs for the separate listing on the JSE and the issuance of shares to major institutional investors as part of the pre-listing capital raise.
Core headline earnings grew between 21% and 26%, which tells me that they are still doing a great job where it matters: buying and selling cars. This includes the impact of transaction costs and other once-offs.
Headline earnings is down 55% to 60%, with transaction costs and various once-offs having an impact there. Combined with the additional number of shares in issue, HEPS fell by between 60% and 65%.
The share price has run 72% this year which is beyond even my expectations, and I’m bullish on the underlying business. I’m certainly not complaining as an investor, but it feels like it needs to calm down and consolidate for a while. Detailed results are due for release on 18 November and management’s outlook statements will be the thing to watch.
Nibbles:
Director dealings:
Andre van der Veen and Adrian Zetler, operating through their investment vehicle A2 Investment Partners, sold CFDs over York Timber (JSE: YRK) worth R65.3 million and bought shares for the same value. This moves them from a derivative position to a direct holding position, with a separate announcement noting that they hold 19.47% in the total issued share capital.
A director of CMH (JSE: CMH) sold shares worth R1.1 million.
Two directors of NEPI Rockcastle (JSE: NRP) bought shares worth a total of around R180k.
Equites Property Fund (JSE: EQU) has announced the reinvestment price for the dividend reinvestment alternative. Shareholders who prefer to have shares rather than cash dividends can reinvest at R14.00 per share, a slight discount to the current market price of R14.64.
Unsurprisingly, shareholders of MTN Zakhele Futhi (JSE: MTNZF) voted almost unanimously in favour of the extension of the scheme to give it a chance to deliver decent value to investors.
Back in June, Spear REIT (JSE: SEA) announced the disposal of 100 Fairways, N1 City. The deal has been given approval by the Competition Commission, so the disposal is now unconditional and will become effective on date of transfer. This is expected to be during January 2025.
Prosus (JSE: PRX) shareholders will receive their upcoming distribution as a capital repayment as the default option. It is possible to elect a dividend payment instead of a capital repayment, provided that election is made by 18 November.
If you are a shareholder in Frontier Transport Holdings (JSE: FTH), then be aware that the company has issued a notice regarding a general meeting to vote on proposed amendments to the group employee option scheme.
Eastern Platinum (JSE: EPS) has changed auditor from PricewaterhouseCoopers to Davidson & Company, a name that South African investors probably aren’t familiar with. They are based in Vancouver and Eastern Platinum is a Canadian company, hence why it makes sense.
Chrometco (JSE: CMO) will change its name and start trading as Sail Mining Group with effect from 30 October. The new share code will be JSE: SGP.
Fedgroup is a specialist financial services provider with a legacy of putting people before profit, offering a range of stable and diversified investment options that help investors steer clear of market scares. With billions under management, Fedgroup ensures your investment decisions are stable so you don’t have to worry about them coming back to haunt you.
And in the month of Halloween, with ghosts everywhere (including on this podcast of course), it was great to be able to chat to Paul Counihan from Fedgroup about how to make the markets less scary and daunting, a topic close to my heart. For more information on Fedgroup, visit their website here.
Fedgroup Financial Holdings (Pty) Ltd is a licensed controlling company, and companies within the Group are authorised FSPs. Ts and Cs apply.
Listen the podcast here:
Podcast transcript:
The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. It is nearly Halloween, and I guess as ghosts go, that means it’s probably my favourite month. I suppose, more importantly, it’s summertime, or at least it’s trying to be in Cape Town, so maybe that’s more the reason why it’s my favourite month.
If anyone is prepping for a Halloween party, you might have all your decorations ready and all sorts of interesting food. Not too many of you will put stock price charts up as scary things, but you could certainly pick a few because there’s some crazy stuff that happens in the markets, and investing can be pretty daunting, pretty scary – ghosts as well, but luckily not this one! I always said that this business was designed to help make the markets less scary and Paul, it’s going to be what we do today, which I’m really, really looking forward to.
Fedgroup is running this kind of Halloween themed month around not letting your investments scare you, which I think is just such a fun idea. And joining me today on this podcast is Paul Counihan, who is at Fedgroup. He’s been in the markets for a good couple of decades, so he’s seen it all, which is wonderful. Paul, you’ve worked at a variety of financial institutions, and today you head up Fedgroup’s direct wealth advisory business.
Thank you for joining me. You bring tons of experience to this conversation and obviously a deep understanding of Fedgroup, a brand that a lot of Finance Ghost readers have really gotten to know over some excellent podcasts. So yeah, thanks for your time. I’m very happy to have you on here.
Paul Counihan: Yeah, thanks, Finance Ghost. It’s great to be chatting with you today. And, yeah, we really, really wanted to bring across and cement the message of taking the scare factor out of your day-to-day investing. That’s really what we’re here to do and what we’ve done for over three decades.
The Finance Ghost: Absolutely. It is scary, and we never want to downplay that because the markets are daunting, they’re risky, but that’s how finance works. If you don’t take risk, you don’t get rewards. That’s literally how it works.
Over a couple of decades, you would have had a lot of conversations with clients. You would have no doubt invested your own money and experienced the ups and downs of the markets. What do you think is the most daunting thing about the markets? What do you think actually makes it that scary?
Paul Counihan: I think the biggest thing that makes it scary is the fact that no one has a crystal ball, that the future is uncertain. I was recently looking at what I think a lot of your savvy investors and your listeners will understand as a “smartie box” – it’s that view where you can see the different asset classes represented over a timeframe, and it then ranks the asset classes on a scaling down of returns. If you just look at a smartie box, it really is a smartie box – the sector in the market that’s up this year is down the next year. You can never predict what’s going to go on as we’re a global economy.
