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Ghost Bites (Coronation | Insimbi | Motus | Remgro – Mediclinic | Spear | Vunani)

The Finance Ghost
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Ghost Bites (Coronation | Insimbi | Motus | Remgro – Mediclinic | Spear | Vunani)

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

A major win for Coronation against SARS (JSE: CML)

And indeed, a win for corporate South Africa

This is the news that many had been waiting for. The Constitutional Court delivered judgment on the landmark tax matter between SARS and Coronation, with Coronation as the victor. This has important ramifications for offshore structures put in place by local corporates.

The full impact of this matter was R794 million, which Coronation had provided for in full. This is a great windfall for shareholders, especially as the SARS fight had ruined the Coronation dividend for a year. Investors will be very happy to see this cash kept within the company (and hopefully paid out as a dividend) rather than paid to the tax authorities.

Insimbi is selling two underperforming businesses (JSE: ISB)

And there’s an innovative structure to help the buyers pay for them

In listed companies, we are quite accustomed to seeing asset-for-share transactions. In these deals, the companies buy assets (usually private companies) and pay for them by issuing shares to the sellers. In Insimbi’s latest announced deals, they are doing things the other way around.

The core outcome here is the disposal of the AMR Booysens Business and the AMR WR Business, both of which are underperforming. The trick is that the disposals are linked to specific repurchases of shares from shareholders who are related to the buyers of these businesses. Effectively, most of the proceeds from the specific repurchases of shares will be used to pay Insimbi for the businesses.

In both underlying transactions, the repurchase price is R1 per share. Insimbi closed at R0.80 on Friday but has a 52-week high of R1.35, so the repurchase price isn’t as silly as it may look. This is an illiquid stock where the price can move significantly in a single day.

The repurchases represent 11.41% of Insimbi’s total shares in issue, with a total value of R43.05 million. Insimbi will get back R30 million for the disposals, so the shareholders in question are pocketing a net R13 million from these transactions. Frustrating as that may sound, these businesses are currently making losses, so shareholders need to think about the long-term picture.

This is certainly an interesting structure, with Mazars Corporate Finance appointed as independent expert to opine on the deal. The opinion will be included in the circular.

Motus gave an important strategic update (JSE: MTH)

Proper capital markets days are thin on the ground in SA, so pay attention when you see them

Listed companies need to meet a minimum disclosure requirement under regulations, but nothing stops them from going beyond that. Although very few take the route of hosting capital markets days and really talking to the market, there are those that do. This is to be applauded, with Motus as the latest such example.

The full presentation is available here and I recommend checking it out.

The group targets 65% of EBITDA in South Africa and 35% from international operations. They also target 50% of EBITDA from vehicle sales and the other half from non-vehicle sales. In both cases, they are currently in line with these targets, so no major changes are expected there.

The acquisitive activity has been focused on building out the international arm of the business, which makes sense when the group has its roots in South Africa and has roughly 20% market share in its home market for vehicle sales. Beyond the UK and Australia in terms of vehicle sales, the business that really has them excited is the aftermarket parts business in the UK and Asia. They call this the best growth potential for the group.

Of the many slides in the deck, one that jumped out at me deals with a structural shift in the South African car parc. That’s not a typo – this is the correct term for the total number of vehicles on the road in a given country or segment. With owners keeping their vehicles for longer (and often financing them over a longer term), there’s more demand for value-added products and services. This is a great opportunity for Motus, with strategies in place to develop products (e.g. telemetry) and markets like insurance. They even manage to bring the buzzwords like AI and machine learning into it!

Overall, the flavour of the strategy is to build annuitised revenue streams that are less cyclical than new car sales. Aftermarkets parts and value-added services sit squarely in this strategy.

Remgro has confirmed that Mediclinic is still very boring (JSE: REM)

Margins are down and earnings are flat

Hospital groups generally confuse me from an investment perspective. Although you would expect them to be licences to print money, the reality is that return on capital tends to be sub-par. Despite this, Remgro was happy to take Mediclinic private along with its consortium partners. The latest numbers for Mediclinic (covering the year to March 2024) have done nothing to convince me that this sector is interesting.

Group revenue may have increased by 5% at Mediclinic, but adjusted EBITDA was down 2%. Adjusted EBITDA margin contracted from 15.8% to 14.7%, with margins in both Switzerland and South Africa going the wrong way. At least margins in the Middle East were slightly up. Adjusted earnings came in flat in dollar terms for the year.

The second half was an improvement on the first half of the year, so perhaps some of that momentum will be carried forward. Even then, I just don’t see the appeal of hospital groups as equity investments.

Spear is recycling R160 million worth of capital (JSE: SEA)

The buyer for this property is The City of Cape Town

Spear REIT is selling 100 Fairway Close for R160 million to The City of Cape Town, which also happens to be the current tenant. This is an exit from a commercial office building, which Spear is happy to do as part of optimising the portfolio in the context of the pending Emira Western Cape portfolio implementation.

This also creates further headroom on the balance sheet, which is important as part of the broader funding and planning around the Emira deal. After this disposal, Spear’s loan-to-value will be between 23% and 23.5%. The strategic target for the loan-to-value ratio is between 38% and 43%, with management looking to operate at 39% on a go-forward basis after the Emira acquisition.

The yield for the disposal is 9.8%. This reflects some of the challenges in the office sector, even in Cape Town. The price of R160 million is identical to the value at which the assets were carried as at February 2024, the date of the last published annual financial statements.

Vunani suffers a sharp decline in profits (JSE: VUN)

The fund management and insurance businesses are to blame

Vunani had a year to forget for the 12 months to February 2024. HEPS has plummeted from 30.1 cents to just 7.4 cents. Despite this, the final dividend was only slightly down from 11 cents to 9 cents.

The decrease in profits wasn’t because of some kind of non-operating adjustment. Alas, operating profit tumbled from R124.6 million to R55.2 million. A combination of a drop in income and an increase in operating expenses did the damage.

If you look at the segmental results, there’s still no turnaround in sight for the institutional securities broking business, which made a loss of R12.4 million this year after a loss of R9 million in the prior year. Insurance also swung into losses, with a result of negative R7.6 million vs. positive R10.3 million in the prior year. A blow was also dealt by the fund management business, which saw profit drop from R21.2 million to R9.5 million.

It was only the asset administration business that made a decent, consistent contribution. Profit was R34.6 million this year vs. R33.7 million in the prior year.

If Vunani was serious about creating shareholder value, they would’ve at the very least walked away from the institutional securities broking business by now. Instead, they are willing to still carry those losses for some reason, which really doesn’t work when the rest of the group also goes the wrong way.

Little Bites:

  • Director dealings:
    • There are some very large disposals of Dis-Chem (JSE: DCP) shares by directors and prescribed officers. An associate of director Stanley Goetsch sold shares worth R165 million. Saul Saltzman sold shares worth R38.4 million. Christopher Williams sold shares worth R51 million. They sure weren’t shy to take advantage of the recent rally in the shares.
    • A director of Investec (JSE: INP | JSE: INL) sold shares worth £1.34 million.
    • As part of the related party deal for Novus (JSE: NVS ) to acquire Bytefuse, an associate of the CEO of Novus received R10.8 million in Novus shares in exchange for the shares in Bytefuse.
    • Jan Potgieter, ex-CEO of Italtile (JSE: ITE), sold shares worth R2 million.
    • An associate of a director of Safari Investments (JSE: SAR) purchased shares worth R1.1 million.
    • A director at City Lodge (JSE: CLH) sold shares in the company worth R132k.
  • In a trading statement for the year ended March 2024, Marshall Monteagle (JSE: MMP) flagged a major jump in HEPS from negative 4.4 US cents to positive 5.8 US cents.
  • Castleview Property Fund (JSE: CVW) released a trading statement for the year ended March. It reflects the final dividend per share as being 42.147 cents per share. This is well more than double the comparative period, but Castleview went through so much restructuring that I wouldn’t put too much focus on the year-on-year move.

Trends that end: businesses with short shelf lives

Dominique Olivier
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Trends that end: businesses with short shelf lives

As South Africa celebrates 87 loadshedding-free days, the feeling on the ground is that things can only improve for businesses across every industry. Well, perhaps not every industry.

