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Telling the right story: navigating media challenges in M&A transactions

Siyabonga Nyezi
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Telling the right story: navigating media challenges in M&A transactions

“News is the first draft of history”. This quote is often attributed by many media sources to Washington Post publisher Phillip L. Graham. Graham, born in 1915, couldn’t possibly have come up with an early 20th century quote. Many others attribute it to writer Alan Barth, who would have been a toddler around the time this quote became prominent. These examples are a reminder that, when repeated often enough, inaccurate statements from prominent sources can misrepresent history. Reporting on M&A transactions is no different.

In November 2024, South African Airways (SAA) announced that it had turned a profit for the first time since the 2012 financial year. Many asked how a company that was nearly sold for R51 just a few years prior could be doing so well. The answer to this question is simple: this never happened. There was never a transaction where the national carrier would have been sold for R51.

Without delving into its intricacies, the SAA deal would have required the acquirer – a private equity consortium – to make a working capital injection of R3bn into SAA over a period of two years. The R51 figure was simply a nominal amount representing 51% ownership in SAA, with 51 shares (out of 100) to be purchased by the acquirer at R1 per share. This means that the acquirer would have paid a total investment consideration of R3,000,000,051 (R3bn, plus R51 for the shares).

One might wonder why it is still important to discuss the construct of a deal that is no longer being pursued. It is because the misconceptions that may be created (and are created) by sensational headlines in such high-profile transactions may have far-reaching consequences. In SAA’s case, the reporting played a role in eroding the confidence of the ultimate shareholder (the taxpayer) in the decisions made by the appointed representative, the relevant Minister at the time. There is, of course, nothing wrong with disagreeing with the economics of a deal, as long as the criticism is rooted in fact.

While the parties to a transaction that garners public interest cannot control what publications write about the deal, it is incumbent on such parties to provide information that is clear and accurate, and in a manner that stakeholders will understand. Many of the articles on the SAA transaction feature “R51 SAA deal” or a similar variation of the phrase in the headline. To their credit, some publications do delve further into the deal construct in the body of the article. Others, unfortunately, simply leave it at that: just R51.

While the concerns around reporting on state-linked deals may be centred mostly around issues of public buy-in, the communication and reporting around any high-profile transaction may have far-reaching consequences for that deal. Premature communication, for example, may lead to panic amongst shareholders. Delayed communication, on the other hand, may result in distrust from the public, shareholders and authorities alike and, in some instances, scrutiny or even fines or censure from regulatory authorities. For example, section 9 of the JSE Listings Requirements requires listed entities to announce certain transactions such as takeovers, reverse take-overs and funding arrangements. Failure to announce such a transaction may result in censure or penalties, as set out in paragraph 1.21 of the JSE Listings Requirements. Unclear messaging may result in all of the above consequences. Because of these risks, parties in transactions that garner public attention have to ensure that, when they share information with the public, they do so in a manner that is clear, timely and unambiguous.

As much as transparency and communication are important, parties should take caution not to breach any confidentiality restrictions that may be contained in the transaction documents or, where applicable, the disclosure regulations in the JSE Listings Requirements and legislation, such as the Financial Markets Act.

Parties to such transactions need to formulate an effective communication strategy, focused on clear messaging and timely updates. Clear communication on the proposed transaction provides transparency to stakeholders such as shareholders, employees, and the public. Critically, it mitigates the risk of inaccurate reporting on the deal as a result of scant information from the parties.

The announcement of a proposed transaction is a key event in the transaction. It can have a significant impact on the valuation of a company, especially if it is a listed entity. The recent announcement of the proposed Barloworld acquisition is an example of how announcements can affect a company’s value. The announcement was followed by a 21% surge in the share price, the biggest one-day gain for the company since 1999. Barloworld’s clarity in relation to who the parties will be, what they intend to do, timelines, the future of the company etc. undoubtedly contributed to this. This underscores the importance of clear, effective communication with the public when announcing a proposed transaction.

The flow of information should not and, in some instances, cannot end at the announcement stage. Where it is necessary to update stakeholders on the transaction, the parties should do so in a timely and appropriate manner. Delayed communication may result in discord among shareholders, a shift in the perception of the deal, negative reporting and, as mentioned, censure or fines.

Business media has, for a long time, played an important role in informing the public and holding industry participants accountable. After all, it was because of one of the media calls that analysts first raised the alarm about the dubious happenings at Enron. Parties engaging in M&A activity should embrace the flip-side of this coin, where effective communication with stakeholders ultimately trickles down to more accurate (and usually positive) reporting on deals. The better the communication, the lesser the risk of the transaction being misreported.

Siyabonga Nyezi is an Associate, reviewed by Werner De Waal, Partner | Fasken.

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

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

The growing prevalence of W&I insurance in SA transactions: FAQs

Janine Howard
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The growing prevalence of W&I insurance in SA transactions: FAQs

Since the emergence of Warranty and Indemnity (W&I) insurance in the South African market, this form of insurance has gained momentum as a tool for getting deals done effectively and efficiently. Although traditionally utilised by players in the private equity (PE) space, W&I insurance is increasingly being used by corporate and trade entities.

Traditionally, the primary driver for using W&I insurance in PE deals has been that where PE funds are exiting an asset, they are required to use the proceeds of the sale to realise returns for their investors.

Accordingly, being liable for a number of years in respect of warranty claims can prove problematic once proceeds have been distributed to investors, and the concept of an escrow arrangement or holdback for future warranty claims is not attractive to PE funds.

In addition, PE funds have been reluctant to give operational warranties in respect of the target assets as they are not generally involved in the day-to-day aspects of the business. A further reason for the prevalence of W&I insurance in PE deals is that when PE funds acquire an asset, the selling parties are often founders and they, together with the existing management team, will remain involved or even reinvest in the business.

As such, maintaining positive working relationships with founders and management is a key priority for the success of the business, and using W&I insurance shifts any liability for warranty breaches from the seller to the insurer. This is because the W&I insurance product seen most frequently in the South African market is a no-recourse policy, which means that any amounts paid out by the insurer cannot be recovered from the seller.

Another advantage of W&I insurance is that the parties are more likely to engage in commercial negotiations where a broader, more reasonable set of warranties can be given, instead of the discussions being driven solely by a desire to limit potential recourse.

Finally, W&I insurance also has the advantage of mitigating against enforcement risk in cross-border deals because a claim is made against the insurer and not the sellers, who may be scattered across various jurisdictions.

These elements of W&I insurance have also been noted more recently by trade buyers and sellers and, therefore, we have seen the expansion of W&I insurance beyond the PE space.

However, despite the increasing prevalence of W&I insurance in South Africa, it still raises a number of questions, and it is not always clear to transacting parties how to get the best value out of this product. To clarify this, we have set out some frequently asked questions and responses on W&I insurance below.

What will typically be covered under a W&I insurance policy, and how can cover be maximised?

Broadly speaking, W&I insurance policies will cover loss arising from a breach of warranties resulting from matters that were unknown to the buyer, as well as any defence costs and gross-up costs. There will, of course, be limitations on the amounts and what can be claimed from the insurer, and these largely mirror what one would expect to see in a sale agreement.

Examples of such limitations will typically include de minimis amounts, below which a warranty claim cannot be made, retention amounts, and limitations on the total liability of the insurer under the policy. The thresholds at which the limitations are set will be negotiated between the insurer and the insured and will affect the pricing of the policy.

The quality and extent of coverage under the W&I insurance policy will fundamentally be driven by the extent and quality of the due diligence investigation that was undertaken in relation to the target asset. This is because the policy will only cover unknown risks and, as such, the insurer will seek to get comfort from the due diligence investigations that all risks have, to the extent reasonably possible, been uncovered and are known to the buyer.

Despite this review and examination of the due diligence reports, it is worth noting that the insurer will not seek to obtain reliance on the reports. Typically, areas that are not investigated, or are not adequately investigated as part of the due diligence process, will not be covered by the W&I policy. Accordingly, the best way to maximise cover under the W&I insurance policy is to ensure thorough due diligence has been undertaken on the target asset.

What will typically be excluded from cover under a W&I insurance policy and how should the parties deal with this excluded liability?

In addition to matters that are known to the buyer and items that have not been adequately investigated, there are a number of general exclusions that are typical for South African W&I insurance policies. These include any fines and/ or penalties other than those relating to tax, consequential and indirect losses, structural defects, purchase price adjustments, anti-bribery and corruption liabilities, and environmental pollution liabilities.

Liability for matters excluded from the W&I insurance policy should be negotiated between the buyer and the seller. Increasingly, the position in South Africa is that the seller is expected to stand behind such excluded matters, subject to market-appropriate limitations of liability.

What are the costs of W&I insurance and who is liable for these costs?

The cost of W&I insurance in South Africa was considered high in the past, being around 1.75% to 2.5% of the amount insured under the policy.

However, the global decrease in M&A activity in the United Kingdom and United States has meant that insurers are more willing to extend their reach into Africa. This competition has resulted in the decrease of premiums, and it is now common to see premiums in the range of 0.9% to 1.7% of the amount insured under the policy.

Traditionally, when used by PE funds, it was generally accepted that the buyer would bear the cost of the W&I insurance on the understanding that when the PE buyer eventually exits, they will see the benefit of a W&I policy, which is then paid for by the incoming buyer.

However, as more and more trade buyers are looking to make use of W&I insurance, the cost of the insurance is being more heavily negotiated and, although it is still more common for the buyer to pay the costs, there has been a rise in the premium being split between buyers and sellers.

What is the timing for putting a W&I insurance policy in place?

Often, transacting parties are reluctant to explore W&I insurance on the basis that it may delay a transaction. However, this is increasingly proving not to be the case because W&I processes can be managed in parallel with the negotiation of the transaction and insurers are eager to work within the existing deal timelines. Depending on the availability of the due diligence materials, the W&I processes would typically take between two and four weeks.

As the appetite for W&I insurance grows across the continent, dealmakers should seek out brokers and advisors to test the viability of this insurance for their transactions, even if it is not initially contemplated.

Janine Howard is a Partner | Bowmans.

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

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

CA&S: a business on track

CA&S Group
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CA&S: a business on track

This article has been provided by CA&S and does not reflect the views or analysis of The Finance Ghost. As always, you can find that in Ghost Bites. Published with thanks to CA&S for recognising the value of the Ghost Mail investor audience.

Key highlights (FY2024)

  • Revenue increased 10.6%
  • Headline earnings rose 25.9%
  • Dividend increased 24.9%

CA&S Group (CAS:BSE, CAA:JSE) has reported a strong set of annual results for the financial year ending 31 December 2024, demonstrating the strength of its diversified business model and its continued push into high-growth markets. Revenue rose from R11.32 billion in 2023 to R12.52 billion, with management attributing the growth to expansion into organic growth, geographical expansion and acquisitions. As a result, gross profit increased to R1.92 billion, up from R1.72 billion the previous year.

Headline earnings increased to R585.31 million up 25.9% from last year, with headline earnings per share up from 97.97 cents to 122.71 cents. The Group also reported an increase in total assets to R5.65 billion, driven by warehouse expansion, strategic acquisitions, and investment in associate companies. Operational cash flow remained robust, providing a healthy increase in cash holdings from R1.06 billion to R1.17 billion and further supporting the growth strategy of the group.