The fear factor is around the unknown. And for the general investor, my general observation over the last two, three decades has been that the level of complexity in the market has gone up and that your general investor has really, really struggled to keep up with that complexity. If you’re not invested in this day-to-day, it’s not going to come naturally.
That’s why we at Fedgroup, we highly advocate talking to an independent financial advisor that can really help navigate through these waters. This is what they do every day of their life.
The Finance Ghost: Yeah, absolutely. I think people are just so scared of risk, ultimately they’re worried about losing their money. It’s really interesting when you speak to people, that’s the bias, right? It’s “I don’t want to lose money. How do I avoid losing money?” They don’t necessarily – very few, in fact, I don’t think I’ve ever spoken to anyone who straight off the bat says: “Well, I’m scared of doing worse than inflation.” You know, no one says that. They just say, I don’t want to lose money. But if you have R100 today and you still have R100 in twelve months, you have in fact lost money. People tend to forget that because it’s not a natural way to think. We kind of anchor to “there’s R100 in my pocket, I want to still have at least R100.” The correct way to think about it is a year from now I want to have at least R105. So that then you genuinely haven’t gone backwards, right?
Paul Counihan: Absolutely. You’re talking about that concept of absolute returns. The absolute return philosophy is you always make positive return on your money. And that’s what people seek. What it really talks to is the fact that investing your money is a highly emotional thing and the best investment professionals around have this incredible ability to take the emotion out of investing. That really is the key. I think you’ve won the game if you can take the emotion out, because emotional decisions when it comes to investing money are the worst. You have to avoid those. And you’re right, inflation is the biggest eater of returns over time. And the problem with inflation is for so many investors, it’s something that sits on an article that they read – they don’t often feel it unless they know what things are costing. It’s not that direct link. It’s the silent erosion of value. And it’s so important to know that assets exceed inflation and people are getting what they call real returns as an inflation plus return so they’re getting wealthier in the future. And that’s really what we’re about at Fedgroup.
The Finance Ghost: It’s not easy to achieve. One feature of the South African market is that every year in the budget speech, the tax brackets go up by less than inflation. In fact, sometimes they don’t go up at all. That bracket creep happens and in reality, your effective tax rate actually goes up a little bit every year now. It just gets harder and harder to actually get yourself ahead and to build up that balance sheet that is starting to generate those returns.
I’m in my mid-thirties now. I think if you asked me ten years ago: what does success look like? I would have had all the typical, I’m in my twenties kind of answers around, oh, you know, a really nice car and a really big house, blah, blah, blah, blah, blah, and you get to a point where actually it’s that freedom: freedom of your time, freedom to do what you want to do with your life. And that doesn’t come unless you’ve built up enough of a balance sheet to actually start doing that. I’m definitely not someone who advocates for frugality above all else, don’t spend your money and never travel etc. I’m not one of those people at all, but I do think that there’s a strong balance and if you can understand what inflation is doing to your money, then you understand the importance of actually building that balance sheet, getting those returns and just treating that as the scary outcome.
It’s not about sitting on your hands and doing nothing because you freeze and you’re nervous and you’re worried. You’ve got to understand that you’re on a treadmill whether you like it or not. It might be set to walking pace at your local Virgin Active, inflation sometimes is at walking pace, sometimes it’s not. Sometimes as South Africans it feels like you’re jogging at 10km/h and it’s uphill at that big gradient and that’s just to keep going. That’s unfortunately how it is and I think people need to reframe it to understand that that’s what they’re up against. And you can’t beat that by having money under your mattress.
Paul Counihan: That’s such a great point. I was just about to say, in the theme with October, what do you do if you think you’ve seen a ghost? You freeze – that’s what people do. Often they’re so fearful of getting stuck into their investments and seeing what else is out there, that they freeze and do nothing. And doing nothing is probably the worst thing that someone can do with their investments.
Maybe another point on inflation, there’s obviously CPI, core inflation etc. that is publicised and measured. You know, it’s often a wonderful exercise to go into: what is your actual household inflation? What is your real inflation rate now? And unfortunately, talking about scariness, that gets a little scary.
But I think what makes it not scary, and that’s really what we’re wanting to offer the market now and we’ve really honed our skills at Fedgroup, is offering alternatives to what your normal, call it, 60/40 strategies, bonds, equities offer in the market now. And what’s really, really nice and what I’ve observed over the last two decades is that the amount of additional options that are available and accessible to your investors have really sort of exploded. But again, that complexity requires advisors to navigate them through it. Carving out stable returns for clients, which has always been what we’ve done, suddenly becomes a very, very non-scary option. And it’s a big one as well – the majority amount of work we do in the financial services industry is dealing with independent financial advisors. And why that’s important is an independent financial advisor, by virtue of their independence, has the choice to use a product provider in part of creating that solution for their clients. And we’re really happy that we have in excess of 1,800 independent brokerages that have used us over the last 30 years in creating a part of that portfolio.
I think we’ll talk about it further in this conversation around diversification. That is still, I’m afraid, really the only tried and tested way to really combat against the scariness of investing. It’s just, it really is, you know, it’s almost that concept of if you’re going to go into a dark alley or a dark room where there might be ghosts and ghouls and whatnot, going in with a team of people, a few people, is far less scary than going by yourself or just maybe someone, your best friend. That’s the analogy I align with it.