I read a statistic the other day that made me simultaneously happy and sad. Everybody’s favourite loadshedding notification app, EskomSePush, has seen its active user base plummet from more than 3.2 million to 300,000 since the current loadshedding break started.

Of course this makes sense in the context of the service that’s provided. Personally, I don’t think I’ve logged on to the ESP app since March – probably around the same time I last charged my battery-powered lights. A precipitous drop in users of that scale can only be devastating for a free-to-use app that relies on advertisers to keep the lights on (pardon the pun). As traffic halts, so does the interest from potential advertisers. When I opened the ESP app just minutes ago out of sheer curiosity, there was one lonely banner ad on display – for solar installations, of course.

The reason that I was sad to read this statistic is because I’ve always had a soft spot for businesses that prove themselves to be adaptable. From the start, I’ve watched as the ESP team have taken what was a very basic idea and embroidered it with features to appeal to their audience. From calendar integration to home screen and lock screen widgets, expanded area coverage, area recommendations, AskMyStreet, water outage coverage and even a throwback Snake game, there seemed to be no limit of useful add-ons to the app. This clever thinking transformed something that we all had to use, and somewhat begrudgingly at that, into something that I actually wanted to use.

But will they be able to adapt their way out of their core use case vanishing (touch wood: permanently)?

The trouble with trends

Starting a business based on short-term trends or addressing transient problems can be perilous for entrepreneurs. In the defence of the team behind the ESP app, nobody expected loadshedding to just up and vanish overnight, so we can’t really say that they built around a “transient” problem in this case. The app reached 12.36 million downloads by the end of 2023, which also happened to be the worst year of loadshedding on record. To say that Eskom’s sudden turnaround (again, touching all the wood as I write this) was unexpected is a massive understatement.

While the allure of quick profits during periods of high demand is tempting, ventures that rely on that high traffic often prove to be unsustainable. When the trend fades or the specific problem is resolved, the business can swiftly lose its relevance, leading to a sharp decline in interest and revenue. It then comes down to whether they made enough money in a short space to time to justify all the effort.

This kind of short-term approach lacks a foundation in long-term value creation or adaptability, making it difficult to pivot or find new markets once the initial opportunity evaporates. For instance, a company that flourished by selling fidget spinners at the height of their craze will have faced a steep decline once the fad passed. Similarly, businesses that capitalised on temporary market conditions, like certain types of pandemic-related products (didn’t we all know an auntie who suddenly became a hand sanitiser stockist?), found themselves struggling as conditions normalised.

Another local textbook example of this is the great Prime hype of 2023. When the beverage created by YouTubers Logan Paul and KSI first went viral, some South Africans spent thousands of rands on getting stock into the country by any means possible. At the height of the madness, a bottle of Prime cost R800 locally – and demand was high even at those prices. Then the Shoprite Group managed to pull off a small miracle and secure a vast amount of stock. Before long, Prime was being sold in every Checkers from Kraaifontein to Kakamas at a much-more-affordable price of R40 per bottle. That’s still a ludicrous price to pay for what is essentially an Energade in disguise, but compared to its previous highs, R40 seemed reasonable – and people were willing to queue like it was 1994 (or 2024!) to get their Prime fix.

Fast forward into 2024, and the Prime craze has completely blown over. Where once there were moshpits, there are now bargain bins of surplus Prime, marked down to just R7 a bottle. That’s a 99% drop in price in just over a year from the hype prices and is even a nasty drop for Checkers.

Fortunately, the Shoprite Group is more than big enough to take that bath without falling over. That’s the difference between indulging in a trend and building your whole business around one.

Endings and beginnings

In the early days of this column, I wrote an article about what happened in the art world after the mainstream adoption of the camera. You can read the original article here, but the TL;DR is that the primary purpose of art before the camera was to produce accurate representations of things because there was no other way to do so. When the camera was invented it completely fulfilled that purpose in a way that was quicker, cheaper and more convenient than, for instance, sitting for five hours to have your portrait painted.

Many artists perceived this as the death of their industry. Like the ESP app, painting seemed to lose its use case overnight. An essential pivot was needed, and thankfully artists (being a creative bunch) found one. By focusing on what the camera couldn’t do nearly as well as a human being could, they managed to shift the purpose of art from pure representation to expression.

(In a karmic moment, the same film cameras that caused artists so much grief in the 1800s were overtaken by digital camera technology in the 1900s. The original disruptors, Kodak, were so unprepared for this industry shift that they became almost as irrelevant as the film cameras they once sold by the thousands. Disruption comes for us all.)

Moving on, the mechanical watch and horse-based transport are products of industries that survived massive disruption (via the quartz crisis and automotive technology, respectively) by accepting that they now appeal to a niche audience. There’s nothing wrong with a niche, if you can manage to carve one out for yourself. Demand may be lower, but you have fewer competitors (usually), and those who seek you out are often more committed to what you’re selling (and willing to pay a premium as a result).

Of course, you can only have a niche if there is still some use for your product. Digital and quartz-powered watches may reign supreme, but the underlying need to tell the time still exists, which is why mechanical watches are still being sold. From my perspective, I can’t say that I see a niche userbase in the future of the ESP app.

This generation’s Kodak moment

I can’t really write about disruption without thinking about my own business and my own industry at this point in time. This is an issue that I’ve been wrestling with for a few months now.

In 2023, a report from Harvard Business School, the Imperial College Business School and the German Institute of Economic Research examined 2 million online job listings across 61 countries from July 2021 to July 2023. The report found that since ChatGPT debuted in November 2022, demand for freelance writers has dropped by 30%. This research was done a year ago, before the launch of GPT4. I can practically guarantee that demand has dropped even more since then.

I’m not the only one in a pinch, according to the report: demand for freelance coders has dropped by 20%, graphic designers by 17%, and social media managers by 13%.

I’ve seen many writers in my industry lean into the trend in order to try to secure their incomes. They now offer prompt engineering services, or cleanup and “humanification” of AI-generated content. With AI regulation still a hot topic and some businesses actively distancing themselves from “unproven” technology, there’s still a question around whether AI is here for a long time or just a good time. Building a business or a product offering around it, in my opinion, is not that different from joining the mad rush to stock up on Prime. Sure, customers want it now. But are they going to want it this badly a year from now?

Is the answer to carve out a niche instead? I certainly hope so, as that is the route that I’ve taken. As AI fatigue starts to set in, readers might find a restful reprieve in writing that not only sounds human, but that showcases human thought. ChatGPT may be able to imitate my cadence if I trained it on enough examples of my writing, but at this stage it cannot link ideas in the same way that I do. It would have written this article without referencing the invention of the camera or the Prime craze, and I doubt it even knows what ESP is, or understands why South Africans formed such an attachment to an app.

Like the classically trained painters in 1816, my fellow writers and I stand at the edge of an industry today and gaze into the unknown. The great disruptor has found us, and the way before us is unclear. Fortunately, like the artists that executed their brilliant pivot all those centuries ago, we are a creative bunch. I’m sure we’ll figure something out.

As for ESP… well, I’m not sure if there’s much room left for innovation there, unless loadshedding makes a sudden comeback. I guess sometimes things just end.

About the author: Dominique Olivier

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

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

Dominique can be reached on LinkedIn here.

Ghost Bites (Coronation | Grindrod Shipping | Harmony | Sirius Real Estate | Sasol | Standard Bank)

The Finance Ghost
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Ghost Bites (Coronation | Grindrod Shipping | Harmony | Sirius Real Estate | Sasol | Standard Bank)

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

Coronation shareholders: brace yourselves (JSE: CML)

The Constitutional Court ruling is coming on Friday morning

After much legal to-and-fro, the big day has finally arrived. The Constitutional Court will deliver a landmark ruling on Friday regarding Coronation’s battle with SARS and the tax assessment on its transfer pricing. This ruling will have ramifications for many South African corporates.

At 10am on Friday, the magic will happen. Watch that Coronation share price either way.

