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Ghost Bites (African Rainbow Minerals | BHP | Calgro M3 | Emira – Spear REIT | Gold Fields | Invicta)

The Finance Ghost
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Ghost Bites (African Rainbow Minerals | BHP | Calgro M3 | Emira – Spear REIT | Gold Fields | Invicta)

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

African Rainbow Minerals to take a 15% stake in Surge Copper Corp (JSE: ARI)

Surge Copper is listed on the TSX Venture Exchange

From time to time, listed companies invest in other listed companies. This can be for portfolio diversification or more strategic reasons. In this case, African Rainbow Minerals has invested in a 15% stake in Surge Copper Corp, which is listed on a couple of exchanges including the Venture Exchange on the TSX (Toronto).

The subscription price works to an 18% premium to the 20-day VWAP. Before you panic, this isn’t very unusual. To build a 15% stake through on-market buying would inevitably be even more expensive, as the price would run higher in the process.

This looks like an early-stage mining group that owns the Berg Project, which has a Preliminary Economic Assessment showing an IRR of 20% (that’s in Canadian Dollars) based on copper, molybdenum, silver and gold resources. The company also has a 100% interest in the Ootsa Property, an exploration project which has similar resources.

This gives African Rainbow Minerals exposure to low-carbon energy transition metals.

At BHP, Blackwater has been bought by Whitehaven (JSE: BHG)

Clearly, names related to colours are in!

BHP Group and Mitsubishi Development each owned a 50% stake in a joint venture that in turn held the Blackwater and Duania mines. Whitehaven Coal has now paid $2 billion in cash to acquire those mines. There’s a preliminary adjustment of a further $44.1 million to be received from the buyer. A $100 million deposit was already received in October 2023.

On top of this, $1.1 billion is payable by Whitehaven over three years, with a potential further $900 million in a price-linked earnout structure. The earn-out is a maximum of $350 million each year for three years, with a cap of $900 million overall.

The total cash consideration for the deal is thus up to $4.1 billion, plus the completion adjustment amount of an estimated $44.1 million. Half of the net proceeds would be attributable to BHP.

Calgro M3 locks in Bankenveld District City (JSE: CGR)

This is a major boost to the development pipeline

First off: where on earth is Bankenveld District City? I’m hoping this video I found on YouTube is an accurate representation of what they are actually building, but at the very least it gives you an idea:

Calgro M3 is entering into a joint venture with Eris Property Group to acquire a strategic land parcel that will deliver between 20,000 and 30,000 housing units alongside commercial, retail and industrial spaces. That’s a huge opportunity. Calgro M3 and Eris will share the cost of the infrastructure installation (34% of the land), whereafter Calgro M3 will do the residential development and Eris will develop the rest.

Clever, isn’t it?

As at August 2023, the project pipeline at Calgro M3 was 20,239 units. This deal therefore more than doubles the project pipeline, with more than R18 billion in potential revenue. Goodness knows it’s easier said than done to do developments like these, but it’s a very interesting strategic step.

One wonders what the impact will be on capital allocation, as Calgro M3 has been active with share buybacks at a time when the share price has been cheap. It’s still at a modest valuation multiple, but more capital will presumably be applied towards this development now.

The share price closed 3% higher on the day.

Emira sells a Western Cape portfolio to Spear REIT (JSE: EMI | JSE: SEA)

Emira is reducing debt and Spear is growing at pace

The beauty of a market is that there is a buyer and seller for every asset. This means that someone can think of reasons to sell it and someone else can find reasons to buy it. Sometimes, it’s because of different plans with the assets. Other times, it has more to do with the different stages of business and strategic priorities.

In this case, Emira is selling a portfolio of 13 properties in the Western Cape to Spear REIT for R1.146 billion. Spear is focused exclusively on the Western Cape and this is a pretty spectacular way to beef up the portfolio in one big deal. Emira is looking to recycle capital and reduce debt, which makes sense based on what I saw in their results last week.

In a particularly interesting twist, Emira is paying a transaction fee of R22.5 million to Spear that the latter can use at its discretion. Another fun term is that if Emira wants to incur capital expenditure on any of the properties prior to transfer, this can be done with Spear’s consent and with the understanding that Spear will refund Emira up to R15 million for such expenditure.

As you can imagine, there are many other property-specific terms in a deal like this, not all of which are worth highlighting here.

Here’s the portfolio:

The companies have confirmed that these values are in line with the fair market value as determined by the directors.

In the Spear announcement (which is a Category 1 deal announcement), the company notes that the acquisition price is a net operating income yield of 9.46% excluding the transaction fee payable by Emira to Spear. Including this amount would take the net initial yield to 10.1%. Given that’s a once-off amount, I would personally focus on the former number, not least of all because Spear will also incur once-off expenses for the deal.

One of the conditions to the deal is that at least 50% of the purchase price will be funded by mortgage bonds that can be raised over the properties. These approvals have been granted in principle.

If you are a shareholder in Castleview (JSE: CVW) then remember this deal is also relevant to you, as Castleview is the 59.3% shareholder in Emira.

Salares Norte commences production at Gold Fields (JSE: GFI)

This has been a 13-year journey

Gold Fields announced that Salares Norte has commenced production and delivered first gold, in line with the updated project schedule that was shared with the market in December 2023. The payback period is less than three years at current gold prices, which would be a wonderful return on investment if the good times continue.

The journey from discovery through to exploration, development and now commencement of production took a whopping 13 years. Mining isn’t a quick process, although companies obviously choose to delay or accelerate projects based on market conditions and availability of capital.

The all-in cost of gold production is $1,790 to $1,850 for 2024 and expected production volumes are 580koz. This gives it one of the industry’s lower cost profiles. The total capital cost was between $1.18 billion and $1.2 billion.

The rest of the group has a less enjoyable story to tell, with group production for the first quarter of 2024 coming in lower than planned. This was impacted by operational challenges at South Deep (a fatality on 2 January 2024 and many other far less serious issues) as well as severe weather conditions in Australia and Peru.

For now though, the company has left production and cost guidance unchanged for 2024.

Invicta: getting its bearings (JSE: IVT)

Or more bearings, I should say – as this is a familiar product category for the industrials group

Invicta has agreed to acquire 100% of Nationwide Bearing Company (NWB) in Doncaster, South Yorkshire in the United Kingdom. Invicta has tons of experience with bearings in South Africa, so this feels like a good fit.

NWB has been around since 1992 and has its own developed brand as well, with the products developed internally and manufactured by outsourced partners across the world. Invicta believes that it can add value in the supply chain here, using its scale to help source inventory.

The effective date was on 1 April. No, this isn’t a joke, especially not when R293 million is changing hands. There is the potential for the final price to be adjusted based on how the net asset value of NWB changes, to a maximum adjustment of £34,000 (and thus small in the greater scheme of the deal).

The purchase consideration is heavily front-loaded (£9.9 million), with two major deferred payments 6 months and 12 months after completion of the deal. The adjustment amount is payable 55 business days after the completion date.

The total purchase consideration is £12.355 million and the net asset value (NAV) of the entity was £8.7 million as at March 2023. Based on the adjustment for net asset value, it seems the NAV may be up to £10.2 million by completion date. Either way, it’s a premium to NAV. Profit for the year ended March 2023 (which is now a full year out of date) was £1.395 million. It’s a pity that profits for the year ended March 2024 aren’t given in the announcement.