The Finance Ghost: Yeah, absolutely. I think survivorship bias is a real challenge in this. People point to the great investors who took five or six huge punts and they worked. And it’s like, look, concentration is the answer. Concentration that works is the answer, sure. But now get that right, and we don’t talk about everyone who lost money because they were concentrated. We only talk about the heroes. And that’s the survivorship bias coming through. I am very much a fan of having a whole bunch of smaller positions and recognizing that there is so much variability in the world that you cannot possibly hope to know with such certainty how something is going to turn out. You only kidding yourself. If you think that it’s because you just haven’t been hurt yet. And it will come, and it will hurt.
Paul Counihan: And I think right about now, we’re experiencing one of the best examples of this concentration risk. And there’s potentially room for hurt if you are totally concentrated. If you look at that growth sector in the equity market now, where a lot of the magnificent seven – your Alphabets – the market is now suddenly 63% concentrated in that market. There are some worrying statistics. Those stocks constitute 23% of the market, but only contributing 12% to the profit.
There’s this imbalance. It’s an amazing statistic. And again, why I mentioned this is because it’s now a worry. Have exposure to potentially concentrated markets, but don’t let it be your sole, your sole concentration at the moment.
Now, this is a crazy, scary statistic, in relation to what we’re talking about. Your average forward multiple on the S&P is sitting around 22x. If you just extract your magnificent seven, your Teslas, your Microsoft, that average multiple drops to 18x by extracting seven shares. Now, again, it’s very hard to explain to someone that’s made a lot of money over the last few years that listen, maybe this has run its course, but until you get hurt, you wake up the next day, you just cannot understand what’s around the next corner. So diversification is absolutely key to us.
The Finance Ghost: Yeah, because I’ll tell you what is scary and what people forget all the time is the impact of competition. And this is the Tesla debate that I’ve had for years with people.
If you look at Tesla over the last couple of years, it’s actually been really disappointing. If you bought in at the right time, you’ve made a fortune, absolutely, you know, and well done to you. But it was when Tesla was already very hot and I was looking at these cars and having these debates with people around competition and everything, and being shouted down from every corner of “You don’t understand, and Musk is going to do this”. And obviously Cathie Wood is out there predicting that Musk will be emperor of all the universe in the next, know, seven weeks. Anyway, I’m being facetious, obviously, but you read some of that stuff and it’s honestly just crazy.
And actually, as time has proven, you know, guess what? Tesla is not the only car manufacturer in town. There’s some really good electric stuff. I think the Chinese were a force that people didn’t necessarily see coming. But that’s my point: something will come, you don’t know what it is.
Nvidia is now the next big one. Can that carry on the way it has? Is AI going to continue being that strong? And will anyone else come in? Because when there’s such a lucrative market, then it’s going to attract a ton of R&D, lots of new competitors.
Ulta Beauty, another great example in the US market. You know, they disrupted beauty retail. Now they are facing disruption from tons and tons of competitors. And their share price is having a pretty rough time this year. So this is more of a single stocks thing maybe, than buying an index. Although, as you point out, this is the importance of not just blindly going into things and thinking, oh, I’m buying this very diversified ETF. Go and have a look what’s in it, because if it’s got six or seven stocks that are making up the bulk of the story, actually, you’re not buying something that is diversified in the slightest. You are buying basically a tech index and some other stuff.
It’s not the same thing as being diversified. Right?
Paul Counihan: Yeah, 100%. And that’s where we are. That’s where we sit at this point in time now. But you raise such a great point around this elevated focus on where success lies. And that’s the worry in the markets, by the way. It’s quite an interesting point. I think we even sit with it where we are in South Africa today.
Suddenly you take an Nvidia, the expectations on Nvidia are so much higher. And remember, that’s where the market is absolutely heartless. They will judge you on their expectations. Now, suddenly the expectations have doubled.
It’s the same in South Africa. I mean, we’re in a purple patch. I think you’d agree it’s been almost a tale of two worlds this year. The first half of the year versus second half of the year for SA. What people don’t realize, is that suddenly interest rates are dropping a bit now, SA GNU is really starting to sort of show some of the fruits, there’s some great public private partnerships working – but what that does though for SA as well, is just increase the expectation levels.
In the event SA, you know, listed equities or SA Inc. doesn’t deliver on expectations, the fall is harder. And that is a wonderful position to be. You want to be in those positions, but people must understand the responsibility around these elevated expectations. I mean, it’s like the Springboks. I use this analogy quite a lot now. It’s a wonderful analogy for where we are and what Rassie’s done with the Springboks. But right about now, we sit down and watch a match. I don’t know about you, but I expect the Boks to win!
The Finance Ghost: Absolutely. Against anyone. All Blacks, no problem. You know, we can win this. Imagine that seven, eight years ago, 100% different expectation levels.
Paul Counihan: So that’s where I really believe in what we’ve done at Fedgroup is right from the beginning. It’s been around strategically deciding what sectors we’re in and that was the decision around which sectors can we properly understand, manage, monitor and that we believe can give those stable returns. Alternative in nature but always giving stable returns – that’s been our mantra over the last while, responsible, well-diversified investments in sustainable tangible asset classes. That’s what’s been our magic sauce. We’ve been very focused and continue to be very focused on what works for us. Many, many clients have been happy with what we’ve delivered.
The Finance Ghost: Yeah and I absolutely agree with you about what I like to call the GNU-phoria, pick your term. The stock prices move first. And actually, if you go and draw a chart of ArcelorMittal, you can go and see an extreme example of this. I love pointing to extreme examples because they teach you how the markets work. Sometimes the markets do it over twelve months and sometimes they do it over three weeks.
ArcelorMittal went absolutely nuts with the news of Chinese stimulus because a big problem there is that Chinese demand for steel has been down. The Chinese produce an enormous amount of steel and so what they’ve had to do is dump their steel on global markets including South Africa. And that has severely hurt ArcelorMittal. That’s the TL;DR of what’s gone wrong there and a bunch of other things too.