While the comparative figures for 2023 were positively impacted by a once-off bargain purchase gain linked to the acquisition of Namibia’s T&C Group, CA&S still delivered a year-on-year increase in operating profit – rising from R747.31 million to R782.57 million. Excluding the non-recurring item, underlying profitability improved meaningfully, with both operating profits increasing by 25.5% and earnings per share by 27.9%, showing solid organic growth.

Commenting on the performance, Group CEO Duncan Lewis said the results were “a testament to our focus on strategic growth, operational efficiency, and market expansion.” He noted that despite a challenging global economic environment, the Group had demonstrated “resilience and agility,” positioning itself well for continued progress across its key markets.

CA&S acquired a 49% stake in Roots Sales (Pty) Ltd, a South African business that specialises in servicing the informal retail sector, an area identified by the Group as a key growth opportunity, and forms part of its channel broadening strategy.

CA&S acquired the remaining share capital in Macmobile, a provider of IT and data-driven market intelligence solutions focused on the formal and informal FMCG retail chains, across Africa.

The group declared a dividend increase of 24.44 cents per share, an increase of 24.9%, in line with its dividend policy.  

Looking ahead, CA&S is optimistic about the prospects within southern and East Africa, where GDP growth across most markets is forecast to average 3%. On 17 February 2025, the Group announced a strategic partnership and investment in Tradco Group, a route-to-market operator based in Kenya with a presence across multiple East African countries. The acquisition forms part of the Group’s strategic push into East Africa, aimed at strengthening its regional footprint and deepening its ability to support brand growth for multinational clients.

“We acknowledge the challenges posed by global economic volatility and supply chain disruptions,” Lewis said. “However, with our diversified business model, resilient product portfolio, strong balance sheet and a high-calibre leadership team, we are well positioned to navigate uncertainties and unlock further growth.”

CA&S intends to maintain its disciplined approach to cost management and capital deployment, with Lewis reaffirming the Group’s commitment to “delivering sustainable, long-term value for all stakeholders.”

Investor presentation:

CAS_Investor-Presentation_Annual-Results-FY-2024

GHOST BITES (Bell Equipment | Metair | Metrofile | Zeder)

The Finance Ghost
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GHOST BITES (Bell Equipment | Metair | Metrofile | Zeder)

Bell Equipment tightens its earnings guidance (JSE: BEL)

It’s not pretty, but could’ve been worse based on initial guidance

In Bell Equipment’s initial trading statement released in December 2024, they guided for a drop in HEPS of “at least 40%” for the year ended December 2024. Now, the words “at least” can work really hard here, so investors always need to be nervous of that.

The good news is that the guidance wasn’t far off at all. In an updated trading statement, they’ve tightened the range to a drop of between 40% and 44%. That’s not what shareholders want to see of course, but it could’ve been much worse based on the initial guidance.

Metair expects more pressure to come in the automotive manufacturing sector (JSE: MTA)

Disruption can be an ugly thing

Metair has now released its results for the year ended December 2024. They include this fascinating table that shows passenger vehicle production in South Africa from 2014 to 2024, by manufacturer:

The SA Auto Industry Master Plan apparently had a vision of 735,000 units. Then along came COVID, followed by the Chinese. Alas, it doesn’t look like we are going to get there, as there is now massive disruption in the sector for the European brands. This means that Metair has had to downscale production estimates based on meetings with key customers like Ford and Toyota.

This is of course the reason why Metair has acquired AutoZone. They have little choice but to find ways to extract value from the existing cars out there, not just the manufacturing of new cars. The synergies are pretty clear here, with the ability to push manufactured parts through that distribution channel.

To be fair, they are also making solid progress in turning the business around within this difficult context. For example, Hesto shifted from negative EBIT of R608 million in 2023 to a profit of R257 million. This was despite the drop in vehicle production volumes.

Although the group reported a headline loss, you can blame the discontinued operations for that. The thing to focus on is continuing operations, in which case HEPS fell by 9% to 89 cents per share. Cash generated from operations was up 28%, so there’s some more good news.

All eyes are on the balance sheet, as Metair needed to navigate a situation that included R5.2 billion in group debt as at 1 January 2024. By the end of December 2024, it was down to R4.5 billion. They’ve managed to restructure bank debt of R3.3 billion at Metair into term loans of R1.7 billon and a secured mezzanine facility of R1.6 billion. They’ve also restructured R1.4 billion worth of debt in Hesto.

The cost of debt will vary based on net debt : EBITDA. As the metrics improve, the debt gets cheaper. I wish I could tell you what the metrics are for the mezzanine facility, but I cannot find them in the annual report. Unless I’m missing something obvious, that’s now gone from a concern to a red flag, as mezzanine funding can be extremely expensive based on the usual equity kickers.

If anyone has seen that disclosure, I would love to know where.

An approach has been made to Metrofile (JSE: MFL)

Will long-suffering investors finally get a good outcome here?

Metrofile hasn’t exactly been a bastion of organic growth. Recent results have been uninspiring to say the least, which is why the share price had lost 28% of its value thus far this year. Over three years, it had lost half its value. There hasn’t been much to smile about.

Those who bought in recently had a great day on Wednesday though, as the company released a cautionary announcement related to a potential acquisition of the company. Although there’s no firm offer just yet, the company has appointed advisors and things seem to be moving in that direction. Remember, until there’s an offer on the table, there’s no guarantee of one coming through.

The share price closed 28.8% higher in anticipation. That sounds amazing, until you see what that looks like on a chart:

As you can see, the latest rally has effectively taken the share price back to where it started the year. Other than investors (or is that punters?) who bought the stock this year, practically everyone else is in the red.

Here comes another disposal by Zeder Investments (JSE: ZED)

This time, it’s a business within Zaad Holdings

Zeder has been firmly in value unlock mode, which is a fancy way of saying that they’ve been selling off assets and paying the proceeds out to shareholders. There have been a bunch of disposals in this regard, leaving the company much smaller than it used to be.

The latest such example is a disposal of Bakker Brothers and Pristine Marketing, which fall under Zaad Holdings. The operations in question are in Zimbabwe, Mozambique and Zambia, along with intellectual property held by Bakker Brothers in the Netherlands. Zimbabwe is a difficult region and has been struggling with hyperinflation.

The total price is R135 million and the purchaser is an entity that is owned by ETG and SABIC Agri-Nutrients. R118 million is payable up-front and the rest will be held in escrow for 12 months. When you adjust the earnings for hyperinflation to get to a recurring number, the assets in question generated headline earnings of R65.7 million for the year ended June 2024. They aren’t exactly getting much of a multiple here, are they?

Before the fair value loss recognised in the interim results ended August 2024, these businesses were held at R440 million. They’ve therefore taken quite a bath here. The good news is that the fair value loss in the interim period already brought the value down to this selling price, so there’s no further impact on the net asset value or sum-of-the-parts value of the company.

Zaad will use the proceeds to reduce debt, so shareholders won’t get a special distribution. This is different to what investors in Zeder have become accustomed to.

Nibbles:

  • Director dealings:
    • Des de Beer has bought just under R2 million worth of shares in Lighthouse Properties (JSE: LTE), adding to his rather extensive collection of shares in the company.
    • An associate of a director of The Foschini Group (JSE: TFG) sold shares worth R975k.
    • A handful of directors of Anglo American (JSE: AGL) elected the “shares in lieu of fees” scheme. This is effectively a purchase of roughly R740k worth of shares.
    • A prescriber officer at the JSE (JSE: JSE) sold shares worth R62k.
  • Labat Africa (JSE: LAB) is pushing forwards with its IT strategy. The group has concluded the previously announced acquisition of Ahnamu and has issued the associated shares. They’ve also entered into a royalty distribution agreement with Ubits, an ICT company focused on the financial sector. They talk about generating “substantial value” without giving any real details of the economics, apart from throwing the number R2.5 billion around without any context. The announcement is a good example of a company using SENS as a PR platform.
  • SAB Zenzele Kabili Holdings (JSE: SZK) released its annual report for the year ended December 2024. This structure has some pretty serious risks given the underlying exposure and the way the whole thing is funded. The dividend is down 31% for the year and the net asset value plummeted by 57%. The net asset value per share is now just R28.26, so the share price of R39 is once again way above the underlying value. I genuinely don’t know where the bottom is for this thing.
  • Supermarket Income REIT (JSE: SRI) has completed the internalisation of its management function. In other words, it has cost shareholders a lot of money to put a normal situation in place where executives earn salaries and bonuses, rather than a fee linked to the size of the fund. It really is incredible how generational wealth was created by property executives (at a number of funds) who found themselves in the right place at the right time. There are very few external management company structures left.
  • Sibanye-Stillwater (JSE: SSW) announced that the Keliber Lithium project in Finland and the GalliCam project in France have been designated as strategic projects under the EU Critical Raw Materials Act. If this sounds terribly familiar to you, that’s because you read it just one day prior in an Anglo American announcement regarding their Sakatti copper project in Finland. Sibanye gave an interesting additional insight that there were 170 applications received and 47 strategic projects selected. The Keliber Lithium project is expected to start production in the first half of 2026. The GalliCam project is at pre-feasibility stage.
  • Gemfields (JSE: GML) requires more time to finalise the full year results. They will make more announcements in due course.
  • Perhaps something is finally going to happen at PSV Holdings (JSE: PSV), which has been suspended from trading since forever. There was a meeting with the JSE in March to understand how a potential recapitalisation would work. The JSE has requested information that the liquidator will need to provide. Overall, the company is still under a cautionary announcement – not that you’re able to trade it on the JSE right now anyway! You’ll struggle to even find a website for them.

Ghost Stories #57: VAT strategies, bracket creep and what it means for South Africans

The Finance Ghost
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Ghost Stories #57: VAT strategies, bracket creep and what it means for South Africans

Listen to the show using this podcast player:

With the dust having settled on the Budget Speech and the proposals that parliament will need to vote on, Tertius Troost of Forvis Mazars in South Africa joined me to reflect on the key drivers behind the headlines. 

VAT has been the focus area, but is it true that a VAT increase is anti-poor? And is it correct to rebut the “South Africa has a small taxpayer base” argument by pointing out that everyone pays VAT?

What is bracket creep and how does it affect middle-class South Africans?

Perhaps most importantly, what was not said in the Budget Speech?

This podcast is a great way to make sure you are on top of the key drivers behind the fiscal strategy in our country.

Full transcript:

The Finance Ghost: Welcome to this episode of the Ghost Stories podcast. And yes, we are going to be talking about the budget, the South African budget, goodness knows you’ve seen plenty of that in the media over the past few weeks.

We were kind of waiting for the dust to settle a little bit to see if anything changes and if anything else comes to the fore about how it’s all going to get approved etc. The headlines do keep flowing on what the process is going to be and there’s really been a lot of noise. I think what’s going to be great on this podcast is we’re going to cover some of the most important things that have been in the headlines and been a factor in this budget.

We have a genuine expert with us to do it. You’ve heard from him before. We did a budget speech podcast last year. That is Tertius Troost. He is a senior manager in the tax consulting team at Forvis Mazars in South Africa.

Tertius, thanks so much. It’s great to have you back. Really enjoyed having you on the podcast previously and I’m looking forward to getting your views on this budget speech and its aftermath because it hasn’t quite been like it’s been in the previous years, has it? Where the thing just sails through? We are in a GNU environment now.

Tertius Troost: Yeah, brilliant. Thanks so much for having me back. I’m looking forward to the chat again. I think last time I also said that during this time, tax people are rock stars. Once again, this one is a lot more tax-focused than some of the previous ones. There are many questions that have arisen from this budget. Looking forward to the chat.

