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Devil in the details: indemnities vs warranties in M&A

Keagan Hyslop and Roxanna Valayathum
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Devil in the details: indemnities vs warranties in M&A

Introduction

In an economy that is still recovering from the COVID-19 pandemic and other global challenges, companies are adopting an increasingly risk-averse approach to the M&A environment. Two common safeguards used to mitigate risk are indemnities and warranties. The fact that both warranties and indemnities seek the same result – compensating an innocent party that has suffered damages – often leads one to question whether it is necessary to include both indemnities and warranties. Warranties and indemnities play significant but different roles in managing risk and liability, and it is therefore important to understand how they compare.

Underlying difference between warranties and indemnities

Warranties and indemnities primarily differ in the legal remedy used when a claim is triggered. A warranty is a contractual statement that a certain situation is true. If it is not true, this is a breach of the contract, and the appropriate remedy is one for contractual damages. A warranty is not an under-taking to make the situation true and, therefore, the remedy of specific performance is normally not possible nor appropriate. Conversely, an indemnity is an agreement between the parties that the indemnifying party will compensate the indemnified party for any losses suffered as a result of a claim by a third party. The appropriate remedy for an indemnity claim is, therefore, one for specific performance in terms of the contract.

Practical significance of the difference

Whether claiming damages or specific performance – the end result seems to be the same, namely compensation for a loss.

However, practical differences arise from the rules that apply to claims for contractual damages, which do not apply to claims for specific performance. Two legal rules, amongst others, apply to contractual damages –
• a party may only claim contractual damages that were reasonably foreseeable and not too remote; and
• the amount recoverable as contractual damages is limited to the innocent party’s actual pecuniary damage.

Amongst the legalese, two issues of practical significance arise that limit the amount that an innocent party may claim as contractual damages.

Contractual damages must be reasonably foreseeable and not too remote
Contractual damages are limited to damages that the contracting parties reasonably foresaw as a probable consequence of the breach in question. Damages that were not reasonably foreseeable may not be claimed unless such damages were expressly or tacitly agreed to by the parties. Consequently, assessing contractual damages is a tedious task that normally devolves into arguments over which damages were reasonably foreseeable and which are too remote. It is unlikely that the innocent party will ever be able to fully recover the actual damages suffered. This rule applies to warranty claims (claims for contractual damages), but not to indemnity claims (claims for specific performance). Since this rule does not apply to an indemnity claim, it is usually possible for the party to recover its loss on a Rand-for-Rand basis when claiming under an indemnity, provided that this is permitted by the wording of the contract.

Contractual damages are limited to the innocent party’s actual pecuniary damage
The innocent party’s actual pecuniary damage is the difference between the actual purchase price and what the purchase price would have been if the warranty was actually true, which the courts have determined would be its market value. This rule becomes problematic when a party pays a bargain price. Since the innocent party paid less than the market value, the fact that an untrue warranty reduces the market value does not necessarily result in the innocent party suffering claimable damages. The innocent party only suffers a loss if the market value is reduced below the actual bargain price that it paid. This is not a problem faced by indemnity claims, as the party is able to claim any damages they have suffered, whether actual pecuniary damages or not, provided that this is permitted by the indemnity clause.

Why still have warranties?

From the above discussion, indemnities clearly provide benefits that warranties do not. However, both are important to mitigating risk. Warranties induce parties to stand behind their word, and are therefore worth their weight in gold in the event of litigation. Indemnities also usually only apply to third-party claims, rendering them unsuitable where there is no third-party claim but only a loss suffered between the parties (e.g. where the purchase price would have been less, simply because the quality of the assets is not that which was warranted).

Conclusion

There is, therefore, a clear distinction between warranties and indemnities, and the seemingly identical end result is not as identical as it seems. Both warranties and indemnities should be included in M&A deals in order to effectively manage and mitigate risk. Each has its own role to play, and the party that understands these roles will have the upper hand.

Keagan Hyslop is a Candidate Attorney and Roxanna Valayathum a Director in Corporate & Commercial | Cliffe Dekker Hofmeyr.

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

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

FinSurv’s concerning silence on the regulation of crypto assets

Bright Tibane and Andani Thovhakale
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FinSurv’s concerning silence on the regulation of crypto assets

Despite the Financial Sector Conduct Authority’s (FSCA) declaration and regulation of crypto assets as a financial product – in terms of the Financial Advisory and Intermediary Services Act 37 of 2002 (FAIS) – late last year, the Financial Surveillance Department (FinSurv) of the South African Reserve Bank (SARB) has still not shared its position regarding crypto assets.

Crypto assets undoubtedly qualify as capital in terms of Exchange Control Regulations issued under the Currency and Exchanges Act 9 of 1933 (Exchange Control Regulations). Regulation 10 of the Exchange Control Regulations prohibits the transfer or exportation of capital or any right to capital from South Africa, unless such transfer or export has been approved by FinSurv (per its authority delegated by the National Treasury).

FinSurv has indicated that this prohibition extends to transactions where an individual purchases crypto assets in South Africa and uses them to externalise any right to capital.

The qualification of crypto assets as ‘capital’, and therefore Regulation 10’s application to crypto assets, does not mean that cross-border transactions pertaining to crypto assets are prohibited. It simply means that South African residents require exchange control approval from FinSurv to transfer crypto assets or rights to crypto assets offshore or cross-border.

A challenge is FinSurv’s position that it does not approve crypto asset-related transactions because such transactions are currently not reportable on the FinSurv Reporting System.

FinSurv’s position does not only restrict the transfer of crypto assets or right to crypto assets offshore, but it also restricts the offshore transfer of actual money to purchase crypto assets offshore. The only exception to this restriction is that individuals (natural persons) are permitted to transfer money using their annual allowances (R10 million foreign investment allowance and R1 million foreign discretionary allowance) for purposes of buying crypto assets offshore.

Corporates and institutional investors (including asset managers or discretionary financial services providers licensed under FAIS) are restricted from using their foreign investment allowances to transfer money offshore to buy crypto assets.

The above stance was sensible at the time when it was made, as it was understandably driven by the fact that there were no dedicated laws or regulations specifically governing the use of crypto assets in South Africa.

However, it has now been almost a year since the FSCA declared crypto assets as regulated financial products in South Africa, making the providers of crypto asset-related services subject to the FAIS regulatory framework, and FinSurv has yet to communicate to the public its response to the regulatory developments from an exchange controls perspective.

This begs the question whether FinSurv will update its Reporting System to allow Crypto Assets Service Providers (CASPs), regulated as financial services providers under FAIS, pursuant to the declaration of crypto assets as financial products, to be involved in transactions where crypto assets or the right to crypto assets are directly or indirectly exported from South Africa.

Another question is whether FinSurv will allow institutional investors, particularly CASPs regulated under FAIS, to transfer funds that they hold on behalf of their clients (assets under management) for purposes of buying crypto assets offshore.

Sooner rather than later, FinSurv will have to communicate its plans to address what one can consider to be a regulatory disconnect / lacuna with regards to crypto assets (regulation of crypto assets under FAIS v exchange controls).

Bright Tibane is a Partner, and Andani Thovhakale a Candidate Attorney | Bowmans South Africa.

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

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

ESG dispute resolution in Africa: trends and strategies

Sandra Sithole, Chandni Gopal and Thandekile Mbatha
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ESG dispute resolution in Africa: trends and strategies

Global litigation and regulatory enforcement actions and threats related to Environmental, Social and Governance issues are on the rise, and Africa is no exception.

While Africa is the world’s second largest and second most populous continent, it has and continues to contribute the least to global carbon dioxide (CO2) emissions (according to Statista, Africa contributed 3.8% of global CO2 emissions in 20221). Despite contributing the least to global warming, however, the continent continues to suffer disproportionately from climate change.

The World Meteorological Organisation’s 2022 report on the State of the Climate in Africa cited withering droughts; heatwaves and associated wildfires, violent tropical storms, and catastrophic flooding as the extreme weather events which took centre stage in 2022. Most recently, in September 2023, Cyclone Daniel unleashed 400 mm of rain in a mere 24 hours in Derna, Libya2 (where historical average rainfall for September is no more than 1.5mm). This resulted in the collapse of the Derna Dam, causing catastrophic flooding which resulted in the death of 4 000 people, with 10 000 reported missing.

Africa is rich in mineral, oil and other natural resources, making it a popular destination for foreign investment in large-scale engineering and infrastructure development projects. While the citizens of African countries often stand to benefit from these projects, they are the most affected by environmental disasters linked to them.

The above factors have contributed to a significantly more socially conscious, reactive and community-focused citizenry, government and regional leadership.

There are several cases outlined in which Africa-based projects are being litigated and arbitrated in courts and tribunals seated outside of Africa.

Philippi Horticultural Area Food & Farming Campaign (PHA) and Another v MEC for Local Government, Environmental Affairs and Development Planning: Western Cape and Others 2020 (3) SA 486 (WCC)

The PHA challenged the MEC’s decisions relating to a proposed development on a portion of farmland, considering that there is an underlying aquifer.