Grindrod Shipping approves the selective capital reduction (JSE: GSH)

This is effectively a take-out of minority shareholders

At a price of $14.25 per share, Grindrod Shipping shareholders were happy to say goodbye. Good Falkirk Limited and its concert parties were not allowed to vote on this deal to effectively cancel the shares held by non-controlling shareholders, so only those shareholders who would see their shares cancelled in exchange for that price were entitled to vote.

There was strong approval for the deal, with over 95% approval from those who voted.

Harmony has affirmed its guidance for FY24 (JSE: HAR)

This has been a poor year for safety at the group but a strong financial year

Harmony Gold has released far too many announcements recently that start with “loss-of-life” – a stark reminder that this is still a dangerous industry. There is much focus on safety, but any loss of life is unacceptable and the industry knows that. If it wasn’t for those incidents, Harmony would be putting together the perfect financial year. Against the backdrop of those incidents though, the financial performance for FY24 can only be celebrated to a lesser extent than would otherwise be the case.

For the year ending June 2024, Harmony is obviously taking advantage of strong rand-denominated gold pricing. They are also enjoying improved recovered grades, so the production metrics are strong at the right time, with total production expected to exceed the FY24 guidance of 1,550,000 ounces. All-in sustaining costs will be well below R920,000/kg.

Total capital expenditure will be marginally below the guided R8.6 billion, so that’s promising for free cash flow as well. The investment plan for FY25 is focused on the higher quality assets across both gold and copper, with Harmony looking to de-risk its business.

Sirius has recycled capital into new UK assets (JSE: SRE)

This is a good example of the typical approach taken by Sirius

Sirius Real Estate doesn’t sit still, which is why investors like the fund. To create additional value in property, it’s important to buy underperforming properties and turn them into gems before selling at a much better price. Rinse and repeat.

Sirius has been very busy with raising new capital and deploying it into assets. They also recycle capital by selling properties, like the disposal of two sub-scale assets in Hartlepool and Letchworth for £1.9 million. This was a 2.7% premium to the last reported book value.

The bigger news is the two industrial asset acquisitions in the UK for £31 million, representing a 9.2% net initial yield. These deals have been funded by the Maintal disposal, which was achieved on a gross yield of 6% for €40.1 million. Remember, you want to buy on a high yield and sell on a low yield. To improve the value of the properties that have been acquired, Sirius will use its extensive industrial asset platform in the UK.

Sasol gets a major win against Transnet – but it’s not over yet (JSE: SOL)

Talk about a windfall!

For beleaguered Sasol shareholders, every SENS announcement must seem scary right now. For once, there’s a good one to read. The High Court has a gift for you if you are a Sasol shareholder.

This goes back to an agreement in 1991 regarding the setting of pipeline tariffs for the conveyance of crude oil by Transnet for both Sasol Oil and TotalEnergies Marketing from Durban to the Natref crude oil refinery in Sasolburg. Sasol Oil and TotalEnergies are co-invested in Natref and in 2017, Sasol followed TotalEnergies in instituting legal action against Transnet for damages based on Transnet overcharging for a number of years.

After years of litigation and many happy lawyers, the High Court eventually handed down judgment in favour of Sasol Oil and TotalEnergies. Damages to the value of R3.9 billion plus interest of R2.3 billion were awarded to Sasol Oil. Even on Sasol’s market cap of R85 billion, that’s a welcome bit of news.

It’s not a guarantee just yet, as Transnet intends to appeal the ruling.

Standard Bank’s earnings growth has slowed down (JSE: SBK)

African currency exposures have applied the handbrake

Standard Bank has released an update for the five months to May 2024, with the key takeout being that HEPS is up by low-to-mid single digits. That’s a far more modest growth rate than we’ve seen from the bank in recent times, with movements in various African currencies relative to the ZAR to blame. On a constant currency basis, HEPS would be up by mid-teens, which is certainly more like it.

The banking activities achieved headline earnings growth of mid-single digits, with the trends in the first quarter continuing into the subsequent months. Income growth was driven by the combination of higher average interest rates and transactional volumes at clients, with trading revenues as a dampener on the numbers. Balance sheet growth has also slowed down, with clients perhaps struggling to justify ongoing growth in debt at these rates. Importantly, income growth was ahead of operating expenses growth, so there was positive jaws – a key metric in banking that measures the direction of travel for operating margin. Impairments were higher in the retail and business banking books in particular, partially offset by lower charges in the corporate and investment banking book. The credit loss ratio is above the group’s through-the-cycle target range of 100 basis points.

In the insurance and asset management segment, a better risk claims experience in South Africa helped drive earnings. This benefit was partially offset by the impact of the Nigerian naira on the asset management earnings in Africa.

At ICBC Standard Bank, earnings were profitable but lower vs. the comparable period which was a high base.

The group’s Return on Equity (ROE) is down year-on-year but has remained in the target range of 17% to 20%.

When you consider just how strong the base period is, this remains a decent set of numbers at Standard Bank.

Little Bites:

  • Director dealings:
    • A director of Investec (JSE: INL | JSE: INP) sold shares worth £885k.
    • Here’s one you don’t see every day: a director of Capitec (JSE: CPI) has donated shares to a charitable foundation to the value of R2.6 million.
    • An independent non-executive director and an associate of Bytes Technology (JSE: BYI) bought shares in the company worth nearly £48k.
    • A director of a major subsidiary of RFG Holdings (JSE: RFG) sold shares worth R738k.
    • A director of Afrimat (JSE: AFT) sold shares worth R508k. Separately, an associate of director of Afrimat sold shares in the company worth R140k.
    • A director of a major subsidiary of Sanlam (JSE: SLM) sold shares worth R326k.
    • An associate of Piet Viljoen bought shares in Astoria Investments (JSE: ARA) worth nearly R320k.
    • Associates of the CEO of Spear REIT (JSE: SEA) bought shares in the company worth R220k.
    • A director of a major subsidiary of Vodacom (JSE: VOD) sold shares in the company worth R193k.
    • Sean Riskowitz bought further shares in Finbond (JSE: FGL) worth R75k. A different director bought shares worth R69k.
    • A director of Premier Group (JSE: PMR) bought unlisted A1 ordinary shares worth R225. That may sound entirely unimportant, but just be aware if you are a shareholder here that there are two classes of shares. Digging into the rights of the A1 shares would be wise if you hold Premier shares.
  • Capital & Regional (JSE: CRP) announced back in May that controlling shareholder Growthpoint (JSE: GRT) had received a preliminary expression of interest from NewRiver REIT in relation to a possible offer in shares and cash for Capital & Regional. The original PUSU (the “put up or shut up” – i.e. commit to an offer or not) deadline was 20 June, which has obviously passed. Discussions are still underway and the Takeover Panel has consented to an extension to 18 July.
  • MTN (JSE: MTN) announced that the offer of MTN Uganda shares to the public was heavily oversubscribed. MTN made a portion of its holding in MTN Uganda available to the public to raise funds and increase the local float. The offer was 2.3 times oversubscribed, so there was strong interest in the shares. MTN Uganda has attained the 20% minimum public float requirement as well.
  • Although a director dealing, I wanted to include this separately to the others as a hedging transaction isn’t the same as a sale or purchase. Barry Swartzberg has bought put options over Discovery (JSE: DSY) shares at a strike price of R112.03 (giving downside protection below this level), in two tranches, with exercise dates in mid-2025 and December 2025. In both cases, the notional value is R84 million. To finish the collar structure, Swartzberg chose to give away upside by selling call options with a price of R172.32 per share for mid-2025 expiry (R129 million in value) and a price of R187.29 per share for end-2025 expiry, with a value of R140 million. The current share price is R134.
  • Kibo Energy (JSE: KBO) has announced its new corporate restructuring plan. Considering that the last one had a very short lifespan before being cancelled, forgive me for not putting too much faith in this plan at this stage. Either way, Louis Coetzee is on his way out as CEO. A placing of £340,000 is part of this plan. The debt reduction with Riverfort announced earlier this month remains in place.
  • Trustco (JSE: TTO) announced that the Supreme Court of Appeal upheld the JSE’s directive to Trustco to restate its financial statements. This restatement already happened, so there’s actually no further action required. This was purely a matter of legal precedence. Interestingly, the court confirmed that members of the Financial Services Tribunal do not need to have experience or expert knowledge of financial services or the financial system in order to adjudicate on a case. Do with that what you will.