The Finance Ghost: Yeah, absolutely. Look, you’ll never see tax in the headlines quite as much as at this time of year. Suddenly everyone wants to understand more about that and everything else. It’s a very emotive thing. No one wants to pay more tax, everyone wants to pay less tax. That is the great truth about all of us, really. But we need to fund the country and that’s of course where the balance comes in.

That has been the focus area of this budget. If we look through everything, the war seems to be fought around VAT for whatever reason, this is what was chosen as the hill to die on by the various politicians. I think let’s maybe start there and let’s maybe get an understanding of how important that is to the overall budget. How much money are we getting from VAT versus other sources, for example? Why is VAT so important?

Tertius Troost: Yeah, so that was definitely a significant focus of this budget. Just to understand the importance, like I said, you need to look at the numbers. VAT accounts for approximately 26% of the total tax revenue that SARS collects. So to put that in a number, SARS is expected – the year-end is the 31st of March coming up – to collect about R1.863 trillion in taxes. Of that, R477 billion is just from VAT alone. This is the second highest contributor to the fiscus, only outshone by your personal income tax take, which accounts for about 40%. Then the final, which we usually refer to as the top three, is the corporate income tax, which accounts for approximately 16%, so that one takes third place.

When you look at those top three income streams, they account for 81.5% of all tax revenue. This just shows how crucial VAT is in the budget component. Like I said, making up 26%, it’s a significant sum.

The Finance Ghost: And it’s a bit easier to get a change across the line here because you’re not introducing a new tax, you’re just tweaking the rate. It’s not like saying, oh, we’re going to put a wealth tax in place, and now aside from the huge political fallout that is almost guaranteed, you’re also going to have all the stuff around the legislation for what this tax looks like and you need to amend the Act and then you need to think about how it interacts with all the other taxes. That doesn’t happen overnight.

But with VAT, all the legislation is there. It’s literally just saying, well, now the rate is a little bit higher. Right? That’s got to be one of the reasons why it’s been a focus area as well?

Tertius Troost: 100%, and it’s like you say, it’s an easy change. Businesses have gone through this back in 2018 when we had the change previously from 14% to 15%. It’s just systems that need to be updated and then it pretty much pulls through to the economy. What’s always interesting is it doesn’t necessarily pull through immediately, but it does pull through over the course of time as prices increase according to the VAT rate increase.

The Finance Ghost: Yeah, exactly. And you talk about how important VAT is and I see this argument online a lot where people talk about, oh, there’s very small tax base in South Africa. We have a very small number of taxpayers supporting a lot of people. And inevitably it is higher income earners who are trying to point that out because they’re angry about the way government has been doing things and they’re saying, well, I pay a lot of tax, I’m supporting a lot of people. You know, why is it like this?

And then one of the frequent counter-arguments that I see online is people saying, well, the definition of taxpayers is actually much broader than that because anyone who goes to the store and buys something through the formal market that they’ve paid VAT on is technically paying tax.

Now, both those arguments I think are correct, right? But the first person is arguing about income taxpayers and the second person is saying, well, if there’s a general uplift in economic activity and more people are buying stuff, full stop, there are more taxpayers. It’s an interesting argument, but I guess the way to maybe unpack it a little bit more is to say, what is the concentration within the VAT base? Is it the same story where you see most of the VAT paid by a relatively small number of taxpayers? So, you have almost the same problem you have in income tax?

Tertius Troost: Yeah, I actually read a very interesting statement in the budget review document. This is a document that is released along with budget. It’s quite a substantial document that deals with how they will be spending, how they will be collecting the taxes. And one of the things that jumped out at me was that they state that 75% of the total tax collected is from the top four expenditure deciles.

Now let’s just take a step back. What they refer to as an expenditure decile is where they divide the population into 10 groups based on their spending patterns. Each decile represents about 10% of the population where they’re spending from highest to lowest.

It might be an obvious statement saying that okay, the more people spend, the more they contributed to VAT. But just looking at it and taking a step back and saying that three quarters of all the VAT is collected from the top spenders, which usually equates to your top earners. It just once again points out that, okay, we need to think about the wealthy in the country and just looking at that tax base specifically because they are still not only contributing in the form of personal income tax with higher rates, but also in their spending in indirect taxes.

And I mean indirect taxes like VAT, also aspects like transfer duty on home ownership. There are a lot of taxes that are collected in different forms. It just talks again to this fact about even though that rate does affect the poor because they have less money to spend, they will feel that pinch bit quicker, the wealthy are just spending more which relates to a bigger tax take from them when it comes to that.

The Finance Ghost: Yeah, not only are they spending more, but they’re spending on taxable things, right? So if you think about the average, on the bread line South African earning R6,000 or R7,000 a month, doing one of the many jobs that can pay you that kind of number in South Africa, a very high proportion of that amount is getting spent on transport, which inevitably is taxis where you’re lucky if there’s income tax. There’s definitely not any VAT.

Then there’s a lot of purchasing of basic foods. There’s inevitably payment of rent which is often a room in someone’s house or that kind of setup. Again, no VAT. So, of that amount, it’s actually a very small proportion of that salary is being spent on VAT-able items as opposed to when you go into middle-class and certainly elite South Africa, they’re just paying VAT on most of what they’re buying actually. As opposed to such a small piece. Right?

Tertius Troost: Most definitely. You’re talking about taxis, the transport of people is an exempt supply. So there’s definitely no vat. Then rent, again, same story. So it is a fact that when you’re looking at what people are spending on and what the wealthy are spending on and if you look at once again the zero-rated items, the wealthy don’t necessarily just spend on zero-rated items, they spend on a range of things. It’s definitely much larger tax take from them.

The Finance Ghost: Having said that, the zero-rated mechanism, it’s good, but it doesn’t also completely buffer the poor from the impact of this. That’s what’s been interesting to see play out politically is that this VAT increase has very much been portrayed as anti-poor. I don’t want to call it pro-rich because no one wants to pay more tax, but if anything it actually sounds like it hits the rich more than it hits the poor.

I think the difference is the poor literally cannot take on any additional pressure, whereas in a wealthy household it’s like, oh, darn, our groceries are a little bit more expensive. We can’t go out an extra time this month, cry me a large river. But in reality it is irritating for those people and they are creating jobs and they want to live in a country where they don’t feel like they’re being fleeced. So the “cry me a river” approach also very quickly leads to people emigrating and paying less tax and putting more pressure on the poor. None of those approaches work. You’ve got to have a decent balance.

But is the VAT increase actually anti-poor? Are there mechanisms that they’re trying to get in place to actually sort that out? I’ve got to tell you, I don’t hate the narrative purely because I want pressure on government to reduce spending. And I feel like the only place that pressure will come from is if their policies are seen as anti-poor. It feels like that’s how it’s going to happen. But be that as it may, how true is this and what are they doing to mitigate it?

Tertius Troost: Yeah, the narrative of VAT being anti-poor is a common one. VAT is a form of a regressive tax, so it does take a larger percentage of the income of lower income earners than high income earners. In other words, the poor will definitely feel a VAT hike more quickly than the rich would. That’s probably why it has received this tag of being anti-poor.

This budget did try and alleviate some of the effect of the VAT rate increase by adding certain items to this zero-rating list. But interestingly, in Treasury’s own words, once again in this budget review document, the zero-rating is sometimes what they refer to as a “blunt tool” because when assisting low income households, there’s no guarantee that this price reductions will flow through to the actual consumer. If I give an example. So we’re looking at the additional Items being added 1 May when the VAT rate increases slightly. But if you think about it, retailers aren’t going to drop the prices immediately with 15%, you won’t see a 15% reduction on the shelf. There will be a period of some of the items maybe becoming slightly cheaper, maybe they added to a special every now and then. There will be a period of retailers taking a slightly higher profit until it settles in, until your economics just flows through to it.

Then at the same time, whenever you add items to a zero-rated list, the definitions of these items are extremely important. There’s always a interesting case, it’s actually a UK tax case way back in 1991, where the UK courts had to rule whether a Jaffa Cake is actually cake or biscuits just based on the definition. In the UK cakes are zero-rated, but biscuits are subject to VAT.

The Finance Ghost: That’s hilarious, actually.

Tertius Troost: It’s quite interesting. Yeah, you’re reading about learned judges having to debate the difference between cakes and biscuits.

The Finance Ghost: I can just imagine on the witness stand, you’re getting a baker in there, someone’s granny who’s been baking for 30 years. She’s got a strong view on whether this is a cake or a biscuit. Ask 10 toddlers. No, it’s lovely.

Tertius Troost: They’re looking at aspects like how it looks when it becomes stale, what’s the shape, what’s the size? Yeah, it was interesting.

The Finance Ghost: That must have been hysterical to follow.

Tertius Troost: But going back to South Africa, we’ve actually seen the draft legislation of the items that they’re looking to add. And initially in the Budget speech, the Minister alluded to zero-rating canned vegetables, which is a broad statement. But when we look at the actual legislation it seems to be limited to only peas and beans that are in cans.

So once again, that definition gets much narrower than we initially thought. And then at the same time, when we’re looking at the other item added of offal and we know that the chicken industry has been lobbying treasury tirelessly trying to get chicken added to the list. But now we’ve got this where chicken, only the heads, feet and giblets of chickens are added, but at the same time something like that within a soup mix is excluded from the zero rate, so it’s still subject to VAT.

These definitions are so important and you will find that all business will try and get in them, trying to make the items more cheap, just getting it slightly cheaper and thereby increasing sales. But it’s a very interesting space when you look at these definitions of the zero-rated list.

The Finance Ghost: Yea, look, this government has a dubious relationship with Woolworths cooked chickens, so we’ll wait and see if they do anything specific there. I don’t think we’re going to see a zero-rating on chickens for the rich, unfortunately. But it is super interesting. And of course why they have to be so careful is because of the possibility of VAT fraud, right? I mean, that’s the magic of zero-rated items. You can still claim that if you are producing that stuff versus exempt – scratching back in my brain now for my varsity days on tax, it’s been a while..

Tertius Troost: Well done.

The Finance Ghost: But I mean, that’s the risk, right? So if you can claim that what you are selling is zero rated, you can suddenly have a very different life. To your point, it doesn’t mean you’re putting your prices down. It just means you’re not necessarily paying across any VAT anymore on the same selling price.

Tertius Troost: You’re 100% right. A zero-rated item means that the input VAT or the expenses that you incur in order to produce the product, you can still claim those and usually that can result in a form of refund because you don’t have any output VAT when selling the item. That’s where most retailers want to be, or wholesalers or producers want to operate.

I won’t necessarily say it’s fraud. I think it’s just sometimes it’s a very – looking at the definition and trying to get as much into it as possible because of the benefit attached to it. It can lead to higher admin costs by SARS now needing to close certain loopholes or they have certain court cases trying to just bed down these definitions. Usually in the past, the definitions I think initially back in 2018 we had a list of 19 items or so and it was pretty clear what they were just basic foodstuffs. But now as they’re adding items, you can see how people start interpreting.

I mean another very interesting – and this was in last year’s budget they mentioned that – we know that fruit and vegetable is zero-rated, but then we have – you were talking about Woolies earlier – if you go to Woolies you sometimes get vegetables that have been chopped up and they are in a little bag and you just cut off the corner and you give two minutes and it steams and it’s perfect. That’s actually prepared vegetables. Then SARS said but we don’t want prepared vegetables in that list and they would actually remove that out of the list. So now you’re going to have a case where it’s fruit and vegetables are still zero-rated but then if they’ve been chopped slightly or have some form of little dressing on it then it’s subject to VAT. It’s a very interesting space.