The court remitted the MEC’s decision to dismiss an appeal of the environmental authorisation granted to the developer and sent the matter back for redetermination by the MEC. The MEC was instructed to reconsider the appeal, considering new evidence and reports relating to the impact of the proposed development on the underlying aquifer, and to consider water scarcity and supply in the City of Cape Town, in the context of climate change.

Okpabi and others v Royal Dutch Shell plc and another [2021] UKSC 3

40 000 citizens in the Niger Delta brought a claim against Royal Dutch Shell, which arose from alleged oil leaks from pipelines and associated infrastructure operated, and human rights abuses committed by Shell’s Nigerian subsidiary (SPDC). The claimants allege that the oil spills caused significant environmental damage, and rendered the natural water sources unsafe for drinking, fishing, agricultural or recreational purposes.

While the merits of this claim are yet to be decided, the UK Supreme Court determined that it was at least arguable, based on the degree of control and management of SPDC, that the parent company (Royal Dutch Shell) owed a duty of care to the claimants.

Sustaining the Wild Coast NPC and Others v Minister of Mineral Resources and Energy and Others 2022 (6) SA 589 (ECMk) (1 September 2022)

In September 2022, the High Court handed down a judgment in an application to review and set aside a decision by the Minister of Mineral Resources and Energy to grant an exploration right to Impact Africa Ltd for the exploration of oil and gas in the Transkei and Algoa area. As a precursor to the exploration, the exploration company (Shell) would need to conduct a seismic survey off the Eastern Cape coast.

The court found that the consultation process undertaken by Impact was procedurally unfair, in that key stakeholders, such as those who hold customary law rights, had not been consulted. In addition, the court found that the potential harm to marine and bird life, and communities’ spiritual and cultural rights, had not been considered.

Overall, the exploration rights granted by the Minister to Impact were unlawful and were set aside, effectively putting an end to any seismic survey in the ocean off the Wild Coast of South Africa.

Friends of the Earth et al. v. Total

In 2019, six civil society organisations filed a lawsuit against Total (now TotalEnergies) in France, for allegedly failing to comply with the 2017 French Duty of Vigilance law. This law requires French companies to establish and implement reasonable vigilance measures to identify risks and prevent severe impacts on human rights, the health and safety of individuals, and the environment. The plaintiffs alleged that Total failed to adequately assess the human rights and environmental impacts of its Tilenga oil project in Uganda and Tanzania. The project was expected to displace around 100 000 people and affect numerous endangered species in the area.

In December 2021, the French Supreme Court rejected the jurisdiction of the commercial court but recognised the jurisdiction of the civil court. In February 2023, the latter court dismissed the case on procedural grounds. The merits of the case have not been adjudicated by any of the courts. The plaintiffs have, however, lodged an appeal to the Court of Cassation – France’s highest court.

Mbabazi & others v. The Attorney General and another

In September 2012, four citizens and a Ugandan NGO brought their claim against the Ugandan Attorney General and environmental authority before the High Court. The claimants alleged that extreme weather events linked to climate change inaction on the part of government had resulted in damage and loss of life.

The claimants based their claim on the Ugandan Constitution, which makes the Ugandan government a public trustee of the national resources (including its atmosphere) and imposes a duty to preserve those resources from degradation for present and future generations, stating that unless urgent action was taken, climatic patterns of prolonged droughts, floods, hurricanes and crop losses will escalate into human catastrophe for both present and future generations.

After a preliminary hearing, the High Court ordered the parties to undertake a 90-day mediation process; however, no further action has been taken since then.

These cases, among many others, allude to several trends and strategies in ESG dispute resolution in the African continent, including:

•Disputes that demand that governments adopt “climate adaptation” strategies to proactively strengthen their capacity to meet the needs of communities directly affected by climate change; for example, providing flood defense infrastructure, and putting disaster response and migration systems, and social safety nets in place.
• A more engaged and active citizenry that will demand strict compliance with environmental, procurement and consultation laws.
• Shareholder activism, where shareholders seek to mitigate ESG-related risks by holding companies accountable and influencing their behaviour through governance mechanisms and shareholder rights.
• Use of human rights and sanctions litigation by States seeking to act against those who violate internationally recognised human rights.
• Increase in colourwashing claims, where consumers and stakeholders bring claims against companies that deceptively describe their products or services as having unsubstantiated values and qualities (for example, “sustainably sourced” or “cruelty free” labels).
• Climate change litigation, where parties use “attribution science” to show a connection between impugned activities and the harm that ensued.
•The use of third-party litigation funding to finance large class actions, and community or NGO-initiated claims against large multinationals with comparatively deeper pockets.

With African countries and their citizens disproportionately affected by climate change, environmental disasters and corporate governance shortcomings, the need for ESG dispute resolution is inevitable.

  1. https://www.statista.com/statistics/205966/world-carbon-dioxide-emissions-by-region/
  2. https://floodlist.com/africa/climate-change-libya-floods-sepotember-2023#:~:text=When%20Storm%20Daniel%20made%20landfall,reported%20by%20Nasa’s%20Earth%20Observatory

Sandra Sithole and Chandni Gopal are Partners and Thandekile Mbatha an Associate | Webber Wentzel

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

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

Ghost Bites (AYO Technology | British American Tobacco | Gemfields | Metair | Nedbank | Rebosis | Schroder Real Estate | Texton | Tharisa | Tongaat Hulett)

The Finance Ghost
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Ghost Bites (AYO Technology | British American Tobacco | Gemfields | Metair | Nedbank | Rebosis | Schroder Real Estate | Texton | Tharisa | Tongaat Hulett)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

AYO Technology reports much larger losses (JSE: AYO)

This is despite a significant increase in revenue

AYO Technology has released results for the year ended August 2023. Revenue is up 28% thanks to increased revenue in the managed services and unified communications divisions, like Sizwe IT Group. Group gross profit margin fell from 22% to 16% though, so that ate up the benefit. It sounds like margin mix is a major driver here.

Most of the segments are actually profitable, except Managed Services which somehow manages to lose R719 million off revenue of R1.6 billion. Incredible.

Still one of my absolute favourite things about AYO Technology is that they invest some of their excess funds in the stock market. Nevermind returning it to shareholders so they can do it themselves; AYO Technology is quite happy to act like your asset manager and take risk with your capital. Whether or not they make good returns really isn’t the point here. I cannot think of another example where I’ve seen this in a public company when it comes to treasury management.

The headline loss per share deteriorated from -60.25 cents last year to -176.46 cents. Considering they still paid a dividend of 60 cents last year, things must be really bad for the dividend to have gone to zero.

British American Tobacco is pushing harder on non-combustibles (JSE: BTI)

When the entire business model is in flux, why do investors see this as a defensive stock?

I have a fairly unusual view on British American Tobacco, in that I don’t see it as a defensive stock. I simply see it as a company in structural decline, which means dividends probably won’t make up for capital losses. I wrote on this topic just two months ago in Financial Mail and my bearishness turned out to be correct.

On Wednesday, the share price closed 10% lower based on a business update. That dividend doesn’t look so good anymore, does it?

The problem here is that the company needs to push harder to get people off old-school cigarettes and onto non-combustibles which are supposedly healthier. Regulators aren’t overly pleased with those products either, so my suspicion is that British American Tobacco needs to create scale a lot faster in order to make it harder for regulators to take action. This is firmly a “lesser of two evils” product range.

They are talking about “Building a Smokeless World”, which is a stretch even for an ESG team that has managed to make the website look like they sell baby unicorns rather than cigarettes. It’s not exactly a “smokeless” world that we are talking about here, as the plan is for 50% revenue from non-combustibles by 2035.

In an effort to allay some of the fears of investors, the news is that New Categories as a segment will be breakeven in 2023, two years ahead of target. Currently, 10% of the world’s 1 billion smokers use New Category products.

In recognising a massive impairment of £25 billion that is mainly in recently acquired US combustibles brands, the company tries hard to make it sound like this is on purpose because of the push into non-combustibles. They also note macroeconomic challenges in that part of the world, which I suspect is the bigger story.

I am not a smoker, so I don’t pretend to understand the nuances across Vapour, Modern Oral and Heated Products as alternatives to traditional cigarettes. British American Tobacco is particularly strong in Vapour, with decent market share in Modern Oral and Heated Products as well. Heated Products don’t seem to be doing well overall, with growth decelerating.

The bull case here is that British American Tobacco is a cash cow, delivering close to 100% operating cashflow conversion. They have quite a bit of debt though, which isn’t helping things at the moment. Investors believe that the pricing power (through addiction of its customers; let’s not beat around the bush here) is enough to keep the cash dividends growing.

Guidance for full year 2023 is organic constant currency revenue growth at the low end of the 3% to 5% range. EPS growth is mid-single digits.

