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Ghost Bites (Bell Equipment | MiX Telematics | MTN | Omnia | Sirius)

The Finance Ghost
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Ghost Bites (Bell Equipment | MiX Telematics | MTN | Omnia | Sirius)

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

Bell Equipment is still growing earnings strongly (JSE: BEL)

This stock has been a great lesson in the importance of valuations, up 44% this year

As a cyclical business with significant operations in South Africa, you don’t need to be much of a business expert to point out some of the risks for Bell Equipment. The good news is that the valuation is so dirt cheap that the excavators feel compelled to try and move it around.

In a trading statement dealing with the year ending December 2023, Bell expects to report HEPS of at least 750 cents. We are weeks away from the end of this period, so that’s a very big show of faith. I also want to give credit to the company for this level of disclosure, as this is the way a trading statement is supposed to be used.

This implies an increase of at least 59% in HEPS, with stronger market demand and a high level of execution by the company in response to that demand.

The share price is R21.85, so the Price/Earnings multiple is not even 3x.

MiX Telematics reports a major year-on-year profit swing (JSE: MIX)

Remember, these results should be read against the backdrop of the potential Powerfleet transaction

MiX Telematics has been busy lately. The proposed merger with Powerfleet was announced in October 2023, with the hope of creating an Internet of Things (IoT) scale player.

Of course, financial reporting requirements don’t just fall away because a deal is underway. The company has released a trading statement dealing with the six months to September 2023, reflecting a return to profitability.

After reporting a headline loss per share of 0.5 cents for the comparable period, HEPS for this period is 7 cents. That’s a very big swing, achieved through a combination of higher revenue and better margins as a result, along with a lower effective tax rate because of the impact of foreign exchange movements on intercompany loan funding.

The share price closed 9.3% higher on a day that was bright red for the JSE.

Has MTN settled in the R90s? (JSE: MTN)

The release of group results didn’t seem to have much impact

For the past week or so, we’ve been digesting the updates from MTN’s African subsidiaries. In most cases, they weren’t great this quarter. Inflation has been hitting those markets hard.

The group results have now been released, kicking off with a reminder that MTN has 290 million customers in 19 markets. The big dream is to turn those customers into fintech payments customers, creating a monster of a financial services business along the way. Execution of that idea isn’t so easy, of course.

Group revenue increased 9% as reported or 14.2% in constant currency. Voice revenue grew 4.3% in constant currency and data revenue was up 23.1% on the same basis. Interestingly, fintech revenue was slightly slower at 22.1% growth (again in constant currency). This is despite a 33.9% increase in fintech transaction volumes.

Group EBITDA before once-offs fell by 13.8% as reported. It increased 6.2% in constant currency, which shows you how severe the currency impact has been. As the share price shows, the market has focused on reported results rather than constant currency performance.

Over the nine months year-to-date, EBITDA fell 2.8% as reported or grew 11.2% in constant currency. Regardless of which of those metrics you use, EBITDA margin has contracted.

The share price got down to R90 before turning up and landing at R95. Here’s a one-year chart:

I must caution that if it breaks below the R90s, it’s entirely plausible that it gets to the R70s before sentiment changes.

What will improve things for MTN? Certainly a drop in inflation in the various African countries will help, along with a weaker dollar. If we are at the top of the hiking cycle in the US, then that should lend some support to a recovery.

It’s also important to understand that South Africa is far from being an exciting story for MTN. Total service revenue increased just 4.1% year-on-year in this quarter, which is better than Q1 and Q2 but still well below inflation. There’s also some sequential improvement in EBITDA margin since the beginning of the year. Overall though, we are a slow growth market. People like MTN because of the Africa story, hence why the recent macroeconomic deterioration has hit the price so hard.

Interestingly, mobile data is now 47.9% of MTN SA’s service revenue.

Finally, I think it’s good news that holding company leverage was still at 1.5x, in line with the June number. The group balance sheet is always a worry as upstreaming cash from the African subsidiaries is difficult.

Omnia expects HEPS to drop (JSE: OMN)

It seems like chemicals businesses are struggling across the board

There are a number of JSE-listed companies that play in the chemicals sector, or at least they have certain segments that do. From what I’ve seen recently, chemicals groups are struggling in general at the moment (there are exceptions of course). Omnia can add its name to the list, with an expected drop in HEPS.

For the six months ended September, the group expects HEPS to have dropped by between 12% and 2%, which means a range of 260 cents to 289 cents for the interim period. For reference, the share price is R57.00.

The pressure was felt more in the agriculture segment than the mining segment, although the commentary in the announcement is incredibly positive for a company that is telling shareholders that earnings are down.