The Finance Ghost: Yeah, it is. I think let’s move on from VAT for now. Our parents warned us about a lot of creeps in our lives and staying away from them but unfortunately bracket creep is the one we can’t get away from. This is an income tax problem and this is the one that hits the middle class, I think, the hardest.

This is basically just the complete lack of inflationary increases in the tax brackets. For those who don’t understand it properly or maybe aren’t familiar with it, your income tax works on a sliding scale and obviously the next tax rate – and by the way, people make this mistake all the time – they say, I’m going into a new tax rate now. I’m actually going to earn less even though I’m earning more! No, the incremental amount will be taxed at the higher rate. You’re not suddenly worse off because you got a raise from your boss. So, calm down.

But what should happen every year is the brackets, the point at which a specific tax rate comes in, should be going up by inflation because otherwise what’s happening over time is that you’re getting increases in all likelihood and so your effective tax rate actually just keeps going up on that salary because you are not getting any relief. What should happen is if you just get an inflationary increase, you should not be paying a higher overall tax rate. You should just be sitting in the brackets the way you always have been. It’s a very, very, very stealthy way for the government to keep taxing us more and more. This impact becomes severe over several years, right? You’ve looked at this as well. I can see why government loves doing it because it’s a very sneaky way to keep increasing taxes.

Tertius Troost: Yeah, I think as you mentioned, when bracket creep was first introduced, when they first did it, it was a very stealthy way of increasing tax revenue. And many of us in industry had to sit down and really understand the impact and how we can explain it to the public because it takes the concept of inflation into account, which is sometimes not understood by all. I think we tend to understand that.

So if I take a very basic example and please ignore all kind of tax principles, it’s just using R100, don’t come at me about with rebates. But if we use, let’s say you earned R100 last year and you paid R30 in tax, you’ve got R70 left for your normal living expenses. Now, some of the misconceptions might be – let’s say it’s a year later, there’s been no relief on the tax brackets and you still earn R100. That means the tax is not more, it’s still R30 and you still have R70 after-tax money to spend. But what you have found is that all the things that you’re spending your money on have increased due to inflation and therefore you’re in a worse position. Therefore, you would have wanted to have your tax tables take that into account, so that when you have your after-tax money, you’re actually in the same position in a case where you for example, don’t get any increase in your salary.

Obviously as you get increases in salary and there’s no increase in the tax tables, it just ends up with something on your effective tax rate. That’s where if you run the numbers, let’s just take a very basic amount or someone that earned R200,000 back in 2015, if they were to increase, if the tax that they would have paid at that date would have been effective tax rate of 12.1%. Now I did the calculation aside, you don’t have to. Then if we take that and we just increase their salary by inflation, that means 10 years later, now in 2025, they should be earning just shy of R320,000 a year. That means they’re in the same position as they were 10 years ago. But all of a sudden the tax take or the effective tax there is 14.65%, so there’s been an increase. That’s the effect that bracket creep has on the actual people paying personal income tax.

The Finance Ghost: Yeah, exactly. As you say, there are two ways to understand it. One is you get these inflationary increases and hence your average tax rate goes up. The other way, which is interesting, is to say if your salary stayed exactly the same, then if there was relief in the brackets, you’d actually have more take home pay as a result. But because there’s no relief, you don’t. So yeah, very effective little trick there by government. They love it. I doubt we’re going to see it going away given where South Africa’s fiscus is. Bracket creep is going to be creeping around the corners for a long time unfortunately.

So, we’ve done VAT, we’ve done a little bit of income tax. The other thing I want to ask you about is corporate tax. We’ve been at a higher rate before. I remember when the rate dropped, it was several years ago. Isn’t it easier to just lop another 100 basis points on top of the corporate tax rate? Take us back to where we used to be? Or is our corporate tax rate actually quite onerous benchmarked against other countries and that’s why it’s a difficult one for them to do? Because that feels like one of the easier ways to do it, right?

Tertius Troost: Yeah. I mean similar to the VAT rate increase, a change in the corporate tax rate is once again just a change in the rate. It is easy to administer. But in an environment where globally most countries are actually reducing corporate income tax rates, trying to attract investment, it would not be wise to increase it at all. Another thing that stood out once again in the budget review document is that South Africa is ranked 13th of 123 countries when it looks at the share of corporate income tax rate to the share of GDP. It’s highly reliant on the corporate income tax rate where other countries actually don’t rely on that so much because they just want people to invest there, bring people there, get taxes and other forms of personal income tax or VAT and actually don’t rely on corporate income tax rate that much.

And the other aspect that South Africa needs to bear in mind is our corporate income tax rate or collections from it is very volatile because it is heavily dependent on commodity price cycles as you are well aware and just economic growth which we’ve not been seeing in the past number of years. So no, increasing that rate is definitely a non-starter or something that they should not be looking at there.

The Finance Ghost: Dare I say, it’s a pro-growth policy there to not increase that rate. Imagine seeing a pro-growth policy! No, it’s cool. That makes a lot of sense and it is good to see. Those are very good arguments because if you are encouraging investment, that’s creating jobs, that’s more people paying PAYE, it’s more people buying stuff and paying VAT and that’s exactly the multiplier effect that you need to see coming through the economy. That’s where we’ve been lacking, unfortunately.

I think in these budget speeches and actually in anything in life, you often learn as much from what was not said as from what was actually said. As we start to bring this to a close, what were the deafening silences for you in this budget speech? What was not said?

Tertius Troost: Yeah, it’s one of the items I really like looking at, is what was left unsaid. What I always find interesting is there’s never a word about NHI in the run up to budget. In periods outside of the actual budget speech, you always hear the Minister of Health talking about NHI and how it’s going to be implemented. But when it comes to the actual figures, you don’t read a single word of it because it can’t be afforded by the fiscus.

What was even more alarming is once again about three weeks prior to the budget there was this whole – the media was talking a lot about this transformation fund, R100 billion that they’re going to get from another levy on corporates. But when it came to the actual budget speech, there was literally not a single word stated about that because once again, you can’t levy – a levy is a form of tax, so you’re going to be just taxing your corporates again. Once again as I’ve just stated previously, we can’t afford that.

And then during the time between the initial budget in February and then the actual budget on 12 March, some were alluding to well, is Treasury maybe looking at a wealth tax and we know that the problems we have with the wealth tax – just the definitions would be how to value certain private companies, what it would do to your actual tax base. Maybe you find that your higher earners would then leave the country. You’ve seen internationally that many countries that actually had a wealth tax did away with it. So once again a non-starter, no mention of that in the budget.

Finally, there were a number of rumours about the relationship between the Finance Minister and the Commissioner, Edward Kieswetter and it seems fine. Edward Kieswetter wanted additional funding saying that he could obtain significantly more from the tax base, but I think the figures that he made were just quite remarkable. I don’t think it’s really achievable but once again, nothing was stated about that. I think the relationship is sound. They’re each working on their own part – one with policy and one with administration and collection. I think it’s just that everyone keeps to their line and does their job, that’s what the country requires.

The Finance Ghost: Yeah, “hot mic” incidents aside, I remember seeing those headlines and that was a bit of an awkward one. It has been a very interesting budget speech process. This is the GNU playing out, right? That’s what’s changed. It’s just not so easy anymore. Government can’t just wake up and do whatever they want.

Certainly, from my side what I hope to see is that instead of continuously trying to just get more money, that there’s actually some introspection around spending cuts and finding places to save money. This is where I want to just finish off on this podcast. What is quite interesting to think about is we talk about the public sector wage bill and the number of people who are employed by government. Of course, the funny thing is that government is paying them a gross salary and then immediately collecting a piece of that back as tax. So, the impact to the fiscus is actually their net salary, not their gross salary, unless you assume that if they weren’t working for the government they could immediately work in the private sector for exactly the same salary and then government is no worse off, they’re collecting the PAYE anyway.

Now that’s a perfect world where private sector absorbs all these public sector employees at what they earn in the public sector. I am willing to go out on a limb here that that is not what would happen. I think we all know that is not what would happen. So, cutting jobs in the public sector is going to miss some of that multiplier effect of paying someone a salary and they go out and spend, you get a piece back as VAT etc. It would save money, but if a government employee is earning R1 million a year, it’s not going to save R1 million to the fiscus. It’s going to save significantly less than that. We’ll see how that plays out.

I wanted to get your views on spending cuts, how to allocate them, what government should be thinking about. I think it’s just a nice place to bring this to a close.

Tertius Troost: Yeah, I think when it comes to the public sector wage bill, people always think the public sector wage bill is some administrative person sitting behind a desk or someone that’s sweeping the streets and there are too many people doing that or you want to cut those jobs. But you have to think much wider than that. If you think about if you’ve been to a department of home affairs trying to get an ID or passport, there are few people already doing that job and you get frustrated with long lines and if you keep cutting that, you’re actually cutting people from those jobs and the service delivery will be worse. That’s the problem with just cutting in that space.

I think what the public want to see is they want to stop wasteful expenditure. Where you can, you hear about the headlines of money being spent on this trip or this is not well managed or they’ve built this stadium and for this much over budget, I think that’s where the cost cutting measures need to be focused on. If that takes place, then we’ll see a definite turnaround and that’s where we’re definitely hoping that the GNU will push this forward, that there’s a stop in just “bad spending” if I can call it that. It’s not necessarily just cutting the public sector wage bill and saying to people now you’re no longer employed by government, it’s actually just using them more effectively and then just making sure that the money is spent well. As you said, pro-growth environment.

The Finance Ghost: Yeah, that makes a world of sense. It’s the wasteful expenditure, it’s the corruption, it’s the nonsense you see in procurement, it’s all that kind of stuff. That’s what we desperately need to sort out. We will see if this budget gets approved, we will see what happens with the implementation of the VAT increase. If it doesn’t get approved and it’s back to the drawing board, we might be doing another one of these on this budget. We might have to make this a whole season each time they change something.

Maybe we’ll see some certainty, maybe we won’t. Either way, Tertius, thank you so much for your time. It’s been really fun to have you back on and it’s going to be an interesting year for you. It’s going to be an interesting year for all of us, I think.

Tertius Troost: Brilliant. Thanks for having me. Cheers.

The Finance Ghost: Ciao.

GHOST BITES (Astoria | Barloworld | Fairvest | Master Drilling | Oceana | Pepkor | Remgro | Santova)

The Finance Ghost
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GHOST BITES (Astoria | Barloworld | Fairvest | Master Drilling | Oceana | Pepkor | Remgro | Santova)

Congratulations to Forvis Mazars in South Africa, my brand partner that makes the Ghost Wrap podcast possible, on their appointment as the new external auditor of Argent Industrial (JSE: ART).

A tough year for Astoria (JSE: ARA)

And especially in the diamond business

Astoria has released its results for the year ended December 2024. There won’t be many smiles about these numbers, with the NAV in down by 22% in USD or 19.5% in ZAR.

The largest individual investment is the 40.2% stake in Outdoor Investment Holdings, which contributed 57.4% of net asset value (NAV). This also happened to be one of the better performing assets in the group, with the value up by 7.5% in ZAR thanks to decent underlying trading in the retail business in particular.