So with the announcements of Chinese stimulus – and ArcelorMittal is a broken stock, it really is, it’s a loss making group, it’s terrible. And people jumped in and said, well you know, this is what’s going to drive the improvement. And you could have made some really great returns on ArcelorMittal, but you needed to have the skill and frankly the luck to get out because literally just the other day they went and released an announcement that basically said hi everyone, you know, please remember actually we are in huge trouble. Basically here are all the issues we’re making. Losses, it’s awful. And the stock has lost almost everything that it gained from the stimulus.
So it’s very much this buy the rumour, sell the deal approach. I literally wrote about that in Ghost Mail this week and it’s an M&A lesson, but it’s actually a very useful thing to apply in the markets as well.
This GNU-upswing this year might just be a slower version of that. There was the sort of buy the rumor, which was the election going well and everything’s going to get better in South Africa. Whoosh go all the share prices, lovely, but things need to now get better. And I’m watching a few sectors of where that might start happening. I can tell you where it’s not happening yet, for example, is construction. You go and read PPC’s results, there’s not really any positive move there at all. Afrimat also not amazing, so it’s not happening there.
I think where it might start happening is somewhere like the clothing retailers. You might start to see it coming through, but it’s going to take time and by then share prices might have washed away. This is what happens in the markets: people run to where the success is. And that’s actually the scariest thing – it’s too late! Not always, but it often is. It often is too late. You’ve missed it and now you need to just be very careful.
When every South African stock is suddenly a double digit P/E, all of a sudden, we’re not there yet. We all want to be there. We all want to be the Springboks winning World Cups, but we’re not there yet. We’re still a development team. It’s going to take a while and if it takes longer than people think, it’s a problem.
Paul Counihan: And that’s exactly it, quite right, the length of time is a big one. It’s similar to our grey status. It’s no great shakes that we’re in it. It really isn’t. I mean there are another two G20s, Turkey and Argentina. We’re in, out. look, I always say the list of countries that are currently in grey status now, it’s like being in the wrong crowd at school. You don’t really want to be in that crowd to be honest. But it’s more around the expectation when we should be coming out. That time extends and that hurts us.
So infrastructure, there’s that concept of fixed capital formation, gross fixed capital formation as part of GDP which is spending on value creating stuff in SA which is mainly infrastructure. You’re quite right, that is lagging and that actually has to grow at double our target to GDP. If we’re targeting GDP growth of 2%, you need that fixed capital expansion to be running at 4%, 5% now and it’s slow.
One of the interesting things that’s happened which we’re looking at now is – I’m not sure if you’ve seen the statistic, but foreign investors in listed SA equity have dropped over the last few years from 40% down to 28%. Now that that’s got to do with mandates, global mandates funds, you know, not being allowed to invest in sub-investment grade, etc. But believe me, on the street we’re rubbing shoulders with industry. The amount of money that’s committed and ready to go is mammoth. It’s better than ever because people understand the potential of South Africa, but they’re wanting to see more tangible results before they pile in. So it’s just ours to lose. I agree with you.
I spoke earlier about the average forward multiple P/E of the S&P. SA sits at between 11x and 12.5x. But the worry is that if SA equity and SA companies don’t deliver the earnings growth that the market expects, you aren’t going to get the returns. And I suppose that’s where we have chosen these sectors where, and you talk about, if you read about something, it’s too late. We genuinely are invested in sectors of the market – property, agriculture, renewables – where we take a very tech engineering approach to our investment philosophy. We have technology that’s been deployed into our assets where we can very, very accurately predict what potentially is going to happen.
We’ve got the finger on the pulse. I always talk about if we’ve got the equivalent of having a camera and a mic on a boardroom of a listed entity or global boardroom of a company, we just know the inside – whether it’s measuring an agricultural farm or measuring a property, we’ve got that. And of course, yes, there are external influences that come in there, but we’ve got that deep integration around managing these assets now. We realized that it allows us to give a bit more of a stable component to someone’s portfolio because of all these other risks now.
I always say, as a financial advisory guy, you’ve gotta have a bit of everything. And, you know what’s an important one as well? I wanted to raise the point for all the listeners as well. You know, this diversification concept, there’s actually something that comes even before it that takes this emotion out of it. You spoke about biases. I mean, these cognitive biases are just such a fascinating world, but there’s this concept of asset liability matching, and that’s just such an important component that actually precedes diversification as well. Sitting down with clients and people and saying, right, when do you need certain bits of money? Putting these things in boxes and then aligning unemotionally the assets and where they should be invested to actually when these liquidity events are happening in life. That actually trumps everything. Only then can you even start conceptually.
That’s the sort of guidance that SA investors need. And that, we really believe that that’s where we are. A huge, a critical part of someone’s portfolio is around those planned events in life where, you know, you need money x, five years from now, you don’t want capital risk. That’s really the component where we play, because, I mean, we have that level of stability. It’s our game. We are stable.
The Finance Ghost: Yeah. And I really appreciate that about Fedgroup’s business, sincerely, is that there’s some stuff in there that is quite unique and different and unusual. And, you know, to your point, it’s almost straddling capital allocation and also the operational side. You’re not just sitting there doing the desktop research. And with the greatest of respect to long-only fund managers, I understand the constraints under which they need to operate, but there’s a lot of benchmark hugging. There’s a lot of looking at the top 40 and making slight changes to what the weightings are sitting on. It’s not actually different. It’s not really diversification. If you go and buy five funds like that, you are really just – in fact, you should probably just be buying a top 40 ETF, let’s be honest, that’s not diversification.