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

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

Exchange-Listed Companies

Sanlam and MultiChoice have entered into an agreement which will see Sanlam Life take a 60% stake in NMS Insurance Services (SA). MultiChoice will receive an upfront cash payment of R1,2 billion for the stake with a potential earn-out payment of up to R1,5 billion. A pre-acquisition dividend of R59 million will be declared by NMSIS. The deal is a category 2 transaction for both companies and accordingly does not require shareholder approval.

Zeder Financial Services (Zeder Investments), through its direct and indirect subsidiaries Pome Investments and CS Agri, will dispose of Theewaterskloof Farm to the Japie Groenewald Trust for R283 million. The disposal consideration will be paid to CS Agri which intends to distribute most of the proceeds to shareholders.

To facilitate ongoing discussions, and on the request of Growthpoint Properties, the UK Panel on Takeovers & Mergers has extended the deadline to July 18, 2024, for NewRiver REIT plc to make a formal offer for Capital & Regional. Growthpoint owns a 68% stake in Capital & Regional. In May, Vukile Property Fund withdrew its bid to acquire Capital & Regional, leaving NewRiver as the only suitor.

Sirius Real Estate has completed the acquisition of two industrial assets in Banbury and Wembley in the UK for c.£31 million. In addition, the company has disposed of two sub-scale assets located in Hartlepool and Letchworth for a combined total of £1,9 million.

Unlisted Companies

Azelis, a global innovation service provider in the specialty chemicals and food ingredients industry, has signed an agreement to acquire Durban-based specialty chemicals distributor CPS Chemicals (Coatings). CPS distributes to the paint, ink, resins, paper, plastics and rubber industries. The acquisition expands Azelis’ footprint in South Africa, complementing the company’s lateral value chain in the CASE (coatings, adhesives, sealants, and elastomers) segment. Financial details were undisclosed.

Weekly corporate finance activity by SA exchange-listed companies

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

Remgro has completed an accelerated bookbuild offering of 122,908,061 Momentum Metropolitan shares raising aggregate proceeds of R2,7 billion. The shares were placed at a price of R22.00 per share representing a 7.6% discount to the closing price of R23.82 on 18 June 2024 and a 0.3% premium to the 30-day VWAP average price of R21.93. The placement represents 8.9% of the total issued ordinary shares of Momentum. Remgro no longer holds any ordinary shares in the company.

MTN Uganda attained the 20% minimum public float required in terms of the Uganda Securities Exchange, with MTN successfully placing 1,57 billion MTN Uganda shares at UGX 170 per share (UGX 267 billion/R1,29 billion) to institutional investors. The offer was 2.3 times oversubscribed with 3 billion shares applied for by 20,636 shareholders.

Lighthouse Properties has, on the open market, disposed of a further 109,103,790 Hammerson plc shares for an aggregate cash consideration of R718,48 million.

As part of the restructuring of its existing debt, Kibo Energy plc will issue a further 3,400,000,000 shares in the company to raise £340,000. Shard Capital Partners subscribed for £240,000 worth of shares with the remaining raised through two private subscriptions of £50,000 each.

The JSE has advised that the following companies, Acsion, African Dawn Capital, Sable Exploration and Mining, Visual International and Vunani have failed to submit their Annual Financial Statements (AFS) within the three-month period as stipulated in the JSE’s Listing Requirements. If the companies fail to submit their AFS on or before 30 June 2024, then their listings may be suspended.

Afristrat Investment’s listing will be removed from the Main Board of the JSE following its suspension in August 2022. The company has failed to take adequate action to enable the JSE to reinstate the listing. Accordingly, the last day to trade (off market) in the company’s shares will be 25 June. The listing will be removed on 1 July 2024.

A number of companies announced the repurchase of shares:

In line with its share buyback programme announced in March, British American Tobacco this week repurchased a further 210,994 shares at an average price of £24.05 per share for an aggregate £5,1 million.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 10 – 14 June 2024, a further 3,225,887 Prosus shares were repurchased for an aggregate €110 million and a further 236,125 Naspers shares for a total consideration of R904 million.

Two companies issued profit warnings this week: Thungela Resources and Nampak.

Two companies issued cautionary notices this week: Choppies Enterprises and Coronation Fund Managers.

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

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

Vanessa Aitken
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Who’s doing what in the African M&A space?

DealMakers AFRICA

MTN Uganda has released the results of the offer announced in May whereby MTN International (Mauritius) offered up to 1,574,807,373 shares (7.03% stake) in MTN Uganda for sale at UGX 170 per share. The offer closed on 10 June and was 2.3 times oversubscribed. The company has now attained the 20% minimum public float required by the Uganda Securities Exchange.

Vantage Capital has provided Two Rivers International & Innovation Centre (TRIFIC SEZ) with US$47,5 million in mezzanine funding. TRIFOIC SEZ is a services-oriented business park in a special economic zone located in the diplomatic blue zone of Nairobi, Kenya. The funding will be used to fund and renovate a 14,975 sqm office tower and to develop two Grade A office towers.

EnjoyCorp has completed the 100% acquisition of The Raysun Nigeria from Heineken B.V. that was announced in February. The Raysun Group holds an 86.5% stake in NGX-listed Champion Breweries.

Ghanaian agritech, Wami Agro, has received an undisclosed investment from Mirepa Investment Advisors’ Mirepa Capital SME Fund I. The funding will be used to scale up operations. Wami currently has a network of over 13,000 farmers across five regions in Ghana in the rice, maize, soya and sorghum value chains.

Kenya Orchards has notified its shareholders that Africa Mega Agriculture Centre (AMAC) is looking to acquire up to,10,863,537 shares (84.423%) in the firm from Westpac Holdings (34.282%); Thakarshi Keshav Patel (33.606%); Vipul Thakarshi Patel (14.886%) and Hansa Dinesh Chandra Shah (1.649%). AMAC has stated in the Notice of Intention that is does not plan to delist Kenya Orchards and will apply to the Capital markets Authority for an exemption from having to make a full takeover offer for the firm.

British International Investment has signed an agreement to provide funding of US$15 million (with the potential to increase this to $25 million) to Rift Valley Energy to finance the installation of an additional 7.6MW of renewable energy for Tanzania’s national grid. Rift Valley Energy is wholly owned by Meridiam and operates and is developing a portfolio of 30MW of renewable energy generation together with its subsidiary Mwenga Power Services.

Yield Uganda Investment Fund managed by Pearl Capital, has fully exited its equity investment in Ugandan vanilla processor and exporter, Enimiro. Financial terms were not disclosed. The fund first invested back in July 2022 with a US$515,000 blend of equity and cumulative redeemable preference shares.

Enhancing accountability: a closer look at the ‘Two-Strike Rule’

Jaynisha Chibabhai
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Enhancing accountability: a closer look at the ‘Two-Strike Rule’

Remuneration plays a pivotal role in the corporate landscape, influencing not only the retention, motivation and performance of executives, but also shaping the overall governance framework of companies.

The recent Companies Amendment Bill [B27B-2023](Bill), a legislative initiative aimed at, inter alia, promoting equity between directors and senior management on the one hand, and shareholders and workers on the other, introduces significant changes to the remuneration disclosure requirements for public and state-owned companies. One such notable reform is the introduction of the ‘Two-Strike Rule’, as defined and discussed below.

Understanding the ‘Two-Strike Rule’ and its alignment with global practices

The ‘Two-Strike Rule’ aims to enhance transparency and accountability in executive remuneration. Arguably, the rule alters the dynamics of remuneration governance, particularly for non-executive directors (NEDs) serving on remuneration committees (RemCom).

The move to implement the ‘Two-Strike Rule’ brings South African legislation in line with global peers, particularly Australia, which previously adopted a similar rule. There are, however, some noteworthy distinctions between the Australian and proposed new South African rules.