The next largest asset is ISA Carstens, contributing 9.9% of NAV and up 5% year-on-year. Astoria is busy selling this asset, with the buyer’s due diligence underway. Leatt Corporation is 9.6% of the NAV, with sales at that business having stabilised. Although the fair value of the investment is higher than a year ago, this is because Astoria bought more shares rather than because the share price went down. Leatt’s share price has been under significant pressure and they will be hoping for a recovery there.

This brings us neatly to Trans Hex, which can be combined with Marine Diamond Operations to get the full view on the diamond exposure in the group. Both businesses are being severely hurt by diamond prices and the disruption by lab-grown diamonds. The impact on the value of the marine operations is far more severe than the land operations due to differences in the quality of stones and the operating costs. Marine Diamond Operations took a particularly nasty knock, with the value down by a whopping 87% vs. the prior year.

The other investments in the group include gaming group Goldrush (which has been impacted by the relative strength in online gaming at the expense of physical alternatives) and Flexi Mobility Group (previously Vehicle Care Group) where a more conservative approach is being taken on provisions into the motor dealership industry.

Overall, it was clearly a difficult period for the company. The NAV per share is R11.71 and the share price is R8.00. With a couple of asset disposals in process and a likely increase in the cash balance as a result, it will be interesting to see whether management takes action based on that discount.

Mongolia remains the highlight at Barloworld – but watch that order book (JSE: BAW)

The share price is remaining stubbornly close to the failed offer bid

The Barloworld share price is going to be fascinating to watch. The offer of R120 per share was voted down by shareholders who were looking for a better number of R130 per share. This offer is the reason why the share price is up 80% in the past year, as this substantial upward move has come at a time when the underlying business is struggling. Sure, the underlying fair value might be R120 – R130, but someone actually has to pay you that. At R108 per share, the market is hoping that the bidders (or someone else) will come back with a better offer. If they don’t, then there’s real risk of the share share dropping way back down.

This is especially true when you consider the trading update for the five months to February, which shows that group revenue fell 4.9% and EBITDA was down 12.9%. Operating profit from core trading activities took a nasty 20.5% knock. The Russian business is causing most of the problem, although excluding that operation still leaves you with a group that saw revenue down 2% and EBITDA up 3%, with flat operating profit.

If we look deeper, we find that Equipment Southern Africa was impacted by the state of the local mining sector and the unrest in Mozambique. Revenue fell 9.2% and although they managed to get expenses down by 3.7%, this wasn’t enough to mitigate the pain. EBITDA was 6.1% lower. Note that this means that EBITDA margin actually improved from 10.4% to 10.8% thanks to the cost control! The share of profit from the Bartrac joint venture in the DRC also went the wrong way. The only highlight is that the firm order book for the business increased by 13%.

Barloworld Mongolia is definitely the bright spot. Revenue grew by 49.5%, which is obviously excellent, but EBITDA was “only” 24.2% higher thanks to pressure on gross margins. This means that EBITDA margin fell from 25.9% to 21.5%. Sadly, said bright spot does have a rather gloomy cloud over it going forwards: the order book in this part of the business has plummeted from $117.8 million to $27.8 million. Sure, they had a great period of deliveries, but it looks like things are slowing down dramatically and that the aftermarket parts business will become a larger component of revenue. As I wrote at the time when everyone was quick to shout down the R120/share offer: Barloworld is a cyclical business. It might take years to get earnings back to strong levels.

Russia is of course the biggest problem, with Vostochnaya Technica (VT) suffering a 25.3% drop in revenue. EBITDA tanked by 83%. Although VT is self-sufficient in terms of funding requirements, they expect it to operate at roughly breakeven levels. The independent investigation into potential export control violations is ongoing and the narrative account of voluntary self-disclosure is due by 2 June 2025.

Moving along from the equipment side of the group, we find ourselves at consumer industries business Ingrain. Although revenue was flat, EBITDA increased by 11.4% and thus EBITDA margin expanded from 12.0% to 13.3%. This was thanks to a favourable product mix, particularly in the domestic market.

I will be rather surprised if Barloworld finishes 2025 on the right side of R100 per share. Time will tell.

No surprises here: the Fairvest capital raise was well supported (JSE: FTA | JSE: FTB)

As expected, the accelerated book build was oversubscribed

In the Nibbles section on Monday evening, I referenced the announcement by Fairvest that they would be raising R400 million via an accelerated bookbuild process. Thanks to deep capital pools on the JSE, the word “accelerated” really is applicable here.

As we’ve seen many times before in the sector, there was no problem in raising this capital from institutional property sector investors. The book was oversubscribed and the R400 million was raised at a paltry discount of just 1.05% to the 30-day VWAP per Fairvest B share. I must say, that discount is really small by any standard.

Part of me wonders why they didn’t raise more at such a narrow discount!

Will Master Drilling’s dividend growth distract investors from the impairments? (JSE: MDI)

The recent share price performance suggests that it might

Master Drilling has released results for the year ended December 2024. Revenue came in at a record high (in USD) and they grew HEPS by 22.1% (also in USD). In ZAR, HEPS was up 21.2%, so that’s hardly a difference to the USD results.

Sounds great, except looking at earnings per share (EPS) – which includes impairments – shows a drop of 15.4% in USD or 16.0% in ZAR. This is the blemish on the numbers, as some major equipment has been written down in value based on market dynamics.

Investors seem to be glossing over these risks, focusing instead on the juicy 24% growth in the dividend per share and the solid pipeline of work. To some extent at least, that’s the right approach. There might be some bumps in the road along the way, but at least earnings have moved higher. Still, when you’re taking about $7.8 million in impairments on one item of machinery in a single period, there are clearly some significant risks in the business around obsolescence of expensive equipment. In case you think it’s an isolated example, an impairment of $5.4 million was raised on the Shaft Reverse Circulation Equipment.

Master Drilling’s share price is up 2.3% year-to-date and 12% over the past 12 months.

Against a tough base, Oceana’s results are “significantly lower” (JSE: OCE)

The comparable interim period was incredibly strong

Oceana had a difficult end to the previous financial year, so there was always a risk of those challenges continuing into the new one, particularly when viewed against such a strong interim period for comparative purposes. Indeed, for the five months to 23 February 2025 (yes, one week short of the full month), results are “significantly lower” than in the comparable period.

Lucky Star has lived up to its name, being the highlight in this result with better production volumes and the benefits coming through of cannery upgrades. Sales volumes were up 5% and margins also headed in the right direction. This did come at the cost of higher inventory levels and short-term borrowing requirements due to frozen fish market dynamics, so this financing cost has offset some of the benefits of volumes and margins.

Fishmeal and Fish Oil (Africa) was hit by lower prices for its products. This more than offset the benefits of better fish landings and higher oil yields. In the business in the US, Daybrook, the same impact of a decrease in global fish oil pricing was relevant. There was only one month of activities in this period due to how the fishing seasons work, so I’m not sure how much we can read into a 17% decline in sales volumes. That could just be a weird timing thing. In both businesses, inventory levels were much higher than in the comparative period, so watch out for the impact on working capital.

In Wild Caught Seafood, catch rates for hake and mackerel improved in the second quarter. The first quarter sounds like it was rough though, so they will hope that the momentum over the period continues. Ditto for squid catches, although pricing is down on that product.

Much like on Netflix, this Squid Game is treacherous. Fishing is a difficult industry with many external factors at play, so the only real certainty is that there will be uncertainty along the way.

Separately, Oceana has decided to wind up the Oceana Stakeholder Empowerment Trust. This was created in 2021 and it only holds 0.5% of the listed shares. Very little value was created in the trust, with Oceana having repurchased shares for just R6.5k. The employee trust that was also created in 2021 will stick around.

Pepkor wants a bigger share of the adultwear market (JSE: PPH)

They are making an important acquisition to make that happen

When you’re happy to go slowly and build something up from scratch, like Shoprite Holdings has been doing recently with businesses like Petshop Science, it’s ok to work up from zero stores to a meaningful footprint. But when you want to go much faster, there’s only one way to do it: a large acquisition.

In one fell swoop, Pepkor is acquiring 462 stores from Retailability. These operate under the Legit, Swagga and Style banners. The Boardmans online business is also part of the deal. This leaves Retailability with Edgars, Edgars Beauty, Red Square, Kelso and Keedo.

The rationale here is that Pepkor is “overindexed” on market share in categories like babies and school wear and “underindexed” on adultwear. This is fancy retail speak for saying that their market share is much higher in younger categories than in adultwear. This is of course a direct result of having businesses like Pep and Ackermans in the stable.

The acquired businesses are focused on adults and will be housed in the Pepkor Speciality business unit. Pepkor hopes to unlock synergies related to the usual areas like sourcing, supply chain and back office costs. Scale is your friend in this game and Pepkor certainly has plenty of scale – and even more so after this deal.

They don’t make a big thing of it in the announcement, but the credit strategy is also clearly at play here. Pepkor is pushing hard on its “credit interoperability strategy” and the more retail outlets they can spread this over, the better.

It’s a small transaction for Pepkor, representing less than 2% of the group’s market cap. This gives you an idea of just how huge and valuable Pepkor actually is. They expect the deal to close in the first quarter of 2026, with Competition Commission approval underway.

A better period for Remgro (JSE: REM)

This is more like it – but the separately listed assets are the highlight

Remgro has released results for the six months ended December 2024. As I wrote when the trading statement came out, the HEPS guidance is useless other than to give us a clue that the direction of travel in the intrinsic net asset value (INAV) per share was probably the right one. Indeed, INAV (which is what counts) was higher, but only by 10.3% despite HEPS being 38.6% higher. Still a solid result obviously, but nowhere near as exciting as HEPS would suggest. Notably, the interim dividend is up 20%.

The positive contributors to the story include Rainbow Chicken, RCL Foods, OUTsurance and even Mediclinic. All but one of those are separately listed, so you don’t need to buy Remgro to get access to them. This is a major reason why Remgro trades at a discount to INAV. Heineken Beverages has at least returned to profitability, but that hasn’t exactly been an asset that you would have wanted to own recently. On the negative side, we find TotalEnergies South Africa (higher negative stock revaluations) and Community Investment Ventures (a victim of higher borrowing costs).

Further boosts to the earnings came from a decrease in finance costs thanks to preference share redemptions, as well as a much lighter impact from IFRS 3 charges and transaction costs based on the timing of transactions.

The broader question is why the dividend has moved higher despite the INAV being at R276.89 while the share price is languishing at R161. It would surely make infinitely more sense to undertake a large share buyback programme?

Some details finally emerged on why Santova is trading under cautionary (JSE: SNV)

Not many details, mind you

When the first cautionary announcement came out on 11 February, Santova didn’t give the market many details. They simply referenced “negotiations” and “potential strategic transactions” – this can mean literally anything.

In the renewal of the announcement, they’ve given the market some additional details. We now know that Santova is considering an acquisition in Europe, specifically a company that provides a variety of logistics services in the UK and Netherlands.

It’s been a choppy few months for the share price, trading in a range between roughly R7 and R8. If a deal goes ahead here and if the pricing looks good, it might catalyse some share price action. Of course, if the market doesn’t like the deal, it’s worth remembering that a catalyst can work in either direction.