I think part of what you guys do is genuine diversification. And some of which we’ve talked about on podcasts before with other members of the Fedgroup team, I’m thinking specifically around some of the agricultural assets, etc.
I think just to bring the show to a close, I’d love to just open the floor to you to give an overview, just high-level some of the elements of the product suite effectively at Fedgroup and how you guys use it to achieve diversification.
Paul Counihan: Okay, great. That’s a great opportunity to map it out. The tangibility is such an important aspect of what we offer. A bit of a silly story. When I joined the group, I was asked by our head of impact team to come and join on one of the farms. And I rocked up there in my fancy brogue shoes and my suits, and I was very quickly reprimanded for that. But now I’m very happy in my vellies and realising it’s the on-the-ground stuff and understanding what’s going on, which is absolutely fantastic.
With regard to what we offer, we’re a specialised financial services company. We’re highly diversified, we have a nice diverse set of licences, and that allows us to bring to the market our alternative assets in a stable way through a range of products ranging from tax-free savings accounts to endowments on a fixed and asset-linked basis and our secured investment, which we’ve been running for over three decades, etc. We really offer a huge amount of tax efficient options as well, which has been a huge evolution in our world over the last few years around adding the stable asset components and the stable returns, but in tax efficient ways.
It’s been a wonderful journey over the last five years, where we’ve really wanted to become more relevant to the market. Also the important thing is just scale up the business. There’s so much wonderful opportunity in the market to leverage these assets now. We’ve been able to bring far more availability into the market, which has been wonderful. And there’s been so much positive reception from the advisors and clients. Our aim, we live and breathe here to make sure that we continue to give those stable returns year on year and continue into the future.
The Finance Ghost: Paul, thanks very much. I think that’s a really great overview. I must say the culture at Fedgroup is also quite fun. I did see someone in the background there dressed up in a sheet waving at me. So that was great. Purple sheets, I mean, you’ve got to really get them on brand here. That white sheet, it’s just far too cliche!
And Fedgroup is not about cliche. It’s about doing unusual stuff, which I think is great. And I would encourage anyone listening to this, go check out the Fed group website because it really does range from your more traditional sort of investment products through to, as I say, some of what you guys have done in your impact farming ventures, for example, from pistachios through to nursery saplings through to beehives, macadamias – I mean, these are really just interesting assets. I think the way you’ve done some of that stuff is particularly cool in that it actually makes investing feel more real to people.
For a lot of people, for the majority of people – let’s face it, we live in this financial world, but most people absolutely don’t. They do not get a kick out of going and picking their investment products or whatever. They pretty much outsource this to their financial advisor. And half the time my goal is to just get them to a point where at least they can ask better questions to their financial advisors and get better outcomes. But I think with stuff like the impact farming assets, it’s a lot easier to say to someone, especially younger investors or people who haven’t really dabbled in the markets: “Hey, did you know that you can invest in growing nursery saplings or blueberries or whatever and actually earn a decent return and most likely beat inflation from this thing?” So that kind of stuff is really great. I really enjoy the work you guys do in that regard.
Thank you for coming back onto the podcast – well, Paul, it’s actually your first time, hopefully not your last time, because I think it was a great discussion. And for those who want to reach out to you, learn more about Fedgroup or perhaps engage with you directly, what is the best way?
Paul Counihan: Yeah, so as I said, best way is get in touch with us is on our website. All the contact details are there. We’re a high touch environment with traditional values, old-school values. A computer will not call you, a person with blood running through their body will call you. We love those conversations. And importantly, a unique culture fit around us is we get the senior execs in front of clients on a regular basis. We like to keep our finger on the pulse and that is the tangibility element of what we do.
But you summed it up beautifully, that really is it. Tangible assets that give a nice hedge against inflation and currency risk, but that you can feel, touch and experience for yourself. We love giving those experiences, by the way, to our, to our clients, visiting our various investments. It’s the way to go. It’s a wonderful experience.
The Finance Ghost: Yeah, absolutely. Well done and thank you for your time, Paul. And I look forward to doing another one of these with you.
Paul Counihan: Yeah, anytime. Thanks for the time today.
BHP responds to press speculation around Samarco (JSE: BHG)
The terms of a settlement proposal are being considered
BHP felt it necessary to issue a formal response to press speculation in Brazil regarding negotiations between BHP, Vale and the Federal Government of Brazil. At this stage, negotiations are ongoing and no final agreement has been reached on the amount or the terms thereof.
At this stage, it seems that the total settlement amount to the people, communities and environment will be $31.7 billion. Of this, $7.9 billion has already been spent since 2016, a further $18 billion will be spent over 20 years in the form of instalments (an obligation to pay) and the remaining $5.8 billion would take the form of benefits to the affected parties (an obligation to perform).
BHP’s share of this is $15.9 billion, as they are on the hook 50/50 with Vale. BHP reckons that this is roughly in line with the $6.5 billion provision currently on the balance sheet. That looks very off at first blush, but remember that some money has already been spent and a lot of it is payable over 20 years, with the provision reflecting the present value of the obligation.
This doesn’t necessarily bring things to a close even if settlement is reached, as there are still claims in Australia, the Netherlands and the UK, as well as criminal charges.
Capital & Regional releases the circular for the NewRiver scheme of arrangement (JSE: CRP)
This is highly relevant for Growthpoint shareholders as well (JSE: GRT)
After much speculation around whether an offer would finally be on the table, we recently learnt that NewRiver had pulled the trigger on a cash-and-share offer to the shareholders in Capital & Regional. They are structuring it as a scheme of arrangement, which means that sufficient approval by shareholders will lead to the deal being applicable to all shareholders. The alternative is a general offer, which only applies to those who accept the offer.