Little Bites:

  • Director dealings:
    • The CEO of Trellidor (JSE: TRL) has bought shares worth R137k. With a share price down 42% over the past year, that’s interesting.
  • Fortress Real Estate (JSE: FFB) announced that the scrip distribution will be at a 5% discount to the 5-day VWAP, which means a shareholder can elect to receive 5.77205 new Fortress B shares for every 100 shares held. The cash dividend is 81.44308 cents.
  • Lighthouse Properties (JSE: LTE) has announced a scrip distribution reference price that is a 3% discount to the closing spot price on 28 March 2024. Shareholders can either receive a gross cash dividend of 27.69614 ZAR cents per share, or 3.67803 new Lighthouse shares for every 100 Lighthouse shares held.
  • After a review of Pepkor’s (JSE: PPH) credit rating, Moody’s has left the credit ratings and stable outlook unchanged. This is based on Pepkor’s resilient business model, while recognising the risks of South Africa. I must remind you that a credit assessment is a completely different lens to an equity investment, so see this more as some downside reassurance rather than upside potential.
  • MultiChoice (JSE: MCG) has agreed with Imtiaz Patel that he will extend his tenure as Chair until the conclusion of the Canal+ transaction, or a sooner date depending on how the deal goes. Elias Masilela will become the Deputy Chair.
  • Trustco (JSE: TTO) has withdrawn the announcements previously released about the terms of the related party transaction with Next. This is because material terms have changed in subsequent negotiations. The company will release a further announcement when appropriate.
  • aReit (JSE: APO) has declared a dividend of 33 cents per share for the year ended December 2023. I just can’t help but wonder where the financial results are, as I can’t recall seeing another example of a dividend announcement without the accompanying results.
  • Oando (JSE: OAO) has been suspended from trading on the JSE based on the inability to meet the extended deadline to publish the 2022 year-end results. The company believes that it is close to completion on these, with the board scheduled to approve before 15 April.

Ghost Stories Ep33: Artificial, or Artificial Intelligence? (with Nico Katzke of Satrix)

The Finance Ghost
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Ghost Stories Ep33: Artificial, or Artificial Intelligence? (with Nico Katzke of Satrix)

Listen to the show here:

Nico Katzke of Satrix* returns to Ghost Stories to talk about the latest buzzword of the moment: Artificial Intelligence (AI). This topic has been dominating market headlines for a while now and it poses both opportunities and risks.

In this podcast, we discuss:

  • The way in which some people run towards hype and others run in the opposite direction – talking to the different investor personalities in the market.
  • Whether the development of cloud computing and SaaS can teach us anything about the risk of being too sceptical about AI.
  • The energy demands of AI and what this could mean for renewable energy.
  • What AI technology is and what it is not – and why the term may well be an example of great marketing more than anything else.
  • Our preferred ways to get exposure to this theme in our portfolios.

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>>>

*Satrix is a division of Sanlam Investment Management

(this article was first published on Satrix’s podcast platform 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.

The Microsoft of Musicians: Taylor Swift

Dominique Olivier
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The Microsoft of Musicians: Taylor Swift

No, you’re not imagining it: Taylor Swift really is everywhere right now. From radio airwaves to streaming services, social media to news outlets and now even the sidelines of football fields, there genuinely is no escaping her presence. But with one artist dominating public attention (and spending) to this degree, is there space left for anyone else?

You don’t have to like Taylor Swift or her music to be able to appreciate that she is currently the poster child for winner-takes-most economics. To give you some perspective on her dominance, consider this stat: in 2023, 1 in every 78 US-based audio streams was a Taylor Swift song. Keep in mind that streaming is based on the choice of the listener, not the radio DJ forced to play the latest pop.

She claimed 1.28% of the US streaming market in 2023, which doesn’t sound that impressive until you consider that entire genres of music like Classical and Jazz only made up 0.8% and 0.9% respectively. Even the Children’s streaming genre, fueled by parents having to play Baby Shark 15 times a day to placate their demanding toddlers, could only claim 1.1% of the total streaming market.

So yes, Tay-Tay is doing just fine, thank you very much. But what is it about her and her music that has singled her out from millions of professional musicians worldwide – not to mention every amateur garage-band, viral talent-show contestant and high-school virtuoso in the world? Why do some musicians get a minute in the limelight, while Taylor Swift gets almost two decades?

What makes her the Microsoft of Musicians?

One of a million girls next door

Almost anything or anyone has the potential to evolve into a brand – like a blonde, guitar-playing American girl. Just like household brands Nike and Google, Taylor Swift’s brand strength is the result of smart marketing and knowing how to sell a product.

To be fair, her backstory definitely helped to shape the lore: after growing up on a Christmas tree farm (yes, really) in Pennsylvania, a 13-year-old Swift expressed an interest in country music and subsequently became the catalyst for her entire family moving to Nashville to get her closer to the wellspring of the genre. She describes one of her earliest introductions to music as hearing her opera-singer grandmother singing in church (cue the beam of golden light coming through the stained glass window). The fact that her entire childhood sounds like a Hallmark movie waiting to happen is only underlined by the fact that Taylor Alison Swift is her real name, even though it sounds exactly like the kind of pretty pseudonym a pop princess would choose.

So she’s pretty, talented and she has an interesting backstory – but then again, so do hundreds of other musicians. This brings us back to the original question of Taylor’s rocket-fuelled career.

Taylor currently occupies one of the top positions in music, which is a career avenue notorious for its winner-takes-most approach. In a winner-takes-most market, the top performers seize a significant portion of the available rewards, leaving little for the rest of the competitors. This dynamic exacerbates wealth disparities, as a small elite accrues a growing share of income that would otherwise benefit a broader segment of the population.

Then there’s also the Matthew Effect to consider. No, Matthew isn’t one of Taylor’s many prominent exes – the Matthew Effect is the tendency of individuals to accrue social or economic success in proportion to their initial level of popularity, friends, and wealth. The term was coined by sociologists Robert K. Merton and Harriet Zuckerman in 1968. This phenomenon can be primarily attributed to preferential attachment, where wealth or credit is allocated based on existing holdings.

In other words, according to the Matthew Effect, lower-ranked individuals face escalating challenges in augmenting their assets due to limited resources to invest over time. Conversely, higher-ranked individuals find it easier to maintain their substantial holdings because they possess greater resources to invest.

That sounds a bit like Taylor’s reign, doesn’t it? She accumulates new fans through a fiercely loyal existing fanbase, and she is able to pour almost endless resources into extravagant tours, album launches and more. Newer or lesser-known musicians face a much steeper uphill battle to getting an album sold than Taylor does, in the same way that a locally-made sport shoe brand would have a hard time competing with Nike.

In her money Era

As of October 2023, Taylor Swift is the first billionaire in history to have accumulated their fortune solely from a career as a musician.

She has released a new album every two years since 2006 (with the exception of Reputation, which was released three years after its predecessor, 1989). She doubled down during the pandemic, which is why 2020 saw the release of two “sister albums”, Folklore and Evermore, in the same year.

This excludes the “Taylor’s Version” albums, which are four of her early albums that she re-recorded between 2021 and 2023 in order to own her masters, following a dispute over ownership with record label Big Machine Records in 2019. Six of her 14 albums have opened with over one million sales in the first week. What’s that quote from Steve Jobs about real artists shipping?

With that much material to draw from, it makes sense that Taylor was able to create one of the biggest retrospective shows in the history of live performance in the form of her Eras Tour. Spanning 152 shows across five continents, the tour kicked off on March 17, 2023, in Glendale, Arizona, United States, and is scheduled to wrap up on December 8, 2024, in Vancouver, Canada. Though currently only halfway, the Eras Tour has already left an indelible mark on global culture, achieving the milestone of surpassing $1 billion in revenue, thus solidifying its status as the highest-grossing tour in history.

The Microsoft of Musicians

When we see a business like Nike at the top of its industry, we are quick to recall its humble beginnings in Phil Knight’s garage, and just as quick to applaud the hard work, strategic prowess and marketing successes that allowed it to ascend to its position. When we talk about Microsoft, we are impressed by the consistent evolution of the company to stay at the very top of its game. But for some reason, when we see remarkable success in a single person, we want to start talking about luck, chance and having “it”.

The key to understanding Taylor Swift’s success is to think of her as a business, not a person. There is no magic stick that selected Taylor Swift as the artist of the century, thereby distinguishing her from every other guitar-playing girl to ever come out of Nashville. Just like Phil Knight took a risk when he imported that first batch of Onitsuka Tigers into the United States, Taylor’s parents took a risk by moving their family to another state in order to support her interest in music. Just as the team at Nike grew their operation through smart partnerships with suppliers and distributors, Taylor connected with agents, record labels, writers and engineers who aligned with her vision and the unique sound she wanted to produce.

Yes, it may be true that there isn’t much space at the top of the music market, and Taylor’s massive success thus far is certainly helping to bring in new opportunities on a regular basis. But let’s not gloss over the fact that she climbed this ladder through regular album releases, clever marketing, and an extremely well-managed brand.

A nice name and a cute backstory will get you a head start in the music industry. But just like everywhere else, the ones right at the top are the ones who work the hardest off the initial platform of luck.

