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Production to sales specification has been underway for two weeks now
Alphamin announced that Mpama South has been producing tin concentrate to sales specification since 14 May, so that means two weeks with no hiccups. Even more importantly, the tin grade of the feed ore was increased from 17 May, with the focus on consistent throughput and producing in line with the targeted recoveries for the processing plant.
The good news for shareholders is that the facility is doing what it is supposed to do: operating at targeted levels of processing recoveries and is producing high grade concentrate to sales specification.
A group with cyclical exposures can’t always go up
Barloworld has released results for the six months to March 2024. Although revenue fell by 7.7%, the highlight is that EBITDA margin was steady at 12.9%. It’s unusual to see margins stay consistent when revenue has fallen.
The consistency goes all the way down to HEPS which also fell by 8% for the period. This is despite finance costs moving 13.4% higher for the period. One of the key offsetting benefits was a much lower effective tax rate after restructuring the domicile of the equipment businesses. The share of profit from associates and joint ventures came in 22.4% higher and this also boosted HEPS.
You might assume that the same is true for the dividend, but the surprising outcome is that the interim dividend is 5% higher at 210 cents per share. This tells you that the balance sheet is in good shape, with net debt to EBITDA at 0.6x (giving plenty of headroom vs. covenants of 3x).
Return on invested capital (ROIC) was in line with the prior period at 14.3%.
As you might guess, the consistency in group level results isn’t because the underlying divisions were all in line with the prior year. In a diversified group like this, there will be good years and bad years at divisional level, with the hope being that the group result is smoother over time than the underlying divisional numbers. In this period, Barloworld Mongolia was the standout performance with a 43% revenue increase, whereas VT in Russia reported a drop of 24%. Between those extremes, we find Equipment Southern Africa with a drop of 10% and Ingrain with a decrease of 3%.
EBITDA movements at divisional level were more volatile than what we saw at revenue level, which is to be expected when a business has fixed costs. Equipment Mongolia led the way with an EBITDA jump of 78.8% and EBITDA margin of 24.7%. Disappointingly, Ingrain put in the worst EBITDA performance despite the modest dip in revenue, with EBITDA down 19.6% as margin contracted from 14.1% to 11.7%. Equipment Southern Africa saw EBITDA decrease by 8.5% and VT was down 16.1%.
For further context, Equipment Southern Africa is the largest EBITDA contributor at R1.4 billion. Barloworld Mongolia is next up at R479 million, followed by VT at R417 million and Ingrain at R372 million.
In a separate announcement, Barloworld renewed the cautionary announcement that was first issued on 15 April. They haven’t indicated what the potential opportunity on the table is. We don’t even know if they are looking to acquire or dispose of something in these discussions.
You won’t often see a target loan-to-value this high – but what’s the catch?
Collins Property Group is officially a REIT and they aren’t wasting any time in getting those dividends out the door, with a dividend for the year of 90 cents based on distributable income per share of 94 cents.
Of course, REITs are supposed to have very high payout ratios. That’s kind of the whole point of being a REIT. It’s easier said than done though, with many of them tripping up when debt is high.
There are no such issues at Collins it seems, despite a very high loan-to-value ratio of 54.3%. The target range is 45% to 55%. Total debt on the balance sheet comes in at R6.3 billion, with various banks lending to the group.
With bank covenants for a 55% loan-to-value as the maximum, Collins is sailing close to the wind and feeling just fine about it. Generally speaking, companies in the Wiese stable aren’t shy of taking a financial risk or two.
Note: an earlier version of this article noted a large outstanding balance of preference shares held by Christo Wiese’s Titan entity. I misread R1.3 million as R1.3 billion. My apologies for this. The loan-to-value ratio information was correct in the original article.
This is what happens when a low margin EBITDA business goes the right way
In Datatec’s results for the year ended February 2024, you’ll find a 6.1% increase in revenue. That may not sound like much, until you see the 15.8% increase in gross profit and excellent 80.7% jump in EBITDA. The EBITDA increased from 1.9% to 3.3% and there’s an important lesson here about earnings volatility in low margin businesses. It takes just a small change further up the income statement (like a shift in gross margin) to drive big moves in EBITDA.
If you can believe it, the gross margin was 15.8% and the increase in gross profit was also 15.8%. At first I thought it was a typo in the SENS announcement!
The company announces various measures of earnings per share, not least of all because of Analysys Mason as a discontinued operation in the comparable year. The best measure is probably continuing underlying earnings per share, as this has the minimal level of distortion. Even then, it increased by 231.1% to 20.2 US cents!
The dividend was lower this year though, coming in at 130 cents vs. 195 cents in the prior period (a 33.3% drop).
Looking deeper, Westcon International is the largest contributor with EBITDA of $121 million, up by 150% thanks to significant improvement in gross margin. Logicalis International saw its EBITDA increase by 31.7% to $66.5 million, once again thanks to improved gross margin. Logicalis Latin America wasn’t so fortunate, with gross margin increasing but not enough to offset foreign exchange losses in Argentina that led to a drop in EBITDA from $21.2 million to $11.5 million.
In terms of prospects, the company highlights the opportunity of AI driving a new cycle of computing hardware investment. I’m hearing this more and more in the market and it certainly makes sense to me.
Despite strong growth in net operating income, the distribution per share has dipped
Exemplar’s portfolio is rather unusual in the modern South African context, in that it has absolutely no exposure to the Western Cape. The fund has 26 retail assets across five provinces with a particular focus on malls that service township areas. 86% of tenants are national and international tenants, or those with rental guarantees, featuring many large retailers who want to service lower income consumers who represent a high growth opportunity. If you’re building out a property portfolio, this is a good example of how you can diversify vs. many funds that are focused on properties in premium urban areas.
Despite a 16.4% increase in rental and recovery income, as well as a 13.2% increase in net property income, the total distribution per share for the year ended February 2024 fell by 1.5%.
The culprit? You guessed it: finance costs. They increased from R200 million to R287 million, completely offsetting the increase in net property income. This is what it looks like when you’re working hard so your bankers can have a better life:
The share price closed 32% higher on strong volumes (for a small cap)
Mantengu Mining released results for the year ended February 2024. This is the first year-end in production for the group, so the year-on-year movements look a bit silly (e.g. revenue up from R4.5 million to R109.9 million).
It’s probably better to just look at the results in isolation as opposed to comparing them to the prior year. Gross profit came in at R52.6 million and operating profit was R24.9 million. HEPS came in at R0.01 per share – positive by the smallest of margins. Even then, these results don’t tell much of the story, as there were only two months of steady state production at Langpan.
Aside from the a full production period at Langpan for FY25, the future looks interesting with the recent acquisition of 100% of Birca Copper and Metals that approximately doubles the existing chrome ore supply at Mantengu.
Be careful of the wide bid-offer spread in this stock, with the best bid currently at R1.07 and the best offer at R1.57. The share price closed 32% higher at R1.03 on strong volumes of roughly 8x the average trading volume.
The financials are in disarray and the turnaround will be extremely tough
Pick n Pay has released results for the 52 weeks to 25 February. They reflect revenue growth of 5.4%, which is pretty poor, along with a particularly revolting decline in gross profit margin from 19.6% to 18.1%.
Trading profit collapsed from just over R3 billion to only R385 million, with a paltry trading profit margin of 0.3%. It only gets worse from there of course, with a loss after tax of nearly R3.2 billion. A vast increase in finance costs to just over R700 million was a major contributor here, along with impairments of R2.8 billion. The impairments are a non-cash item. The same cannot be said for the finance costs.
Unsurprisingly, there’s no dividend. This is what happens when the headline loss per share is -254.72 cents.
Net debt ballooned to R6.1 billion at the end of February vs. R3.7 billion the year before. What’s that old story about gradually and then suddenly?
Silver linings? Well, Boxer grew revenue 17.3% and they will need to get the market to pay a decent price for those shares when Boxer is set free from this mess, so that’s good news. Pick n Pay Clothing standlone stores were up 17%, a strong result that might bring some hope to the broken grocery business.
The SENS announcement claims that experienced leadership has re-energised the supermarkets business. I can hand on heart say that my last visit to a Pick n Pay was many things, but energetic wasn’t one of them. I’ve heard that some stores look much better, but it’s the inconsistency in the footprint that makes Pick n Pay so hard to believe in. Although like-for-like sales growth for the first 12 weeks of the year is up vs. FY24, that’s hardly saying much. They are in a different postal code to Shoprite these days in terms of in-store execution. Just ask your friends where they shop.
Part of the turnaround is to either close 100 loss-making supermarkets or convert them to Pick n Pay franchise or Boxer stores. I somehow doubt that franchisees will be queuing around the block for these.
Pick n Pay has a huge mountain to climb here and they will probably only have one shot at raising the equity capital required to get it right. People have a limit to how willing they are to throw good money after bad.
The big news at the top is that Gareth Ackerman is stepping down as chairman, getting out of the way after being there for a period of time during which Pick n Pay’s core supermarkets business was left for dead by Shoprite. In even bigger news, the Ackerman Family has agreed to let go of majority shareholder voting control. The SENS announcement puts a positive spin on this, calling it a vote of confidence in the current management team. Somehow, I suspect the boardroom discussions weren’t quite that simple.
Ackerman Investment Holdings will follow its rights in the recapitalisation up to a maximum of R1.025 billion. The offer is R4 billion in equity, with three banks (Absa, RMB and Standard Bank) coming in as underwriters in equal proportions. I can’t help but wonder just how exposed those banks are to Pick n Pay. At this point at least, perhaps it hurts less to underwrite the equity raise than to face facts around the debt.
Speaking of the debt, the R4 billion in equity will primarily be used to repay group debt. If they don’t achieve a proper turnaround quickly, the debt hole will be back before you know it.
Remember when property funds invested in Edcon to try and save a sinking ship? The jury is still out on Pick n Pay, but you would be incredibly naïve to think that Shoprite won’t try and deliver the death blow here. Pick n Pay better pray night and day that load shedding doesn’t come back after elections, as I think an environment devoid of load shedding is the best chance they have to emerge in a sustainable (albeit smaller) form.