In a high yield world with businesses that are paying good dividends without all the concerns around long-term prospects, I continue to scratch my head at why anyone owns this stock. Heck, I even made a meme for fun:

Rubies are red; their profits are green (JSE: GML)

Gemfields is enjoying ongoing strong pricing

At a time when diamond prices are under the kind of pressure that makes those stones in the first place, rubies are doing really well. This is good news for Gemfields, which has a 75% stake in Montepuez Ruby Mining Limitada in Mozambique.

The final auction of 2023 has capped off the second highest year of auction revenue in Gemfields’ history. It’s fascinating to look at the pricing at these five auctions (per carat):

  • Dec’21 – $132.47
  • Jun’22 – $246.69
  • Dec’22 – $154.84
  • Jun’23 – $265.99
  • Dec’23 – $290.02

As you can see, gemstone prices are volatile and they aren’t always comparable because of varying quality. There’s also a specific lot that has skewed the June and December 2023 auction numbers. Still, the overall message is one of success and the share price jumped 13% in response.

A weird day of news at Metair (JSE: MTA)

This is the definition of a mixed bag

It’s really not nice to read that Sjoerd Douwenga is stepping down as CEO of Metair for health reasons. He’s a youngster (certainly by CEO standards) and this is most unfortunate news, especially after less than a year in the job. I hope he will be alright.

He’s going to formally step down from 31 January and will be around until the end of March to help with handover. A successor hasn’t been named.

The other bad news is that Rombat (the battery subsidiary in Romania) has received a nasty letter from the European Commission. The letter expresses concerns that manufacturers (including Rombat) may have potentially violated EU anti-trust rules between 2004 and 2017. No further disclosure is possible at this stage and the company has two months to respond. This is only the first step in the dance and is very far from any kind of definitive ruling.

The good news in the announcement relates to Hesto Harnesses, which is a supplier to Ford in South Africa. Ford’s volumes are in line with expectations (no surprise there based on the quality of the new models in my view) and commercial negotiations are making progress. Ford shifted the goal posts during the product design phase and caused much financial pain for Metair’s business. A commercial price adjustment and cash compensation is being negotiated, which would significantly improve the remaining economic profit over the remaining model life.

So, as usual, Metair seems to have mostly bad luck. I genuinely struggle to think of an unluckier company, if you look back over the past couple of years.

Nedbank gets a major boost from Ecobank (JSE: NED)

Africa has been a significant help to local banking groups this year

Nedbank has released a pre-close update dealing with the 10 months to October 2023. It starts off with a reminder that economic growth in South Africa is a huge and worsening headache, with the 2023 GDP growth forecast at just 0.5% (vs. 1.9% in 2022). They do at least anticipate a downward trend in inflation and hopefully a dip in interest rates.

They don’t bluntly say it, but a low growth environment with falling rates isn’t fantastic for banks.

Performance for the 10 months to October is mostly in line with the FY23 guidance given in the interim results.

Net interest income is up by more than mid-teens, with net interest margin consistent with the interim period at 418 basis points. Growth in loans and advances is still decent, but slower than in the interim period. They should end with mid-teen growth for the full year.

Importantly, the credit loss ratio is lower than 121 basis points in the interim period but above the through-the-cycle target range of 60 to 100 basis points. Retail and business banking is where the problem lies, with the other clusters within target ranges.

Non-interest revenue growth is below mid-single digits, with a slowdown in client activity and delays in closure of some renewable energy deals. Insurance income also fell. Guidance for mid-single digits for the full year remains in place, with downside risk.

The positive news is in the Ecobank investment, with Nedbank’s associate income up by a rather delicious 80%. This includes a substantial reversal of an impairment estimate related to Ghanaian sovereign debt.

Expense growth is mid-to-upper single digits, which means that the JAWS ratio should be positive for the full year.

The CET1 capital adequacy ratio is solid, which supports ongoing dividend payments at the top end of the payout ratio.

Return on equity is higher than the 14.2% reported in the interim period, as the group moves closer to the target of 15%.

Rebosis releases a business rescue quarterly update (JSE: REB | JSE: REA)

Although there is a “reasonable prospect” of rescuing the business, how much of it will be left?

I must be honest: as business rescues go, a property fund is surely one of the simpler ones. You basically keep selling properties until you’ve gotten the creditors and overall levels of debt under control. If there is any equity value in there, it takes a lot of digging to find it.

In its obligatory quarterly update, Rebosis reminded the market of sales achieved before 31 August 2023 of R7.6 billion. It’s been pretty slow going since then, with sales of only R160 million.

And of course, being property transfers, these sales take a while to go through.

The business rescue practitioners have managed to preserve the employment of around 75% of affected employees. This has been achieved through engagement with the buyers of the properties.

Schroder Real Estate signs off on a tough year for the NAV (JSE: SCD)

When rates go up, property values come down

Schroder Real Estate has released results for the year ended September 2023. They reflect a difficult year that saw the NAV per share drop by 8.9%, with asset valuations coming under fire in an environment of higher yields and geopolitical risks.

Looking at earnings tells a different story, with earnings up 31% thanks to rental growth and acquisitions, along with a low average interest cost of 2.9% that is 100% hedged against rate movements.

The loan to value ratio is also quite low at 24%, with many funds operating at well over 30%.

If we’ve now seen the top of the rate cycle, the next year should be a lot easier for the group. The company has announced a dividend of 1.48 euro cents per share, payable in January 2024.

Texton: another local stock I won’t touch (JSE: TEX)

The capital allocation strategy is terrible for minority shareholders

When a company raises capital on the markets, the immediate things to look out for are (1) the price of the capital raise vs. what the directors told you the group is worth, and (2) what the proceeds will be used for.

Sometimes, only one of those things is problematic. Occasionally, you get a proper mess that is cause for concern on both metrics.

Texton trades at a large discount to net asset value (NAV) per share, like so many property funds. Where a company like Calgro M3 has done a great job with share buybacks far below NAV (and just look at the effect on the share price), Texton has instead been on an empire-building mission by clutching onto the capital for dear life. Instead of large buybacks, the fund has invested in offshore funds.

It’s very hard to understand why any investor wants to own something with a costly structure and a strategy of redeploying capital into the hands of other investment managers overseas.

It’s going to be even harder to understand that decision after this rights offer at R2.20, when the NAV per share is 619.37 cents. The capital raise is at a 10% discount to 30-day VWAP and a vast discount to NAV per share. That is a big red cross against the first metric given above. As for the second metric I put forward, the capital will be used to reduce debt (they could’ve done that before), support capital projects (ditto) and, wait for it, further fund the group’s capital allocation towards the offshore deployment strategy. I can only interpret this as Texton wanting you to give them money to invest on your behalf in more offshore funds.

The rights offer is non-renounceable and will not allow for excess applications, so there’s another tick in the box for hurting minority shareholders. And best of all, there are underwriters for the portion of the R85 million offer that hasn’t already been committed to, with a 1% fee paid to the underwriters. Those underwriters are Oak Tech Properties and Rex Trueform Group.

This ticks basically every box for hurting minority shareholders and treating them poorly. Texton will never, ever see my money.

Tharisa can’t escape the PGM downturn (JSE: THA)

Earnings for the year ended September 2023 have dipped considerably

In case you’ve been under a rock this year, the platinum sector has been getting hammered. Tharisa enjoys a buffer from its chrome operations, but it still can’t escape the broader pressure of much lower commodity prices.

The group has done what it can in terms of using operational flexibility, like adjusting the timeline for the Karo Platinum project to adjust for weak PGM prices.

In a trading statement dealing with the year ended September 2023, Tharisa noted a drop of between 30.7% and 33.1% in HEPS. This puts HEPS at between 27.5 and 28.5 US cents. The share price closed 2.4% lower at R14.

There’s a sting in the Tongaat Hulett business rescue tail (JSE: TON)

Two new court applications have thrown the whole thing into uncertainty

When I open a court affidavit and see that it is 430 pages long, then my first thought goes to what shiny new cars the lawyers will be buying at the end of this process. Rest assured, the biggest winners of all in these situations are the attorneys and advocates.

In addition to the separate attempts by RCL Foods and the South African Sugar Association to stop the plans in their current form, Tongaat Hulett faced another setback in the form of a rather juicy judgement dealing with the statutory obligations of companies in business rescue. I wish I had the time to read all 74 pages properly, but I enjoyed skimming them. Long story short, the judge didn’t grant an order that allows Tongaat Hulett to avoid settling an industry levy.

So, not only is that a big knock to the financial situation of Tongaat Hulett, but there is now a court process underway that could cause further delays and/or the current plans being declared unlawful. Part of the problem as I understand it is that the levies haven’t been built into the plans, so RCL Foods and the South African Sugar Association want that rectified. You may recall that RCL Foods suffered financial loss as they needed to pay up the additional levies to the association as a result of Tongaat’s non-payment.

This is likely to impact the final distribution of proceeds, assuming one or both of the current deals can go ahead.