In Australia, the ‘Two-Strike Rule’ entails that board members of a company will be required to stand for re-election if the company’s remuneration report (Rem Report) receives a ‘no’ vote of 25% or more at two successive annual general meetings (AGM). The first strike is triggered when the company’s Rem Report receives a ‘no’ vote of 25% or more at an AGM. The company’s subsequent Rem Report in the following year must explain how the shareholders’ concerns have been taken into account. The second strike occurs should the company’s subsequent Rem Report receive a ‘no’ vote of 25% or more at the next AGM (Second AGM), resulting in a ‘spill resolution’ to be put to shareholders at the Second AGM. A successful ‘spill resolution’1 would initiate a ‘spill meeting’, in which the company’s directors (except the managing director, who may continue to hold office indefinitely) would need to stand for re-election.

In South Africa, the Bill proposes that, if the Rem Report (including the background statement, remuneration policy and implementation report) is not approved by ordinary resolution (more than 50% of votes cast by shareholders) at a company’s AGM, the RemCom must, at the Second AGM, present an explanation on the manner in which the shareholders’ concerns have been taken into account. NEDs serving on the RemCom must stand for re-election as members of the RemCom at this Second AGM, at which the explanation is presented. If, at this Second AGM, the Rem Report in respect of the previous financial year is also not approved by ordinary resolution, the NEDs on the RemCom may continue to serve on the board as NEDs, provided that they successfully stand for re-election at the Second AGM. However, there is a crucial caveat – these NEDs will not be eligible to serve on the RemCom for a period of two years thereafter (Suspension Period). The abovementioned provisions do not apply to members of the RemCom who have served for a period of less than 12 months in the year under review.

Legislative perspectives and amendments

Following representations by the business community, Trade, Industry and Competition Minister Ebrahim Patel, who is responsible for overseeing the Companies Act, provided a concession by reducing the Suspension Period from three years to two. Despite this, the introduction of the new re-election requirement to the board adds a layer of complexity, making it a more rigorous provision, compared to the Bill’s predecessor [B27 – 2023].

A necessary addition or an undesirable imposition on governance

The ‘Two-Strike Rule’ introduced in the context of executive remuneration has several key benefits. Firstly, it empowers shareholders by allowing them to express their views on the remuneration structure of executives, ensuring that their interests are actively considered. Secondly, the ‘Two-Strike Rule’ promotes accountability by encouraging companies to tie executive pay to performance, with the prospect of a vote against the Rem Report incentivising directors to align their decisions with the company’s long-term success, and shareholder value. Lastly, the ‘Two-Strike Rule’ contributes to improved transparency through comprehensive disclosure of remuneration policies and practices. This heightened transparency enables shareholders to make well-informed decisions, and holds companies accountable for their remuneration choices.

However, the ‘Two-Strike Rule’ also poses some potential drawbacks. Firstly, there is apprehension about the ‘Two-Strike Rule’ fostering a short-term focus on immediate results to secure shareholder approval, rather than incentivising the pursuit of long-term strategic goals. Secondly, the compliance requirements of the ‘Two-Strike Rule’ pose a significant administrative burden for companies, involving extensive time and resources for comprehensive disclosure and adjustments to Rem Reports. Lastly, the requirement for certain NEDs to stand for re-election to the board raises concern about the overall attractiveness of directorship roles, potentially impacting the pool of candidates willing to take on such positions.

Remuneration is a multifaceted area that undergoes continuous evolution, influenced by market dynamics. By placing greater emphasis on shareholder involvement and detailed reporting, the Bill seeks to address concerns related to executive remuneration practices. While the ‘Two-Strike Rule’ aligns South African legislation more closely with international peers, its nuanced provisions and potential implications warrant close attention. The coming months will likely see robust discussions and adjustments as stakeholders navigate this new terrain, in pursuit of a more transparent and accountable corporate environment.

1.The term “spill” refers to the effect of the ‘Two-Strike Rule’; that is, to have board members stand for re-election

Sources:

Companies Amendment Bill [B 27B—2023], https://www.gov.za/sites/default/files/gcis_document/202312/bill-b27b-2023.pdf

Explanatory Memorandum on the Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Bill 2011, https://treasury.gov.au/sites/default/files/2019-10/explanatory_memorandum.pdf

Corporations Amendment (Improving Accountability on Director and Executive Remuneration) Act, No. 42, 2011, https://www.legislation.gov.au/C2011A00042/latest/text

https://www.businesslive.co.za/fm/features/2024-02-01-new-pay-rule-to-squeeze-boards/

Jaynisha Chibabhai is a Corporate Financier | PSG Capital.

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

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

Capital Gains Tax and its impact on offshore indirect transfers in Kenya

Alex Kanyi, Lena Onyango and Judith Jepkorir
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Capital Gains Tax and its impact on offshore indirect transfers in Kenya

It was expected that the steady rise in foreign investments in Africa would result in an equally steady increase in tax revenue. As this has not been the case, African countries have embarked on reviews of their tax policies in an effort to get as much tax revenue in the net as possible. One type of fish, Capital Gains Tax (CGT) seems to have been avoided by both the African governments and the investors, yet it counts for a big percentage of the potential tax revenue collectable from the foreign investments. For instance, in 2020, an analysis by Oxfam highlighted that in just seven disputes emanating from CGT avoidance by multinationals, an amount of US$2,2 billion was in contention.

This article takes a deep dive into the specific steps taken by Kenya to ensure an increase in the amount of CGT collected from both onshore and offshore transactions. In light of this, it is imperative for potential investors to carefully review their activities, to ensure that they are not adversely affected by the changing laws in Kenya and the aggressive position taken by the Kenya Revenue Authority (KRA).

A look at Kenya

In Kenya, CGT has traditionally been levied on gains made from the transfer of property, whether or not acquired before 1 January 2015. The applicable rate went up from 5% to 15% of the net gain, beginning 1 January 2023.

The Finance Act, 2023 (the Act) ushered in a new regime for CGT in Kenya. Of relevance to this article is the fact that, effective 1 July 2023, gains from the sale of shares in foreign entities that derive more than 20% of their value directly or indirectly from immovable property situated in Kenya shall now be subject to CGT. Immovable property is defined within the Act to include land and things attached to the earth or permanently fastened to anything attached to the earth, an interest in a petroleum agreement, mining information or petroleum information. Please see the following illustration.

Figure 1: Before the Act

Figure 1 is an illustration of an onshore transfer of shares in a company situated in Kenya. A and B are individuals owning 80% and 20% respectively of the shareholding in KenyaCo. B is transferring half of his shares in KenyaCo (10%) to C. Before the Act came into force, only transfers of this nature (happening in Kenya) were subject to CGT.

Figure 2: After the Act

Figure 2 is an example of an offshore indirect transfer now subject to CGT in Kenya. In the illustration, Mauritius Holdco indirectly derives more than 20% of its value from immovable property located in Kenya, owned by its subsidiary, KenyaCo. As such, it is liable to pay CGT in Kenya.

It is noteworthy that pursuant to the Act, non-residents holding more than 20% or more of the shareholding in a resident company, directly or indirectly, are subject to CGT on the disposal of their interest in the company. Please see the following illustration:

Figure 3: After the Act

In Figure 3, X is a non-resident who owns Offshore Limited. Offshore Limited and Y (a Kenyan individual) each own 50% of the shares in KenyaCo, a resident company. X is transferring 30% of the shares in Offshore Ltd to A, a non-resident. According to the Act, transactions of this nature by non-residents are now also subject to CGT in Kenya.

This recent development was not only effected in law, it has also been enforced by the judicial organs. More specifically, the Tax Appeals Tribunal, in the case of Naivas Kenya Limited v Commissioner of Domestic Taxes (2022) and ECP Kenya Limited v Commissioner of Domestic Taxes (2022), determined that the Kenya Revenue Authority (KRA) had not erred in taxing the gains from the sale of shares in Mauritius-based entities, for the reason that they were being managed and controlled from Kenya. It is notable that the assessment in both cases related to corporation tax and not CGT. This points to the aggressive position taken by the KRA not just to pursue 15% CGT, but corporation tax at 30% for an offshore indirect transfer that derives value in Kenya.