Just take a look at how difficult this will be, based on this slide from the strategic turnaround presentation:
They have moved through the R1 billion NAV mark
RH Bophelo is an investment holding company in the healthcare sector. The group now boasts a net asset value (NAV) of over R1 billion after growing NAV by 19%. NAV per share is now R15.99 and the share price is only R2.25, so the market clearly has a very different view on what the NAV is.
They do make some rather odd investments, like 29% in Ambit Health (a pathology company) for just over R1 million. How does this move the dial on a R1 billion NAV? Or even influence the dial?
If you can believe it, that was the biggest of three new investments in this period. Like I said, odd. The market doesn’t reward investment holding companies with vast portfolios of small investments. If they want to close the gap between the share price and NAV per share, this isn’t the way to do it.
Income from associates saved the growth as core operations went sideways
Tiger Brands is under new management, with a new CEO and CFO in place as well as managing directors for the six business units in the group. The new brooms need to sweep clean, as Tiger Brands is currently trading at levels that we also saw in 2011. There have been some encouraging rallies in the past year, but the price just can’t seem to sustainably break higher:
The results for the six months to March 2024 show why this might be the case, with revenue decreasing by 1%. Volumes fell by 9% and price inflation came in at 8%, with the loss in volumes being a deliberate strategy in some cases to improve pricing.
Group operating income fell by 3%, so the top half of the income statement clearly isn’t telling a positive story.
Finance costs also moved significantly higher, so the numbers at headline earnings level would’ve been pretty rough were it not for income from associated companies (Carozzi and National Foods in particular) that shot up from R274 million to R396 million.
I’ve included a screenshot of the income statement below to show you the shape of the financials and how it was the associates that came in right at the bottom to save the trajectory of profit before tax:
HEPS may have been up by 11% thanks to the associates, but not a cent in dividends was received from them in this interim period. In the context of such difficulties in the core businesses, as well as the levels of debt and associated finance costs, I therefore found it surprising that the interim dividend increased 9% to 350 cents per share.
In v.01 of my Short Stories, I’m sharing five tales of AI to educate, captivate and horrify. Read them at your own peril.
When you picture the people who built ChatGPT, you probably envision a slick office in Silicon Valley, staffed with bespectacled tech virtuosos who spend their days and nights writing endless lines of code. The last thing that crosses your mind when you’re creating this image (I’m guessing) would be a building full of underpaid Kenyan data labellers.
For all its promise of changing the world as we know it back in 2022, the earliest versions of ChatGPT presented a significant stumbling block: its tendency to spit out racist, biassed and sexually suggestive answers. It makes sense if you consider that this is a large language model that was trained on that which already exists on the internet – and we all know what kind of stuff can be found on the web. From smut fiction to hate speech, this dicey content was poisoning the data pool and resulting in some seriously toxic responses.
The solution? To build a filter that would catch these kinds of responses before they made it past ChatGPT’s blinking cursor. Of course the building of this filter would require more human input than the usual data scraping that was used to train ChatGPT, because human beings would need to assess whether or not something was offensive. By identifying and labelling enough offensive inputs, they could feed ChatGPT a “guidebook” of topics, words and ideals that are not OK to use.
That’s where the Kenyans come in. In 2021, OpenAI (ChatGPT’s parent company) partnered with Sama, a data labelling partner based in San Francisco that claims to provide developing countries with “ethical” and “dignified digital work”. Sama recruited data labellers in Kenya to work on behalf of OpenAI, playing an essential role in making the chatbot safe for public usage. But despite their integral role in building ChatGPT, these workers faced gruelling conditions and low pay.
In order to obtain the labels it needed, OpenAI outsourced tens of thousands of text snippets to Sama, who then sent it to their Kenyan teams. Many of these texts seemed to originate from the darkest reaches of the internet, detailing graphic situations such as child sexual abuse, bestiality, murder, suicide, torture, self-harm and incest. Kenyan workers were expected to read and label between 150 and 250 passages of this text per nine-hour shift, with those passages ranging from around 100 words to well over 1,000. For this, they were paid a take-home wage of between around $1.32 and $2 per hour.
While the nature of this work eventually led to the cancellation of the contract between OpenAI and Sama, the harsh realities faced by these data labellers sheds light on a darker facet of the AI landscape. Beneath its techy allure lies a reliance on covert human labour in the Global South, often characterised by exploitation and harm. These unseen workers persist on the fringes, yet their contributions underpin billion-dollar industries.
The digital world is brimming with personal remnants, from forgotten MySpace profiles to dormant social media pages, lingering online even after a person’s passing. But what if AI used these artefacts to recreate the presence of those we’ve lost?
It’s a reality unfolding before us as we speak – and one that AI ethicists caution could lead to a new phenomenon: “digital hauntings” by “deadbots.” With the ongoing advancements in generative artificial intelligence, there emerges a novel possibility for grieving individuals to interact with chatbot avatars trained on the digital footprint of the deceased, encompassing their voice, appearance and online persona.
Certain products from companies like Replika, HereAfter and Persona, marketed as “digital replicas”, are already pushing these boundaries, allowing users to simulate the departed. Amazon’s 2022 demonstration, wherein its Alexa assistant mimicked the voice of a deceased woman using just a brief audio clip, underscores the potential of this unsettling trend.
In their recent publication in Philosophy and Technology, AI ethicists Tomasz Hollanek and Katarzyna Nowaczyk-Basińska employed a technique known as “design fiction” to envisage various situations where fictional characters encounter challenges with different “postmortem presence” enterprises. The scenario that stuck with me the most is one where an adult user is impressed by the realism of their deceased grandparent’s chatbot, only to soon start receiving premium trial and food delivery service advertisements in their deceased relative’s voice.
“These services run the risk of causing huge distress to people if they are subjected to unwanted digital hauntings from alarmingly accurate AI recreations of those they have lost,” Hollanek added. “The potential psychological effect, particularly at an already difficult time, could be devastating.”
“We need to start thinking now about how we mitigate the social and psychological risks of digital immortality,” Nowaczyk-Basińska added.
Earlier this month, New York City saw a grand gathering of music, entertainment and fashion icons for the annual Met Gala, themed “Garden of Time”.
However, amidst the glamorous snapshots flooding social media, Katy Perry was notably absent. Or was she?
Despite the fact that Perry was in studio recording while the Met celebrations went on, two images of her (wearing two completely different dresses) seemingly posing for photographers at the Met started circulating on social media channels as other celebrities made their entrances.
While it’s unclear where these AI-generated images originated from, they were realistic enough that they were shared and liked thousands of times before sharp-eyed viewers cried foul. According to a screenshot shared by Perry herself, even her mother was fooled into commenting on her flowered ball gown.
Less amused by AI’s imitation of her is Scarlett Johansson, according to recent headlines.
The actress stated that she was left “shocked and angered” after OpenAI launched a chatbot this month with a voice that sounds “eerily similar” to hers.
This comes on the heels of Johansson turning down an offer from OpenAI to voice the chatbot, named Sky, in September last year. Two days before Sky went live, Sam Altman reached out to Johansson again, requesting that she rethink the offer. She declined, and the contested demo version of the chatbot went live days later.
In a statement shared with the BBC by OpenAI, Mr Altman denied that the company had sought to imitate Johansson’s voice. “The voice is not Scarlett Johansson’s, and it was never intended to resemble hers,” he wrote.
Johansson’s lawyers have retaliated by sending two letters to OpenAI, demanding insights into how the voice was created. While OpenAI continues to deny that the voice of its chatbot was designed to imitate Johansson, they have since suspended the use of that particular voice.
As AI continues to soar in popularity, researchers have raised concerns that the industry could be facing a shortage of training data – the essential fuel powering advanced AI systems. This potential scarcity threatens to decelerate the development of AI models, particularly the expansive language models that rely heavily on vast datasets.
In other words: after scouring the world wide web for half a decade and scraping data from billions of sites (presumably both legally and slightly-less-than-legally), AI is running out of fresh data to learn from.
When I first read this headline, I was a bit surprised that we could be at this junction already. To me it feels as though OpenAI and its cousins have only really been a major part of our lives since 2022. Consider that the internet itself is over four decades old – that’s four decades worth of writing. It’s a bit astonishing to consider that these large language models have burned through this much fuel already.
Obviously, training powerful, accurate and high-quality AI algorithms requires an immense amount of data. For example, ChatGPT was trained on an extensive dataset encompassing 570 gigabytes of text data, equivalent to roughly 300 billion words.
In a similar vein, the stable diffusion algorithm, which powers many AI image-generating applications like DALL-E, Lensa and Midjourney, was trained on the LIAON-5B dataset. This dataset includes an impressive 5.8 billion image-text pairs.
High-quality AI models cannot be developed using low-quality data sources, such as social media posts or blurry photographs, despite their abundance and ease of access. These types of data do not provide the richness and precision needed to train high-performing AI systems. Therefore, ensuring both the quantity and quality of data is paramount for the advancement and reliability of AI technologies.
To further complicate the problem (although this writer in particular was quite gleeful to learn this fact), AI models cannot be trained on AI-generated content. All of those blogs and LinkedIn articles that are being churned out at pace by ChatGPT? Those are absolutely useless for training purposes – in fact, their inclusion in learning datasets can actually cause damage to the algorithm. By making ChatGPT so freely available to the masses, OpenAI has effectively contributed to its own training data shortage.
(For the record, I don’t usually subscribe to schadenfreude. But when something has messed with your industry and your ability to work as seemingly effortlessly as ChatGPT has, well… it does make you smile a little to see them struggle for once.)
So, what next? Innovation, of course. The people building AI models are way too smart to be held back by something as trivial as a data shortage. One promising avenue for AI developers is to enhance algorithms to utilise existing data more efficiently. By refining these algorithms, it is likely that, in the coming years, they will be able to train high-performing AI systems using less data and potentially less computational power. This optimisation would not only advance the capabilities of AI but also contribute to reducing its carbon footprint, addressing environmental concerns associated with large-scale data processing.
Another viable strategy is the use of specially-designed AI to generate synthetic data for training systems. In this approach, developers can create the specific data they require, tailored precisely to the needs of their particular AI model. Obviously, this kind of content differs from the break-the-algorithm type of AI-generated content I mentioned before. This synthetic data can mimic real-world data scenarios without the need for massive data collection efforts. It can fill gaps in datasets, provide diversity in training examples, and even help in creating rare or hard-to-obtain data instances.