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 Bites (Ascendis | Bell Equipment | Emira | Heriot | Renergen | RMB Holdings | Workforce | York Timber)

The Finance Ghost
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Ghost Bites (Ascendis | Bell Equipment | Emira | Heriot | Renergen | RMB Holdings | Workforce | York Timber)

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

Ascendis swings sharply into the green (JSE: ASC)

You do need to read carefully for the once-offs though

Revenue at Ascendis may be down 5% for the six months to December 2023, but that’s where the bad news stops. Gross profit margin increased by 150 basis points to 40.9% and significant cost-cutting efforts have paid off, with a substantial drop in operating costs across the board. Without adjusting for once-offs, operating profit came in at R47.6 million vs. a loss of R122 million in the comparable period.

That’s quite the swing, isn’t it?

The group goes on to explain that there were major line items like a VAT provision reversal of R43.1 million and an accounting gain of R27.1 million. There were also various transaction costs and impairments. On an adjusted basis, operating profit was R8.9 million vs. a loss of R47 million in the comparative period.

Interest paid was R5.1 million, vastly less than R50.5 million in the comparable period after all the progress was made in reducing debt on the balance sheet.

Remember, Ascendis is currently at the centre of what became a controversial potential take-private transaction. This is being spearheaded by the current CEO, which is relevant information when there’s commentary in the announcement that the company may look to raise further equity from shareholders to enable growth. This suggests that if the take-private doesn’t go ahead, the group may look to equity funding mechanisms on the public market. Some will heed this warning and others may see it as a strategy to encourage the delisting.

Either way, aside from the extensive noise around the potential deal, it’s clear that things have improved significantly at Ascendis from an operational standpoint. The group is profitable, albeit not by much once you look at the adjustments.

Dividend disappointment at Bell Equipment (JSE: BEL)

HEPS up strongly, yet the dividend has disappeared

After a couple of trading statements, there’s been much excitement around Bell Equipment. With the release of annual results though and the disappointing news of no dividend at all, the share price closed around 10% lower on the day.

A revenue increase of 32% drove a HEPS improvement of 69%. The cash flow tells an incredibly different story though, with a massive cash outflow of R437 million for the year vs. an inflow of R14 million in the prior year.

You may assume that this is related to working capital, but a deeper look reveals that this isn’t the case. You’ll find that cash generated from operations actually looked just fine thanks (with 2023 in dark blue):

The biggest swing in cash actually happened in financing activities, shown here:

The company notes that working capital investment across inventory and receivables is the primary reason why the dividend is gone. That’s a forward looking view of where the cash might go in the coming year. Based on the financials, a contributing factor to why the dividend disappeared seems to be more related to the longer term debt on the balance sheet rather than working capital.

Emira sells two properties (JSE: EMI)

Makro Crown Mines and Market Square in Plett have been sold in separate deals

Emira has decided to recycle capital by selling two properties. The first is Makro Crown Mines, disposed of for R337.5 million. The second is Market Square in Plettenberg Bay, sold for R354 million. These are two separate deals with different buyers.

The net operating income for Makro Crown Mines for the six months ended September 2023 was R14.98 million. On an annualised basis, the property has been sold on a yield of 8.9%. Market Square’s net operating income over the same period is R12.4 million, implying an annualised yield of just under 7%.

The net proceeds will be used to reduce Emira’s debt and fund new acquisitions once opportunities are identified.

In a separate update, Emira gave investors a pre-close view for the 11 months to February 2024. The overall story is that the local commercial portfolio is performing in line with expectations. It’s rather interesting to note that retail vacancies increase from 3.2% at September 2023 to 4.1% at the end of February, whereas office vacancies actually improved from 12.0% to 11.3%! For completeness, the industrial portfolio improved marginally from 0.7% to 0.6%.

Moving on to residential, this was an important period for the company as the takeover of Transcend was completed. 486 units in the residential portfolio have been disposed of during the period at a small premium to book value. A further 74 units should transfer by the end of March.

In the US-based portfolio, vacancies increased from 3.6% to 4.7%. There are some larger tenant failures that have negatively impacted results.

The loan-to-value ratio of 43.7% as at the end of February is up from 41.2% at the end of September, with the increase driven by the acquisition of the remaining shares in Transcend. That does feel a bit high to me in this environment, with the firm continuing to recycle capital and diversify the fund. Perhaps some of that capital will be used to bring debt down.

Heriot took a knock from financing costs (JSE: HET)

The distribution per share has fallen for the interim period

Property fund Heriot reported a 4.2% decrease in the distribution per share for the six months to December 2023. This is despite a 12.9% increase in net property operating income. Property funds have been hit hard by the rising interest rates, with Heriot as just one of many examples.

The retail portfolio has been the biggest source of growth, with net operating income up by a very impressive 21.2%. The Industrial property increased by 9.9%. Office and residential assets have a less pleasing story to tell. Luckily, 71% of the portfolio is retail and 19% is industrial.

Heriot is looking to increase exposure to Safari Investments, with a 48.7% direct interest and a further 10.1% held by a concert party, Thibault REIT.

The net asset value per share at Heriot increased by 21.3% from R13.02 to R15.78. The share price is R13.50.

Renergen gives a quarterly update (JSE: REN)

There’s nothing new here, but it’s still a useful summary of the past three months

Renergen releases a quarterly update to give investors a summary on the latest strategic news and the state of the financials. The fourth quarter of the 2024 financial year can count the Mahlako Gas Energy investment as the major highlight, with that party putting in R550 million for a 5.5% equity stake in the South African operating entity. The investment by Airsol has also been completed.

Although LNG deliveries resumed in February, it’s the production of helium that investors are really waiting for. The helium system integration is nearly complete, with no significant issues detected. The OEM supplier is busy with pre-checks ahead of the final performance test.

Whatever the outcome of that test, I would expect a pretty big share price move either up or down, depending on the results.

RMB Holdings finds a way to exit Divercity Urban (JSE: RMH)

The group is trying to turn assets into cash – and some aren’t as easy as others

Trying to sell a tiny stake in a private company really isn’t easy. This is generally why listed groups avoid holding such stakes in the first place. RMB Holdings is trying to turn assets into cash as part of the strategy to return value to shareholders. On more strategic holdings, it’s a lot easier. For the 7.15% stake in Divercity Urban, there probably weren’t many buyers in town.

This is why RMB Holdings has agreed to the company repurchasing shares and shareholder loan claims held in and against Divercity. The company is loss-making, so RMB Holdings didn’t get a great price here. The carrying value of Divercity in RMB Holdings’ accounts as at 30 September 2023 was R87 million. In that period, there was a fair value loss of R9.8 million. The price for this repurchase is only R50 million, so that’s a long way down from the September carrying value.

This will in all likelihood lead to another special dividend to RMB Holdings shareholders once the deal is completed.

Workforce suffered major headline losses (JSE: WKF)

This is despite an increase in revenue

Revenue at Workforce Holdings increased by 4% for the year ended December 2023. Despite this, EBITDA came down sharply from R201.1 million to R151.3 million off a revenue base of R4.5 billion. Those are very skinny margins indeed.

It looks much worse at HEPS level, with a drop from 46.8 cents to a headline loss of 13.3 cents per share. There’s no final dividend, which is to be expected when there are losses.

The revenue increase was simply no match for margin erosion and increases in overheads. The company put steps in place to reduce costs, but they were only completed by September 2023. This suggests that a more palatable 2024 may be on the cards.

In general, a low margin company in a volatile market like South Africa is always going to be a rollercoaster.

At York, the assets go up in value and HEPS comes down (JSE: YRK)

The share price has been on a steady slide since 2022

York Timber has released results for the six months to December 2023. Revenue fell 2% and cash generated from operations was down R111 million, so it was another difficult period for the group. HEPS fell sharply from 13.27 cents to 4.67 cents. Core earnings per share deteriorated from a loss of 2.62 cents to 10.06 cents.

Despite the financial performance dropping faster than the trees being cut down for processing, the biological asset value increased by 5%. It strikes me as such a theoretical concept, as we can quite clearly see that extracting value from the trees is far harder than the valuation would otherwise suggest.

There’s no dividend for this interim period, just like in the last period as well.