International best practice

Tax treaties are at the centre of international cooperation in tax matters, such as tackling international tax evasion. To prevent double taxation, they would typically award taxing rights to either the resident state or the state where the asset is located.

Kenya has aligned itself to International best practices, including the OECD Model Tax Convention and United Nations (UN) Article 13 (4). Both the UN and OECD Model Tax Convention stipulate that gains derived by a resident of a Contracting State from the alienation of shares or comparable interests, such as interests in a partnership or trust, may be taxed in the other Contracting State if, at any time during the 365 days preceding the alienation, these shares or comparable interests derived more than 50% of their value directly or indirectly from immovable property situated in that State.

Conclusion

For commercial reasons, Foreign Direct Investors may opt to invest through offshore entities. However, the recent developments in Kenya call for a review of this approach. Kenya and other countries have taken steps to implement concrete measures to effectively collect CGT from capital gains realised through such transactions, and the taxation of offshore indirect transfers is already a fully established international tax norm.

Investors with offshore operations should, therefore, consider taking a step back to ensure that their legal, operational and transactional structures adapt to the changing tax regulations. This calls for expert guidance to identify any potential weaknesses in the existing structures, as well as to advise on and implement the necessary adjustments to maintain tax compliance, minimise tax exposure, and guarantee sustainability.

It is important for global investors to carefully review the tax impact for investments that derive their value from Kenya, to ensure that the risk of CGT and Corporation Tax on offshore indirect transfers is addressed.

Alex Kanyi and Lena Onyango are Partners, and Judith Jepkorir a trainee Advocate | CDH Kenya

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

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

Ghost Bites (Ascendis | Brait | Fortress | Gemfields | Libstar | Safari Investments | Schroder European Real Estate | STADIO | Zeder)

The Finance Ghost
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Ghost Bites (Ascendis | Brait | Fortress | Gemfields | Libstar | Safari Investments | Schroder European Real Estate | STADIO | Zeder)

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

Ascendis announced the ruling of the TRP (JSE: ASC)

This comes after much fighting on social media and several complaints

It’s quite unusual to see a regulatory process play out like this, but this is exactly why we have rules and regulations enshrined in our law. When parties feel aggrieved by the actions of a company in a regulated transaction, there are mechanisms for them to formally complain. I always prefer seeing this route vs. mudslinging on the ol’ socials.

After an investigation into the complaints received, the associated report and the TRP ruling have now been released. You can find the report at this link and the ruling at this link.

Long story short, the TRP has found that the consortium, Calibre and Theunis de Bruyn were indeed acting as concert parties. They have been instructed to rectify the disclosure around this. The investigator also recommended that the TRP consider whether provisions of the Companies Act were contravened. The TRP has left that recommendation open-ended at this point in time, committing to a further investigation in this regard.

If you’re wondering what this means for the delisting itself, the inspector notes that this transaction has been structured as a general offer. Shareholders still have the option whether to accept it or not. Disclosure needs to be updated, but this doesn’t affect whether shareholders can accept the offer. The TRP is not there to prevent the delisting itself.

The consortium “strongly disagrees” with the TRP’s findings and is considering legal options.

Brait asks bondholders for flexibility (JSE: BAT)

The request is for a three-year extension, as was previously announced by the company

This isn’t new information from Brait. The group already hurt the market recently by letting everyone know that the maturity of the bonds needs to be kicked out by three years in order to give more runway for a recovery in the underlying assets. The goal here is to avoid a forced sale of the underlying assets at an inopportune time, which would be catastrophic for equity holders.

As it is, the company needs an equity raise to help sort out the balance sheet. Not getting the extension on the bonds would only make things worse. Unsurprisingly, Titan (Christo Wiese’s entity) has fully underwritten the rights offer at R0.59 per share, a discount of 25% to the theoretical ex-rights price.

The good news is that the outstanding balance on the bonds will be reduced with the proceeds from the listing of Premier. This takes the form of a partial redemption of bonds to the value of R750 million, achieved by reducing the nominal value of each bond from R1,000 to R750.

To sweeten the deal for bondholders and to get them to agree to a three-year extension, the coupon on the bond will increase from 5.0% per annum to 6.0% per annum. This unfortunately offsets much of the benefit to Brait of the reduced value of the bonds, so shareholders just never seem to catch a break here.

As has been the case before for Brait shareholders, value simply transfers from minority investors to strategic investors. The share price is down 95% over five years.

Fortress has given solid earnings guidance (JSE: FFB)

Things are looking promising in the aftermath of the share class restructure

After much distraction to sort out the dual-share class structure and the mess that created, Fortress is now able to focus on the business itself. That’s a good thing.

In a highly detailed pre-close update, the fund gave updated earnings guidance for FY24 of at least R1.7 billion. That’s an improvement on the previous guidance of R1.66 to R1.72 billion. The group has also guided that distributable earnings for FY25 should be at least R1.73 billion. Although that sounds like a modest uplift, it works out to 20.7% growth on the normalised figure for FY24 that adjusts for the NEPI Rockcastle dividend received in FY24. This is because those shares were used to sort out Fortress’ share class structure, so the dividends on those NEPI shares won’t be received in FY25. In other words, they are doing well.

The growth is being driven by extensive development in the logistics portfolio and selected retail properties, assisted by the disposal of non-core assets. Importantly, the disposals were at a premium to book value. This gives support to the NAV of the fund.

Across the logistics and retail portfolios, metrics generally look promising. They do have some odd exposures though, like in the CBDs of Johannesburg and Bloemfontein. Fortress doesn’t exactly stick to marble floored retail properties, but the CBDs really aren’t the place to be.

Although load shedding seems to have left us for now, Fortress continues to invest heavily in solar energy generation and that’s a good thing. They currently get 5% of energy needs from renewables and they expect this to rise to 10%.

The office portfolio is only 2.6% of value and they expect this to drop to below 2.0% after disposals. Vacancies are still high at 22.4%, although that’s a slight improvement from 24.4% at least.

Fortress still holds 16.2% in NEPI Rockcastle and can use those shares for funding, like in the scrip lending arrangement with Standard Bank. Fortress remains the beneficial owner of the shares, but earns something from Standard Bank for lending the shares out.

With a loan-to-value ratio of 39.4%, Fortress finds itself in a strong balance sheet position with a level of debt that is typical for a fund like this.

Gemfields banks another successful ruby auction (JSE: GML)

The price has moved through the $300 per carat milestone

Gemfields sounds pleased with the results of the latest ruby auction. Although you have to be careful with comparisons across different auctions, going through the milestone of $300 per carat is meaningful. Total auction revenues of $68.7 million were achieved through the sale of 97% of the lots on offer. This is very similar to the amount achieved in December 2023, although that prior auction could only manage $290 per carat.

The thing to especially be careful of here is that no rubies in the “low ruby” category were offered at this auction, so this limits comparability to some of the older auctions. Still, this is a decent outcome at a time when softer demand in China has been a concern.

Libstar’s growth is being driven by pricing increases (JSE: LBR)

Against a tough market backdrop, the company has also been focused on its restructure

Libstar is dealing with a difficult consumer environment that makes growth tough to come by. The group is responding to these challenges by simplifying its operations and restructuring into two super categories: Perishable Products and Ambient Products. It’s also worth noting that they have both domestic and export products, although they don’t organise the business along those channels.

A pre-close update has given the market a sense of trading for the financial year up until the end of May. This is a story of revenue growth through pricing increases, with overall revenue up by 4.6% thanks to price and mix changes of 6.3%. Volumes declined by 1.7%.

Looking deeper, Perishable Products saw revenue drop 4.4%, with price and mix up 7.7% and volumes down 3.3%. Ambient Products revenue increased 5.3%, with price and mix up 5.8% and volumes negative.

Of course, sales growth is only part of the equation. Gross margins are critical, with Libstar guiding for margins above the levels seen in H1 2023 based on pricing increases and cost management. Below that on the income statement, they describe general and administrative expenses as being “well-controlled” in the group.

Overall, management sounds optimistic about the restructuring of the group and the momentum they are seeing. It sounds like tough going though, as pricing and margin increases only get you so far. They will need volumes to turn positive for investors to really get rewarded.