By focusing on these strategies, the AI industry can overcome the challenges posed by data limitations, paving the way for more sustainable and efficient AI advancements.
Hooray for that, I guess. Or not.
Dominique Olivier is the founder of human.writer, where she uses her love of storytelling and ideation to help brands solve problems.
She is a weekly columnist in Ghost Mail and collaborates with The Finance Ghost on Ghost Mail Weekender, a Sunday publication designed to help you be more interesting.
Dominique can be reached on LinkedIn here.
This deal also has an interesting funding mechanism
Balwin has agreed to acquire 13.41 hectares of land in Shongweni in KZN. The property is adjacent to Westown Square, which is a 50,000 square metre retail site due to be completed in 2025. The broader area includes plans for a hospital, hotels, warehousing, schools and all sorts of other things. I don’t know this particular area at all, but Balwin reckons its an LSM 8 – 10 opportunity that has strong population growth among 30-somethings in particular.
What makes this deal particularly interesting is the “pay-as-you-register” model that Balwin has put in place with the seller. Basically, a contracted amount per apartment is paid to the seller on the registration of each apartment. Balwin will acquire development rights once all infrastructure has been installed by the seller and the property is fully serviced.
The benefit here is obvious: Balwin can do this deal with far less strain on the balance sheet than would otherwise be the case. They will develop 1,260 residential apartments and pay for the development rights as each one is sold. The value of the development rights is R133.7 million.
The price paid to the seller will be R100k for a 1-bedroom, R110k for a 2-bedroom and R120k for a 3-bedroom apartment. Balwin must settle the full price within 6 years and expects to sell all the units within 4 years, so they’ve built in some fat. Importantly, there are no inflation escalations on the purchase price.
There’s a further R27 million payable to the landowner when apartments are sold to clients. This is based on 1.5% of the selling price of each apartment. The seller of the development rights must also pay 1.5% over to the landowner, so Balwin and the seller are sharing the cost equally.
Long story short, Balwin has found a way to defer the payment of the development rights and make this a less capital-hungry exercise. Importantly, the company must still fund the development of the apartments and of course takes the risk on the development being a success, as the development rights must be settled within 6 years regardless of how well the development performs.
This is a category 2 deal, so shareholders won’t be asked for an opinion or a vote on it. The share price closed 5.4% lower on the day but this announcement came out after market close, so keep an eye on share price action on Monday when trade reopens.
The company has guided a return to profitability
Brikor has released a trading statement for the year ended February 2024. It’s an important one, as it reflects a move from a headline loss per share to positive headline earnings.
With full details due to be released before the end of May, we at least know in the meantime that HEPS will come in at between 1.2 cents and 1.4 cents per share vs. a headline loss of 0.1 cents per share in the comparable year.
The share price is trading at R0.15 and there is limited liquidity in this thing, with a market cap of just over R100 million.
Sea Harvest is the source of pressure on intrinsic NAV in the past three months
Brimstone’s intrinsic net asset value (NAV) per share is the key metric to assess the performance of the business, as this is an investment holding company with a variety of investments ranging from very small stakes through to control.
The investments in Oceana (a 25.1% stake) and Sea Harvest (53.4% stake) contribute the bulk of the intrinsic NAV per share. These are valued based on the market value per share, so this can lead to significant swings in the Brimstone intrinsic NAV.
Between December 2023 and March 2024, intrinsic NAV fell by 6.7%. Pressure on the Sea Harvest share price is largely to blame, although some other investments also went the wrong way (like MTN Zakhele Futhi). A reduction in net debt helped limit the pain at least.
If we take a longer-term view, it’s easy to see that the intrinsic NAV per share has been a really disappointing story in recent years. On a fully diluted basis, it reduced from R12.827 per share as at December 2020 to R11.097 per share as at March 2024. The market has valued the share price at roughly a 55% discount to intrinsic NAV, with little sign of that discount closing.
Revenue is up substantially
4Sight operates in the technology space and it really won’t take you long to figure that out, with words like digital transformation and artificial intelligence featuring prominently. Buzzwords aside, the growth in the business across Africa and the Middle East is significant. This table shows how they make money:
Total revenue is up by 57.7% and the increase in support and maintenance is particularly encouraging, as that sounds recurring in nature. Operating profit is up by 76.9%, so the revenue growth is being accompanied by an improvement in margins – a wonderful combination for investors. Gross margin did dip though, so the operating expense management was where the good stuff happened.
But here’s the trick: you need to read really carefully. The latest period is for the 14 months to February 2024 and the comparable period is the 12 months to December 2022. This is because of a change in year-end. Those growth rates are impressive regardless, but clearly that plays a role.
HEPS is up by 153.8%, coming in at 6.037 cents per share. The dividend is 5 cents per share vs. no dividend in the comparable period. Again, this is for 14 months, so you can’t use this in the normal way to calculate a dividend yield or P/E multiple. They did also release 12-month results which help, but there’s an odd situation here where January and February added plenty of revenue but not much profit. It’s not clear how much of this is seasonal.
Change in reporting period and other questions aside, there’s still a very high growth rate and the dividend is a high payout ratio vs. HEPS, suggesting that these are high quality earnings.
The share price is R0.84.
Revenue and profits are up strongly
ISA Holdings seems to be in the right place at the right time, with a business model focused on cybersecurity solutions. This is a major area of investment by corporates at the moment. ISA offers a consumption-based solution that is resonating with consumers.
Revenue is up by 33% and profit before tax is up 23% for the year ended February 2024. These are great growth rates, even if there is some margin contraction. They attribute the dip in margin (gross profit margin down from 53% to 49%) to product sales during the current period that excluded any of the higher margin services.
Share of profits from equity associate DataProof (another cybersecurity offering) increased by 63%. This helped drive HEPS higher by 35% to 18.9 cents.
But here’s the real kicker: the dividend payout ratio is 100%. The interim dividend was 7.7 cents and the final dividend is 11.2 cents. This adds up to 18.9%, which is equal to HEPS for the year. As cash quality of earnings goes, you won’t find better than that.
And in case you think it’s a fluke, they did exactly the same thing in the comparable period with a 100% payout ratio.
There is no compulsory squeeze-out envisaged
Goldway is giving the remaining shareholders in MC Mining another chance to sell their shares on the same terms and conditions as the recent buy-out offer. This means a cash price of A$0.16 per share.
This gives remaining shareholders until 25th June to accept the offer. Those who do not accept it will then sit with a highly illiquid stake in the listed company. There’s no guarantee whatsoever of being able to sell those shares to Goldway or anyone else.
Goldway intends to delist the shares from the ASX and the JSE but has not commenced the process yet. The listing on the AIM in London is being cancelled, though.
The company needs to rectify a technical problem with previously paid dividends
Here’s one that you won’t see every day! Pan African Resources has released a circular that seems to reclassify the share premium account on the balance sheet as a distributable reserve. The reason is that dividends paid from 2019 to 2023 met the net assets test on a ZAR basis, but not on a USD basis which is the presentation currency for the group.
The substantial depreciation in the rand over the past few years led to a Foreign Currency Translation Reserve with a negative equity balance of $171 million. It gets deemed as a distributable reserve under the rules for assessing whether a dividend can be paid, leaving the group with a serious problem. Even though the ZAR numbers look perfectly capable of supporting a dividend, the USD balance sheet tells a different story.
Share buybacks over the same period suffer from the same problem.
The company has no intention of trying to recover the past dividends from shareholders. Instead, the goal is to get shareholders to agree to remedial resolutions that take the form of a capital reduction, which means reclassifying some equity as distributable reserves.
What isn’t clear at this stage is how the company fixes this problem going forward. They note that a number of accounting strategies are being considered to ensure adequate distributable income going forward. Changing the presentation currency to ZAR is presumably one way to do it, although this goes against the company’s attempts to appeal to a global shareholder base.
Like I said: you won’t see this every day.
This was a period of margin improvement
Revenue at Quantum Foods fell by 13% for the six months to March 2024. That doesn’t sound like the start of a great highlights package, yet operating profit was up a ridiculous 327% and HEPS jumped by an even sillier 653%.
To put more sensible numbers to it, headline earnings increased from R6 million to R43 million. This is a good reminder of how touch-and-go the base period was.
Although there was an impact from avian flu outbreaks in this period, the real win came in higher egg prices and a drop in input costs in the form of raw materials for feed (yellow maize and soya meal). This is despite the weaker rand, as international prices thankfully fell by enough that the rand couldn’t offset the benefit. And of course, less load shedding took some strain off the system in terms of diesel costs etc.
In summary, despite the pressure on revenue from a drop in egg volumes, the unit economics improved so much that profitability went firmly in the right direction. This is a great reminder that margins matter more than revenue. It doesn’t help to sell more of something that is barely profitable.
Of course, first prize would be a recovery in egg volumes along with these improved margins.
As this paragraph in the outlook section shows, Quantum isn’t buying the story that load shedding is gone for good:
No interim dividend has been declared despite the improved results.
The latest De Beers sales numbers are in
In and amongst all the noise around potential offers for the group, Anglo American has released the latest sales cycle numbers for De Beers. With $380 million in sales for cycle 4, the trend is firmly negative. Cycle 4 2023 was much higher at $479 million. Cycle 3 2024 was also significantly higher at $446 million.
Apart from the obvious issues of macroeconomic pressures, there was a quieter period of trading in India during the elections. The next sales event is in the US – and in Las Vegas, no less. The company has already tried to temper expectations by referencing macroeconomic issues and hoping for a recovery in coming years.
As a reminder, Anglo American’s current proposal to shareholders to unlock value involves a disposal of some kind of De Beers. Selling a business with falling sales isn’t straightforward – at least not for a decent price.
This is one of the best rand hedges on the JSE
Bidcorp has updated the market on performance for the ten months to April. In case you aren’t familiar with the group, this is a global food services giant that is one of the genuine rand hedges on the JSE, as very little of its revenue is generated here.