The outlook isn’t a source of encouragement either, with York noting that the lumber market is expected to remain weak in terms of demand and pricing.

Little Bites:

  • Director dealings:
    • With the share price at Quantum Foods (JSE: QFH) continuing to run amok from speculation (now up to R13.50), the company announced that director Hendrik Lourens has agreed to buy shares worth R1.26 million for either R9.00 or R10.00 depending on which tranche you look at. Director Wouter Hanekom, acting through an associate, bought R1.7 million worth of shares at R10 per share.
    • Following the release of the annual results, the chairman of Kore Potash (JSE: KP2) will subscribe for shares worth $150k. In those results, the company confirmed that it is still targeting the signing of full EPC documentation in Q2 2024, with funding required to help the company reach that point.
  • If you’re closely following the MC Mining (JSE: MCZ) offer by Goldway and all the to-and-fro with the independent board, then you’ll want to check out the fourth supplementary bidder’s statement released by Goldway. They are focusing on trying to discredit the work of the independent expert here, which of course underpins the board’s decision to recommend that shareholders do not accept the offer. There’s far too much detail to go into here. If you hold shares in MC Mining, you need to read everything carefully.
  • Jubilee Metals (JSE: JBL) released an update on its copper projects and expansion of chrome operations. On the copper side, International Resources Holding in Abu Dhabi has exercised its right to proceed with the formation of the joint venture for the implementation of the Waste Rock Project. At the Roan Project, ramp-up is expected to commence in April 2024. At Project Munkoyo, initial deliveries of copper ore to the Sable Refinery are expected in September 2024. Moving to local chrome and PGMs, the chrome tolling agreements have been extended to February 2027 and the construction of Thutse’s second chrome processing module is on track to commence in August 2024.
  • Zeder (JSE: ZED) has appointed PSG Capital and Rabobank as co-advisors to consider any approaches from third parties regarding the investment in Zaad Holdings. This may or may not lead to a formal process to find a buyer. Zeder also confirmed that third parties have made approaches regarding the Pome Division that was excluded from the disposal of Capespan.
  • enX (JSE: ENX) announced that the urgent application by Inhlanhla Ventures to try and interdict the general meeting for the disposal of Eqstra has been withdrawn. This means that the meeting will go ahead on 3 April as planned.
  • Europa Metals (JSE: EUZ) released results for the six months to December 2023. As this is a resource development company, it shouldn’t really shock you that there are net losses. They came in at A$248k, which is a lot better than A$1.2 million in the comparable period. The company is developing the Toral project in Spain. Of critical important is the funding arrangement with Denarius, which gives that company the option to acquire up to 80% in the Toral project. If you’re investing in junior mining, you need to understand that massive dilution of your equity interest is par for the course, unless you have very deep pockets to help fund the development.
  • DRA Global (JSE: DRA) released its annual report and announced a dividend of A$0.11 per share for the year ended December 2023. This is the company’s first dividend since listing. It works out to 136.35 cents per share. For reference, the share price is R22 at time of writing.
  • The Foschini Group (JSE: TFG) has announced the appointment of Ralph Buddle as CFO, which relieves Anthony Thunström from the role as executive financial director in addition to being CEO. Buddle was previously interim CFO at Oceana Group and has been in an executive role at The Foschini Group since September 2023.
  • Stefanutti Stocks (JSE: SSK) has reached agreement with its lenders to extend the capital repayments profile of the loan as well as its duration to 30 June 2025. This is part of the group’s restructuring plan.
  • Sanlam (JSE: SLM) implemented a B-BBEE deal in 2019 that ended up being badly impacted by COVID. These highly leveraged structures depend on dividends and significant share price growth to be successful. When those things don’t happen, they end up underwater. This is what has happened here, with Sanlam looking to buy the shares back from that structure at a nominal value. It’s even worse than that really, as Sanlam had to step in to buy the preference shares from Standard Bank that funded the deal. It’s an expensive outcome for Sanlam shareholders.
  • Wesizwe Platinum (JSE: WEZ) does not have any revenue at the moment. The auditors have also made it clear that there are uncertainties around the company’s ability to continue as a going concern, with the group’s existence dependent on ongoing support from the majority shareholder and a willingness not to call the current shareholder loans. Although the loss per tax for the year came down significantly from R134 million in the prior period to R25.2 million in 2023, it was still a substantial loss.
  • Randgold & Exploration Company (JSE: RNG) is focused pursuing legal claims and limiting operational costs. It’s not the most inspiring company vision in the world, but somebody has gotta do it. The company reported an operating loss of R30.6 million for the year ended December 2023, worse than R22 million in the prior year.
  • SAB Zenzele Kabili (JSE: SZK) released its annual report. The net asset value has increased from R2.26 billion to R2.67 billion, a direct result of a strong finish to the year for the AB InBev share price.
  • In order to meet B-BBEE requirements under ICASA licensing provisions, Telemasters (JSE: TLM) is disposing of 30% in major subsidiary Catalytic Connections to the Sebenza Education and Empowerment Trust. This is a Category 2 transaction, so there is no shareholder vote on this. A more detailed announcement with terms of the deal will be released in due course.
  • Chrometco (JSE: CMO) is an absolute mess that is suspended from trading. The reporting is running behind schedule and the company is struggling to appoint auditors because subsidiaries are in business rescue. On top of all this, the business rescue practitioner in on subsidiary is even suing another subsidiary! It sounds like only the lawyers are making money here, with the creditors meeting for the business rescue plan to be held on 11 April 2024.
  • Afristrat Investment Holdings (JSE: ATI), perhaps the most broken company of all on the JSE, would really like to voluntarily liquidate itself. It can’t though, as a creditor is trying to liquidate it first. Yes, really.
  • Deutsche Konsum (JSE: DKR) has basically zero liquidity on the JSE and has announced an intention to drop this listing. Still, in case you are one of the few local shareholders, it’s important for you to know that the company has sold off a large portfolio of properties to try reduce debt and is negotiating with bondholders to extend debt maturities.

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

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

Exchange-Listed Companies

Deutsche Konsum REIT-AG has disposed of a sub-portfolio of 14 retail properties with an annual rent of c. €5,5 million. The properties were sold at a discount of 3.8% on current carrying amounts. The funds will be used in full to repay bank and bond liabilities.

Sirius Real Estate is to expand its UK portfolio with the acquisition of Vantage Point Business Village, a multi-let business park in Gloucestershire for a total acquisition of £48,24 million. Through the purchase, Sirius will add more than 1,5 million square feet of space to its BizSpace portfolio, of which 1 million square feet is industrial space. The acquisition has been made using the proceeds of the company’s £147 million capital raise achieved in November 2023.

MTN has accepted an offer from Africa-focused telecommunications company, Telecel, to acquire its units in Guinea-Bissau and Guinea-Conakry. The disposals are part of MTN’s portfolio optimisation strategy and investment in digital platforms and fintech offerings. Financial details were undisclosed.

Following the failure to get the deal with Alma Trading CC across the line, Accelerate Property Fund has announced the sale of Cherry Lane Shopping Centre in Pretoria to Cadastral Assets for a cash consideration of R60 million. Accelerate purchased the property as part of a retail portfolio acquired in 2014.

CA Sales, through its wholly owned subsidiary CA Sales Investments, is to acquire a 49% stake in Roots Sales from Mass Market Distribution Holdings. The acquisition is part of the company’s channel broadening strategy and has the option to increase its shareholding in the future. Roots has an integrated market offering that combines all commercial requirements, including sales, merchandising, auditing and delivery solutions into a single interlocking and dynamic service enterprise specialising in the main market. Financial details were undisclosed.

In August last year Nampak announced it would undertake to implement various turnaround initiatives including an asset disposal plan to raise c.R2,6 billion. This week the group announced the disposal of its liquid cartons business in South Africa and its businesses in Zambia and Malawi for a total consideration of R450 million. The assets have been acquired by a consortium represented by RMB Corvest (FirstRand) and Dlondlobala Captial.

After several months of cautionary announcements and speculation around Telkom’s sale of its mast and towers business Swiftnet, the company has finally released further details. Towerco Bidco, a consortium comprising an infrastructure fund managed by a subsidiary of Actis and a vehicle owned by Royal Bafokeng Holdings (RBH) will acquire Swifnet. As its BEE partner, RBH will hold at least a 30% of the acquiring entity. The aggregate consideration to be paid to Telkom will be calculated with reference to an enterprise value of R6,75 billion.