The NAV has moved higher at Safari Investments (JSE: SAR)

But distributable income is down due to non-recurring income in the base

Safari Investments has released results for the year ended March 2024. The NAV per share moved 8.63% higher to R9.94, with the share price currently at R5.60 and reflecting a significant discount to NAV.

Despite the increase in NAV, the distribution per share for the full year actually dipped from 65 cents to 61 cents. This is because the base period included a significant non-recurring insurance payout.

The loan-to-value ratio is 34%, which is a comfortable level for a property fund. Another data point that you might find interesting is that the all-in weighted average cost of debt for the period was 10.38%. Debt certainly isn’t cheap in South Africa at the moment.

Earnings up but NAV down at Schroder European Real Estate Fund (JSE: SCD)

Valuation pressures on the underlying portfolio continue

As the name suggests, Schroder European Real Estate Fund is focused on property opportunities in European cities. Specifically, they focus on higher growth cities, admittedly by European standards. The entire region is relatively low growth vs. emerging markets, but offers far more certainty and stability of course.

For the six months to March 2024, Schroder achieved earnings growth of 3% thanks to rental growth offsetting finance charges. Despite this, the net asset value moved 3.6% lower based on the valuation metrics for the properties going the wrong way. This is what happens in a “higher for longer” rates environment.

The group remains strong overall, with no debt refinancings until June 2026 and a fairly low loan-to-value ratio that leaves plenty of flexibility.

The total dividends for the six months come to 2.96 euro cents per share. This works out to roughly R0.57 at current rates on a trailing basis. The share price is R15, so that’s an annualised yield of 7.6%.

STADIO’s student numbers are up 8% (JSE: SDO)

Milpark is dragging this down, as there is much higher growth elsewhere

At STADIO’s AGM, the group gave a voluntary business update. The high-level news is that student numbers are up by 8% across both distance learning and contact learning students. The split of students is 86% distance learning vs. 14% contact learning. This is consistent with the prior year.

These numbers hide the fact that Milpark Education’s B2B business is a drag on growth, as student numbers excluding that business are up 15% in total.

Another encouraging metric is that learner numbers at the comprehensive campus in Centurion increased by 52%, giving much support to STADIO’s decision to construct another such campus in Durbanville. That construction is due to start in the second half of the year and will be funded 50% from debt and 50% from existing cash reserves.

Zeder is selling Theewaterskloof Farm (JSE: ZED)

This is part of Zeder’s broader asset disposal plan

Zeder has announced that one of the three Capespan Agri farming businesses is being sold to the Japie Groenewald Trust. The Theewaterskloof farming unit is being disposed of for R283 million plus some additional adjustments, none of which will take the transaction into Category 1 status. This means that shareholders won’t be voting on the deal.

Although the disposal is taking place a couple of levels down in the Zeder structure, the proceeds should ultimately end up as a special distribution to shareholders. Some patience will be needed though, as there are conditions that need to be met first. The fulfilment date for the conditions is 30 September 2024, so they aren’t anticipating a painful journey to get those approvals.

The value of the net assets being sold as at the last reporting date was R231 million, so this price is a juicy premium to that level.

Little Bites:

  • Director dealings:
    • The CEO of Sun International (JSE: SUI) has sold shares worth just under R11 million as part of a broader portfolio rebalancing. This is 13.5% of his total shareholding in the company, which is important context.
    • The financial director of Vodacom South Africa, the subsidiary of Vodacom (JSE: VOD) has sold shares worth R2.5 million. I’m generally bearish on this sector, so I would pay close attention to that.
    • An associate of Marcel Golding bought N ordinary shares in African & Overseas Enterprises (JSE: AOO) worth R1.1 million. The same associate bought N ordinary shares in Rex Trueform (JSE: REX) – which is basically the same group of companies – worth R9.9 million. Oddly, Golding in his own name sold R765k worth of shares and a different director sold R1.5 million in shares.
    • A director of a subsidiary of AVI (JSE: AVI) received a share-based award and sold the whole lot (not just the taxable portion) for R151k.
    • A family trust linked to the CEO of Motus (JSE: MTH) sold shares worth R145k.
    • A director of Copper 360 (JSE: CPR) has bought shares in the company worth R67.5k.
    • A prescribed officer of Spear REIT (JSE: SEA) has bought shares in the company worth R10.3k.
  • Choppies (JSE: CHP) has released a cautionary announcement regarding the potential sale of 100% of Mediland Health Care Distributors for cash. This is a non-core business as Choppies wants to focus on retail. Although there’s no firm deal yet, the deal has been pre-approved by the Consumer and Competition Authority. No indication of price has been given.

Ghost Bites (MultiChoice – Sanlam | Sephaku | Southern Palladium | Stor-Age | Telkom | Thungela)

The Finance Ghost
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Ghost Bites (MultiChoice – Sanlam | Sephaku | Southern Palladium | Stor-Age | Telkom | Thungela)

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

Despite the Canal+ deal, MultiChoice isn’t sitting still (JSE: MCG)

Sanlam (JSE: SLM) is partnering with MultiChoice to drive an insurance strategy into the user base

The insurance game is all about distribution and reaching large client bases through clever partnerships, especially when you’ve reached the size of Sanlam. Writing one new policy isn’t even a drop in the ocean at Sanlam. But accessing millions of potential customers? Different story.

Sanlam will acquire a 60% stake in MultiChoice’s insurance business called NMS Insurance Services. Even though nobody ever talks about this operation within MultiChoice, it’s clearly not small. The up-front payment for the 60% is R1.2 billion and there’s a potential earn-out that could take it to R1.5 billion. Before the deal, NMS will declare a pre-acquisition dividend to MultiChoice of R59 million.

NMS has been operating for the past 20 years, writing policies related to device, installation, funeral, subscription waiver and debt waiver insurance products. Of course, there are much bigger plans with Sanlam involved. There are 21 million households across 50 countries, so this is a huge potential market. The question is whether NMS will successfully convince a DStv subscriber to take out insurance for things that might not be related to the DStv subscription itself.

The number of in-force policies increased 19% year-on-year in the 2024 financial year. There are 3.3 million in-force policies. Profit after tax was up 51% for the year to R296 million, so you can see how they’ve gotten to that valuation.

I like this transaction for many reasons. Sanlam is taking control of the insurance business with this 60% stake, which makes perfect sense as Sanlam (not MultiChoice) are the insurance experts. For MultiChoice, retaining a 40% stake in a growing business is significant. Goodness knows the up-front cash doesn’t hurt either, as MultiChoice is investing heavily in its business at the moment as it grows in digital streaming.

These are Category 2 transactions for both companies, so shareholders of Sanlam and MultiChoice won’t need to vote on the deal. There are a number of conditions to be met though, with a fulfilment date of January 2025.

Sephaku flags much higher earnings (JSE: SEP)

The share price closed 25% higher in appreciation of these numbers

Sephaku Holdings released a trading statement for the year ended March 2024 that tells an excellent story for shareholders. You won’t often see a year-on-year move like this, although there’s a significant base effect here. The underlying story is that the group’s businesses have returned to a level of performance seen two years ago.

Still, there will be no complaints from shareholders about HEPS jumping from 9.98 cents to between 24.5 cents and 26.0 cents. The share price closed 25% higher at R1.35.

Southern Palladium has completed its drilling campaign (JSE: SDL)

The results are described as consistent and robust

For an early-stage mining group, it’s all about working through milestones on the project and getting it closer to production. There are a number of important steps along the way, like a Mineral Resource Estimate and a Pre-Feasibility Study. As each milestone is reached, value is created for investors.

This means that there is drilling along the way. Lots of drilling. The initial drilling campaign has now been completed by Southern Palladium and the company seems happy with the results, with the goal being to release an Indicated Mineral Resource in the third quarter of 2024. This will facilitate the planning for the Pre-Feasibility Study.

So far, so good then.