A key feature of this result is that food inflation has come all the way down to 2.6% vs. 15.2% in the comparable period. They point out that food inflation is lower than core inflation for the first time in two years. Another important point is that rand weakness has delivered a 9% positive impact on the reported numbers, as much of the revenue is generated elsewhere.
The performance across Australasia, Europe and the United Kingdom looks solid, with sales growth and stable or improving margins. Emerging markets are more of a mixed bag, with China and Brazil of particular concern. South Africa is actually performing well despite the challenges here, with other highlights being Malaysia, Chile and the Middle East.
Group sales for the ten months increased by 8.8%, with the UK as the standout at 15.9% (rand weakness helps here). Gross margins are slightly ahead of the previous year, which is just as well because operating costs as a percentage of revenue deteriorated by 40 basis points to 18.9%.
The EBITDA before IFRS 16 margin of 5.6% of net revenue is in line with 2023 which was a strong year. This is a period of working capital absorption for the group, with the good news being that working capital is in line with management expectations and slightly better than the comparable period.
R4.4 billion has been invested by the group, which is well up on R2.0 billion in the comparable period. Aside from two bolt-on acquisitions (a small bakery in Germany and a seafood wholesaler in South Africa), the focus has been on vehicles. They are busy with a “couple” of potential deals in the UK and one in Europe, all expected to close early in the new financial year.
Bidcorp is a powerhouse of note. Like most of the really high quality businesses on the JSE, the multiple reflects that. Based on last reported earnings, the Price/Earnings multiple is roughly 19x.
If you bought the panic selling around the departure of Neil Murphy, you’re smiling
Disgraced ex-CEO Neil Murphy is no longer involved at Bytes, after it came out that he had executed many, many undisclosed trades over a few years. The share price reflected panic when the news broke and those who were smart enough to buy the panic have already locked in a roughly 20% return in the past month.
This is because the group is still doing well, although margin compression in the IT services industry continues. Gross invoiced income increased by 26.7% and revenue was up 12.3%, so they are having to work harder and harder for that revenue. Gross profit increased 12.5% and operating profit was up 11.4%. By the time we reach HEPS, growth has been leveraged up to 15.4% – a very presentable result, especially in GBP.
The final dividend is 17.6% and the board has decided to pay another special dividend like last year, with a 16% growth rate in the special dividend as well. The only reason why they call it a special dividend is because they don’t want to commit to the higher payout ratio forever, just in case they need the capital for something else.
And a 19.7% increase in the share price on the day
Capital & Regional is suddenly the talk of the town, confirming that on 19 April it received a non-binding indicative proposal from Vukile Property Fund (JSE: VKE) regarding a possible cash and share offer for the share capital of the company. I’m surprised it was kept under wraps for this long.
There’s nothing binding at this stage, with Vukile facing a PUSU (Put Up or Shut Up) deadline of 20 June 2024. As the juicy name suggests, they need to announce a firm intention to make an offer by that date or they need to confirm that they won’t make an offer.
On top of all this, Capital & Regional announced that Growthpoint (JSE: GRT) (which holds 68.13% in the company) received a non-binding expression of interest from NewRiver REIT in relation to a potential offer for Capital & Regional. The board of Capital & Regional hasn’t received a proposal from NewRiver at this stage.
Of course, the outcome of all this was a significant jump in the Capital & Regional share price as punters hit the buy button in the hope of a juicy offer coming in.
But the range for the distribution certainly is
Emira Property Fund released a trading statement for the year ended March. The challenge here is that the comparable period is only nine months long as there was a change of year-end, so the increase in distribution per share of between 19.86% and 21.93% isn’t a valid growth rate as the comparable period was shorter.
It does tell us that the range is 116 to 118 cents per share and that’s the useful bit of information. This puts the fund on a trailing yield of 11.7%.
I’ll deal with them all in one place – and Tsogo Sun separately as it is much bigger
I’ll start with eMedia, which reported for the year ended March 2024. Load shedding doesn’t help TV viewership at all, with advertising down 1%. It’s worth highlighting that e.tv spends R600 million per year on local drama series. Media Film Service got hurt badly by the writer’s strike in Hollywood, with profit down R31.5 million year-on-year. They also spent R8.8 million in legal battles with MultiChoice related to channels being carried on that bouquet. Revenue in eMedia fell 2.1% and HEPS was down 11.7%. The dividend of 16 cents per share was 20% lower.
Moving on to Frontier Transport, a wonderful example of how to make money in an unsexy industry, revenue increased by 8.9% and HEPS was up 37.8%. This is because operating costs increased 6.3%, with the resultant margin expansion driving that juicy improvement in HEPS. In addition to the ordinary dividend of 48.4 cents, there was a special dividend in January of 137.38 cents.
We now get to the mothership, Hosken Consolidated Investments (or HCI for short). We have an interesting scenario here where HEPS fell 29% and the dividend per share doubled to 100 cents. The major negative move was in oil and gas prospecting, where the headline loss jumped from R75 million to R528 million. That’s a very big move when total headline earnings came in at R1.18 billion. The reason why we can see negative moves of this side and yet a higher dividend is that the negative moves are non-cash in nature, with downward fair value adjustments recognised on the investment held by Africa Energy Corp.
Here’s what the total group looks like:
Although HCI controls Tsogo Sun, I’ve dealt with that company further down as the market cap is much larger than the likes of eMedia and Frontier. And in case you’re wondering, Deneb reported earlier in the week.
Key metrics like Return on Equity (ROE) also moved higher
Investec has released results for the year ended March 2024. This was a period of significant corporate activity, like the major deal in the UK to combine Investec Wealth & Investment UK with the Rathbones Group. They also sold the property management company to Burstone Group for a small fortune.
To make the numbers more comparable, Investec has presented adjusted operating profit as though the abovementioned transactions took place at the start of the period. On that basis, adjusted operating profit is up 8% in GBP or 24.6% in ZAR. Return on Equity has moved higher, up from 13.7% to 14.6%.
The cost to income ratio improved from 54.7% to 53.8% as total operating costs increased by only 3.2%, an impressive show of discipline.
The full-year dividend increased by 11.1% to 34.5 pence for the year.
It’s interesting to note the revised through-the-cycle targets for the credit loss ratio. In Southern Africa, where the book is mainly high income private clients and large corporates, the range is 15 to 35 basis points. In the UK with more of a mid-market positioning, the range is 35 to 55 basis points. This tells you something about the economic resilience of the different books.
The share price closed 4.5% on the day of these results, taking the 12-month gain to 19%. Those who enjoy range trading strategies might want to take a look at this chart:
The ASX has even queried the recent price action
The Australian Stock Exchange sent Kore Potash a price query, which means they noticed an unusual uptick in price and volume in the stock and wanted to understand if there is any information that should’ve been disclosed that could have leaked into the market.
Here’s the chart – and it’s not hard to see why the ASX took notice:
The company reiterated that no formal legal agreements have been entered into with PowerChina re: the all-important EPC contract for the development of the Kola Project. In other words, the last release from the company is still the latest news.
Speculators seem to be lining up for a release of good news and what that might do to the share price.
As in, literally
Mahube Infrastructure released a trading statement dealing with the year ended February 2024. There’s a huge swing in profitability and in the right direction. Compared to a headline loss per share of 53.68 cents, HEPS will come in at between 91.05 cents and 100.64 cents.
Aside from dividends received from investee companies (including special dividends), the earnings were driven by a favourable change in the fair value of financial assets due to a revision of wind forecasts an improvement in the macroeconomic indicators.
Things seem to be going well in this London-focused fund
Shaftesbury has released a trading update that was presented at the company’s AGM. The highlight is that leasing demand is producing rents that are 7% ahead of 2023 numbers, with the company also enjoying the recycling of capital at a premium to the values at which the properties are held on the balance sheet.
They have completed £213 million in asset sales since the merger that created Shaftesbury as we know it today, with a premium of 3% to the valuation on the books. They have reinvested £83 million in target acquisitions.
The loan to value is at 30% which is a very healthy level for a property fund. The current weighted average cash cost of drawn debt is 4%.
Perhaps most interesting, the office portfolio is showing the best increase in contracted rent vs. 2023 levels, with the return to office trend gaining momentum:
The group is hoping that the Eskom claim will be finalised in Q3
Stefanutti Stocks is in the midst of a turnaround plan. If you aren’t sure why, a quick look at the balance sheet where liabilities exceed assets will dispel that uncertainty for you. The financials are still prepared on a going concern basis due to the expected cash flows under the restructuring plan.
For those punters willing to take a speculative position here, the key is the dispute with Eskom that is now with the Dispute Adjudication Board (DAB). This relates to contractual claims and compensation events at Kusile Power Project. Independent experts evaluate the delays and related numbers and the DAB then makes a decision that is binding on the parties. Stefanutti Stocks submitted a total claim of R1.6 billion to the experts and will now wait to see how much it gets. It is hoped that a binding decision will be issued in Q3 2024.
The rest of the group still has all the usual uncertainty and difficulty that seems to follow construction companies around. For example, Hyvec JV was previously shown as a discontinued operation. A change of plan means that it is back in continuing operations. Delays in on-boarding labour due to legislative changes led to the recognition of an onerous contract provision and a loss for the year there of R78 million.
Although the year-on-year swing in continuing and discontinued operations is rather wild, the combined operations managed to show what looks like a smooth result: growth in profit for the year of 9%.
HEPS tells a different story though, deteriorating by 44% to a loss of 55.73 cents.
Chrome prices helped mitigate the fall in PGM prices
Tharisa has announced results for the six months to March. They reflect a 9.9% increase in chrome production and a 7.7% decrease in PGM production. Chrome prices were 16.9% higher and PGM prices were 39.3% lower.
The net effect is that revenue was actually up 10.1%, with EBITDA slightly down and EBITDA margin contracting from 24.2% to 21.6%. Due to higher finance costs, HEPS fell sharply, down 25% to US 13.2 cents.
The interim dividend of US 1.5 cents per share is 50% lower than the prior year.
Adjusted HEPS has dipped
Tsogo Sun has released results for the year ended March 2024. Income is up 2% and operating costs increased 3%, with load shedding having an impact on both those metrics. This led to adjusted EBITDA decreasing by 2%.