Hot on the heels of the release of details on the listing of WeBuyCars, Transaction Capital has announced the disposal of Nutun Australia (NAH) for A$58,3 million. The sale, to Australian alternative investments company Allegro Funds, is in line with Transaction Capital’s announcement that it was reviewing its operations to reposition or dispose of non-core assets. Nutun International has entered into a strategic partnership with NAH and its new shareholder, through the on-going provision of customer and debtor engagement support services and associated technologies to NAH clients from South Africa.

Copper 360 has entered into a memorandum of understanding with Far West Gold Recoveries (FWGR) in terms of which the DRDGold subsidiary will conduct a due diligence (DD) on Copper 360’s copper tailings dams over a 12-month period. The DD will determine the viability of the copper dumps which may result in the parties entering into a joint venture agreement, with FWGR acquiring a 50% interest and becoming the operator of the dumps.

Telemedia, a subsidiary of the Rex Trueform Group, is to acquire a number of properties from Telelet, a company owned by The Bretherick Family Trust. The R51,5 million acquisition of the properties is seen as a strategic opportunity for Telemedia which currently partially occupies the properties for operational purposes. Additional rental revenue from remaining portions will diversify Rex Trueform’s existing portfolio of properties.

Actis has exited its investment in Octotel and RSAweb to a consortium led by African Infrastructure Investment Managers (Old Mutual). AIIM is investing alongside STOA, an impact fund in infrastructure and energy and Thebe Investment Corporation. Octotel is a key player in the fibre-to-the-home and business markets in the Western Cape.

Zeder Investments has received several approaches from third parties regarding the company’s portfolio investments, namely the Pome Division, previously in the Capespan Group and Zaad Holdings. Zeder will consider these approaches and will, it says, embark on formal processes where appropriate though this may take several months.

Unlisted Companies

Medu Capital has acquired a majority stake in Optron Group, a distributor, supporter and integrator of cutting-edge technology brands. The strategic partnership, through its Medu IV fund, will aim to foster innovation, drive market expansion and deliver value to both customers and stakeholders.

RH Managers, a local private equity firm headquartered in Johannesburg, has invested R270 million, split evenly between debt and private equity, into Herolim Private Hospital, a healthcare facility in Mthatha.

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

Weekly corporate finance activity by SA exchange-listed companies

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

Adcorp has repurchased 73,701 shares for a consideration of R295,798 in terms of its Odd-lot Offer, representing 0.07% of the company’s total issued share capital.

Kore Potash plc has advised on the conversion of Convertible Loan Notes into 109,865,053 new ordinary shares in the company at a price of 0.38 pence per new ordinary share. Following the issue of the new shares, the total issued share capital of the company will consist of 4,229,532,173 ordinary shares.

Deutsche Konsum REIT-AG has announced it is to withdraw its secondary listing on the JSE. The company, which has a primary listed on the Frankfurt Stock Exchange, listed on the JSE in March 2021. The intention was to attract interested South African investors. However, despite various initiatives, engagements with investors have not yielded the desired results from a local market perspective. Further details will be announced in due course.

Oando plc, which has a secondary listing on the JSE, has had the trading of its shares suspended. This follows the company’s failure to comply with the JSE Listings Requirements by not publishing its year-end results for 2022 and the interim results for 2022 and 2023.

A number of companies announced the repurchase of shares.

British American Tobacco has commenced its programme to buyback ordinary shares using the £1,57 billion net proceeds from its sale of ITC shares. The company will buy back £1,60 billion of its ordinary shares – £700 million in 2024 and the remaining £900 million in 2025. This week the company repurchased a further 1,76 million shares at an average price of £23.71 per share for an aggregate £4,17 million.

Tharisa plc, dual listed on the JSE and London Stock Exchange, is to undertake a US$5 million general share repurchase programme during the period 26 March to 21 February 2025. The repurchase will represent up to 10% of the ordinary shares in issue.

Hammerson plc has, in accordance with the terms of its share repurchase programme announced on 12 March 2024, this week purchased a further 857,634 shares at a volume weighted average price of 26,92 pence, for an aggregate £232,393.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 18 to 22 March 2024, a further 3,994,681 Prosus shares were repurchased for an aggregate €109,8 million and a further 315,210 Naspers shares for a total consideration of R976,9 million.

Five companies issued profit warnings this week: Gemfields, Wesizwe Platinum, Salungano, Randgold & Exploration and Balwin Properties.

Three company either issued, renewed, or withdrew cautionary notices this week: Telkom SA SOC, Pick n Pay Stores and AYO Technology.

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

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

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

DealMakers AFRICA

Altona Rare Earths has entered into an agreement with Sustineri Group and other shareholders to acquire the entire issued share capital of Phelps Dodge Mining (Zambia), the registered holder of Large Scale Exploration Licence 21403-HQ-LEL located in the Mufumbe District in Zambia. The consideration will be settled as follows – US$40,000 on completion and US$150,000 12 months after completion payable in Altona shares.

AI-powered edtech Sprints.ai, has raised US$3 million in bridge funding in a round led by Disruptech Ventures and includes EdVentures, CFYE and others. The Eqyptian startup, launched in 2020, is looking to use the funding to scale its end-to-end platform that bridges the tech talent gap.

The COMESA Competition Commission has approved the 100% acquisition of Kenyan dairy company Highland Creamers by Uganda’s Lato.

Kenya’s BasiGo announced a US$3 million equity investment by Toyota Tsusho Corporation’s CFAO to accelerate the production and delivery of electric buses in Kenya and Rwanda.

British International Investment has provided a US$100 million finance facility to the Eastern and Southern African Trade & Development Bank (TDB Group) which will assist the group with providing financial support to local businesses and financial institutions in several key African markets.

Flour Mills of Ghana has acquired a stake in Ghana’s oldest animal feed producer, Agricare, from Injaro Agriculture Capital Holdings for an undisclosed sum. The sale represents a full exit from Agricare for the fund which is managed by Injaro Investments.

The International Finance Corporation and other lenders, including African Development Bank, Bangkok Bank, British International Investment, Citibank, DEG, DZ Bank, Emerging Africa Infrastructure Fund (EAIF), Rand Merchant Bank, FMO, Export-Import Bank of India (India Exim Bank), Export-Import Bank of Korea (KEXIM), the Standard Bank Group, Standard Chartered Bank, and the United States International Development Finance Corporation (DFC) have announced a US$1,25 billion financing package to Indorama Eleme Fertilizer and Chemicals in Nigeria to ramp up its fertilizer production and develop a port terminal for exports.

CANAL+ Group has acquired a stake in Marodi TV, a Senegalese production company. Financial terms were not disclosed.

Many Peaks has announced an agreement to acquire a 100% interest in the Turaco Gold and Predictive Discovery Ltd joint venture [CDI Holdings] which holds the right to acquire an 85% interest in four mineral permits in Côte d’Ivoire (including the Ferke Gold Project). The purchase will be settled through the issue of 5,617,978 fully paid ordinary shares in Many Peaks.

DealMakers AFRICA is the Continent’s M&A publication.
www.dealmakersafrica.com

Africa: from basket case to breadbasket

Michael Avery
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Africa: from basket case to breadbasket

I stopped an old man along the way, hoping to find some old forgotten words or ancient melodies. He turned to me as if to say, “Hurry boy, it’s waiting there for you.” ~ Africa by Toto

In the heart of Africa’s transformative journey towards becoming a net exporter of food, a new chapter is being written, guided by the winds of change brought by the African Continental Free Trade Area (AfCFTA). The narrative is set for the agricultural sector to emerge as the protagonist in this story, igniting Africa’s domestic processing capacity and ushering in a denouement of economic rewards. Among the lead authors of this fresh new story is Amos Dairies, the latest venture under the strategic wing of EXEO Capital’s Agri-Vie Fund II.

Agri-Vie Fund II, a US$150m food and agri-business investment juggernaut managed by EXEO Capital, is strategically positioned to leverage the expansive landscape of sub-Saharan Africa. From the farm to the table, this fund spans the entire food and agribusiness value chain, making it a dynamic force in shaping the future of agriculture across the continent.