Just read this excerpt and decide for yourself whether it makes sense in the context of these numbers:

“The Group delivered a resilient operational performance with strong sales volumes, market share growth and robust margins. Solid progress was made in the Group’s international expansion efforts, in particular the Mining segment which contributed to profit ahead of expectations. A focus on costs, prudent capital expenditure and stringent working capital management enabled the Group to maintain a robust financial position with a positive net cash balance of approximately R1.6 billion. Omnia continues to maintain a strong balance sheet which allows it to retain optionality in line with its disciplined capital allocation framework.”

There isn’t much in there to explain the drop in HEPS.

Sirius has concluded the sale in Germany and acquisition in the UK (JSE: SRE)

The Sirius model is based on active management of properties

Sirius has been making a real song and dance about the disposal of a property in Germany on a yield of 5.7% and the acquisition of three assets in North London on a yield of 7.3%.

Remember, the yield and the price are inversely related. Selling at 5.7% and buying at 7.3% effectively means selling high and buying low, which is obviously a good approach when recycling capital.

The disposal in Germany was 6% above book value, which also gives the reported net asset value per share some support.

Active asset management is a big part of the promise that Sirius makes to shareholders. The company believes that the newly acquired UK properties should generate a running yield of 10% at maturity, with a current occupancy rate of just under 70%.

The Sirius share price is up 21.7% this year, though it remains miles off the pandemic peaks when people were willing to pay a very silly premium to NAV for Sirius. This share price chart looks more like a tech stock than a property group:

Little Bites:

  • Director dealings:
    • Des de Beer was clearly feeling flush for this latest trade, with a purchase of R10.7 million worth of shares in Lighthouse Properties (JSE: LTE).
    • Here’s one worth paying attention to: Christo Wiese has bought R654k worth of shares in Collins Property Group (JSE: CPP) and an associate of the Collins family bought shares worth R5.9 million.
    • The company secretary of Growthpoint (JSE: GRT) has sold shares worth R520k. Although these are linked to share schemes, the announcement doesn’t say that this is purely to cover the tax, so it’s a sale in my books.
    • A senior executive at Pan African Resources (JSE: PAN) has bought shares worth R25k.
  • STADIO Holdings (JSE: SDO) has appointed Ishak Kula as CFO. He joins from Bud Group, which is a large private company involved in various industrial verticals.
  • Eastern Platinum (JSE: EPS) has obtained approval from the South African Competition Commission for Ka An Development Co to acquire shares in the company as part of the rights offering announced back in May. The approval is subject to the establishment of a 5% employee share ownership programme in Barplats Mines within six months of Barplats attaining a steady state of certain run of mine tonnages for a period of six consecutive months.
  • AYO Technology (JSE: AYO) has renewed the cautionary announcement related to the ongoing discussions with the JSE around the settlement agreement with the GEPF and PIC. The point here is that the terms need to comply with JSE Listings Requirements.

Ghost Bites (Accelerate Property Fund | AECI | enX | Exemplar | Hyprop | MTN | Redefine | Sibanye)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | AECI | enX | Exemplar | Hyprop | MTN | Redefine | Sibanye)

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

Accelerate confirms the terms of the proposed sale of Eden Meander (JSE: APF)

Shareholders will be asked to vote on this transaction

Accelerate Property Fund (JSE: APF) is in my bucket of property funds that I wouldn’t invest in. There have been some strategies followed by the company that have ruled it out for my own money. The share price is down 20% this year and down more than 80% over five years.

As part of an effort to improve the balance sheet, Accelerate identified Eden Meander for a potential disposal to the Sasol Pension Fund and a couple of other investors. This was first announced in August 2023. After a successful due diligence, terms have now been announced to the market.

The property is being sold for just over R530 million, so this is a Category 1 transaction under JSE rules that will result in a detailed circular being sent to shareholders as a precursor to a shareholder vote. Keep an eye out for further announcements in this regard if you are a shareholder.

The announcement irritatingly doesn’t indicate the book value of the property as at the last reporting date. I trawled through the reporting to find it. As at 31 March 2023, the fair value of Eden Meander was disclosed as R522 million. With a sale achieved slightly above book value, I genuinely don’t know why they didn’t highlight this fact in the announcement.

AECI grows group revenue and EBIT by 10% for the nine months to September (JSE: AFE)

But the German business is going from bad to worse

If you’ve been following AECI, you’ll know that AECI Schirm Germany has been a headache. Within group EBIT (not a typo – this is Earnings Before Interest and Taxes) of R1.895 billion for the nine months to September, we find the German business with a loss of R230 million.

Despite this knock, revenue and EBIT both increased by 10% thanks to solid mining explosives sales volumes, a weaker rand and generally improved profitability thanks to new contracts. AECI Mining is the biggest part of the business and grew revenue by 15% and EBIT by 30%.

There were also negatives in places other than the German business, like AECI Agri Health with EBIT down 23% and AECI Chemicals down 18%.