For each Capital & Regional share, shareholders will receive 31.25 pence in cash and 0.41946 NewRiver shares. This represents a premium of 21% to the 3-month VWAP.
What I was really waiting for in the circular was to see what would happen to shareholders on the South Africa register, as NewRiver isn’t listed on the JSE and has no intention of listing here. The plan is to sell the NewRiver shares to which they are entitled and then pay them the cash. The only way to get around this is to use your foreign allowance to hold shares in NewRiver on the UK register. Either way, the option to hold directly into this portfolio on the local register is not going to be there.
It’s a pity that South African shareholders won’t be able to invest directly in the portfolio on the local market, as the combination of NewRiver and Capital & Regional creates a much larger portfolio that has complementary property assets in the UK. Growthpoint currently holds 69% of Capital & Regional and will vote in favour of the scheme, thereby receiving the mix of cash and shares in the enlarged entity. This means that shareholders in Growthpoint will be able to indirectly participate in the post-deal group in the UK – along with everything else in Growthpoint, of course.
Capital & Regional and NewRiver expect to achieve £7.3 million in cost savings from combining the groups, so it’s not a great time to be in a support role at either fund as those savings have to come from somewhere. I quite enjoyed the reference to £1.1 million in dis-synergies, which basically means additional costs from the deal. This means the net annual saving is £6.2 million. With expected costs for the deal of £2.9 million, this suggests an immediate benefit from the transaction.
Given Growthpoint’s support of the deal, I think it’s very unlikely that it won’t go ahead. Full details can be found in the circular here.
It’s time for tech bingo with 4Sight Holdings – spot the buzzwords! (JSE: 4SI)
But with these results, they can justify it
It’s easy to simply throw all the important buzzwords down on a page, like AI and machine learning. Heck, 4Sight even mentions something called Industry 5.0, which sounds like we skipped the 4th Industrial Revolution altogether.
Revenue for the six months to August jumped by 20.1% and operating profit was up 32.9%, with growth being enjoyed across the business. Unlike many tech companies, gross profit margins seem to be intact, with gross profit up 19.4% and thus reflecting only a 20 basis points decrease to 40.7%.
HEPS has increased by a lovely 35.5% to 5.185 cents, so that’s a great story all round. Despite this, there’s no dividend for the period. Hopefully this will be addressed with full-year results, as there was an interim dividend last year when earnings were quite a bit lower than they are today.
A 100-days letter from the new Prosus / Naspers CEO (JSE: PRX | JSE: NPN)
I really like Fabricio Bloisi’s style
From the very first call to introduce Bloisi to the market, there was something about him that I liked. He’s a proper breath of fresh air at Prosus / Naspers, a group that desperately needed an operator in the top job, rather than an investment banker. Gone are the tight shares and overly smooth appearance of ex-CEO Bob van Dijk. Instead, Bloisi wears a golf shirt and looks like someone you could happily have at your next braai.
This is the difference between someone who made money by building businesses and someone who knows how to manage that most wonderful concept of Other People’s Money.
Here’s the TL;DR of the letter:
The goal is to double the value of Prosus and that means ambitious targets for the portfolio businesses. The letter includes a note that iFood has hit 100 million orders per month and the new target is therefore 200 million orders per month!
There’s a huge focus on AI and deploying the technology in the underlying operations.
The word “profit” appears several times, which I can assure you is an improvement vs. the old narrative – especially for the eCommerce businesses.
In the first six months of the year, eCommerce generated roughly 3x the adjusted EBIT that it managed in all of 2023!
There’s an expectation for the underlying investments in India to IPO on that market, which supports my current interest in that market.
Various asset sales have taken place to improve the portfolio.
The Prosus and Naspers share prices are both up around 34% this year. Bloisi can’t (and wouldn’t) take all the credit for this, as the vastly improved sentiment in China thanks to expected stimulus has helped greatly. Before the stimulus sentiment took hold, each company was up 20% this year – still a solid performance.
South32 maintains annual production guidance (JSE: S32)
It seems like a solid financial start to the year
With an update for the first quarter of the financial year, we now know that South32 is off to a decent start. It’s early days of course, but production guidance has been maintained for all the operations. Highlights include a particularly strong start for aluminium and copper volumes from Sierra Gorda.
In terms of corporate activity, this quarter saw the completion of the sale of Illawarra Metallurgical Coal, with South32 receiving cash proceeds of $964 million. Importantly, further progress made on the construction of the long-life Taylor zinc-lead-silver at Hermosa. It’s also worth highlighting that during the quarter, Hermosa was selected for a $166 million award negotiation from the US Department of Energy.
It can’t all be good, of course. Mining is far too difficult for that. For example, payable zinc equivalent production at Cannington fell by 34%. The trick for these mining groups is to have more good than bad, leading to a decent result overall.
Net debt decreased by $723 million to $39 million, with the proceeds from Illawarra partially going to debt reduction and partially to the capital investment programme.
Workforce Holdings looks set to be the next delisting (JSE: WKF)
Force Holdings wants to take the group private
If you’ve ever wondered what a tightly-held share register looks like, then prepare yourself for this one.
Force Holdings has a 69.33% stake in Workforce Holdings. That’s already a controlling stake obviously, but such a level is not unheard of in a listed context. It’s when you scratch just a little bit deeper that you see the problem, as just three other shareholders plus treasury shares take us to a total of 97.24% of shares that we’ve accounted for across just a handful of shareholders.
Those shareholders have all agreed to come along for the ride into an unlisted structure, so Force Holdings only needs to buy 2.76% of the company to get everyone else out and take it private.