The soap opera continues.

Little Bites:

  • Director dealings:
    • The CEO of Omnia (JSE: OMN) received a large vesting of shares and only sold enough to cover the tax. When just the taxable portion was R12.9 million, the remaining amount is a large enough temptation that this counts as a meaningful positive signal on the share in my books.
    • The CEO of Invicta (JSE: IVT) and Dr Christo Wiese seem to be joined at the hip. They each bought shares worth a total of nearly R265k and in two very similarly sized tranches.
    • Various associates of the CEO of Spear REIT (JSE: SEA) transacted in shares, with a net sale of around R34k across the associates.
  • Back in August 2023, Aspen (JSE: APN) announced an agreement with Eli Lilly to distribute and promote Lilly’s products in South African and other Sub-Saharan African countries. All conditions precedent have been fulfilled and it will come into force on 1 January 2024.
  • Southern Palladium (JSE: SDL) released the results of metallurgical test work from the UG2 Reef. It indicates potential 4E PGM recovery rates of 85%. A new Mineral Resource update is due for release shortly. The scoping study for the Bengwenyama project is due for release in January 2024.
  • Calgro M3 (JSE: CGR) has been busy with its share repurchase scheme that has been a wonderful driver of recent share price performance. Used properly, share repurchases are excellent. From 8 August to 4 December, the company repurchased 3.02% of issued shares (calculated based on the date of the AGM in June), with an average price of R3.95 per share. The current price is R4.20.
  • MTN (JSE: MTN) announced that group COO Jens Schulte-Bockum will vacate this role when his fixed-term contract ends in March 2024. He will be replaced by Selorm Adadevoh, an internal promotion. Adadevoh’s current role is as CEO of MTN Ghana, with Stephen Blewet now appointed to that role as another internal promotion.
  • The CEO of Brikor (JSE: BIK) has sold shares worth R18 million under the mandatory offer.
  • Oando Plc (JSE: OAO) is currently involved in a court petition that has been adjourned pending the company filing its scheme of arrangement document.

Ghost Bites (Lesaka Technologies | Marshall Monteagle | RMB Holdings | Shaftesbury | Transaction Capital)

The Finance Ghost
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Ghost Bites (Lesaka Technologies | Marshall Monteagle | RMB Holdings | Shaftesbury | Transaction Capital)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

Congratulations to Mazars South Africa on their appointment as the auditors of Caxton and CTP Publishers and Printers!

Leadership changes at Lesaka Technologies (JSE: LSK)

It’s time for new leadership to take the group forward

Lesaka announced that Chris Meyer will be stepping down as CEO at the end of February 2024. It sounds like this is a family-driven decision, as Meyer has spent a lot of time away from his family over the past three years in building Lesaka.

Ali Mazanderani will take the role of executive chairman from the beginning of February 2024. That’s not quite the same thing as CEO, but it sounds like it will work that way in practice, at least for a while. He has been on the board since 2020 and has been highly involved in the FinTech strategy.

Along with this change and to ensure that corporate governance requirements are met, Kuben Pillay vacates the chairman role and will instead be appointed as lead independent director. This is important when there is an executive chairman rather than a non-executive chairman.

Marshall Monteagle moves into the green (JSE: MMP)

The market seemed to like this news, with the share price up 8% in early afternoon trade

In a trading statement dealing with the six months to September 2023, Marshall Monteagle announced that HEPS has moved into the green. It comes in at US$2.2 cents per share vs. a loss of US$6.9 cents per share in the comparable period.

Aside from the improved performance on listed equity investments and the interest income earned on group cash, there was also an improved performance from the trading and trade finance divisions.

RMB Holdings has increased its stake in Atterbury Property Holdings (JSE: RMH)

This is due to the issuance of conversion shares by Atterbury to settle the debt

As part of the report on proceedings at the AGM, RMB Holdings announced that Atterbury Property Holdings has issued shares to settle the balance of the loan of R325 million.

The impact of this share issuance is that RMB Holdings now owns 38.5% of Atterbury Property Holdings.

Shaftesbury enjoys the support of several banks (JSE: SHC)

The underlying portfolio cash flows are good enough to support the raising of unsecured debt

Property funds can essentially raise debt in one of two ways: at the underlying property level (like a mortgage that you and I are used to) or at the holding company level without giving specific properties as security. Banks like to be as close to the assets as possible, so the latter is more difficult to raise. It’s also a lot more flexible, which is why funds like them.

Shaftesbury has a good story to tell at the moment about its portfolio in London’s famous West End. A consortium of three banks have happily agreed to lend the company £300 million in unsecured debt with a maturity of three years and the option to extend twice for a period of one year per extension (subject to the approval of the banks of course).

Along with existing cash resources, the proceeds will be used to repay the £376 million balance on an unsecured loan that was arranged as part of the recent merger that the group went through. That loan was due to mature in 2024.

So, Shaftesbury has effectively rolled the facility and has extended the weighted average maturity of its drawn debt to over 5 years without affecting the current weighted average cost of debt of 4.2%. With interest income earned on cash and the impact of interest rate hedging, that cost falls to 3.3%.

Major changes underway at Transaction Capital (JSE: TCP)

The market seemed to like this news, with the share price up 8% in early afternoon trade

For Transaction Capital executives, it must be quite something to watch SA Taxi absolutely blow up at the same time that WeBuyCars is proving to be surprisingly resilient and Nutun is marching on. Such is life as a diversified group, with Transaction Capital now referring to itself as an active investment holding company with its holdings run on a fully decentralised basis. One wonders if an accounting regime change is around the corner, with the group carrying its investments at fair value rather than consolidating them.

There are some significant changes to the group being considered, ranging from the potential introduction of an equity partner in SA Taxi (once restructured) through to an unbundling of WeBuyCars (that’s big news) and a focus on only core operations at Nutun. The head office size has been significantly reduced, which speaks to a decentralised model with Jonathan Jawno taking up the CEO position on 31 December 2023.

So, in terms of how the group is thinking strategically, this is completely different to where they were before SA Taxi disintegrated. Although the announcement makes a point of reminding the market that there are no risks of cross-default, repositioning Transaction Capital as a decentralised group certainly drives that point home.

We may as well start with Mobalyz, which is where you’ll find SA Taxi and GoMo. The latter is barely worth worrying about at the moment and is actually integrated with WeBuyCars, so it surely needs to be restructured under WeBuyCars if there’s a potential unbundling on the table.

The focus in Mobalyz is SA Taxi, which really put the loss in colossal with a headline loss of R3.695 billion vs. headline earnings of R369 million in the prior year. The taxi industry has been smashed by multiple macroeconomic pressures and affordability for new taxis is almost non-existent, so that’s not happy news for Toyota. For SA Taxi, it means that the focus needs to be on financing only pre-owned taxis. This can be a quality renewed taxi (completely repaired) or a pre-owned vehicle that is roadworthy but not refurbished. With this decision having been made, the auto refurbishment and repair facilities will no longer be sold.

For SA Taxi to be viable, the balance sheet restructure will need to be supported by the lenders. This is the old story where you are better off owing the bank a lot of money rather than a small amount, as you’re then swimming in the mud together. The restructuring process is being chaired by Chris Seabrooke of Sabvest, who is a director of Transaction Capital and whose investment holding company is a significant shareholder in the group.

Moving on, WeBuyCars only saw a 14% drop in earnings for the year ended September, which is rather good actually when you consider the strong base and the weak economy. In the second half of the year, earnings were only 4% lower. This was achieved with no further branch expansion in the second half of the year. Interestingly, the B2C business is fueling growth rather than the B2B business, particularly as smaller dealerships are struggling. This suggests that consumers are feeling more comfortable buying from WeBuyCars, with the added benefit of finance and insurance income opportunities that are made possible by B2C sales.

Nutun is a business process outsourcing company focused on debt collection solutions, which is quite ironic given the state of play at SA Taxi. They are growing the “customer experience management services” side of the business quickly, as this is the capital-light side. Simply, Nutun either buys distressed books or manages the collection thereof. The latter is less risky and capital intensive. With attributable earnings from core operations up by 7%, this is a dependable business that is heading in the right direction.

There’s an interesting comment that negative sentiment around SA Taxi has impacted access to funding for Nutun. Although there may not be any cross-default or similar provisions within Transaction Capital, it is true that reputational problems hurt all the businesses. That’s why it is now critical that Transaction Capital finds the best route forward for investors and the underlying businesses.

There are obviously no dividends at the moment. Importantly, there’s also no intention at this stage of pursuing a rights offer.