Nibbles:

  • Director dealings:
    • The ex-CEO of Calgro M3 (JSE: CGR), Wikus Lategan, has sold down his stake to the extent that he now only has 1.48% in the company.
    • A senior executive of Investec (JSE: INP | JSE: INL) sold shares worth around R1.5 million. The announcement isn’t explicit on whether this is only the taxable portion of the share award, so I assume that it isn’t.
    • A non-executive director of Anglo American (JSE: AGL) bought approximately R700k worth of shares.
    • Des de Beer bought another R515k worth of shares in Lighthouse Properties (JSE: LTE).
    • The COO of Spar (JSE: SPP) bought shares worth R197k.
    • The CEO of Libstar (JSE: LBR) bought shares worth R64k and the CFO bought shares worth R96k.
  • If you are a shareholder in Lighthouse Properties (JSE: LTE), take note that the scrip dividend circular has been distributed. The default election is a cash dividend, so if you want the scrip dividend instead then you need to specifically make that choice.
  • Trencor (JSE: TRE) is in the process of distributing its cash to shareholders, so it isn’t an operating company in the traditional sense and hence I’ll just give the financials a passing mention down here. As at the end of December 2024, the net asset value (NAV) per share was 843 cents. The share price is currently 108 cents. Before you jump out of your chair to hit the buy button, there was a dividend paid in January of 730 cents. In other words, assuming no other changes, the current NAV that is comparable to the share price is actually 113 cents. The modest discount to NAV reflects the time value of money, as the cash isn’t being received straight away.
  • Anglo American (JSE: AGL) announced that its Sakatti copper project in Finland has been designated as a Strategic Project by the European Union. This means that the government sees it as being in the public interest, which means easier processing of permitting applications etc. Given how regulated the EU is though, one wonders whether the difference between “easier” and “easy” is still very large.
  • Telemasters (JSE: TLM) has renewed the cautionary announcement related to a potential acquisition. The company is in discussions with potential funders for the deal, including equity investors. When they say you should exercise caution, they really mean it – this sounds like a biggie. There’s also the noise around a potential acquisition of the shares held by the two largest shareholders by a B-BBEE investor, so be alert to that deal as well. One wonders if said B-BBEE investor isn’t perhaps the equity funding partner that they are currently talking to? That would certainly make sense to me.
  • Like many other JSE-listed companies, Omnia (JSE: OMN) is taking part in the Bank of America Global Research Sun City conference – the 26th edition of that conference, to be precise! The company has made its presentation available at this link. It gives a helpful overview of the company and its strategy.
  • Here’s something interesting: Metrofile (JSE: MFL) announced that Mary Bomela will now be classified as an independent non-executive director. This is because she left the employment of Mineworkers Investment Company (MIC), which hold 39.2% of Metrofile. Given that Mary has been on the board for 14 years, the company would like her to stay on as a director. MIC will nominate a new representative to serve on the board, so the board is expanding by one director.

GHOST BITES (ADvTECH | Ascendis | Astral Foods | Burstone | Gold Fields | Grand Parade Investments | Premier | Raubex | Southern Sun | STADIO)

The Finance Ghost
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GHOST BITES (ADvTECH | Ascendis | Astral Foods | Burstone | Gold Fields | Grand Parade Investments | Premier | Raubex | Southern Sun | STADIO)

ADvTECH had a great year in 2024 (JSE: ADH)

Enrolments are driving excellent results

ADvTECH is seeing strong growth at the moment, with results for the year ended December reflecting 16% growth in the full year dividend. Return on funds employed has moved up to 21.4%, having increased every year since the pandemic year.

Importantly, all the education businesses are growing. Schools in South Africa grew revenue by 11% and operating profit by 12%, so they aren’t dealing with the same issues that Curro is facing with its mid-market model. ADvTECH schools are more upmarket and the strategy works, with 83% utilisation of current capacity. Schools in the Rest of Africa grew operating profit by 28% and are now running at a spectacular operating margin of 32.4%, showing how lucrative that business is. The Tertiary segment grew operating profit by 15% and is also running at a juicy margin.

Unsurprisingly, the ugly duckling is the Resourcing business. Revenue fell 8% and operating profit was down 4%. They really, really need to get rid of that business. It continues to drag down the group performance and there’s no logical reason why that situation will change.

Despite such strong numbers, the share price is up just 7.5% over 12 months. This shows you that the market already prices in a solid performance from the group, evidenced by the Price/Earnings multiple in the mid-teens.

Ascendis Health’s numbers will be hard to interpret this financial year (JSE: ASC)

The change to investment entity accounting is a major shift

At one point, it seemed that there were headlines about Ascendis Health on almost a daily basis. After the potential take-private deal eventually collapsed, the news simmered down. Of course, the show goes on at Ascendis and management needs to achieve growth in the business.

This growth will be measured differently going forwards, with Ascendis taking the route of investment entity accounting. This means carrying its investments at fair value, rather than consolidating its subsidiaries. Metrics like net asset value (NAV) per share will therefore be the focus area rather than headline earnings per share (HEPS). To add to the complexities here, they’ve restated December earnings based on the technical accounting treatment of Surgical Innovations. This is another good reason why the NAV is the right thing to look at, rather than earnings.

The trading statement dealing with the six months to December indicates that growth in the tangible NAV per share was between 8.2% and 27.1% year-on-year. That’s a wide range. It looks like the Medical portfolio did the heavy lifting here, consisting of five investee entities. Other than Surgical Innovations which is out of business rescue but still under pressure, the rest did well. The Consumer portfolio had a pretty flat period, with subdued demand and little ability to increase prices.

Despite the shift to investment entity accounting, the narrative around the outlook focuses more on organic growth opportunities in the existing businesses rather than a desire to execute acquisitions.

The share price of 82 cents is actually above the 80 cents per share offer that was on the table in late 2023. The tangible NAV per share is between 101.7 cents and 119.4 cents, so it’s still trading at a significant discount to those levels.

Astral Foods is a reminder that the only certainty in the chicken business is uncertainty (JSE: ARL)

And you can now add cybersecurity to the list of risks they face

The poultry industry always feels like it is standing near the edge of a cliff. In a period where there are no major problems, it can be quite lucrative. As soon as something goes wrong, those thin margins come into play and earnings take a gentle stroll right over the edge.

In a trading statement dealing with the six months ending March 2025, Astral Foods has alerted the market to an expected drop in HEPS of up to 60%. This implies HEPS of at least 354 cents for the interim period vs. 884 cents in the comparable period.

The share price is actually 12% higher over the past 12 months, so the P/E multiple at this company is more volatile than a South American football stadium during a penalty shootout.

What were the reasons for the drop? Aside from pressure on selling prices for frozen chicken thanks to consumers who continue to struggle to make ends meet, Astral had to contend with the usual suspects of higher feed input costs and maize prices. Remember what I said about thin margins that are vulnerable?

The unusual issue faced in this period is a cybersecurity incident that took place on 16 March. The related disruption to group systems has cost them R20 million in profits, measured based on lost revenue and the costs to catch up on the production backlog.

There’s truly never a dull moment in this sector.

Burstone’s fee income is up, but the same can’t be said for overall earnings (JSE: BTN)

A pre-close call has the details

Burstone has released a pre-close update for the year ending March 2025. Through various corporate actions, the group has gotten to the point where fee income is now 11% of earnings. That’s way up on 7.3% in the comparable year, achieved through significant growth in third-party assets under management. A perfect example of the strategy to grow this source of revenue can be found in the recent Blackstone deal, in which Burstone retained 20% of the Pan European Logistics portfolio and will continue to manage it. There are similar strategies being implemented in their Australian business at the moment.

Burstone also hopes to build a South African platform along similar lines, with due diligence completed by a cornerstone investor. The deal is now going through various investment approval processes. The idea is to seed the platform with existing South African assets in Burstone, with the proportional interest reducing over time as Burstone focuses on managing the platform and earning fees.

Over time, you can see that Burstone is slowly moving more towards an asset management model rather than a property ownership model. Make no mistake though, they are still firmly a property company at the moment, evidenced by metrics like the loan-to-value ratio being between 34% and 36% for FY25.

In line with guidance, distributable income per share is expected to be 2% to 4% lower than the comparable year. The announcement could certainly be a lot clearer and simpler in terms of the drivers of underlying performance. If you read through all the details, it looks like the South African portfolio is struggling compared to Europe and Australia. Notably, the office sector is still dealing with large negative reversions and vacancies. Reversions were also negative in the industrial sector.

The release of year-end results is scheduled for 28 May.

Gold Fields wants to buy Gold Road (JSE: GFI)

These gold companies need to get more creative with their names

Gold Fields has put in a non-binding, indicative proposal to the board of Gold Road. They want to buy 100% of the group via a scheme of arrangement, with a proposed price of A$3.05 per share. This would be structured as a fixed portion of A$2.27 per share, plus a variable portion linked to De Grey Mining, which is already the subject of a potential acquisition by Northern Star Resources that Gold Fields would want to support.

The companies already know each other, as Gold Fields operates the Gruyere Mine in Western Australia and Gold Road has a non-operating joint venture interest in that mine. Familiarity doesn’t appear to have helped here, as the Gold Road board told Gold Fields to get lost. It’s pretty funny that the response included a counter proposal to buy Gold Fields out of the Gruyere Mine, funded by a combination of cash and other sources. Returning the favour, Gold Fields also told them to get lost!

So it’s going well, then.

Gold Fields isn’t giving up. The announcement notes the benefits to Gold Road shareholders of a potential deal, including the desire to support the Northern Star Resources deal related to De Grey, as well as the 44% premium to the see-through valuation for Gold Road after adjusting for the value of the De Grey shares held by Gold Road.

I thoroughly enjoyed a comment in the announcement that another benefit of the deal would be to “eliminate dis-synergies” in the joint venture as opposed to delivering on synergies. The PR people really had fun here.

At this point, Gold Fields must be hoping that large shareholders will put pressure on the Gold Road board to take the proposal more seriously. At an extreme, they might even go hostile with an offer directly to shareholders. We aren’t at that point yet, though.

Grand Parade impacted by its gaming exposure (JSE: GPL)

Being a pure-play gaming business ain’t what it used to be

Regular readers who have been following the results of the major gaming groups will know that all isn’t well in that sector. Online alternatives like sports betting are disrupting this space, with casinos in particular losing their shine.

Grand Parade Investments always seems to be on the wrong side of the trend. No sooner had they disposed of their non-gaming assets (like in the food sector) than disruption came through. Grand Parade now finds itself with a share price down 14% this year and a set of numbers for the six months to December 2025 that reflect a drop in HEPS of 9.2%.

Interestingly, the SunWest business (GrandWest Casino as its main asset) was actually 4% up in terms of headline earnings, with Cape Town therefore bucking the national trend. Sun Slots fell 16% and Worcester Casino was still loss making, so don’t get too excited.

They will need to do something here, as I can’t see the situation improving in the gaming sector.

An excellent financial year at Premier (JSE: PMR)

Here’s a good example of how to make shareholders happy

When you hear about a company growing its revenue by mid-single digits, you wouldn’t expect to then see a spectacular increase in HEPS. Some companies are especially good at translating fairly modest revenue growth into excellent shareholder returns. It seems that Premier is firmly part of that crew.

The growth in HEPS of between 20% and 30% for the year ended March 2025 is thanks to a strong focus on margins and costs, which of course is the only way to leverage that revenue growth up into much more exciting profit growth.

For whatever reason, it seems as though the FMCG sector in South Africa has perfected the art of extracting value from revenue growth that is barely ahead of inflation. Perhaps it’s time to put an FMCG executive in the role of finance minister?