But now here’s the trick: to get it right, only the holders of those 2.76% of shares can vote on the scheme of arrangement. This means that 75% of those shareholders will need to vote in favour, which isn’t so easy to achieve. To entice them to say yes, the offer price is a premium of 17% to the closing price of the shares before the offer came out.
The reason this might work is that there is literally no liquidity in this thing and those shareholders have very little prospect of selling their shares at this price to anyone else. We recently saw a scheme voted down at Bell Equipment by a small group of shareholders, with the difference being that there is still meaningful liquidity in Bell and so those shareholders felt they had different options. This situation feels different, which is why the company already received irrevocable undertakings to vote in favour of the scheme by holders of 32.71% of the voting shares.
Still, there’s a big difference between 32.71% and 75% approval. They will need to work hard to get this scheme over the line, especially with the independent expert report only becoming available once the circular is distributed to shareholders.
Nibbles:
Director dealings:
A director of a subsidiary of Attacq (JSE: ATT) sold shares worth R1.18 million. Although it was linked to a share award, the announcement isn’t explicit on whether this was only the taxable portion, so I assume that it wasn’t.
The spouse of a prescribed officer of WBHO (JSE: WBO) sold shares worth R922.5k.
A prescribed officer of ADvTECH (JSE: ADH) has sold more shares in the company, this time to the value of R537k.
A prescribed officer of Thungela (JSE: THA) sold shares in the company worth R113k.
Pan African Resources (JSE: PAN) has raised R840 million in sustainability-linked notes listed on the JSE. The bookbuild was oversubscribed and the notes were priced at 305 basis points above the reference rate (3-month JIBAR).
If you are invested in Sygnia (JSE: SYG) and want to stay close to the detail on everything going on there, then be aware that the company has released a circular regarding proposed changes to a share incentive scheme.
The end is in sight for litigation at British American Tobacco’s Canadian subsidiary (JSE: BTI)
There are big numbers being thrown around here
Back in 2015, a court in Quebec ruled that major tobacco companies were guilty of not warning their customers about the links between cigarettes and cancer. This prompted the majors (including British American Tobacco) to place their Canadian operations in bankruptcy while kicking off negotiations of a settlement. The law allowed these operations to keep running in the meantime.
From what I’ve read online, it looks like a total settlement of C$32.5bn is on the table, working out to roughly C$100k per person. British American Tobacco is only a portion of this (although they don’t disclose how much), with the settlement to be funded by cash on hand and the money they will make from the future sale of tobacco products in Canada.
CA Sales Holdings announces another bolt-on acquisition (JSE: CAA)
This is such a good way to boost growth
CA Sales Holdings is one of the best local stories of growth and excellence in execution. The management team simply gets on with it, growing organically (i.e. in the existing businesses) and through selective bolt-on acquisitions that bolster the operations. This is the perfect way to do it, in my opinion.
The latest deal is to acquire roughly 54% in the MACmobile Group for R37.5 million. This gives them control of the group, while keeping the remaining shareholders motivated to keep running the business. Again, this is the perfect way to do it.
With customers in 16 African countries and a business built around route-to-market in the FMCG space, it’s an obvious strategic fit with the rest of the CA Sales business.
The deal is too small for any further disclosure, so we don’t know how profitable MACmobile is.
Finbond reminds us that share buybacks work against you when you’re loss-making (JSE: FGL)
This isn’t something you’ll see every day
Generally speaking, loss-making groups aren’t the most active when it comes to share buybacks. After all, they are focusing on sorting out the losses rather than returning capital to shareholders!
The situation is different at Finbond, where there was a major repurchase from a related party in December 2023. As the group is still working back towards profitability, we have the really unusual outcome of losses being concentrated among a smaller number of shareholders thanks to the buybacks. In other words, buybacks work against you when the company is loss-making!
This is why the headline loss per share for the six months to August has deteriorated by between 51% and 71% to between 1.87 cents and 2.12 cents. Sitting behind this is a move in headline losses of up to 17%, so you can see how the change in the number of shares in issue has such a large impact.
If Finbond delivers on its promises, then the buybacks will be very helpful over the long-term.
The jury is still out on whether current shareholders will be around to see it, as Finbond released a cautionary announcement at the end of August regarding discussions with a shareholder regarding a potential corporate action. The company now has permission from the TRP to approach additional shareholders.
This sounds a lot like there might be a potential offer on the table, although nothing is confirmed at this stage. The share price is up a whopping 148% year-to-date in anticipation!
NEPI Rockcastle had no problem raising capital (JSE: NRP)
If you weren’t invited to the party, you’ve been diluted at a discount
NEPI Rockcastle has tapped the market in the typical way that we see at property funds: an accelerated bookbuild that raises a lot of money (in this case €300 million) in the space of literally a day. The new shares being issued represent 6.2% of shares in issue, so you can clearly see the power of public markets here and how quickly a property fund can grow.
The downside? Dilution for investors who didn’t participate. This is only a problem if the shares are issued at a discount to market value. If they are issued at market value, then there’s no value dilution here because shareholders are no worse off whether they sell their own shares at market value or the company issues more shares at that market value. But if the shares are issued at a discount (in this case 4.36% to the closing price), then someone else owns shares in the underlying assets at a better price than you would be able to get if you tried to buy the shares on the market.
Investors should always keep an eye on capital raises as a source of dilution. The other trick of course is the use of scrip dividend alternatives, where shares are issued in lieu of cash dividends. Over time, these dilutionary impacts can really add up even if the cash is being invested in solid underlying projects.