When operating profits are going the wrong way, it’s hard for HEPS to avoid following suit. Due to the termination of hotel management contracts in the base year, it’s important to look at adjusted HEPS to see the impact of operational performance. This is down 5%.
Perhaps the final dividend tells the best story, down a substantial 30% after the interim dividend was flat year-on-year. There’s clearly uncertainty in this space and the group has also had to recognise impairments based on the financial performance.
It might help matters if exposure to the Western Cape can be increased. The casino footprint is heavily geared towards the northern parts of the country. The group notes a plan to develop a new casino and hotel precinct in Somerset West, as well as upgrades to the Caledon site.
The revised proposed exchange ratio is 24.8% higher than the initial proposal
The initial deadline for BHP to “put up or shut up” (that is the actual term – also called PUSU) was 22nd May. Anglo American requested an extension of the deadline, which was granted under UK law with a revised date of 29 May. This leaves a week for BHP to decide whether to put in a binding offer or not.
In the meantime, BHP keeps testing the waters with price and gets rejected every single time. The “final” exchange ratio is 0.8860 BHP shares for every Anglo share, plus the shares in Anglo Platinum and Kumba, as BHP is standing firm on a requirement for Anglo to demerge those assets. The revised ratio means that in addition to the Anglo Platinum and Kumba shares, Anglo shareholders would have 17.8% in the combined BHP and Anglo American group.
This proposal is 24.8% higher than the initial proposal put in by BHP. It represents a 47% premium to the undisturbed Anglo American share price (i.e. before the press speculation about the deal) and a much larger premium to the unlisted assets if you work out the Anglo Platinum and Kumba contributions.
BHP says that it won’t increase the offer further, unless a third party sticks in an offer or Anglo indicates that a higher price might be acceptable. In other words, they probably would increase the offer further if it gets the deal done.
Anglo has rejected this proposal once more, citing the complexities around the demergers as a major concern. I continue to enjoy the irony of this argument, as one of Anglo’s own strategic plans is to demerge Anglo Platinum!
Anglo American’s share price is up more than 21% in 30 days. If BHP walks away from this and nobody else puts up their hand, the pressure on the Anglo board to unlock value will be immense.
The loan-to-value ratio is on the high side after the manco internalisation
Burstone (previously Investec Property Fund) paid a lot of money to internalise its management company. Although this has obviously saved on management fees, it required a significant capital investment that has contributed to the loan-to-value ratio moving from 42% at March 2023 to 44% at March 2024.
This is above the group’s comfortable range of 37% to 40%, so you can expect to see some recycling of assets to get it back down there. They have a disposal pipeline in South Africa and Europe and have generally managed to get the sales done at or above book value.
On the asset side of the balance sheet, the South African portfolio value was fairly stable, but the European portfolio fell by around 1% in value after valuation yields expended further. Along with some moves in derivatives, this caused the net asset value to fall 4.5% to R15.45 per share.
The share price at R7.19 (up 6.4% for the day) is a significant discount to that value.
The dividend payout ratio was 85%, down from 95% in the comparable period. This seems to be another place where the increase in debt has bitten.
When growth is hard to come by, you have to be disciplined
Deneb’s revenue growth of 7% makes it sound like things were quite easy for the group, yet the underlying story is that the automotive parts manufacturing business was up 26% and the rest of the group was pretty much flat. This is why diversification is important, especially in the industrials space.
Lower volumes make it difficult to maintain margins, so Deneb did pretty well to keep gross margin contraction to only 30 basis points. The magic was that costs only increased by 1% overall. Fixed costs were down 1%. This was good enough for operating profit to grow by 21%, provided we adjust for the insurance claims received in the base period.
Such an adjustment is warranted, as those claims were clearly a once-off benefit that skew the year-on-year performance if not removed.
Net finance costs were up 45%, with around half the increase coming from rate hikes and the other half from debt balances increasing. This is a perfect example of why banks do well in a combination of inflation and higher rates. The debt has come down sharply in the final quarter of the year, thanks to a 47% uptick in cash generated from operations. This will do good things for the income statement in the new financial year.
Adjusted HEPS (which is the right metric because of the insurance claim) increased by 25% to 23 cents per share. At R2.30 per share, you shouldn’t need to get the calculator out to work out that Price/Earnings multiple!
They expect a “lengthy implementation journey of NHI”
Life Healthcare has reported growth in revenue from continuing operations of 7.8%, as well as 8.4% growth in normalised earnings per share. The interim dividend is up by 11.8%, so the payout ratio has moved higher which is usually a good sign of confidence.
Paid patient days grew by 2.3%, so there was “volume” growth as well as pricing growth in the business.
Life Molecular Imaging (LMI) grew revenue by 77.5%, driven by the sales of NeuraCeq in the US. This business still makes a small loss at normalised EBITDA level as it is an early-stage operation. This loss is expected to reduce after this year.
Thanks to further growth in paid patient days as well as inflationary increases and growth in the South African imaging business, the group expects to see revenue growth of 6% to 7% for the full year. This outlook explains the higher payout ratio.
As for NHI, I’ll repeat the commentary verbatim:
“However, the approval of the Bill without addressing concerns raised during the parliamentary process, is a regrettable missed opportunity to expand sustainable access to healthcare. We, therefore, expect a lengthy implementation journey of NHI due to operational and legislative changes required, as well as the current fiscal constraints.”
Things still look terrible there
Pick n Pay has released a sales update and trading statement for the 52 weeks ended 25 February 2024. It really only takes a visit to your local Pick n Pay grocery store to figure out what the problem is here. The numbers firmly reflect the in-store experiences and lack of consumer resonance, with sales down -0.2% for Pick n Pay in South Africa (or up +0.2% on a like-for-like basis). Internal selling price inflation for the period was 7.3%, so this means a heavy drop in volumes.
The Pick n Pay number includes Pick n Pay Clothing, which grew 17.0% or 7.7% on a like-for-like basis. This means the core grocery business is doing particularly horribly, offsetting all the good stuff in the clothing business.
Boxer continues to do incredibly well, with sales up 17.5% overall or 8.1% on a like-for-like basis. This implies some positive volumes growth along with the benefit of inflation and the ongoing store rollouts.
Although still firmly a poor cousin of Shoprite’s dominance in this space, Pick n Pay Online (which includes asap! and the Mr D partnership) grew sales by 74.4%.
Rest of Africa is in the highlights package for this period, with sales up 10.1% overall and 12.5% on a constant currency basis.
Armed with this knowledge, you won’t be surprised that Pick n Pay recognised a R2.8 billion impairment on the supermarkets. This is a non-cash charge of course, but it sends a message. It also includes another little nugget of information: loss-making company-owned stores will be closed or converted to either Pick n Pay franchises or Boxer stores. A long tail of problematic stores can be a matter of life or death for a retailer.
Other issues that hurt the numbers include once-off costs of R423 million across supply chain changes and employee restructuring, a roughly R400 million trade receivables provision (this implies that franchisees are also struggling), an additional R467 million in net debt service costs and R698 million in diesel for generators.
For the year, the headline loss per share was huge, coming in at between -228.99 cents and -177.14 cents. It’s even worse if you use comparable HEPS as their preferred metric, with a loss of -281.13 cents to -228.31 cents.
The group is working towards a rights offer of up to R4 billion, along with a separate listing of Boxer on the JSE. This is very similar to how Transaction Capital had to spin out WeBuyCars, leaving behind an ugly rump that will need a great deal of fixing.
Group net debt at the end of February was R6.1 billion, which was better than the guidance of R6.7 billion. A debt restructuring agreement has been concluded with lenders, securing funding up to 1 September 2025.
Most importantly, the strategic plan going forward will be presented by Sean Summers as part of the FY24 results presentation, expected on 27 May.
There are some less appealing trends elsewhere in the group
Reunert has reported results for the six months to March 2024. Revenue increased 7% and HEPS was up 8%, with the interim dividend also up 8%. This is real growth (ahead of inflation), so that’s something at least.
There were certainly some challenges in this period, like Nashua struggling with logistics challenges that led to shortfalls in products and a resultant knock to sales and operating profit. The other headache is in residential and small commercial batteries, where the market has become saturated and demand has fallen away. That situation would presumably be even worse after year-end, as there’s been no load shedding for weeks now.
The Electrical Engineering segment was the highlight, with revenue growth of 7% and operating profit growth of a meaty 12%. Both the power cable and circuit breaker sides of the business did well.
In the ICT segment, IQbusiness was successfully integrated into the ICT segment and this led to a 38% increase in revenue, yet operating profit was flat year-on-year. The Nashua issues sit in this segment.
Applied Electronics saw a 10% drop in revenue, but operating profit also remained flat year-on-year. It’s amazing to see two segments report steady profits despite revenue moving sharply in either direction!
The outlook for the full-year numbers is positive overall, with IQbusiness to be included for a full 12 months and encouraging signs in Electrical Engineering and the Defence Cluster (part of Applied Electronics).
Practically every metric has gone the right way
RFG Holdings has had to deal with a weak domestic consumer environment that led to a decline in volumes. You would never know that by looking at the numbers though, with price inflation taking revenue growth into the green and margins improving across the income statement.
Group revenue grew by 3.2%, with regional revenue up 5.8% and international volumes down 8.6%. The price vs. inflation mix was quite something, like in the regional business with price up 10.0% and volume down 5.5%. Internationally, price fell 6.5% and volumes 8.9% (port challenges in Cape Town did them no favours here), with forex benefits of 5.5% mitigating the pain. Mix effects make up the balancing numbers.
Long life foods increased revenue by 7.5% and fresh foods increased by 2.9%. Ready meals seem to have also done well. Consumers are craving convenience, a logical outcome of really busy households.
Operating profit margin expanded by 100 basis points to 10.2% despite these challenges, with operating profit growth of 15.2%. Reduced diesel costs vs. the prior year helped. Margins in the regional segment were up from 8.9% to 10.0%, with the international segment managing to increase from 10.4% to 11.5%.
Group EBITDA margin was up 140 basis points, with EBITDA growing 14.6%. Combined with a reduction in the net interest expense, this drove a 20.7% increase in headline earnings per share.
The group is focusing on working capital management, with a lower outflow for this period than in the prior year. Seasonality is important here. The bulk of the capital expenditure at the moment is at the Tulbagh fruit products factory and the group is achieving a return on equity of 15.7% at the moment, so shareholders shouldn’t feel upset about reinvestment of profits.