Another strong period for Raubex (JSE: RBX)

This group consistently delivers

Raubex has released a trading statement dealing with the year ended February 2025. With HEPS up by between 15% and 25%, this is yet another another strong performance by the group. When you consider the nature of the business that Raubex is in and how cyclical it should probably be, it’s quite remarkable how they just keep growing.

They are doing a great job of winning SANRAL projects, with the Roads and Earthworks Division also working on diversifying its customer base, just in case.

Over in Construction Materials, the asphalt business was ahead of expectations, with supply to major projects like the N3 and N2 running smoothly. Within that segment, the commercial quarry operations got off to a slow start, but have picked up recently.

In the Infrastructure Division, some substantial renewable energy projects have been helpful sources of revenue. They are also involved in projects like wastewater treatment and affordable housing, as well as the upgrade of the parliament buildings in Cape Town! And unlike so many other companies, they are even making solid projects in Western Australia. In fact, the business in Australia is 19% of the group’s operating profit.

The Materials Handling and Mining Division is the only division that went backwards this year. The deterioration of the chrome price in the second half was the major issue. This segment is a bit of a strange fit in the group from a strategic perspective, introducing a completely different set of risks of what you’ll see elsewhere in the group.

Although Raubex hasn’t been immune to the local market pressure this year with a 12.5% decline, the share price remains 44% higher over 12 months. It’s a solid business.

Southern Sun is shining (JSE: SSU)

Occupancy and pricing both headed in the right direction

Southern Sun has released a trading update for the year ending March 2025. It’s been a goodie, with occupancy for the 11 months to February up by 240 basis points to 60.7%, while the average room rate has increased by 5.1%. When both volumes and pricing move higher, it’s likely that earnings will do well. Indeed, HEPS is expected to be at least 20% higher for the year.

HEPS was 35% higher in the interim period, so it’s likely that the full year will be much better than 20% higher. This is where the words “at least” are really important, with the minimum required disclosure under JSE rules being an indication of “at least 20% higher” – even where a stronger move is possible.

Unsurprisingly, the Western Cape has had a positive impact on the numbers. Thanks to refurbishments in Gauteng, growth in this period was solid vs. a low base. Unfortunately, the same happy tune isn’t being sung by the KZN business, mainly due to a lack of demand for events at the Durban International Convention Centre. The Mozambique business has also had a tough time, impacted by political unrest.

You win some, you lose some. Overall, they are winning where it counts. At group level, the strong performance and associated cash flows led to a reduction in interest bearing debt. Along with the impact of the share buyback, this has boosted HEPS.

Detailed results are due for release on 21 May.

STADIO pulled off pretty spectacular growth (JSE: SDO)

This tertiary education model is working beautifully

STADIO has released results for the year ended December 2024. The company was previously spun out of Curro and the results couldn’t be more different if they tried. This share price chart looks like the two of them had a fight and deleted each other off Facebook:

It’s even worse over 5 years, with Curro up 52% from the pandemic lows and STADIO up a massive 481%. It’s not hard to spot which business model is more lucrative.

For the year ended December, STADIO grew revenue by 14%. This was supported by fee increases and an uptick in student numbers of 10% in Semester 1 and 8% in Semester 2. This drove EBITDA growth of 17%, which in turn led to core headline earnings increasing by 28%. The icing on the cake is that the dividend came in 51% higher!

The growth is set to continue. Having achieved the milestone of 50,000 students in Semester 2, the group believes it can reach its original pre-listing forecast of 56,000 students by 2026. They expect to grow to 80,000 students by 2030. The targeted mix is 80% distance learning and 20% contact learning.

And in case you’re wondering, the new Durbanville Campus is scheduled to open in January 2026. With 7 faculties and even some sports facilities as well, this is a major step into private university education in a way that could really disrupt traditional universities. Watch this space.

Nibbles:

  • Director dealings:
    • An executive (but not a director) at Richemont (JSE: CFR) sold shares worth R13.5 million.
    • Des de Beer bought more shares in Lighthouse Properties (JSE: LTE), this time to the value of R3.97 million.
    • A non-executive director of Glencore (JSE: GLN) bought shares worth R3.5 million.
    • Various associates related to directors of Brimstone (JSE: BRN) bought N ordinary shares worth a total of R1.06 million.
    • A director of Libstar (JSE: LBR) bought shares worth R185k. Given the recent direction of travel in the share price after the release of poor numbers, that’s an interesting message to the market.
  • Sun International (JSE: SUI) announced that CEO Anthony Leeming will retire with effect from 31 December 2025. He’s been with the group since 1999 and was CFO from 2013 until his appointment as CEO in 2017. His replacement is Ulrik Bengtsson, a Swedish executive with deep experience in the gaming sector. This includes experience in online gaming, which is proving to be quite a disruptive force in this sector. The changing of the guard at CEO level takes place in July this year, with Leeming sticking around until December to help with the transition.
  • Fairvest (JSE: FTA | JSE: FTB) is about to demonstrate just how deep the JSE capital pools are, particularly for property funds. An accelerated book build process will look to raise R400 million through the issue of new Fairvest B shares. I can almost guarantee that an announcement will come out early on Tuesday morning to say that the raise was completed and was oversubscribed. In fact, they may even increase the size of the raise if demand is strong enough.
  • Kore Potash (JSE: KP2) is looking to raise a meaty $10.6 million to help things move forward with the all-important Kola project. They need to pay PowerChina $800k for the optimisation work in 2022 and 2023, as well as $5 million under the early works agreement. There are various other requirements for capital, including general corporate purposes. Once the company exits the closed period, the chairman plans to subscribe for $0.5 million in shares. Another existing investor will put in $0.3 million. The two largest existing shareholders have been asked whether they wish to subscribe for shares and an answer is due within 20 business days. Any such subscription would be subject to shareholder approval. In case you’re wondering, the Summit Consortium has committed to deliver a non-binding financing term sheet by 31 March. This will be subject to finalisation of legal documentation, so there needs to be a capital raise in the meantime to tide the group over. Although they have appointed a South African broker to be involved in the raise, it looks as though the main bookrunners are focused on the UK market.
  • Prosus (JSE: PRX) gave an update to the market on the timing of the Just Eat Takeaway.com offer. There are obviously some major regulatory hoops that they need to jump through, with the offer memorandum in the approval process before it can be issued to the market. They expect the offer to commence in the second quarter of 2025 and to be concluded by the end of the year. This is of importance to Naspers (JSE: NPN) shareholders as well.
  • Anglo American Platinum (JSE: AMS) released a capital markets day presentation to the market. It’s a detailed document that gives a great overview of the business and the key drivers of performance. You won’t be surprised to learn that the presentation makes the point that demand for electric vehicles hasn’t met expectations, suggesting better demand dynamics for PGMs going forwards. Check out the full presentation
  • Datatec (JSE: DTC) has also made an investor conference presentation available, so investors have been given quite a bit to chew on recently as the company also recently did a roadshow related to its Logicalis International business. If you would like to learn more about the group as a whole, you’ll find the presentation here>>>
  • Telkom (JSE: TKG) announced that the disposal of Swiftnet to a consortium of Actis and Royal Bafokeng Holdings has met all the suspensive conditions required for the closing process to begin. This is good news, as it means that there are no further potential hiccups in getting the deal finalised.
  • You won’t see AGM votes that are this close all too often, but then again Quantum Foods (JSE: QFH) doesn’t exactly have a normal relationship between the board and the shareholders on the register. With plenty of corporate activity and possible permutations of what could happen there, the directors narrowly survived the AGM with most votes ending up at just 51% in favour of appointments.
  • Sygnia (JSE: SYG) released the results of the odd-lot offer. They repurchased 0.03% of total shares in issue for R1.05 million. In the process, they got 2,887 shareholders off the register, significantly reducing the admin burden along the way.
  • Tiny AH-Vest (JSE: AHL – with a market cap of just R14.3 million!) released a trading statement for the six months ended December 2024. HEPS collapsed to just 0.17 cents, a drop of 93.4% year-on-year.

UNLOCK THE STOCK: Homechoice International

The Finance Ghost
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UNLOCK THE STOCK: Homechoice International

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

We are grateful to the South African team from Lumi Global, who look after the webinar technology for us, as well as EasyEquities who have partnered with us to take these insights to a wider base of shareholders.

In the 49th edition of Unlock the Stock, Homechoice International joined the platform for the first time to talk about the recent performance and strategic focus areas for the group. The Finance Ghost co-hosted this event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions.

Watch the recording here:

Temu Teslas no more: how China won the EV race

Dominique Olivier
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Temu Teslas no more: how China won the EV race

If you’ve been to a car expo lately, you’ve probably seen it firsthand: Chinese EVs have evolved from being a curiosity to a force to be reckoned with. And with their sleek designs, competitive pricing, and tech-loaded features, they’re proving that the future of electric cars might not belong to the brands we once expected.

Once the undisputed leader of the EV world, Tesla is now slipping – and hard. Sales took a hit across the US, China, and major European markets in February this year, and its stock price has nosedived nearly 50% from its mid-December peak. Part of that slump is directly tied to controversy (consider that Tesla sales in Germany have collapsed by 76% since Elon Musk’s famous “Roman salute” in January). But beyond the dodgy politics lies a bigger problem: an Eastern competitor decades in the making. 

With rivals gaining ground and sentiment shifting, Tesla’s reign isn’t looking as secure as it once was. In China, where local giant BYD continues its unstoppable rise, Tesla’s numbers fell by 49%. Beyond their homeground advantage, Chinese automakers are also dominating emerging markets (hello, South Africa), and it’s not hard to see why. Chinese brands just keep pushing the envelope on everything from aesthetics to pricing. Just this week, BYD unveiled a new lineup of EVs that can charge almost as fast as filling up a petrol tank. Meanwhile, Tesla is fiddling around with a re-release of the Model Y. 

To most of us here on the Southern tip of Africa, it feels like the Chinese vehicle tsunami came out of nowhere – but in reality, this wave has been building up momentum since before Tesla released its first electric Roadster. So what’s the secret behind Chinese success?

You guessed it – it’s the government

Back in the early 2000s, China’s car industry was having a bit of an identity crisis. It was a manufacturing giant, sure, but they couldn’t hold a candle to the German, Japanese, or American automakers ruling the roads. Competing in the internal-combustion engine (ICE) game was clearly a lost cause. Those legacy brands had decades of R&D and motorsport heritage behind them. Even hybrids were already Japan’s domain, leaving China without an obvious lane to dominate.

So, instead of trying to play catch-up, China swerved entirely. The government bet big on a technology that, at the time, was more of a futuristic fantasy than a viable market: fully electric vehicles.

It was a massive risk. Back then, EVs were little more than niche science projects; GM had already scrapped its early attempt, Toyota’s EVs were short-lived, and Tesla was still a tiny startup. But for China, the potential payoff was too good to ignore. EVs weren’t just a way to stake a claim in the auto industry, they were also a solution to some of China’s biggest problems: choking air pollution, dependence on foreign oil, and the need for an economic boost post-2008 financial crisis.

In 2001, EVs became a priority project in China’s Five-Year Plan, the country’s most important economic playbook. Another key turning point came in 2007, when Wan Gang, a former Audi engineer and an early EV evangelist, became China’s minister of science and technology. He was an early and outspoken fan of Tesla’s first Roadster, and insiders now credit him with China’s decision to go all-in on electric cars.