Little Bites:

  • Director dealings:
    • Another Discovery (JSE: DSY) executive has put in place a sizable collar structure, although it should be noted that it is a replacement of an existing hedge structure. Barry Swartzberg has bought puts at a strike price of R119.56 (downside protection) and sold calls at a strike price of R166.06 (giving up upside in return). The value of the puts is R359 million and the value of the calls is R498 million. The current share price is R135.
    • Chris van der Merwe has sold shares in STADIO (JSE: SDO) worth R5 million in an off-market transaction. This is a sale of 1 million shares and he still has another 6.4 million shares, having been a significant shareholder since listing. The reason given for the sale is the reduction of debt and the restructuring of the family investment portfolio.
    • An executive director of AVI (JSE: AVI) has bought shares worth R3.5 million.
    • The CFO of Old Mutual (JSE: OMU) has bought shares worth R1.3 million.
    • The CFO of Clicks (JSE: CLS) bought R993k worth of shares as part of meeting the company’s minimum shareholding requirement policy. I therefore wouldn’t treat that as a typical purchase of shares that sends a positive signal to the market.
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth R144k.
  • Coronation (JSE: CML) has released its annual financial statements. They have no changes vs. the reviewed condensed results published on 21 November, but they do have more details for those interested.
  • As part of an update on the cancellation of shares held in treasury, Sabvest Capital (JSE: SBP) made the interesting point that it has reduced its share capital by 25% over the years thanks to share buybacks.

Ghost Stories Ep26: How to really manage your money (with Nico Katzke of Satrix)

The Finance Ghost
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Ghost Stories Ep26: How to really manage your money (with Nico Katzke of Satrix)

Nico Katzke is no stranger to Ghost Mail readers. He has written several articles in his role at Satrix and has appeared on a number of podcasts with me.

In this show, there was more of a cross-over with personal finance than usual. The reality is that if you can’t save every month, then you also can’t invest.

Topics we discussed included:

  • Why does it make sense to treat your own financials like corporates do? And why is the concept of an inflection point in your income so important? How does this unlock guilt-free spending, making your discretionary spend so much more enjoyable?
  • How do entrepreneurs differ from salaried employees in how they take risks with their money?
  • Diversification: a concept that goes way beyond just investing.
  • Nico’s core approach of doing things today that have massive impact in 20 years from now: (1) adjust your lifestyle to your savings amount (and not the other way around; and (2) distinguish between saving and investing.
  • Why the greatest risk to investing is not taking enough risk.
  • As difficult as it is to resist temptation, why avoiding over-consumption can make a huge difference to your future, especially when the marginal benefit of buying the new model car / smartphone / whatever is minimal.
  • The huge danger of using debt affordability tests as a target for how much debt you can take on.
  • The benefit of taking a more active role in how your money is invested, particularly focusing on costs.
  • The importance of being willing to ask your financial advisor questions about your investments
  • An overview of the two-pot system that is due for implementation next year.

There’s so much in here, underpinned by Satrix’s commitment to South African investor education. To find out more about SatrixNOW, visit this link>>>

Listen to the show here:

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. 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 podcast (“the information”), the FSP’s, 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 disclaims 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.

Ghost Bites (Alexander Forbes | Aspen | Capital Appreciation | Capitec – Sanlam | Datatec | Ellies | Glencore | Lighthouse | Nampak | Sygnia)

The Finance Ghost
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Ghost Bites (Alexander Forbes | Aspen | Capital Appreciation | Capitec – Sanlam | Datatec | Ellies | Glencore | Lighthouse | Nampak | Sygnia)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

A juicy jump in the Alexander Forbes dividend (JSE: AFH)

Yet the market clearly expected more, as the share price fell 11.8% on the day

Alexforbes reported results for the six months to September 2023 and they reflect growth in operating income of 13%, with acquisitions (like TSA Administration) doing their bit to help. There were also encouraging signs in the core operations, like client retention and higher average asset balances. The other major acquisition in the pipeline is for 100% of OUTvest from OUTsurance Holdings, with that deal currently going through regulatory approvals and thus not in these numbers.

Profit from continuing operations was up 66%, driven not just by the operating income performance but also by higher investment and other income.

Due to substantial once-off losses in the base from discontinued operations, HEPS from total operations increased by 96%. HEPS from continuing operations was up 68%.

These financial services groups are complicated, so it’s sometimes better to just follow the cash. The interim dividend is up 33% year-on-year to 20 cents. This is obviously a more modest increase than we’ve seen at earnings level, which might explain why the market didn’t seem to like the numbers. I can’t really see what else the market could’ve been upset about. The share price closed 11.8% lower at R5.07.

Aspen agrees to a switcheroo with Sandoz (JSE: APN)

In a game of pharma trading cards, Aspen acquires a business in China and sells one in Europe

Acquisitions and disposals aren’t uncommon events in the market. It’s rare to see a deal like this though, in which Aspen is acquiring a 100% stake in Sandoz China and selling the rights and IP to four anaesthetic products currently sold by Aspen in the European Economic Area to Sandoz.

It’s not a straight swap in terms of value, though. The acquisition price is EUR 92.6 million, with EUR 18.5 million being contingent on the performance of the pipeline products in China. The disposal price in Europe is EUR 55.5 million, with EUR 9.3 million contingent on sales performance. The cash difference will be funded from existing debt facilities.

These transactions are at vastly different revenue multiples. The Chinese acquisition adds R1.8 billion in annual sales to Aspen and the European disposal takes away sales of just R280 million. It’s therefore not hard to see why Aspen describes this as being part of its volume-based procurement strategy. It’s also an important strategic foothold in China, with the simultaneous benefit of allowing Aspen’s European management to focus on its remaining products in the region.

The entire deal (both legs) is dependent on the Chinese competition authorities giving the green light. That is expected to be achieved in the second quarter of 2024.

Sandoz was recently spun off from Novartis and is separately listed on the SIX Swiss Exchange.

The deal is not categorised under JSE rules and this is a voluntary announcement. In other words, there’s no shareholder vote.

Capital Appreciation’s EBITDA has had a wobbly (JSE: CTA)

Technology margins are taking strain

It’s more than slightly interesting to compare Capital Appreciation to PBT Group, which I wrote about yesterday. Although they have only small overlap in their businesses, this relationship between revenue and EBITDA over the past few years is remarkably similar:

The Software division is feeling the worst of the margin squeeze, as revenue on new projects was delayed and there was a period in which the group had increased capacity for those projects and incurred expenses. In Software, revenue was up from R220 million to R288 million, yet EBITDA fell from R46 million to R40 million.

In Payments, revenue actually fell sharply from R318 million to R265 million (mainly due to lower sales of terminals), but EBITDA was incredibly resilient at R118 million vs. R120 million. This talks to the annuity income base in that business.

Excluding the expected credit loss raised in the base period, HEPS is down by 6.4%. In this chart, you can clearly see how they were conservative with the dividend per share relative to HEPS, allowing for a steady dividend despite a drop in profits:

I must highlight the 21% growth in international revenue to R77.3 million, providing further evidence that South African skills can compete globally. Of course, our professionals are also a far cheaper resource than their counterparts in places like the US and UK. This business is structured as a small team in the Netherlands, supported by resources in South Africa.

One of Capital Appreciation’s party tricks is a debt-free balance sheet that has R500 million worth of cash for acquisitions and organic growth opportunities.

Capitec has taken the step to write its own funeral policies, terminating the agreement with Sanlam (JSE: CPI | JSE: SLM)

This is a significant show of intent by Capitec

Capitec, Sanlam and Centriq Life Insurance have been co-operating since 2017 on the sale of life insurance policies. Capitec has elected to terminate the agreement once it reaches the end of its 7 year term in October 2024. This will trigger a payment of R1.9 billion to Sanlam in the form of a “reinsurance recapture” amount for its 30% participation in the product agreement.

Capitec Life, a newly licensed insurer in the Capitec group, will take over the administration of the in-force book and will write new business on its own license. Policies in-force on termination date will remain in the Centriq cell captive and will be transferred to the Capitec Life license at a later date.

This is a significant step forward for Capitec and not one that is without risk. I suspect that Sanlam will be upset about this one, as the distribution power of Capitec gave Sanlam the ability to participate in policies that it would’ve struggled to sell otherwise. This is exactly why Capitec would’ve seen the opportunity to bring that economic profit pool in-house.

Datatec takes a bigger stake in Mason Advisory (JSE: DTC)

If the name sounds familiar, it’s because this was spun out of Analysys Mason some years ago

If you’ve followed the Datatec story in any degree of detail, then you’ll know that the group disposed of a business called Analysys Mason. Long before that disposal, Analysys Mason unbundled a business called Mason Advisory in 2014. This group services clients that are consumers of IT rather than providers or regulators. Datatec has held a 40% stake in Mason Advisory ever since.

Datatec clearly likes the business, as the group is acquiring a further 40% in it, taking its holding to 80%. The stake is being acquired form the management team. With over 100 employees, the business is big enough that Datatec can feel comfortable about having a less aligned management team.

The deal value hasn’t been announced as this is a voluntary update. All we know is that it will be funded from existing cash resources.