Paul Nguru, Partner at EXEO Capital, sheds light on the latest development, where Agri-Vie Fund II earmarks $10m for Amos Dairies’ next strategic growth phase. This injection of capital positions Amos Dairies as a key player in Uganda’s dairy sector, standing tall as the largest milk processor in the country, and the sole processor of casein in sub-Saharan Africa.

“Amos Dairies has not just secured a foothold in the market; it has become a standout player in the value-added African dairy sector. Through our Agri-Vie funds, we’ve successfully invested in other dairy processors across the continent. This recent investment is a natural progression, allowing us to build on our experience and extend the Fund’s reach into Uganda and beyond,” remarks Nguru.

Amos Dairies, an African success story with vast potential, currently manufactures a diverse array of nine products, ranging from ghee and butter to casein and various milk powders. The production of casein, a crucial milk protein with a global market value of $2,7bn in 2020, gives Amos Dairies a significant competitive edge.

Nguru highlights Amos Dairies’ strategic positioning, with around 90% of its revenue derived from exports to markets such as Egypt, Kenya, India, and America. This not only provides a natural hedge to foreign exchange risks, but also positions the dairy giant to tap into dollar revenue streams, aligning with the interests of both Amos Dairies and EXEO’s diverse portfolio.

However, what sets Amos Dairies apart is not just its product diversification and export success; it’s the positive impact it has on smallholder farmers. Currently supporting 1,600 farmers, Amos Dairies plans to grow its workforce by 80% over the next five years, creating 140 new jobs. Doubling milk volumes during this period will directly benefit approximately 3,200 smallholder farmers.

Nguru emphasises the centrality of impact in their investment strategy, stating, “Investing in African food and agribusiness companies is about nurturing prosperity. These enterprises represent windows of opportunity, fostering sustainable development on the continent. While economic viability is paramount, we deeply appreciate the transformative impact such investments can have.”

As part of EXEO Capital’s portfolio, Amos Dairies gains more than just financial support. EXEO will provide governance support, opening doors to new markets and customer bases through their extensive networks. Over the next five years, potential partnerships with EXEO’s existing dairy portfolio companies and the development of value-added products are on the horizon.

EXEO Capital aims to guide Amos Dairies strategically, enhancing corporate governance, optimising operations, and fortifying environmental and social governance practices. Mal Beniston, Chair of the Board at Amos Dairies Limited, echoes the sentiment, emphasising the shared commitment to agricultural and agribusiness development across the continent.

In this transformative story, EXEO Capital’s trust in Amos Dairies’ vision propels them to push boundaries in dairy production, while uplifting communities and fostering economic resilience. As the investment arc unfolds, collaboration, growth and a positive impact on Africa’s agricultural landscape are the supporting cast, hopefully changing the narrative from basket case to breadbasket.

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

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

The benefits of due diligence in drafting sale and purchase agreements for M&A deals

Thandiwe Nhlapho and Roxanna Valayathum
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The benefits of due diligence in drafting sale and purchase agreements for M&A deals

In mergers and acquisitions (M&A), acquiring a business or an asset without conducting a due diligence investigation (DDI) substantially increases the risk, particularly to the acquirer. Not only is the DDI important to understand the nature of the business, its affairs, and its assets and liabilities, conducting a DDI on the company to be acquired (Target Company) may inform the negotiation and/or drafting of the sale and purchase agreement for shares or business (Sale Agreement), particularly in relation to the purchase consideration, suspensive conditions, warranties and indemnities, and post-closing obligations.

An M&A transaction often requires a financial, legal and tax DDI, typically to identify any red flags which could be deal breakers or diminish the value of the Target Company, which would impact the purchase consideration payable under the Sale Agreement. These red flags will determine whether or not the acquirer continues to negotiate the transaction and subsequently conclude the Sale Agreement with the owner/s of the Target Company or business (Seller/s).

Notwithstanding the red flags, the acquirer may still be interested in the transaction, provided that the risks identified can be mitigated through, among other things, (i) an adjustment to the purchase consideration; (ii) the Sale Agreement being subject to suspensive conditions, i.e. conditional on certain events taking place prior to the Sale Agreement becoming effective; (iii) warranties and indemnities being given by the Seller in favour of the acquirer; and (iv) post-closing obligations of the Target Company.

This article will provide an overview of the way in which a legal DDI will highlight the aspects which are vital to protect the acquirer’s interests in a Sale Agreement.

ADJUSTMENTS TO THE PURCHASE CONSIDERATION

The DDI may be beneficial in negotiating the purchase consideration. For example, during the DDI, a penalty payable to a regulatory authority as a result of a breach of environmental laws or the termination of a material supply agreement with preferential terms which, if replaced, may increase the overall expenses of the Target Company, may be identified. In such instance, the acquirer may wish to negotiate:

• a discount to the purchase consideration; or
• structuring the payment mechanism in the Sale Agreement in a way which mitigates the financial exposure to the acquirer, such as:

(i) retaining a portion of the purchase consideration in escrow pending settlement of such penalty or conclusion of a renewal to such contract; or
(ii) requesting a guarantee to be issued by a reputable bank or the parent company of the Seller in favour of the acquirer as a suspensive condition, pending settlement of such penalty or conclusion of a renewal to such contract.

SUSPENSIVE CONDITIONS

In order to ensure that the deficiencies identified in relation to the Target Company are dealt with prior to the implementation of the acquisition, to the extent possible, the acquirer will include certain suspensive conditions in the Sale Agreement.

For example, the DDI will reveal material agreements between the Target Company and third parties (usually lenders, customers or clients, and suppliers) in terms of which prior written approval or notification is required for the proposed transaction. For instance, the proposed transaction may trigger a change of control which requires approval of, or notification to a counterparty in the case of a sale of shares, or consent for assignment in the case of a transfer of business. Such approvals/consents and notifications ought to be included in the Sale Agreement as suspensive conditions. Similarly, it may be discovered during the review of accreditations, licences or registrations that regulatory approval from a regulator or governmental body is required prior to the implementation of the Sale Agreement.

In addition to approvals or notifications, although not always ideal for deal certainty, and especially when there is a need to close the deal expeditiously, there could be documents or information which the acquirer requires to consider which may not be available during the period of the due diligence, and these can be included in the suspensive conditions. Further, during the DDI, it may come to light that certain agreements would need to be renewed or would terminate as a result of the M&A transaction.

The renewal of, or entry into such agreements (such as a lease agreement) on terms and conditions acceptable to the acquirer may be included as a suspensive condition, so as to ensure the smooth operation of the Target Company or business post implementation of the Sale Agreement.

Where non-compliances have been identified during the DDI, the acquirer may agree for regularisation to be a suspensive condition if the Seller is not prepared to indemnify the acquirer for any claims which may occur as a result of such non-compliance. The suspensive condition will provide the Seller with the opportunity to rectify such non-compliances or irregularities prior to the M&A transaction becoming effective.

WARRANTIES AND INDEMNITIES

If the acquirer cannot ascertain certain information during its DDI, and the seller cannot provide confirmation, for example, that there is no threatened litigation against the Target Company, the acquirer may request that the Seller warrants this position. If not true or correct, the acquirer can take some comfort in bringing a claim for damages for a breach of the warranty. If the Seller has negotiated a limitation of liability, the acquirer must consider this limitation in light of the potential risk and financial magnitude posed by the risks identified, or which may potentially arise.

The acquirer may also request indemnification in the Sale Agreement against potential risks identified in the DDI. For instance, the Target Company may be involved in a legal dispute where it may or may not be successful. In another instance, statutory non-compliance may be identified in the DDI where no claim or action has been brought. If the acquirer is indemnified by the Seller, the Seller will recover its loss on a Rand-for-Rand basis when claiming under an indemnity, provided that this is permitted by the wording of the Sale Agreement.

Legally, indemnities provide benefits that warranties do not, and one may be appropriate over the other in the context of the Sale Agreement and the negotiations. However, both are important for mitigating risks identified during the DDI.

CONCLUSION

While the costs for conducting a DDI may appear to be prohibitive, such costs are a justifiable expense when considering the potential legal, financial and reputational risks associated with acquiring shares in a Target Company, or the business of a Seller, ill-informed and unprepared.