Although Fortress Real Estate (JSE: FFB) has been reducing its stake in NEPI by using the shares to solve its own capital structure problems and to entice investors into scrip dividend alternatives, Fortress just couldn’t stomach the dilution here. They avoided dilution of their 17.11% stake by subscribing for NEPI shares worth R1.9 billion, funded by euro-denominated debt.
Reinet seems to have had a great quarter (JSE: RNI)
The underlying fund’s NAV is up
As a precursor to the release of the group level net asset value (NAV) per share, Reinet always releases the NAV of the underlying Reinet Fund. This gives a very good idea of the direction of travel for the group’s value, as the fund is the bulk of the assets in the group.
Between June and September, Reinet Fund’s NAV increased by 4.9% to €38.48. That’s a really strong quarter!
Renergen’s losses have worsened due to production delays (JSE: REN)
From here on out, they simply cannot miss a beat
Despite the fact that Renergen is indeed producing helium, the share price is down 37% this year and 62% over three years. Now, the three-year move is explained by how utterly absurd the situation was with this share price in the height of the pandemic, when local retail investors were buying it with little or no understanding of the underlying value. But as for the year-to-date move, the explanation isn’t so simple. I think that the market has been nervous about the production delays and the extent of capital raising ahead for the group. When a growth story loses favour in the market, it’s hard to win that popularity back.
Although it’s not a surprise that Renergen is losing money at this stage in the journey, it’s still not going to help that the six months to August was a headline loss per share that is between 43% and 63% worse than the comparable period. The issues during the commissioning period were to blame here, as Renergen has had a rough start to its life as a helium producer.
The share price closed over 5% lower in response to this update. I believe that the group has used up the patience of investors and simply cannot have any further major issues going forward. They now need a solid couple of years of delivering on promises.
Santova: light on details and on earnings for that matter (JSE: SNV)
All we know for now is that things have gone backwards
Supply chain and freight services group Santova has released a trading statement dealing with the six months to August 2024. It’s not obvious to me why they call it a voluntary trading statement, as the guided range includes a move of over 20% which triggers a mandatory trading statement.
Anyway, they expect interim HEPS to be between 47.03 cents and 50.04 cents, a drop of between 21.9% and 16.9%. They expect to release results before the end of October.
The share price is flat year-to-date.
Sibanye’s terrible luck continues (JSE: SSW)
If calamity bingo was a game, Sibanye would win
At some point in life, we all tell ourselves that things cannot possibly get worse. The bad luck has to stop eventually, right? Well, Sibanye is proof that something else can always go wrong, with the latest being a bushfire leading to a suspension of the Century operations in Australia.
The most important thing obviously is that all the staff are fine, with the next priority being that all infrastructure has been protected as well. Still, operations are expected to remain suspended until 16 November, so they are losing out on 9,600 tonnes of zinc production.
In a desperate attempt to put a positive spin on things, CEO Neal Froneman is quoted as saying that this incident highlights the threat of climate change and why resource stewardship is so important. Talk about having a lemon with your tequila!
Mid-single digits growth at Standard Bank (JSE: SBK)
The banking business is driving these numbers
Standard Bank provides quarterly information to the Industrial and Commercial Bank of China (ICBC) so it can meet its own reporting requirements. To avoid a situation where there are two levels of information in the market, Standard Bank also reports its high level balance sheet moves for the quarter and gives a brief operational update.
Standard Bank’s equity has gone slightly backwards in the last nine months due to the strengthening of the rand. Africa regions contribute 40% of group headline earnings, so the currency moves are important for the group.
The disclosure isn’t as simple as it should be, but it looks like the Banking business managed mid-teens growth for the quarter and mid-single digits for the nine-month period, so there’s an acceleration there if I’m interpreting it correctly. The decrease in interest rates obviously isn’t impacting them yet, with solid earnings in the banking business assisted by lower credit impairment charges. The drag on earnings was lower trading revenue.
The Insurance and Asset Management segment did well in this quarter, but earnings are flat for the nine months. Again, I find the wording in the SENS ambiguous and I hope I’m interpreting this correctly.
For the 12 months to December 2024, banking revenue growth of low-single digits is expected. This is after the impact of rand translation effects, as the constant currency growth is in the double digits. They expect this to be enough to unlock a flat or improved cost-to-income ratio, which implies better operating margins. Finally, group return on equity (ROE) is expected to be in the 17% to 20% range.
Nibbles:
Director dealings:
A prescribed officer of ADvTECH (JSE: ADH) has sold shares worth R4 million.
Something to keep an eye on in the CA Sales Holdings (JSE: CAA) growth story is that the CEO has sold shares worth R1.34 million.
One of the Calgro M3 (JSE: CGR) executives on the way out, Waldi Joubert, sold shares worth R1.2 million.
A prescribed officer of Thungela (JSE: TGA) sold shares worth R242k.
The executive chairman and ex-CEO of WBHO (JSE: WBO), Louw Nel, is resigning with effect from November. Ex-CFO Charles Henwood will join the board to replace him as executive chairman. The lack of independence at chairman level is why the board has a lead independent director.
Zeder (JSE: ZED) is the latest company to add its name to the list of small- and mid-caps that have taken advantage of the General Segment of the JSE. This comes after the JSE decided to split the Main Board into the Prime Segment and General Segment in an effort to achieve more balanced compliance requirements for smaller groups.
Trustco (JSE: TTO) has extended the arrangement that allows Riskowitz Value Fund to invest hybrid or other capital into Trustco of up to $100 million by a further 3 months.
African Dawn Capital (JSE: ADW) is set to release its annual report in the next week or so. They expect to then begin the process of lifting the trading suspension. Interim results for the six months to August are expected to be released before the end of November, thereby meeting the JSE requirements.
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