Ellies finally gives an update on the Bundu Power deal (JSE: ELI)

This transaction is probably the saviour of the company

Way back in February 2023, Ellies announced a deal for the acquisition of Bundu Power for up to R207.6 million. In June, there was talk of a rights offer of R120 million. Then, things became uncertain.

It seems as though Ellies has been hustling in the background to try and raise capital, as the surprising news is that the entire acquisition is being funded by debt. There is no longer going to be a rights issue!

Also, they’ve managed to defer some of the purchase price, with tranches of R26.3 million due within 60 days of the end of February 2024 and 2025. This means that roughly 25% of the purchase price has been spread out, although I would remind you that February 2024 is actually around the corner.

My concern here is that the purchase price of Bundu Power isn’t exactly at a bargain multiple, as profit after tax was R32.4 million for the year ended February 2023. Before you wonder if there is incredible growth in profits thanks to load shedding, the profit after tax for the year ending February 2024 is R33.94 million. That’s a pretty flat performance.

We don’t know yet what the debt cost is, but I suspect that there isn’t a huge amount of daylight between profits and interest costs. If anything goes wrong in the deal, Ellies can get into huge trouble, especially as the sellers of Bundu Power have been granted a call option to repurchase the shares if Ellies fails to pay any amounts due.

This is a Category 1 transaction, so shareholders will need to vote on it and a circular is expected to be distributed by 31 January 2024.

The simple reality is that this deal is do-or-die for Ellies. If it goes wrong, I believe that this is the end for the group and there will need to be a rights issue (or worse – business rescue). By funding it with debt, they are rolling the dice one last time.

For those who enjoy high-risk speculative plays, this makes Ellies interesting.

Glencore closes the Alunorte and MRN deals (JSE: GLN)

These deals were first announced in April 2023

Corporate transactions take a while to close. Mining deals can take even longer, depending on the underlying regulatory environment.

After announcing these transactions in April 2023, Glencore has closed the deals that sees it invest alongside Norsk Hydro ASA to acquire 30% in Alunorte S.A. and 45% in Mineracão Rio do Norte S.A. (MRN).

Although Glencore will not be the operator of either assets, it will have offtake rights for the life of mine in respect of its pro rata share of production.

Lighthouse is on track to meet earnings guidance (JSE: LTE)

This pre-close update deals with the year ending December 2023

You’ve seen the name Lighthouse Properties come up a million times in the director dealings section in Ghost Bites, as Des de Beer buys shares on a regular basis and other directors also dip in from time to time. For once, this update is about the company rather than transactions in the shares!

A pre-close update gives us insight into how the group is performing. In France, footfall is up 13.3% and sales are up 10.1%. It sounds like the letting environment is positive. In Slovenia, footfall is up 8.1% and sales are up 8.9%. In Spain, the group has entered into exclusivity for the acquisition of a shopping mall. If all goes well, that deal will close in February 2024.

That deal will be funded by a mix of debt and the proceeds of the sale of Hammerson shares. The loan-to-value after that acquisition will increase from 15.1% to 24.4%. Speaking of the Hammerson disposal, since H1 2023 Lighthouse has raised EUR 63 million in cash from selling shares. The holding in that company has been reduced from 22.05% to 17.98%.

The board has reaffirmed its distribution guidance of EUR 2.70 cents per share for the 2023 financial year.

In a separate announcement, Lighthouse announced the sale of a further R936 million worth of shares in Hammerson. I worked back through recent announcements and it feels like this is in addition to the sales referenced in the pre-close announcement. I’m just not sure why they didn’t simply bundle these sales in with the rest that were disclosed!

The naira knocked Nampak – and so did the kwanza (JSE: NPK)

Forex issues in Africa remain a huge concern

Fresh from its equity capital raise to save the group, Nampak has released results for the year ended September 2023. They reflect a 2% drop in revenue and a 2% increase in trading profit.

None of that really matters, as the big story is in forex losses and net interest costs.

Trading profit of R1.6 billion disappears quickly when forex losses in Angola and Nigeria come to R1.2 billion. Operating profit before impairments was just R276 million. After impairments, there’s a loss of nearly R2.6 billion.

It gets even worse, as we haven’t considered funding costs yet. They come to R1.2 billion, more than double the prior year thanks to outrageous refinancing advisory costs of R335 million. Although the advisory costs are a once-off, it’s still a ridiculous number. The group raised R1 billion in rights offer and spent R40 million on the costs of the rights offer and then another R335 million on refinancing advisory costs.

The headline loss is R1.6 billion, which is a frightening number compared to headline earnings of R229 million in the prior period.

Nampak is both a going concern and an ongoing concern in my books, as raising R2.7 billion through asset disposals in the next 18 months is key to its sustainability. One wonders what the advisory fees on those transactions will be.

The rights offer was priced at R175 and the share price is at R165, so those who supported the rights offer are already in the red.

Sygnia goes sideways (JSE: SYG)

Despite assets under management and administration up 11.6%, the dividend is flat

Sygnia CEO Magda Wierzycka wastes no time in her report on the earnings for the year ended September. Within the first paragraphs, she gives the media everything they want by lambasting South Africa and calling it “more and more irrelevant” on the global stage. That must do wonders for motivating the South African staff.

Assets under management and administration increased by 11.6% to R318 billion, with the retail business attracting net inflows of just R1 billion vs. R5.3 billion. I think that positive net flows is still a commendable performance in this environment. ETFs among institutional and retail customers experienced net outflows.

For all the complaining about how the government manages its affairs, Sygnia allowed its expenses to grow 7.9% at a time when revenue increased by 4.3%. Weirdly, one of the reasons given is the resumption of business-related travel. How much can you possibly need to travel in this business?

HEPS increased by 4% and the dividend is flat at 210 cents. That’s not a bad performance overall, but I do have questions around that cost growth in what is supposedly a low-fee investments business.

Little Bites:

  • Director dealings:
    • As the person entrusted with the turnaround of Tiger Brands (JSE: TBS), it’s good to see Tjaart Kruger putting his own money behind it. He has bought R3.8 million worth of shares in the company.
    • Here’s a fun one: Neal Froneman exercised a put option to sell shares in Sibanye-Stillwater (JSE: SSW) at a strike price of R45.98. This was part of an equity funding arrangement with a financial institution. The current price is R21, so that put option (the right, but not the obligation to sell shares) was solidly in the money. That sale was worth R218 million. Separately, an independent non-executive director bought shares worth R292k.
    • The CEO of Invicta (JSE: IVT) has bought shares worth R363k and Dr Christo Wiese also bought shares to the value of R394k.
    • The CEO of RH Bophelo (JSE: RHB) has bought shares worth R393k.
    • A director of KAL Group (JSE: KAL) has bought shares worth R184k.
  • ADvTECH (JSE: ADH) has announced that CEO Roy Douglas will step down from the board with effect from 29 February 2024. Geoff Whyte has been announced as his replacement, bringing experience gained in organisations as varied as Unilever, PepsiCo, SAB-Miller and Nando’s. This is an interesting appointment of an executive who is clearly an expert in FMCG.
  • Unitholders in Oasis Crescent Property Fund (JSE: OAS) were able to choose between a cash distribution and a share distribution. 65.51% of holders elected to receive a cash distribution and the rest were happy to receive more units.
  • MAS P.L.C. (JSE: MSP) is working on its balance sheet, inviting holders of the EUR 300 million 4.25% guaranteed notes due 2026 to tender them for purchase by the company. In other words, this is an early redemption at the option of the holder. MAS is either reducing its overall debt or restructuring it.
  • City Lodge Hotels (JSE: CLH) confirmed that the odd-lot offer price is R4.7023454, being a 5% premium to the 30-day VWAP as at the close of business on 1 December. The current share price is R4.56. This allows holders of fewer than 100 shares to let them go at a slight premium to the current price, but we are talking less than beer money here. Remember, the default is that your shares will be sold if you own fewer than 100 of them.
  • One has to wonder why Telemasters Holdings (JSE: TLM) is bothering with a dividend at all, since the declared amount is 0.001 cent (not cents, but cent) per share. The share price is R0.75.
  • Chrometco Limited (JSE: CMO) has renewed the cautionary announcement relating to a material subsidiary of the company.

Ghost Bites (AYO Technology | Brimstone | Fortress | Kibo Energy | PBT Group | Quantum Foods | Sibanye | Tiger Brands)

The Finance Ghost
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Ghost Bites (AYO Technology | Brimstone | Fortress | Kibo Energy | PBT Group | Quantum Foods | Sibanye | Tiger Brands)

Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:

AYO Technology is even more loss-making (JSE: AYO)

Unsurprisingly, the group is getting worse

It’s hard for me to understand why anyone would ever invest in AYO Technology. Reputational problems aside, even the numbers are terrible. For the year ended August 2023, the headline loss per share got a lot worse. In a trading statement, the company guided that the loss has moved from 60.25 cents to between 171.36 cents and 183.41 cents.

The share price, by the way, is just 80 cents.