Still, the fund is in the green at a time when many others aren’t
Spear REIT is respected on the JSE as one of the most focused, well-run property funds on the market. They can control a bunch of things, but not the prevailing level of interest rates. Property funds make extensive use of debt and this leaves them vulnerable to higher rates.
For the year ended February 2024, distributable income per share increased by 1%. The distribution per share is up 3.80%, which means the payout ratio has moved to over 95%. A payout ratio that high tells you a lot about the quality of the business.
The average reversion for the year was -0.37%, which is a pretty solid outcome in this environment. This speaks to demand in the Western Cape.
The loan-to-value has decreased from 36.30% to 31.60%, so the balance sheet is in a good place. The reduction in debt helped limit the impact of higher rates on distributable earnings.
The net asset value per share is up 2.8% to R11.80. The share price is trading at R7.90, which implies a trailing yield just under 10%. Next time you consider a buy-to-let property, remember that you can buy a solid REIT with instant liquidity, some underlying growth and a yield of 10% without you having any headaches with tenants.
A record year of profitability
Southern Sun has a lovely story to tell for the year ended March 2024. 19% growth in income and 32% growth in EBITDAR (not a typo – this is a standard metric in the hotel game) drove a massive 77% increase in adjusted HEPS.
And yet, HEPS without the adjustment only grew by 7%. Should we be worried?
Not in this case, as the base period included once-off income from Tsogo Sun in the form of a separation payment of R399 million. Excluding that from the base is a much better way to view underlying performance, so adjusted HEPS is the right approach.
One of the encouraging signs in these results is the increase in average room rate of 9%. If your hotels aren’t well positioned and appealing, you can’t increase pricing. Food and beverage revenue is up 15%, so they are doing a great job on share of wallet as well.
It’s interesting to see how they allocated funds. Free cash flow of R970 million went towards share buybacks (R670 million), expansion capex (R180 million) and the reduction of net debt, with a comfortable net debt to EBITDA range being enjoyed.
The group’s exposure to Cape Town has been a major benefit here, with a strong year for tourism, business travel and events. Group occupancy levels came in at 58.6% for the year, which is 710 basis points up on 2023 but still below 59.3% achieved before the pandemic.
Given the improved outlook and level of performance, the final dividend is 12.50 cents. There was no final dividend in 2023.
The strategic focus in recent years is paying off
Alexander Forbes has released a trading statement for the year ended March 2024. It has happy news for shareholders, with HEPS from continuing operations up by between 10% and 20%. In this environment, double-digit growth is admirable.
Including discontinued operations i.e. if we look at total operations, HEPS is up by between 23% and 33%. Although that’s no indication of the go-forward position, it’s always better when discontinued operations were a positive contributor rather than a mess as we so often see in large corporates.
In this case, the discontinued operations reflect the impact of the close-out of insurance liabilities and assets relating to the sale of the AF Life business to Sanlam, with remaining reserves released as well.
Detailed results are due on 10th June and the market will watch them closely, especially with the share price having been stuck in a stubborn range this year:
And the distribution per share is much higher
Collins Property Group (previously Tradehold) was granted REIT status in February 2024 and has adopted distribution per share as its key performance metric for trading statement purposes. In other words, when that metric will differ by the prescribed percentage in the JSE rules, the company must give the market advanced warning with a trading statement.
There’s a nuance here in the rules. For a property entity using distribution per share as the metric, the percentage difference that triggers a trading statement is 15%. For all other entities, the percentage is 20% and they would typically apply this to HEPS.
At Collins, the distribution per share is now ramping up by between 33.33% and 53.33% to between 80 and 92 cents per share. It looks like the company waited for REIT status to be granted before pushing the payout ratio higher, so this likely isn’t a reflection of the growth rate in underlying earnings.
Detailed results are due on 24 May.
This doesn’t change my concerns about the recent trend
Before we dig into the latest numbers, I’m going to remind you of Coronation’s fund management earnings per share trend (excluding the impact of the dispute with SARS):
Although the number has at least moved higher in the latest period, you can see that they are treading water here. This is exactly why Coronation trades on a modest valuation that assumes all or most of the return will come from the dividend rather than growth in the share price.
Digging into the numbers, revenue increased by 4.3% for the six months to March and assets under management (AUM) were flat over 12 months. Net outflows for the period came in at 4% of average AUM, which Coronation blames on the South African savings industry. I think it’s more to do with lack of distribution, as the likes of PSG Financial Services are bringing in plenty of assets.
With total operating expenses up 5% for the period (excluding the tax issue), operating margins have moved the wrong way. They will need to look for efficiencies here.
The all-important tax matter was heard by the Constitutional Court on 13 February 2024 and the judgment is pending. It will obviously do wonderful things for the Coronation share price if they get a court victory here.
In the meantime, Coronation has declared an interim dividend of 185 cents per share.
If you do look at the detailed financials, just remember that the impact of the tax assessment was severe in the comparable period, crushing profitability and making the year-on-year movements look silly without adjusting for that impact.
The mid-point of the guided range does suggest a small loss, though
Finbond is on the up, with share price growth of around 48% in the past year and now the potential for plenty of action on the market this week after the release of full-year numbers after the close of trade on Tuesday.
The big news is that HEPS might be positive, with a trading statement suggesting a range of a -2.4 cents loss to a profit of 1.5 cents. The mid-point of that is still a loss, so they might not be in the green just yet. Either way, it’s a whole lot better than the restated loss of -19.1 cents for the comparable year.
Investors will want to pay attention to results when they are released on 31 May, including some significant accounting changes in how they are accounting for Americash Group and Cashback Group, moving from being consolidated to being equity accounted as joint ventures.
For investment holding companies, valuations of the portfolio companies make all the difference
After we saw positive news from HCI group companies Deneb and Frontier Transport, the trading statement from the mothership is less enjoyable to read. HEPS is down between 24.1% and 34.1% and basic earnings per share has dropped by between 74.7% and 84.7%.
It’s far more useful to understand where the pressure points are in the portfolio, as investment holding companies can report wild swings in profitability that are no reflection whatsoever of underlying cash movements. This is the case here, with the big movers being fair value adjustments and impairments.
Africa Energy Corp reported $135 million in negative fair value adjustments on the investment in the Block 11B/12B prospect based on a change to the valuation model. This flowed all the way up, first to Impact Oil and Gas and then to HCI. Equity losses of R528 million were recognised in relation to Impact Oil and Gas.
In the gaming business, HCI has impaired casino licences by a substantial R2.7 billion, with property and equipment impairments taking the total closer to R2.8 billion. This is because of higher interest rates and slower than previously forecasted income growth.
And they are well over a year late
I debated whether to put this in the Little Bites section or not, as the latest numbers from Salungano are for the year ended March 2023. They are a full year behind, which is why the share is suspended from trading. Upon seeing how awful the numbers were, I decided to include them here.
With the group currently dealing with the Elandspruit and Khanyisa operations in care and maintenance, as well as Keaton Mining in court processes around a business rescue vs. liquidation issue, things really are tough there. These numbers show how they got into this mess.
In the 2023 financial year, revenue fell by 6.8% to R4.79 billion and there was a hideous operating loss of R745 million vs. operating profit of R138 million in the prior year. The headline loss per share was 58.64 cents. With the share price currently at 50 cents, Salungano is looking more like an ongoing concern than a going concern. Although it was still solvent as at March 2023, that was a long time ago.
A trading statement for the six months to March reflects a drop in earnings
Mining houses, especially those with little or no diversification, are firmly at the mercy of commodity prices. In the six months to March 2024, Tharisa notes that there was nearly a 40% drop in PGM prices received. On top of this, there were inflationary cost pressures for the mining activities. The combination is clearly a problem.
Against that backdrop, it’s pretty impressive that HEPS only fell by between 23.3% and 29.0% to US 12.5 cents to US 13.5 cents. Take careful note of the currency there.
It would make a lot of sense to shift this to an investment holding company structure now
With WeBuyCars now out of the group, it’s a bit simpler to understand what’s going on at Transaction Capital. There is still great uncertainty around the SA Taxi business, now restructured and renamed as the Mobalyz division. At least Nutun is a relatively stable thing, giving the group something to anchor itself to.
With a net cash position at holding company level and two completely unrelated investments in the group (100% in Nutun and 75% in Mobalyz), this group is itching for a shift to investment holding company accounting. The reduction in head office size is a further step in this direction.
Instead, we are still in a place where the headline loss per share from continuing operations is the favoured metric, with the loss decreasing from 224.6 cents to 164.9 cents. That’s obviously still a hideous number, especially on a share price of R2.60.
Mobalyz remains a huge problem, with a core loss of R1.8 billion in the first half of the year. There was a once-off net loss of R966 million from a reduction of cover in the insurance business. The group has now achieved a sustainable insurance business, so that pain has been taken. More importantly, a detailed business plan has been presented to funders. If they accept it, then the group can keep originating loans and reduce the losses on the existing loan portfolio. Obviously, if the lenders don’t accept it, then all bets are off around the future of this business. They cannot continue at the current low levels of origination, so at some point there needs to be confidence in the rebuilding of this business in order for it to survive.
Over at Nutun, the Australian business has been sold and Nutun Transact is in a sales process. They are busy with a major restructure to streamline the remainder of Nutun into two distinct businesses, a process that comes with short-term costs. It feels like they are trying to just get the worst of the mess out of the way. Although revenue increased by 2% for the period in Nutun, core earnings from continuing operations fell by 22%.
The holding company balance sheet has cash of R521 million against the debt programme of R451 million due in two tranches in February 2025 and February 2027. Most importantly, there are no debt covenants at holding company level after the removal of the WeBuyCars put option liability and the SANTACO obligation. This puts them in a net cash position at head office level.
With the heavy-hitting founding team highly involved now, the battle is underway to clutch the best possible outcome from the jaws of defeat. There has clearly been severe, permanent value destruction here. The question is around what might emerge from the flames, if anything worthwhile.
“Are you a tech startup based in the US, preferably Silicon Valley?”