Understanding the importance of a DDI and how to utilise its findings offers a greater chance of a successful M&A transaction for all parties involved.

Thandiwe Nhlapho is a Senior Associate and Roxanna Valayathum a Director in Corporate & Commercial | Cliffe Dekker Hofmeyr

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 (Balwin | Burstone | CA Sales Holdings | Datatec | Metair | Momentum | Old Mutual | PPC | SA Corporate | Sasfin | Sirius)

The Finance Ghost
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Ghost Bites (Balwin | Burstone | CA Sales Holdings | Datatec | Metair | Momentum | Old Mutual | PPC | SA Corporate | Sasfin | Sirius)

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

Balwin is really struggling in this environment (JSE: BWN)

Apartment sales have plummeted

This isn’t a good time to be trying to sell apartments to middle-income South Africans. Not only are they getting obliterated by inflation on things like cars, but higher interest rates are making it really difficult to justify buying property vs. just renting it.

This is why Balwin’s HEPS for the year ended 29 February 2024 is down by between 45% and 51%. The problems start right at the top, with apartment sales down by a whopping 32%. Gross margin on apartments also fell from 27% to 25%. Due to growth in the annuity business portfolio, now contributing 5.5% of group revenue, total group gross profit margin has remained in line with the prior year. Read that carefully. Total margin, not total gross profit.

Balwin did its best to reduce costs under the circumstances, but it was nowhere near enough. The pressure has also continued to the end of the year, with only 530 forward sold apartments vs. 870 at the end of the last financial year.

The balance sheet looks fine for the time being. That doesn’t mean that troubles can’t come down the line though. The share price has lost roughly a third of its value in the past 12 months.

Burstone’s distributable income per share to inch higher (JSE: BTN)

A strong second half has saved the full-year result

Burstone Group released a pre-close update for the year ending 31 March 2024. It’s exceptionally detailed, so I’ll just touch on some highlights here. This is an interesting property fund, with 55% of assets offshore and a lot of progress made in managing third-party capital. The fund recently internalised its management company at great overall cost, which obviously leads to annual management fee savings on the income statement.

The second half of the year saw growth in distributable income per share of between 6% and 8%. This takes the full-year performance to between 0% and 2% higher, which shows how tough the first half of the year was. The European business was the star of the show for the second half.

Even over the full year, the South African portfolio could only deliver like-for-like property net income growth of 1% to 2%. In contrast, the European business managed growth of 6% to 7%. The European result in particular was then impacted by higher funding costs, so earnings only grew by between 1% and 2% in euros.

The loan-to-value is expected to be 42% to 43%, which is higher than anticipated due to various capex and investment activities. Assets identified for disposal should drop this by between 300 and 500 basis points.

2023 was rather magnificent for CA Sales Holdings (JSE: CAA)

You won’t see growth like this very often

CA Sales Holdings isn’t some kind of frothy tech company that has suddenly shot into profitability. In fact, the group is pretty simple. The business model is to help FMCG producers reach their clients through retail networks. Managing shelf presence is a real thing and CA Sales does it very well.

The results for the year ended December 2023 speak for themselves. Revenue increased by 19.4%, operating profit was up 40.7% and HEPS was 25.3% higher at 97.97 cents for the year ended December 2023. The final dividend was 27.4% higher at 19.56 cents.

Despite such strong growth in 2023, the group is confident of its positioning and further growth prospects for 2024. Across organic and inorganic opportunities (like the recently announced acquisition in South Africa), CA Sales can keep generating solid earnings growth.

Datatec’s growth was spearheaded by Westcon International (JSE: DTC)

Full details will only be released in May

Datatec released a trading update for the year ended 29 February 2024. It focuses only on revenue, which will be up 5.8% year-on-year. The company reports in dollars, so that’s a hard currency growth rate.

The Westcon International division is the largest (roughly two-thirds of revenue) and fastest growing part of the group, with revenue up 7.6% Logicalis International struggled at 1.5% growth, although the second half of the year was an improvement on the first half. Logicalis Latin America grew 3.9% for the year but struggled in the second half relative to the first half.

Metair has released its 2023 financials (JSE: MTA)

This period shows a strong swing back into profitability

After a run of exceptionally bad luck, Metair is at least back in the green. A headline loss per share of 17 cents in the year ended December 2022 is now firmly in the rear-view mirror, with HEPS of 135 cents in 2023 to scrub away that memory.

This improvement was driven by a 14% uptick in revenue and a 12% increase in EBITDA. Once equity-accounted earnings from associates are included, the EBITDA line moves up 86% year-on-year. I must point out that Hesto’s share of equity losses is not brought into the income statement as the group has no obligation to fund those losses. This is the key difference vs. the way a subsidiary is accounted for, where losses are consolidated. Hesto’s losses are considering in debt covenant calculations, though.

Speaking of debt covenants, the group is within agreed banking covenant levels even with the challenges at Hesto. It would’ve certainly helped matters that cash generated from operations jumped from R151 million to nearly R1.2 billion.

IFRS 17 is all over the Momentum numbers, but perhaps following the dividend is the answer (JSE: MTM)

Cash is cash, you know

The insurance industry’s recent results have all been severely affected by a major new accounting standard. Despite efforts to restate the comparable period, this always makes it really hard to know what is actually going on.

For example, we now have a strange scenario where Momentum Metropolitan reported an improvement in return on equity for the six months to December 2023 (from 14.9% to 17.8%), yet a deterioration in return on embedded value per share from 15.6% to 12.0%.

In these situations, it’s usually more useful to read through the announcement to figure out the flavour of what’s going on. For example, new business margins are not high enough and the group is trying to address this. On the plus side, Momentum Insure’s claims ratio has improved despite flooding in the Western Cape, so management interventions there have helped.

Sometimes, the cash tells the best story. With 20% growth in the interim dividend and R500 million allocated for further share repurchases, the group clearly feels confident in the business.

Old Mutual’s metrics head in the right direction (JSE: OMU)

The total dividend is up 7% for the year

Old Mutual has released results for the year ended December 2023. Thanks to key drivers like Life APE sales (up 17%) and gross flows (up 14%), the results look good. Value of new business increased by 37%, with a 10 basis points improvement in the margin. Gross written premiums were up 14%, as Old Mutual Insure had a solid year as well.

Notably, there are still net client cash outflows. The economic conditions are causing many problems for people and this makes saving extremely hard (and in most cases, impossible). This is obviously a worry.

Still, return on net asset value improved by 170 basis points to 11.1% and HEPS was 28% higher. Adjusted HEPS increased by 21%. The total dividend per share was only 7% higher, perhaps pointing to some caution about the road ahead. I must also remind you that IFRS 17 has impacted all of these numbers, except the dividend.

Despite the obvious economic challenges in South Africa, Old Mutual is still moving ahead with its plan to build a bank. It will be very interesting to see how that works out.

Zimbabwe is the highlight for PPC (JSE: PPC)

South Africa and Botswana remain subdued

PPC has released an operational update for the ten months ended January 2024. The important starting point is that numbers exclude CIMERWA in Rwanda, as that business was sold in January 2024 for $42.5 million.

For the ten months to January, revenue excluding CIMERWA grew by 27.6%. This was firmly driven by Zimbabwe rather than South Africa and Botswana. Group EBITDA margin was 13.6%, well up on 9.9% in the comparable period. This is significantly lower than the 15.3% achieved in the first six months of the year though, with weaker performance in South Africa as one of the major factors alongside other issues.

Free cash inflow of R364 million for this period (excluding dividends from Zimbabwe) is higher than R242 million in the comparable period. A timing delay for a major capex project is one of the factors to keep in mind here.

Digging deeper, South Africa and Botswana (which is now a cash positive segment after the proceeds from the CIMERWA disposal were received) saw volumes decrease by 4%. Price increases more than offset this decline, with revenue up 6% for the 10 months and EBITDA margin up from 10.7% to 11.4%.

The materials business still reported negative EBITDA but the losses are far more manageable, coming in at negative R7 million vs. a loss of R60 million in the comparable period. The disappointment is that EBITDA was positive R14 million at the six-month mark, so there’s been a major negative swing since then.