The increased loss is due to lower gross margin in the operating companies, fair value adjustments on investments and other issues like derivatives.

Brimstone’s intrinsic NAV keeps moving lower (JSE: BRT)

Many of the investments have taken a knock since December 2022

Brimstone Investment Corporation has released a quarterly update to its intrinsic net asset value (NAV) disclosure. As an investment holding company, the intrinsic NAV is basically the directors’ opinion on what the portfolio is worth.

The market’s opinion is reflected in the share price, which sits at R5.40 vs. the fully diluted intrinsic NAV per share of R12.48. The discount to intrinsic NAV tends to be between 50% and 60%. The JSE is a tough place for these groups.

The intrinsic NAV per share has dropped 3.7% between December 2022 and September 2023. The growth in Oceana was largely offset by Sea Harvest, with those positions contributing a combined 75% of the portfolio. They’ve also taken big knocks in Equites (the listed property group) and Phuthuma Nathi, the MultiChoice B-BBEE scheme.

The direction of travel for intrinsic NAV has been lower for the past few years. It’s down 6% since December 2019.

The local logistics portfolio remains the backbone of Fortress (JSE: FFA | JSE: FFB)

Don’t forget that there’s a proposal on the table to deal with the dual-share class structure

Fortress Real Estate (not Fortress REIT – it lost that status, as you may recall) has released a pre-close update dealing with the months since the June 2023 year-end.

The highlight is the South African logistics portfolio, with record low vacancy of 0.5% by rental. They’ve been recycling capital through disposals of non-core properties. There’s a comment in the result that makes it sound like selling properties at decent prices is getting harder, so they are happy with the sales achieved in recent months.

The Central and Eastern European logistics portfolio has seen its vacancies increase from 3.9% to 6.4%. The increase is attributable to two buildings, so it shows how lumpy vacancies are in logistics vs. say a retail portfolio with many shops.

Speaking of retail, vacancies are down from 1.5% to 1.3% and tenant turnover is up 7.2% on a rolling 12-month basis.

In the industrial portfolio, vacancies were up from 6.8% to 7.8%. The group notes that there is still strong demand for well-located smaller industrial properties.

The office portfolio remains a mess, but is luckily less than 4% of total assets in the fund. Vacancies are up from 22.3% to 23.1% and they seem to be experiencing some luck with getting offers for properties.

The loan-to-value ratio is 35.5%, which is a decent level for any property fund.

A potentially big setback at Kibo Energy (JSE: KBO)

When a deal starts getting weird, it often ends in tears

If you’ve been keeping an eye on Kibo Energy, you’ll know that the group’s subsidiary in the UK (Mast Energy Developments) has been trying to put a joint venture together. The partner is Proventure Holdings. Well, the theoretical partner at least. In order to get the deal done, Proventure actually needs to pay across some money. That’s where things have been getting weirder and weirder.

For months now, we’ve been listening to silly excuses about why Proventure can’t pay. Frankly, I did think that Kibo sounded a bit naive about all this. Good partners don’t miss payment dates, especially not repeatedly. The latest long-stop date has been missed and it sounds like reality is dawning on Kibo, as they’ve now given Proventure 7 days to remedy the situation.

Even if the money arrives, that’s a terrible way to start a relationship. If it doesn’t arrive, there are theoretically penalties paying, but that’s a process in court to recover them.

There’s a simple lesson here: when deals start to get strange and partners get the basics wrong, there’s a very high chance that everything will fall over.

Where will the growth come from at PBT Group? (JSE: PBG)

Things are definitely tougher in a post-pandemic environment

PBT Group is one of the best local small caps. The business model is good and the company behaves like a much bigger company, evidenced by a proper reporting strategy that includes a bunch of really useful KPIs. In a market where some small caps think a trading statement and final results should go out 2 hours part, it’s always refreshing to take a look at PBT Group.

For example, they do the hard work for you with charts like these:

It’s really great to be able to just eyeball what’s going on here. If you do detailed research on companies, charts like these are worth doing for yourself.

The 5-year Compound Annual Growth Rate (CAGR) is much higher for EBITDA than for revenue. That means the group has achieved substantial margin expansion. If you look over the past couple of years though, there’s a different story. Despite revenue being R78.7 million higher in 1H24 than in 1H22 (R547.4 million vs. R468.7 million on the top left chart), EBITDA is only R2.9 million higher. All the margin expansion over the past five years happened right in the beginning, with the post-pandemic period reflecting a difficult operating environment where they are struggling to maintain the current level of profits.

What certainly hasn’t helped is the PBT Australia business, which contributes roughly 5% of revenue and still makes a loss. Due to difficulties in making progress in that market, PBT will sell that business to its management team.

Another important point is that the software business in which PBT holds a 58% stake outperformed the wholly-owned subsidiaries. Even though the profits from that business are consolidated into PBT’s numbers (i.e. 100% of its revenue and operating profits), the adjustment at the end for non-controlling interest is what really matters. Simply, when you look at PBT’s income statement for this period, there’s a larger proportion going to minority shareholders further down in the structure than before. This is part of why normalised HEPS has dropped by 4.3% to 31.4 cents.

This is a well-managed company that is dealing with the same issues in South Africa that so many other companies are dealing with. It looks like the share price got too far ahead of itself during the pandemic, with this chart now looking rather dangerous:

Quantum Foods is proof that margins are everything (JSE: QFH)

This is exactly why looking at only revenue multiples is foolish

Imagine sitting down at a piano. All the keys together make up the financials of a company. If you only look at revenue, you’re judging the entire piano based on what one octave sounds like. That’s a silly way to play or buy a piano. It’s also a silly way to buy shares.

Now, I don’t think anyone looks at just revenue multiples in the poultry industry, so this isn’t a comment on Quantum Foods specifically. It’s just a lesson in margins, as a company can grow its revenue and still suffer horrible numbers. Read on and see why.

For the year ended September 2023, Quantum managed to grow revenue by 15.5% to R6.95 billion. Sounds great, doesn’t it? Sadly, the operating loss is R35 million, down from operating profit of R37 million.

The highlight was the Animal Feeds division, which contributes just under half of revenue. It made an operating profit of R104 million. Here’s a quote from the result that says it all about South Africa, really:

“Whereas c. 70% of maize was delivered to the Malmesbury mill by rail seven years ago, we now deliver more than 80% via road due to the failing rail infrastructure in the country. This had a significant impact on transport costs over time.”

The Farming business was smashed by avian flu and other problems, so revenue of R1.8 billion (up 15.2%) couldn’t generate a profit. The operating loss was R80 million. If you dig a bit deeper, you’ll find that the biological asset write-off because of the avian flu was R155 million.

The Eggs business had a horrible time. Revenue fell 2.1% to R1.3 billion and the adjusted operating loss was R42 million. The highlight here is that conditions had started improving in May in terms of pricing and feed costs, but then along came the supply problems from avian flu.

The rest of Africa also struggled, with revenue of R443 million and an adjusted operating loss of R1 million.

In summary, this year would’ve probably turned out alright were it not for the flu outbreak. This is a major business risk in poultry at all times, but the industry did get particularly unlucky this year. Although the outbreak has impacted the start of the new financial year as well, FY24 will hopefully be a better period for Quantum.

Sibanye concludes retrenchments in the gold operations (JSE: SSW)

Thankfully, quite a few jobs were spared in the end

Back in September, Sibanye-Stillwater announced a restructuring of its SA gold operations, particularly at the loss-making Kloof 4 shaft.

Initially, 2,389 employees and 581 contractors were due to be affected. Through natural attrition at other operations, 1,057 employees took up roles elsewhere. 31 employees left during the process, which made life easier for the company. 176 employees and 26 contractors will retain their jobs temporarily for the decommissioning phase of the mine. 550 employees took up voluntary separation packages or early retirement, as were 348 employees elsewhere.

With all said and done, 575 employees could not be accommodated elsewhere and didn’t take the other agreed avoidance measures, so they are being retrenched. All the affected contractors are also being retrenched.

A tiger on the revenue line; a kitten further down (JSE: TBS)

Tiger Brands cannot maintain its margins

The good news at Tiger Brands is to be found right at the top of the income statement for the year ended September 2023. I was impressed that volumes are only down by 2% in a period when price inflation was 11%. Once you factor in those elements as well as forex gains, revenue increased by 10%.

If we dig a bit deeper, we find that volume growth was only in the export business. The domestic business suffered a decline in volumes, so that makes sense based on what I’m seeing around me.

Despite supply chain efficiency improvements, gross margin fell from 30.3% in the prior year to 27.7% this year. Combined with retrenchment costs this year and lower insurance proceeds than last year, operating income fell by 9% despite the juicy jump in revenue.

A useful contribution further down the income statement came from income from associates, which increased by 46% to R697 million. A large portion of this was due to a change in functional currency at National Foods from Zimbabwean Dollars to US Dollars.