If yes, then all bets are off for the business valuation you can achieve. Even in this environment of higher interest rates and more conservatism in general, the culture of Silicon Valley and the resultant deals mean that business valuations can be eye-wateringly high. There are good reasons for this, which we will touch on in this article.
Beyond Silicon Valley, things are somewhat less crazy. Valuations of fast-growing companies can still be difficult to understand, but there are sensible methodologies that can demonstrate why today’s numbers aren’t the best indication of value. Like in the Silicon Valley example, there are good reasons for this.
Clearly, the right way to answer the question of how to value a startup will start with “where is your startup based?”
The difference between fixed income investments (like government bonds) and equity investments (like stocks listed on a stock exchange) is that investors in the latter are seeking growth in the underlying cash flows. If this growth rate is higher than inflation, this is called “real growth” and it means that there is genuine wealth creation over time. The extent to which the returns must exceed inflation in order to attract investors will depend on the riskiness of the investment. The risk drives the required returns, not the other way around.
In startups, the risk factors are through the roof. Most of them are still making losses, so the economic viability hasn’t been proven yet. There are endless risks of possible disruption to the plan, or key staff members leaving. If funding dries up at a critical stage, then it can all go to zero even if the founders did everything right along the way.
Long story short: for startups to be valuable, they need to be able to grow at great pace. The environment in which they operate will be one of the biggest determinants of that growth rate. No matter how great the founders are, swimming downstream is so much easier than swimming upstream. Any business valuation calculator for a startup will make this a primary input.
Despite efforts by many local and national governments to set up startup hubs beyond the coffee shops of Silicon Valley, nothing has yet matched the level of activity in the home of technology.
This has an immense flywheel effect on growth:
Of course, this isn’t to say that Silicon Valley is the only place where a founder can be successful. Far from it, actually. This isn’t an on/off switch. Think of it more as a spectrum, with Silicon Valley at one end and completely unknown jurisdictions at the other. Along that spectrum, there are various other well-respected cities and regions that can attract investment in startups, including the likes of London or Berlin.
The startup valuations in different regions will reflect this spectrum. Investors are far more likely to pay up for a business that is operating in the perfect ecosystem vs. one that comes with compromises. This isn’t snobbery; it’s simple the maths of the growth potential and what this means for the valuation today.
Of course, founders shouldn’t forget that this wonderful ecosystem comes with costs. A top developer in Silicon Valley will demand a much higher salary than a developer in Cape Town. The cost of living is much higher for all involved. This makes every cost in the business more onerous, ranging from rent through to accounting services.
Although the startup valuation multiple for a startup in Silicon Valley will almost certainly be higher than a similar business in other regions, that doesn’t mean that the cash burn along the way will be easier to manage. If anything, it’s probably harder.
This is why the startup funding cycles drive exaggerated outcomes in Silicon Valley and other hotspots. When money is available, founders must be eternal optimists and must scale at all costs to compete for funding. When the belts are tightened, layoffs are the only outcome as founders cut back the fat to show funders that there’s a cash flow positive business in there somewhere.
Where funding is less easily available, founders follow more of a bootstrap mentality. This leads to more measured responses to economic cycles, which is typical of what you’ll see among founders outside of Silicon Valley.
Thankfully, startups don’t need to only earn revenue from the city in which they were founded. In the global village, it is possible (and practically a prerequisite) for startups to expand into new markets and offer their services or products.
This is the best way for a startup in a more unusual region to create a great deal of value. By operating outside the main hotbeds, they can get away with a much lower cost structure. Although the surrounding ecosystem may not be as conducive to growth, there’s also less competition for talent and for funding. To truly take advantage of this, the low cost base needs to be used to deliver products to a global audience.
There are plenty of examples of startups that were built outside of Silicon Valley – and even the US. Xero accounting is probably a brand that you recognise. What you might not know is that the company was founded in 2006 in Wellington, New Zealand.
Canva is a brand that is loved by founders, allowing just about anyone to put together decent-looking graphics. It was founded in Perth, Australia in January 2013.
There are of course numerous other startups that have made it from places that are nowhere near Silicon Valley. It’s just helpful to use Australian and New Zealand examples as extreme distances from Silicon Valley.
The Finance Ghost is a co-founder of bizval, where the team is dedicated to making valuation services accessible and affordable for smaller businesses and startups. Visit the bizval website to learn more.
This article was first published on the bizval website here.
Williams says Satrix’s philosophy is to focus on longer-term drivers of performance. This aligns with Warren Buffett’s famous cautionary quote on the dangers of timing the market, which ends with this:
“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy only when others are fearful.”
This extract is often seen as potentially endorsing timing the market, but the full quote encourages the exact opposite. Buffett claims investors have had every opportunity to earn ‘juicy returns’ by ‘piggybacking Corporate America in a diversified, low-expense way’ through an untouched index fund. Instead, they jeopardised their returns by trading excessively or overspending on fund management, making portfolio decisions based on fads and tips, or adopting a start-stop approach to the market through untimely entries and exits. In short, Buffett suggests investors focus on steadily building long-term market exposure, and not timing entry and exits into and out of the market.
In a year where half the world’s population is going to the polls, investors would do well to heed Buffett’s words. Williams cautions people to be wary of being victims of their emotions and behavioural biases. He suggests staying the course and keeping costs low. Additionally, he advocates:
Williams says that elections bring the potential for heightened volatility, however, this isn’t necessarily an issue if an investor’s investment horizon is for the long term. “Investors who combine strategies with payoff structures that are not too highly correlated, and add time for compounding to work its magic, are stacking the odds firmly in their favour over the longer term.”
He adds that Satrix focuses on offering a wide range of asset class and investment strategy building blocks to enable clients to express their investment views. “These range from defensive asset classes in the interest-bearing space to a wide range of equity strategies more suitable for longer-term growth. Our preference is always to provide an appropriate investment strategy to match the investment horizon of a client and to meet a variety of different investment requirements.
“Research suggests that short-term tactical calls tend to detract more value than they add as they require consistently timing the entry and exit points correctly, as per Buffett’s quote. Being ahead of the market is not a trivial thing to get consistently right.”
However, Williams says that if clients do want more defensive fund strategies should they be concerned with short-term volatility and reducing short-term drawdowns, they could consider investing in money market funds, bond index funds or ETFs, low equity balanced index funds, or low volatility equity ETFs.
The recently launched Satrix JSE Global Equity ETF, tracking the FTSE/JSE Global Investor Index is another option, which provides investors with domestic equity exposure that weights inward- or dual-listed companies on the JSE according to their global free float. This provides a rand hedge equity strategy relative to broad market local indices, which could be an attractive proposition for investors who are concerned the rand may weaken.
ETFs and index funds can be an excellent diversifier due to the broad basket of securities they offer. However, understanding the index and investment strategy of an ETF or index fund and how this complements the rest of your portfolio is key to achieving true diversification.
Williams adds that it’s impossible to forecast how the elections may move the markets. “Forecasting these binary or probability outcome events is not how we approach investing. Even if we predicted the election result correctly, how the market may subsequently respond is still unclear. We structure portfolios to provide a through-the-cycle, well diversified mix of asset classes to match a particular client’s risk profile.
“Every asset class has its own risks, which is why a multi-asset class mix of both local and offshore assets is often the best solution. This can diversify foreseen and unforeseen risks and provides a smoother growth path to achieving above-inflation returns over the medium- to long-term. It’s always important to match a portfolio to a client’s risk tolerance and investment horizon.”
The bottom-line? Align your portfolio with your risk tolerance and personal investment horizon. Stay the course, diversify your asset classes, and make the most of the magic of compounding. Be wary of tactically trying to time the market. In periods of uncertainty, a long-term outlook is likely to serve you well.
| Disclaimer Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs, the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document. For more information, visit https://satrix.co.za/products |
SatrixNOW is a no-minimum online investing platform from Satrix that allows you to buy and sell ETFs directly.
This article first appeared here on the Satrix website.
HEPS from continuing operations has taken a significant knock
Adcorp has released a trading statement dealing with the year ended February 2024. Revenue is up by between 5.2% and 10.2% and that’s largely where the highlights stop.
Gross profit is down between 1.0% and 3.0%, so there’s margin pressure right at the top of the income statement.
HEPS from total operations is up by between 27.0% and 47.0%, but this has to be viewed against HEPS from continuing operations which has fallen by between 38.4% and 48.4%. Seeing the core businesses going the wrong way is far from ideal.
The pressure is being felt to the greatest extent in the professional services division in South Africa, which focuses on placing professional staff in roles. This tells you a great deal about how South African businesses have sat on their hands in the past year, with a combination of load shedding (perhaps behind us now) and the run-up to elections. Interestingly, the equivalent business in Australia has had some challenges, but obviously not for quite the same reasons as South Africa.
On the plus side, the contingent staffing businesses in South Africa and Australia are doing well, so the benefit of diversification is showing here. Other good news is that the group has no debt and sits on a cash balance of R204.2 million. That’s not insignificant on a market cap of R420 million!
HEPS from continuing operations will be between 76.3 cents and 91.1 cents. The share price is only R4.00. Once you adjust for the extent of cash on the balance sheet, this business is trading at an exceptionally low Price/Earnings multiple. For the most part, it’s been a value trap for investors though, with limited liquidity and a negative share price trend over the past couple of years (even if you take into account the large special distribution in 2023).
But the group numbers reflect a loss
Altron has at times taken adjustments to the financials a bit far. When we start talking about adjusting for credit losses in the public sector, then I get worried. After all, that’s a pretty well understood business risk in South Africa.
But when the adjustments are because a business was sold during the year, that’s clearly a reason to accept the adjusted numbers. Altron’s ATM business was only included for four months of the year ended February 2024, so that really skews the annual revenue growth vs. the comparable period that included it for a full year.
If we focus only on continuing operations and exclude the ATM business, then revenue grew 8% and EBITDA was up 27%. Operating profit increased by 33%. This is the most rose-tinted way to look at Altron’s numbers.
Before you pop the champagne, we need to consider the impact of discontinued operations on the group. There’s more to this story than just the ATM business. If you include both the ATM business and the discontinued operations, Altron swung from HEPS of 29 cents to a headline loss of 25 cents per share.