Stor-Age could only manage flat dividend growth this year (JSE: SSS)

This is despite strong growth in property net operating income

When it comes to property funds, the main thing to think about is whether the benefits of growth will be going to the banks or the shareholders. At Stor-Age, the growth in the year ended March 2024 was eaten up by finance costs, as this income statement shows:

This is a cyclical thing obviously, as it depends on what happened to interest rates and the levels of debt relative to the prior year. Stor-Age is such a solid operation that most of the performance really is attributed to the cycle rather than any surprises from the business. They are trying to be less impacted by finance costs over time through entering into third-party management agreements for properties. The benefit is that fees are earned off properties owned by other funds, like Hines.

Rental income was up 12.7% in South Africa and 3.0% in the UK. Net property operating income increased by 13.9% and 1.1% respectively in those markets. Once finance costs ate up the benefits, distributable earnings increased by 0.4% and the dividend per share was practically identical to the prior year at 118.17 cents.

The outlook for FY24 is distributable income per share of between 122 and 126 cents. There’s quite a change to the dividend policy though, with Stor-Age considering a move away from the historical approach of a 100% payout ratio. They are considering a decrease to 90% – 95% of distributable income as a dividend, so be careful of this in your dividend expectations from the fund.

At just over R14 per share, Stor-Age is on a trailing yield of 8.4%. This low yield is a reflection of how strong the underlying model is.

Things are looking a lot better at Telkom (JSE: TKG)

The move in HEPS is particularly exaggerated

Telkom’s top-line numbers don’t look like anything special. Group revenue increased by only 1.6% for the year ended March 2024. Within that, next-generation revenue (i.e. everything that isn’t dinosaur technology) increased 7% to R34.4 billion. For context, group revenue was R43 billion.

Group EBITDA increased by 5.2% on a normalised basis (excluding non-recurring restructuring costs in the base period), with margin expanding to 23.2%. A 15% cut in headcount at Telkom obviously helped drive this improvement.

Things get a little crazy after that, with HEPS roughly tripling from 124.8 cents to 376.0 cents! This clearly warrants a deeper read.

The next sanity check is always to look at free cash flow. This improved dramatically from an outflow of R2.7 billion to an inflow of R424 million.

In the Mobile business, total external revenue increased by 4.5%. This forms part of the broader Telkom Consumer stable, which improved EBITDA margin by 280 basis points thanks to operational efficiencies. On the fibre side, Openserve increased external channel revenue significantly by 10.7% and also improved its EBITDA margin by 280 basis points as the benefit of energy investments came through for that business.

BCX unfortunately saw revenue decline by 2.3%, with EBITDA margin contracting 370 basis points as cost initiatives were not enough to offset the sharp decrease in revenue from legacy services within BCX.

Swiftnet is still shown as part of the group while the proposed disposal is going through regulatory approvals. Revenue growth was just 1.3% in that business, impacted by terminations from two customers. Despite this, EBITDA was up by 10.4% in the business as tower costs were optimised.

The group is targeting FY25 as the first year-end to consider paying a dividend. This shows how far things have come at Telkom. The policy is to pay 30% to 40% of free cash flow after capex investments. I’m not sure why they specify that, as free cash flow is generally understood to be a measure net of capex.

It does feel like Telkom is finally on a solid footing with a much-improved trajectory.

Earnings take a dive at Thungela thanks to lower coal prices (JSE: TGA)

In what is effectively a single commodity group, earnings can be very volatile

After winter energy demand in Europe and Asia was below expectations, the coal market struggled with reduced demand and thus lower prices. There are various benchmark prices that are relevant to Thungela, which now has operations in both South Africa and Australia. Wherever you look though, the benchmarks are down.

For example, for the six months to June 2024, the Richards Bay Benchmark coal price is down 18% vs. FY23. The Newcastle Benchmark coal price is down 25% vs. that period. To make it worse, the discount to the Richards Bay Benchmark price increased from 14% to 15%, driven by a mix that included more lower quality export coal. It’s much worse for the Newcastle Benchmark coal price, where Thungela has swung from an 11% premium in the three months to December 2023 to a discount of 6.8% in this period. In addition to the Newcastle Benchmark price, around 20% of Ensham’s sales are exposed to the Japanese Reference Price which hasn’t been settled yet in the market, so they’ve made provisions for the final invoiced amount to be down on 2023 prices.

Export saleable production in South Africa is towards the upper end of guidance on an annualised basis. This has helped the cost per export tonne come in at the lower end of guidance, so Thungela is doing well on the things it can control. Production is one thing, but sales are quite another. This is because Transnet is the link between producing coal and selling it. Sadly, export sales volumes fell 4.8% because of lower rail performance. This was driven by two major derailments.

It’s not hard to see why Thungela was attracted to Australia, where production and sales at Ensham moved higher. Although the hope is that Transnet’s performance will improve from 2025, hope is not a strategy.

This doesn’t mean that Thungela isn’t still investing in South Africa. Quite the opposite, actually, with capex of R1.3 billion in South Africa in this six-month period vs. AUD23 million at Ensham. The South African capex includes R800 million in expansionary capital whereas Ensham is sustaining capex only.

With all said and done, HEPS for the period will be down by between 55% and 69%. The expected range is R7 to R10 for the interim period. Net cash at 30 June 2024 will be between R7.1 billion and R7.4 billion. This includes cash reserved for capex of R1.8 billion.

On the closing share price for the day of R113, the market cap is roughly R15.9 billion.

Little Bites:

  • Director dealings:
    • A family trust associated with the chairman of The Foschini Group (JSE: TFG) has sold shares in the company worth R42.5 million. That’s a huge number obviously, with the reason given being the portfolio rebalancing of the trust interests of a sibling of the director.
    • The CEO of Investec Bank in the UK sold shares in Investec (JSE: INP) worth £532k.
    • The company secretary of NEPI Rockcastle (JSE: NRP) has sold shares in the company worth R289k.
    • Des de Beer has bought a further R282k in shares in Lighthouse Properties (JSE: LTE),
    • Acting through a combination of Protea Asset Management and in his own name, Finbond (JSE: FGL) director Sean Riskowitz acquired R187k worth of shares in the company.
  • Vukile Property (JSE: VKE) has confirmed that the dividend reinvestment price is R14.50 per share, which is practically identical to the 30-day VWAP (less the cash dividend per share). It’s important to compare the reinvestment price to the ex-div price on the shares.
  • Although it’s not news to the market that Lighthouse Properties (JSE: LTE) is selling down its shares in Hammerson (JSE: HMN), the company must still announce any sales that take it through a regulated threshold. This is why the sale of shares worth R718 million has been specifically announced.
  • Yeboyethu (JSE: YYLBEE) made a basic loss per share of R40.04 for the year ended March 2024, driven by a R2.8 billion write-down of the investment in Vodacom. The total dividend for the year was 183 cents vs. 177 cents in the prior period.
  • There’s at least some good news for Conduit Capital (JSE: CND), with an arbitration process with Trustco Properties on the other side going the way of Conduit. This relates to a transaction announced back in 2020 in which Conduit would acquire a property development from a wholly-owned subsidiary of Trustco (JSE: TTO). There were conditions related to the valuation of the property, which ended up being less than the threshold that allowed Conduit to cancel the deal. This led to a dispute over the R50 million deposit that Conduit had paid. In rare, positive news for Conduit, the arbitration award is the refund of the R50 million deposit plus interest at 7.75% per annum from December 2020. Conduit now needs to actually enforce the award, so the timing of payment remains uncertain.
  • Efora Energy (JSE: EEL) is still catching up on its financial reporting, releasing results for the six months to August 2023. The shares are still suspended from trading. For that interim period, the headline loss per share was 0.74 cents.
  • As part of the SENS announcement dealing with the distribution of its integrated annual report, Salungano (JSE: SLG) confirmed that KPMG has now provided the group with a reason for the resignation by the firm as the company auditor. KPMG made the decision as Salungano no longer meets KPMG’s risk criteria. Obviously, that’s exactly what Salungano shareholders don’t want to read.
  • Northam Platinum (JSE: NPH) announced the resignation of Temba Mvusi as chairperson of the board as he is moving across to take the role of chair at Sanlam. Mcebisi Jonas has been appointed as the new chair at Northam.
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