A far more “real” issue to look at is net financing costs, which ballooned from R75 million to R238 million. This was driven by higher interest rates, more working capital and of course a reduction in cash because of the R1.5 billion share buybacks.

With all said and done, HEPS managed to limp higher by 2% and the final dividend is 3% higher. The total dividend of 991 cents puts Tiger Brands on a dividend yield of 5.5%.

If you read the outlook section, this company is firmly on the defensive in this environment. It’s all about cutting costs and rationalising the product range. Right at the end, they talk about growth in the informal market and in certain categories. One of them is hilariously called “snackification” – an excellent example of a made-up word in corporates.

There’s a new management team in charge to deliver on that strategy. Thushen Govender as been appointed as CFO as an internal promotion. You may recall that the company recently announced the appointment of Tjaart Kruger as CEO, seen by many as a turnaround specialist.

Little Bites:

  • Director dealings:
    • Calibre Investment Holdings, related to a director of Ascendis (JSE: ASC), has bought shares worth R24.9 million.
    • Collins Property Group (JSE: CPP) announced that Christo Wiese bought R8.8 million worth of shares on 28 and 29 November and then sold R5.4 million worth of shares on 30 November in an off-market trade. Although the announcement isn’t explicit, it looks like associates of the Collins family bought the shares in the off-market deal.
    • The CEO of Spear REIT (JSE: SEA) is buying more shares in his family investment vehicles, this time to the value of R89k.
    • A non-executive director of Richemont (JSE: CFR) bought warrants for A shares with a value of R36k.
  • African Equity Empowerment Investments (JSE: AEE) has made a change to the structure of its offer for an attempted take-private of the company. Instead of an offer to shareholders and subsequent delisting vote, this will now be a scheme of arrangement, still at a price of R1.15 per share. If the scheme is passed, a delisting would go ahead.
  • After a few difficulties along the way, Brikor (JSE: BIK) has released the mandatory offer circular relating to the offer by Nikkel Trading 392 for the shares it doesn’t own in the company. Nikkel currently owns 68.01% of the shares. In the end, the CEO of the group changed his mind about not accepting the offer. He has now indicated that he will be taking it. This puts a lot of pressure on other shareholders to accept, as there’s little point in not being aligned with the CEO. The offer price is 17 cents per share. If Nikkel holds 90% of the shares after this offer, then a squeeze out can be used under s124 of the Companies Act to force remaining shareholders to sell. You’ll find the circular here.

Son of a cymbal maker: lessons in succession from Zildjian

Dominique Olivier
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Son of a cymbal maker: lessons in succession from Zildjian

It’s not often that a business outlasts an empire. 400 years and 15 generations later, the Avedis Zildjian company is still making a beautiful noise.

Whenever I’m stuck for conversation at a dinner party, I like to ask the person that I’m speaking to if they can name any of the oldest family-run businesses in the world. It’s an unconventional way to get a conversation started, sure, but it always gets interesting results.

Many people will guess the names of oil giants (sorry, too new) or diamond miners (nope, too volatile). Some will hazard a guess at wineries (clever – there is actually a French winery that was operated by the same family for 1000 years). One memorable lady once told me about a Japanese spa hotel that was established in the year 705 and run by 52 generations of the same family before it was taken over by an “outsider” in 2017 (imagine being that guy).

But no-one ever guesses a company that makes cymbals. And that’s why I like to tell people about the history of Zildjian.

There’s a market for noise

The Zildjian story starts in 1618, in what is now known as Istanbul but was then called Constantinople. An Armenian metalsmith and alchemist named Avedis was working in the court of the Sultan of the Ottoman Empire when he came across a way to shape an alloy of tin, copper, and silver into a sheet of metal. Popular anecdotes have it that Avedis was trying to create gold – but instead he created a thin metal that could make musical sounds without shattering.

Sultan Mustafa I was so impressed by Avedis’ invention that he officially granted him the surname Zildjian, which translates to “son of a cymbal maker”, thereby ensuring that Zildjian’s invention would be intrinsically linked to his bloodline. In 1623, Avedis was granted permission to start his own business outside of the palace.

Ottomans of the day had many different uses for cymbals: for starters, there were the Ottoman military bands, who relied on cymbals to make noise that would intimidate their enemies on the battlefield. Cymbals were also used in the services of Greek and Armenian churches, and (on quite the opposite end of the spectrum) by the belly dancers of the Sultan’s harem. So while Avedis’ business operated in a very particular niche, there was no lack of demand for his products.

When the original Avedis passed away, his business and the secret formula for his unique alloy were passed down to his son. And so started one of the most successful succession stories in the history of business.

A harsh clashing of ideas

For 356 years, the descendants of Avedis Zildjian guarded his secret alloy formula and kept his business going strong, despite such challenges as an Armenian massacre, the exile of the head of the family, World Wars 1 and 2, the family’s emigration to the United States, and the Great Depression. 9 generations of Zildjians built on their forefather’s legacy – until the 10th threatened to tear it apart.

Following the death of Avedis the Third in 1979, an acrimonious dispute developed between his sons, Armand and Robert, While Armand was the eldest and the rightful heir to the business, Robert insisted that he was the better businessman. The dispute was settled (on paper, at least) after two years in court, with Armand being granted ownership of the company’s main factory in Massachusetts, while Robert was given the secondary, smaller factory in Canada.

Determined to do things his way, Robert broke away from the family business and used his factory to start a new line of cymbals. This was the birth of the Sabian brand, which would rise to become one of Zildjian’s main competitors for the title of largest cymbal-maker in the world.

Armand and Robert passed away in 2002 and 2003 respectively. Both Zildjian and Sabian have continued to be run exclusively by members of the Zildjian bloodline since then. Between them, these two cymbal brands have cornered more than 65% of the market.

Finding success in succession

Legend has it that the founder of Zildjian was trying to create gold when he stumbled across his proprietary alloy formula. I sometimes wonder how he would feel if he could see the brand that was built on his name celebrating 400 years in business this year. I reckon that legacy is worth more than gold.

So, why did succession work for Zildjian, when it led so many other businesses to failure?

There’s no recipe that guarantees longevity in a business – there are just too many variable factors like brand power, global disasters, technological innovations and the ability to move with the times. That being said, I do think that the Zildjian family has made some smart decisions over the years.

For starters, the secret alloy formula at the heart of the business has stayed a family secret to this day. The Zildjians who do know it are prohibited from sharing it, even with their spouses. As far as this business is concerned, that formula is their main IP, and they’ve guarded it extremely well.

Secondly, Zildjian believes – really believes – in the power of the bloodline. While the business was transferred from male heir to male heir in the early years, in the early 1900s, when the main male heir was exiled, the business was transferred to his daughter instead of to an outsider. Victoria Zildjian was the first female in the family to run the factory, but she wasn’t the last. When it comes to passing the baton, Zildjian favours family over all else.

While staying true to the original nature of the business, Zildjian has also been pliant enough to move with the times and innovate. As you can imagine, making the leap from supplying instruments of war to instruments for rockstars took some careful navigating. Historically, Zildjian has relied on those who use their products – musicians – to collaborate with them and inform them on the innovations that were needed. Musical legends such as Ringo Starr and Gene Krupa have worked closely with the brand to develop specific lines of cymbals for particular genres of music.

Reading the descriptions of board members’ careers on the Zildjian website, you soon notice a familiar pattern. A Zildjian descendant will study a discipline of their choice and find work out in the world that has little or nothing to do with cymbals – but they will stay on the board, with their finger firmly on the pulse of the business. This ensures that the business doesn’t become trapped in a vacuum, as fresh ideas and insights are constantly being introduced from the outside world.

I’ll close with my favourite anecdote about this business, which I read in an interview with Zildjian’s current CEO, Craigie Zildjian. During the interview, Craigie’s four-year-old granddaughter Emilia – a member of the 16th generation of Zildjians – came to sit on her grandmother’s lap. “Are you going to work in the factory one day, Emilia?” Craigie asked her. Without hesitation, the little girl answered “Yes!”

Maybe there is something special in the Zildjian bloodline. Or maybe they’re just really good at linking business with family pride. Either way, I think it will be a really long time before we encounter a family business quite like this one again.

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Wrap #56 (Purple Group | Spar | Pepkor | Bidvest | Attacq)

The Finance Ghost
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Ghost Wrap #56 (Purple Group | Spar | Pepkor | Bidvest | Attacq)

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

In this episode of Ghost Wrap, I recapped five important stories on the local market:

  • Purple Group may be loss-making, but the revenue resilience in a near-impossible year is a strong tick in the box for this story.
  • Spar has hopefully signed off on the worst year that the company will ever experience, with several own goals and the suspension of dividends.
  • Pepkor has a reputation as a defensive retailer, but that doesn’t seem appropriate based on the underlying businesses.
  • Bidvest gave the market a fright with its recent commentary about pricing pressure, leading to a sharp correction in the share price.
  • Attacq is an excellent reminder that the old adage of “location, location, location” applies to REITs as well.
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