It helps in this case to dig into the more detailed segmental numbers. The Own Platforms segment grew revenue 9% and EBITDA 23%. Netstar is the largest part of this segment and grew revenue by 12%, while expanding its EBITDA margin and finding some rather interesting ways to scale into new markets and products through partnerships with the likes of Toyota. The FinTech platform is the second largest in this segment, growing revenue by 5% and EBITDA by 22%. HealthTech is the smallest platform and grew revenue by 7% and EBITDA by 3%.
For context, Own Platforms contributes EBITDA of R1.2 billion.
The Digital Transformation segment is good for EBITDA of R243 million, up 60% thanks primarily to profit improvement strategies at Altron Systems Integration. There are various other operations within that segment.
Within discontinued operations, we find Altron Document Solutions with revenue growth of 13%. That sounds good until you consider the operating loss of R65 million in the first half of the year, which was turned around quite spectacularly into an operating profit of R53 million in the second half. Long may that continue.
If you’re wondering where the group result really broke, then look no further than Altron Nexus and a 35% drop in revenue, with an operating loss of a whopping R433 million. The business was not awarded phase 3 of the Gauteng Broadband Network project, leading to a full business review and a winding down of parts of it. They are trying to sell this business.
And yet, despite the overall group loss, the final dividend was 74% higher at 33 cents vs. 19 cents in the comparable period. Talk about a confusing set of numbers. If you keep digging, you’ll find that there was a significant working capital release in this period (including from discontinued operations), along with a reduction of debt.
This certainly isn’t an easy set of numbers to work through, but those who have believed in the turnaround in the past year have been rewarded with a 50% share price rally over 12 months.
Welcome to the poultry rollercoaster
Businesses with structurally low margins can experience absolutely wild swings in profitability. Astral Foods is the latest example, with a 4% revenue increase and a 461% jump in operating profit from just R98 million to R550 million. Things are certainly looking a lot better in the poultry industry and if the load shedding and avian flu can just stay away, they will get even better.
HEPS for the six months to March came in at R8.84, which is a magnificent improvement from R1.63 in the comparable period. The second half of the previous financial year (i.e. April to September 2023) was an absolute disaster, with a headline loss for the full year of -R13.24 as Astral literally had to subsidise the cost of producing chicken. Investors in this sector will be hoping that the horrors aren’t repeated, allowing Astral to conclude a solid recovery year.
Perhaps even the weather will play ball, with the outlook section noting that El Niño is weakening, which could mean La Niña and thus improved conditions for the local planting season. This matters because of maize prices, a key cost input in farming of chickens.
The balance sheet certainly looks much better, with gearing down to 10.1% – much lower than 25.6% at September 2023.
This business is firmly on the wrong side of South African trends
Balwin has released results for the year ended February 2024 and they aren’t pretty. Revenue is down 29% and HEPS has plummeted by 48%. When you see extensive promotions for developments (like I witnessed at Montecasino on trip to Joburg towards the end of 2023), you know that the apartments aren’t exactly flying off the shelves. There was a 32% reduction in the number of apartments sold year-on-year.
They’ve worked hard at building the annuity business portfolio and it’s now up to 5.6% of group revenue, with an operating profit margin of 41%. That’s a cute contribution, but nowhere near enough to protect shareholders from a year like this.
To make it worse, the sales incentives to try and boost revenue from apartments led to a dilution in gross margin from 27% to 24%. That’s certainly not what you want to see when volumes are under pressure. At least they managed to bring operating expenditure down by 11% year-on-year to try and limit some of the pain.
Against this backdrop, it’s perhaps not surprising that there’s no dividend to shareholders. They paid 24 cents per share last year and the share price is trading at around R2, so this is a harsh lesson in buying something on a high trailing dividend yield without considering how resilient that dividend is.
The loan-to-value ratio reduced slightly from 40.7% to 40.5%. I’m just not sure that this is the best metric for the group, as the net asset value (NAV) also happened to increase by 4% to 858.49 cents per share despite the drop in profits. In a development company, I feel like profitability metrics are more important than balance sheet metrics like NAV.
The share price at a 73% discount to NAV suggests that the market agrees with my view.
HEPS isn’t always the right measure of performance
Deneb has released a trading statement dealing with the year ended March 2024. Looking at HEPS is misleading for once, as it shows a drop of between 10% and 30% which sounds like a poor outcome.
If you read further, you’ll see that the base period included insurance proceeds for business interruption and flood damage. This is obviously a non-recurring source of income, hence why earnings have dropped so much if that is included in the base for comparison.
A better way to view these numbers is by excluding the insurance claims, in which case HEPS on an adjusted basis would be up by between 15% and 35%. That’s more like it!
On an adjusted basis, earnings have inched higher in the past year
Famous Brands has released results for the year ended February 2024. They aren’t very exciting unfortunately, despite revenue growth of 8%. The business is far more diversified than a group like Spur, boasting 16 restaurant brands and a presence in 18 countries. Here’s the thing though: diversification isn’t always beneficial.
The year-on-year movements need to take into account the once-off Gourmet Burger Kitchen liquidation dividend of R75 million that was received in August 2022 (part of the base period). Excluding this, operating profit increased 3.3%, which reflects a decline in operating margin from 10.6% to 10.1%. Adjusted basic earnings per share would be 2% higher after this adjustment.
HEPS fell by 5% and I must highlight that the headline earnings calculation takes out the liquidation dividend in the base, so that’s the best way to view this result in my view. It hasn’t been a great period for Famous Brands, with pressure on consumer spending on one end and production costs on the other.
If we look at the segments, Leading Brands (the more affordable restaurants) grew revenue by 5.6%, while Signature Brands (the fancier eat-in formats) grew revenue 2.3%. Even within Leading Brands though, we need to distinguish between classic quick-service restaurants – the takeaway joints – and casual dining restaurants, which are generally found in shopping centres. The casual restaurants did better, with load shedding as a factor there due to landlords providing backup power. Remember, we are looking at full-year numbers here where load shedding was prevalent throughout.
The operations outside of South Africa range from simpler (like SADC countries with operating profit of R55 million) through to complex, particularly in Northern Africa and Middle Eastern (AME) markets. An operating loss of R14 million was suffered in AME, which is at least a lot better than a loss of R26 million in the prior year.
Wimpy UK saw a slightly decline in operating profit from R19 million to R18 million. They don’t have the Joburg – Durban roadtrip on that side of the pond to help justify Wimpy trips.
At heart, Famous Brands is a manufacturing and logistics play, with those segments contributing operating profit of R297 million and R94 million respectively. In both segments, profits were down year-on-year due to pressure from operating costs and load shedding.
In the retail segment (the sauces on the shelves), revenue was R368 million but operating profit was only R6 million. Talk about a marginal way to make any money. Hopefully, a significant portion of further revenue growth will drop straight to the bottom line.
In case you struggled to follow all that, here’s an overview of the segments for context:
Looking ahead, the group has flagged improvements that need to be made to the logistics and manufacturing footprints. This suggests a period of increased capex, which will be staggered over several years. Money isn’t cheap at the moment and they will need to think about returns carefully, particularly as interest on borrowings jumped from R89 million in the prior year to R125 million in this year.
Helping people get from A to B can be lucrative
Frontier Transport is a perfect example of the benefit of excellent execution in a sector that is anything but sexy. The group operates a number of commuter bus services, with Golden Arrow as its most well-known business. It’s not exactly AI and cloud computing, yet HEPS is up by between 35.3% and 39.5% for the year ended March 2024.
This implies a range of 130 cents to 134 cents, which means the share price at R6.58 is still on a modest multiple.
There was only a slight reduction in the number of shares outstanding, so this growth was driven by higher earnings, not extensive share buybacks. That speaks to the quality of the business.
With equity values under pressure, this is expensive timing for existing shareholders
Impala Platinum’s acquisition of Royal Bafokeng Platinum included a merger approval condition related to a need to increase B-BBEE ownership in the group. These types of deals are usually costly to existing shareholders and even more so when equity values are depressed.
This is a significant deal, resulting in 13% B-BBEE ownership in each of Impala and the newly renamed Impala Bafokeng Resources, with a combined transaction value of R9 billion. It includes a 4% community share ownership trust, a 4% employee share ownership trust and a 5% holding by a strategic consortium, led by Siyanda Resources. This will be called the Bokamoso consortium.
Siyanda is seen as a preferred partner in the PGM space based on its track record, leadership and reputation in the broader Rustenburg community.
The investment by the community share ownership trust will be facilitated by an interest-free vendor loan from Impala and Impala Bafokeng. 65% of its annual dividends will go to beneficiaries and 35% will service the debt. Much the same approach is being followed for the employee share ownership trust.
The Bokamoso consortium will subscribe for shares with a R100 million equity tranche and vendor funding for the rest in the form of preference shares that will be subscribed for by Impala and Impala Bafokeng. The commercial terms haven’t been announced yet. Aside from covering operational costs, 30% of dividends can be distributed to equity funders and the rest will go towards servicing the preference shares.
With all said and done, Impala Holdings will have 87% in each of Impala and Impala Bafokeng. The interest-free vendor loans are obviously costly to the group but are necessary to ensure the commitment of the community and staff. The cost of the strategic consortium element of the deal will depend on the rate on the preference shares, which Impala shareholders will hope is on the higher side, particularly given the timing of this deal at a depressed point in the cycle.
A more conservative payout ratio probably makes sense here
Hospital groups are a grind, if we are honest. They achieve modest revenue growth and if they are lucky, EBITDA margin goes the right way. In the six months to March 2024, Netcare grew revenue 4.3% and EBITDA 7.0%, so that’s in line with the best possible shape that this kind of business can really hope for.
Profit was up 6.3%, with higher finance costs biting. Net debt is 16.4% higher and the cost of debt is of course still elevated, so the combination puts pressure on the income statement. Thanks to share buybacks though, HEPS is up 9.2%.
The interim dividend has stayed at 30 cents despite HEPS moving up to 48.9 cents. This is a more conservative payout ratio than in the comparable period, which is a reflection of (1) the levels of debt and (2) the share buyback programme that the company has been following, which gives it more flexibility and boosts HEPS – unlike a dividend.
Here’s the chart that I don’t think many of us ever expected to see:
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