Zimbabwe is the real star here, with volumes up 41% and EBITDA margin expanding from 18% to 22%. The drop from 25% in the interim period was driven by the high cost of clinker imports as local production couldn’t meet demand levels. The business declared dividends of $4 million in July 2023 and $7 million in November 2023, with another dividend expected in July 2024.

With the balance sheet in vastly better shape, PPC will either continue with dividends or implement a share repurchase programme if there are no corporate investment opportunities available.

SA Corporate had a better second half to the year (JSE: SAC)

Full year distributable income is down, though

SA Corporate Real Estate has released results for the year ended December 2023. They reflect a 4% decline in distributable income for the full year. For the second half though, distributable income increased by 5.5%.

This is despite net property income being 4.6% higher on a like-for-like basis.

The distribution of 23.18 cents per share is 4% lower than in the comparable year, tracking the decrease in distributable income.

The loan-to-value ratio of 41.9% is up from 38.1% and looks to be on the high side, especially as the weighted average cost of funding (including of swaps) has pushed higher from 9.0% to 9.4%. This does no favours for distributable income.

Sasfin’s rough year continues (JSE: SFN)

The share price is down 45% this year and results look poor

In 2023, banks either did very well (like Standard Bank) or reasonably well (like Nedbank). There aren’t any others I can think of that watched HEPS get smashed, yet Sasfin’s HEPS for the six months to December fell by 62.4%.

The cost-to-income ratio has now moved 131 basis points higher to 83.79%, which is far too high. Return on equity is 2.91%. It was 8.09% in the comparable period and I joked about how a fixed deposit gives a better return. We are now well below money market. If this trend carries on, perhaps just keeping your money in a current account would be a better return on equity.

If you’re looking for the problem in this particular period, a 55 basis points uptick in the credit loss ratio to 1.72% holds the answer for you, especially when combined with a 1.8% decline in gross loans and advances.

Asset Finance grew operating profit by 10.5% to R101.1 million, coming through as the highlight in the group. The Business and Commercial Banking division recorded an operating loss of R58.4 million, which is even worse than the loss of R50 million in the comparable period. Sasfin Wealth’s operating profit fell slightly to R59.4 million.

Somewhere inside Sasfin is a a potentially decent financial services business. Perhaps the disposal of Capital Equipment Finance and Commercial Property Finance to African Bank will help reveal it.

Sirius makes an acquisition in the UK (JSE: SRE)

A multi-let business park in Gloucestershire is the target

Sirius Real Estate raised £147 million in November last year and has been busy spending it. There have already been three acquisitions in Germany announced this year, coming in at a total of €53.75 million. The latest deal is an acquisition in the UK for £48.25 million, or €56.4 million. The UK deal is thus larger than the three German deals combined.

The target is a multi-let business park in Gloucestershire and the net initial yield for the acquisition is 10.2%. The property is 81% occupied and Sirius has plans in place to improve the economics of the property. Sirius has also acquired a solar business from the seller that supplies most of the electricity on site.

In a separate announcement, Sirius noted the disposal of an industrial park in Germany for €40.1 million on a net initial yield of 5.7%. The selling price is a 6% premium to the last reported book value.

I can’t fault Sirius here on selling high and buying low, albeit in two different markets. This the kind of dealmaking that does wonders for the valuation multiple.

Little Bites:

  • Director dealings:
    • To make you feel poor, Mark Sorour (a director of Naspers JSE: NPN) sold shares worth R111 million. He also sold shares in Prosus (JSE: PRX) worth R3.8 million.
    • There are significant purchases by two directors of Remgro (JSE: REM), coming in at nearly R3.4 million worth of shares.
    • An associate of Wouter Hanekom, a director of Quantum Foods (JSE: QFH), has continued buying up shares. Purchases worth R1.15 million have been executed and there are agreements in place for another R1.19 million.
    • At Sibanye-Stillwater (JSE: SSW), the Chief Regional Officer of the Americas bought shares worth $45k.
    • A trust associated with the chairman of Stor-Age (JSE: SSS) sold shares worth R126k. The announcement calls this a “portfolio rebalancing” but I always completely ignore that. It’s a voluntary decision to sell, hence it’s a sale.
  • Pick n Pay (JSE: PIK) has released a further cautionary announcement, confirming that the two-step recapitalisation plan (a planned rights offer of up to R4 billion in mid-2024 followed by an IPO of Boxer on the JSE towards the end of the year) is making progress. More details will be provided in late May at the results presentation.
  • Copper 360 (JSE: CPR) has signed a memorandum of understanding with Far West Gold Recoveries (a subsidiary of DRDGOLD (JSE: DRD)) for a period of 12 months to conduct a due diligence on copper tailings dams at various operations. If all goes well, the DRDGOLD subsidiary would look to acquire 50% in the copper tailings dams. We know that DRDGOLD has been looking for new asset opportunities, so this is a particularly interesting development.
  • Right at the bottom of the announcement dealing with results from the AGM, the CEO of Hudaco (JSE: HDC) gave commentary on trading for the first quarter of the new financial year. This includes the holiday months of December and January, so treat it with caution. The overall feeling is that the engineering consumables business has continued its good form and the consumer-related products are still under pressure. The alternative energy business is overstocked and hasn’t corrected. Pricing is under a lot of pressure in that side of the business, which is luckily only 5% of group turnover.
  • Astoria Investments (JSE: ARA) released results for the year ended December 2023. The net asset value per share increased slightly in ZAR terms but fell in USD terms. The compound annual growth rate (CAGR) in the net asset value (NAV) per share for the period under the current management team has been 32.4% in ZAR and 24.8% in USD. This is since December 2020. The largest exposure is Outdoor Investment Holdings (47.6% of NAV), followed by Marine Diamond Holdings at 17.8%. Astoria is also busy with a transaction to increase its exposure to Leatt Corporation.
  • Shareholders of Clientele (JSE: CLI) showed strong support for the proposed acquisition of 1Life Insurance from Telesure.
  • A 17-year legal battle has come to an end, no doubt much to the disdain of the lawyers who have made a fortune over that period. AfroCentric (JSE: ACT) announced that Medscheme, a group company, was on the right side of an arbitrator’s decision to dismiss all claims brought against it by Neil Harvey & Associates as baseless. Costs were also awarded in Medscheme’s favour. The proceedings had been launched back in 2007 on the basis of agreements concluded in 2003 and 2004. The claim was initially R80 million and grew somehow to over R2 billion!
  • Accelerate Property Fund (JSE: APF) has agreed to sell Cherry Lane Shopping Centre for R60 million. It was valued at R65 million as at March 2023, but beggers can’t be choosers. Accelerate needs the money to reduce its debt. To be fair, the vacancy rate deteriorated significantly from 31 March 2023 to 30 September 2023, now at a whopping 47.8% vs. 32.3%. On that basis, the sales price actually looks rather appealing!
  • Tiny little Telemasters (JSE: TLM) may have closed 65% higher on the day, but there’s almost no liquidity in this thing and the bid-offer spread is the size of the moon. The company released results for the six months to December 2023 that reflect a revenue decline of 3.4%. Operating expenses fell by 9% though, so EBITDA came in at R3.9 million instead of R3.4 million. Yes, the company really is that small. A dividend of 0.201 cents per share has been declared, with HEPS coming in at 0.61 cents.
  • Coronation (JSE: CML) is going ahead with the odd-lot offer to shareholders. If your stake is worth around R3,000 or less based on the latest share price, this affects you. Be especially careful of the structure of the offer as a dividend, as this is most likely a worse tax outcome for you than just selling your shares in the market. Read carefully.
  • Rex Trueform (JSE: RTO) released results for the six months to December 2023 that reflect revenue growth of 2% and a HEPS decline of 62.2%, which is what happens when operating costs increase by 35.8%. There is no ordinary dividend. African and Overseas Enterprises (JSE: AOO) is essentially the same group of companies and reported a HEPS decline of 72.3%.
  • AYO Technology (JSE: AYO) has reached an agreement with the GEPF to amend terms of the settlement agreement. This has been structured as an addendum that covers matters like minority protections for the GEPF in the event that AYO is delisted from the JSE. The company will release a circular to shareholders with full details in due course.
  • All conditions for the scheme of arrangement to take African Equity Empowerment Investments (JSE: AEE) private have been met. The listing will be terminated from 16 April and shareholders will receive R1.15 per share.
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