One thing about the Chinese government: it does not do half-measures. It threw everything at making EVs work, handing out massive subsidies and pouring over 200 billion RMB ($29 billion) into tax breaks and direct incentives between 2009 and 2022. It even rigged the registration system for new cars in favour of EV buyers. If you want a petrol car in Beijing, you’re in for a battle for a licence plate in an expensive, years-long lottery. Want an EV? No problem – here’s your plate immediately – no wait, no fuss.

And when private buyers took longer than expected to bite, the government made sure EV companies had a market anyway. Public transport fleets became a testing ground for China’s first EVs, with cities buying up electric buses and taxis before consumer adoption took off. Shenzhen, home to BYD, became the first city in the world to electrify its entire bus fleet.

Fast forward to today, and the results of the Chinese government’s investment speak for themselves. From just 500 EVs sold in 2009, China hit nearly 11 million EVs in 2024. For reference, that’s more than half of all EVs sold worldwide. The subsidies have officially ended, but that seems to be OK in markets like China. The government’s early push gave Chinese automakers the momentum to go toe-to-toe with the biggest names in the business. Now they’re thriving, while legacy carmakers and erstwhile innovators are shrinking in the rearview mirror. Notably, not all markets have achieved the level of EV adoption seen in China, so subsidies remain an important factor elsewhere in the world.

Where’s the juice?

If there’s one thing that makes or breaks an EV, it’s the battery (obviously). It accounts for around 40% of the cost of the car, which means the challenge has always been the same: how do you make a battery that’s powerful, reliable, and still affordable?

While the West was focusing on lithium nickel manganese cobalt (NMC) batteries, China started its EV journey with lithium iron phosphate (LFP) batteries. These were cheaper and safer, but back then, they had some serious downsides, including low energy density and poor cold-weather performance. Instead of giving up on LFP, a few Chinese battery giants (like CATL) spent a decade fine-tuning the technology. Fast forward to today, and they’ve basically closed the gap, and the EV industry is catching on. 

By 2022, roughly a third of all EV batteries were LFPs. That’s a direct result of China’s relentless innovation – but battery tech is just half the story. China also controls a huge chunk of the global supply chain for critical battery-making materials like cobalt, nickel sulfate, lithium hydroxide, and graphite. While other manufacturers are scrambling to lock in deals for raw materials with the likes of Chile and Australia, China had the foresight to dominate refining capacity years ago.

As a result, Chinese EV batteries are not only cheaper, but also more widely available, and that’s why China’s battery makers are now sitting at the top of the global supply chain. For rival EV makers, you can imagine that this is like trying to outdo Italy in espresso-making – if Italy also controlled the best coffee beans, the top roasting facilities, and the finest espresso machines in the world.

Temu Teslas for the win

The rise of these EV brands has gone hand in hand with a new generation of car buyers who don’t see Chinese brands as second-rate or inferior to foreign ones. These buyers grew up with Alibaba, SHEIN and Tencent, so they’re far more comfortable with Chinese brands than their parents, who still instinctively lean toward a German or Japanese badge. And remember, those same parents were once wary of anything made in Japan!

Millennial and Gen Z car owners put more value on affordability and a smaller debt commitment than on brand prestige or heritage (a lesson that Jaguar’s marketing department had to learn the hard way). 

So, what happens next? Even if Tesla could somehow disentangle itself from the professional stick-poker that is Elon Musk, it still faces the challenge of falling behind a country that does everything at double speed, from innovating to manufacturing. It’s the classic tortoise-and-hare story – except in this version, the tortoise took the time to build itself a jetpack.

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. She now also writes a regular column for Daily Maverick.

Dominique can be reached on LinkedIn here.

GHOST BITES (Choppies | Investec | Momentum | Shaftesbury | South Ocean Holdings)

The Finance Ghost
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GHOST BITES (Choppies | Investec | Momentum | Shaftesbury | South Ocean Holdings)

Solid earnings at Choppies, but a flat dividend (JSE: CHP)

It’s somewhat hilarious that this has been the pick of the retailers in 2025

I’m not sure what you had on your bingo card coming into this year, but I certainly didn’t have an expectation for Choppies to be massively outperforming the South African retailers. Yet here we are, with a year-to-date move of 26% at a time when most local retailers are firmly in the red!

The results for the six months to December 2024 give some support to this move. Revenue was up by 19.4%, with sales in like-for-like stores up by 15.1%. Although gross profit margin came under some pressure with a decline of 10 basis points due to promotional behaviour by competitors, they still saw a strong increase in gross profit of 18.7%.

The shine does come off once we take expenses into account, with a 22.9% increase driven by a number of factors including forex losses on lease liabilities and the loss on sale of the Zimbabwe segment. Some of this sounds non-recurring in nature.

Operating profit was up just 6.1% due to the jump in expenses, with operating margin down 50 basis points to 4.06%. In terms of HEPS, which reverses out those irritating impairments and other non-recurring issues, they were up 32.7%.

Tempting as it may be to focus on the HEPS number, it’s worth pointing out that net cash from operating activities fell by 6% and the dividend was flat at 1.6 thebe per share. Still, the market is clearly pricing in growth for this business!

Investec’s UK business has negatively impacted their latest numbers (JSE: INL | JSE: INP)

To be fair, they faced a demanding base period in the UK

Investec has released a pre-close update dealing with the year ending 31 March 2025. This is designed to update the market on performance before heading into a closed period which only ends when results are released. Not all companies do this, but it’s always good to see more disclosure rather than less.

The group’s pre-provision operating profit is between 5% and 12% higher than the prior year. That sounds great, yet HEPS is between 8% lower and just 1% higher. Impairments had a significant impact on the numbers, even though the credit loss ratio is still within the through-the-cycle range of 25 basis points to 45 basis points.

If you dig deeper, you’ll see that the South African business expects a credit loss ratio around the lower end of their through-the-cycle range of 15 basis points to 35 basis points. In the UK, the expected credit loss ratio is at the upper end of the guided range of 50 basis points to 60 basis points. The impact of specific impairments in the UK business has hurt them, although the Specialist Bank segment was also trying to grow against a base year in which operating profit had increased 33.9%. When you consider that the latest performance is a move of -4% to +4% in the UK, the two-year view is still strong in that business.

Notably, the cost-to-income ratio improved, so cost control was decent. This confirms that it was firmly an impairments story that took the shine off the growth numbers. Another highlight worth mentioning is the 14.5% increase in funds under management in Southern Africa, boosted by net inflows.

Group return on equity is between 13% and 14%, which is at the lower end of the medium-term target range of 13% to 17%.

Momentum shows what happens when everything goes right (JSE: MTM)

The share price closed almost 11% higher on the day of results

Momentum has released results for the six months to December. They are certainly living up to their name, as the group enjoyed a period in which its key business units delivered strong growth.

Normalised headline earnings per share increased by a delicious 48%, followed closely by the interim dividend with 42% growth. Those are exceptional numbers, leading to return on embedded value per share jumping from 11.6% to 16.8%.

With underlying drivers of performance like improved persistency in life insurance, better underwriting profits in the short-term business and favourable market returns, there’s a lot to smile about here. Even the operating loss in India was reduced!

Despite this, the embedded value per share of R39.29 is significantly higher than the share price of R32.68. This suggests that there might be more room for this share price to run, even though its up 58% over 12 months. Alternatively, you could argue that the market is worried about how maintainable these returns are.

The group has affirmed its financial ambitions for 2027, which include return on equity of 20%. Considering they just banked a return on equity of 24.6%, this perhaps suggests that conditions in this period were just unsustainably good. The share price trading at such a discount to embedded value would support this view. South African investors do tend to have a “it’s too good to be true” mentality, given the last decade or so on our market.

Shaftesbury is allowing a minority shareholder into Covent Garden (JSE: SHC)

The order of events on SENS was rather funny

Before the market opened on Thursday, Shaftesbury released a “response to market speculation” that confirmed that discussions with underway with Norges Bank Investment Management (NBIM) regarding a potential sale of 25% of Covent Garden. That announcement went on to say that there’s no certainty of a transaction being agreed.

Certainty came rather quickly, as just two hours later there was an announcement of the full terms of the deal!

So, onto the deal we go. Shaftesbury will sell 25% of Covent Garden to NBIM for £570 million, which values the asset in line with its balance sheet value as at December 2024. This is an iconic property in the West End of London, which has to be one of the best places in the world to have property. This is why the net initial yield is just 3.6%, which tells you how low a return investors are willing to accept for the underlying risk – or perceived lack thereof.

This is a NAV-neutral deal, as they are selling the stake based on current book value i.e. they are just exchanging an equity investment for cash. But from an earnings perspective, they note that this is accretive as they are unlocking capital through selling down the stake and still earning fee income based on the management of the property.

Shaftesbury has a solid balance sheet, but they will still use the proceeds to reduce debt. The remaining cash will be deployed as opportunities arise for acquisitions and portfolio refurbishment and improvement projects.

South Ocean Holdings had a horrible time in 2024 (JSE: SOH)

Revenue is pretty much the only thing that went up

When a set of results starts with a 9% increase in revenue, you would expect to see the rest of the income statement looking good as well. Alas, South Ocean Holdings suffered an ugly drop in HEPS of 62%. The dividend was 50% down. Clearly, the year to December 2024 didn’t go well.

Things went wrong right near the top of the income statement, as gross profit margin plummeted from 9.7% to 5.8%. This is a low margin business that just got a whole lot lower. Despite revenue increasing, gross profit itself was down 35% and the rest of the numbers didn’t stand much of a chance from there.

The pressure is being caused by imported goods in the market. That’s really bad news, as it suggests that this isn’t a temporary issue. To add to the worries, the overdraft facility has ballooned from R224 million to R417 million and is due for renewal during July 2025. Ongoing support from the bankers is required here.

The group is still profitable at least, so that should hopefully keep the bankers at bay. As for shareholders though, it’s a rough situation. This sounds like a structural problem rather than a temporary one.

Nibbles:

  • Director dealings:
    • The former CEO of Standard Bank (JSE: SBK) sold non-redeemable preference shares in the bank worth R2.4 million.
    • The company secretary of Impala Platinum (JSE: IMP) sold shares worth R1.2 million.
    • The CEO of Putprop (JSE: PPR) bought shares worth R212k.
    • Des de Beer bought shares in Lighthouse Properties (JSE: LTE) worth R183k.
  • Libstar (JSE: LBR), which has indicated to the market that they are considering various strategic options, announced the appointment of ex-Pioneer Foods CEO Tertius Carstens to the board as a non-executive director.
  • AngloGold Ashanti (JSE: ANG) is busy with site tours for analysts. After releasing a presentation earlier in the week dealing with the Obuasi mine, there’s now one on Sukari. If you enjoy (and understand) the more technical elements of mining, you’ll find them on the home page of the AngloGold website.
  • Anglo American Platinum (JSE: AMS) is planning a change of name, so they are trying to make it as clear as possible to the market that they are splitting from Anglo American (JSE: AGL). The proposed new name is Valterra Platinum.
  • Wesizwe Platinum (JSE: WEZ) is suffering a delay in the publication of its 2024 financials. This is due to a cyber attack towards the end of 2024, which impacted the financial systems of the company.
  • In the incredibly unlikely event that you are itching for Globe Trade Centre (JSE: GTC) to release the 2024 annual report, you’ll have to wait a bit longer as it’s scheduled for 29 April. The Q1 2025 release has been pushed out to 29 May.
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