The balance sheet has been well contained, with net working capital down 3% despite the growth in revenue. This is a great example of using creditors to fund debtors and inventory. Also, capital expenditure was 4% lower at just over R1 billion. But due to debt in AECI Schirm and of course higher interest rates overall, net finance costs jumped by 92% to R425 million.

There is still decent coverage here of EBIT to finance costs, but the trajectory isn’t good.

Will things get better in Germany? Despite a turnaround plan that was showing promise, trading conditions have deteriorated even further and AECI isn’t expecting a short-term recovery.

If you would like to dig deeper into this company and review the capital markets day presentation, you’ll find it here.

enX posts strong earnings from continuing operations (JSE: ENX)

The HEPS story looks very different if all operations are included, but this isn’t the most useful view

enX Group operates businesses that produce and market oil lubricants and greases, design and diesel generators, distribute industrial engines, offer cleaner power solutions and import and distribute plastics and speciality chemicals. They are even involved in conveyor belting fabric.

In other words, enX is firmly an industrials play, which has been a better choice this year than being in a consumer vertical. Not all industrial models have worked well though, as Eqstra Fleet Management is being sold by the group for strategic reasons.

Focusing on continuing operations for the year ended August, revenue increased 26% thanks to demand for power solutions and related services, along with the various other products offered by enX. Operating profit is up 31%, despite once-offs in the base period and the current period. HEPS from continuing operations increased by 16%.

Within continuing operations, I have to highlight New Way Power as a major winner in load shedding. Revenue jumped 72% and profit before tax shot up from R10 million to R101 million. That’s what happens when a business suddenly achieves scale, helped by the entry into the provision of solar PV systems back in 2021.

HEPS from total operations is down 38%, but this isn’t because of a poor performance by Eqstra. Instead, it’s because of discontinued operations in the base period that weren’t in this period. enX has been through a period of significant restructuring, so focusing on HEPS from continuing operations is sensible.

After closing some major asset disposals in the past couple of years and paying substantial distributions along the way, there is still excess capital on the balance sheet. enX has declared a special distribution of R1.00 per enX share. The group has been structuring recent distributions as a reduction of capital rather than a dividend for tax purposes.

Exemplar REITail reports a 6.5% drop in the dividend (JSE: EXP)

A large insurance claim in the base period has skewed the results

Whenever you are assessing the financial performance of a company, you need to scan the numbers for anything unusual. Here’s a perfect example from Exemplar REITail:

Net rental and related income has moved higher, which is good. The next line your eyes should’ve moved to (in the absence of highlights) is profit from operations, which shows a big negative move. The “other income” line is clearly where the negative shift happens. If you read the notes to other income, you find that R69 million in insurance proceeds were recognised in the base period. Although it doesn’t explain the entire move, it goes a long way towards doing so.

Why isn’t this insurance claim on the line that is literally called “insurance claim on material loss”? Well, if you look in the final column, you’ll see that it was classified there for the full year reporting.

I don’t make the accounting rules. I just try hard to navigate around their weirdness at times.

You may also want to take note of the big jump in finance costs from R97 million to R133 million. This issue is plaguing property funds at the moment, as leverage is a huge part of the business model.

Investors care most about the dividend (down 6.47%) and the net asset value per share (up 13.81% to R14.34). The share price closed at R10.10.

Hyprop achieved the R500 million target for the dividend reinvestment programme (JSE: HYP)

In fact, the reinvestment alternative was oversubscribed

Real Estate Investment Trusts (or REITs) try to find ways to retain equity capital. This is because the REIT rules mean they are always on a treadmill, having to distribute most of their profits to shareholders.

One of the ways to retain capital is a dividend reinvestment programme, which in some respects works like a miniature rights offer. Hyprop has used this with great success in the past and has done it again, retaining R500 million in equity capital through shareholders electing to reinvest at R24 per share. For reference, the current price is R26.76, with the discount used to encourage this election.

Holders of 68.5% of shares chose the reinvestment alternative, which would’ve meant retention of R730.6 million were it not for the self-imposed R500 million limit. This means that each shareholder who elected this alternative will reinvest a pro-rata amount.

MTN Rwanda is moving firmly in the wrong direction (JSE: MTN)

Even East Africa, once a hotbed of potential, isn’t safe from these conditions

As a quick recap on MTN:

  • MTN Nigeria could win a game “bad things happening to me” bingo
  • MTN Ghana is growing, but below inflation (only just)
  • MTN Uganda is doing really well, with earnings growth way ahead of low inflation in the country

This brings us neatly to MTN Rwanda, which is an unfortunate story. EBITDA could only limp 4.7% higher, with EBITDA margin unwinding by 390 basis points to 44.9%. Capital expenditure increased by 11.5%, so pressure on the balance sheet (a feature of telecommunications businesses) is clear to see.

Thanks to the muted EBITDA performance and a sharp increase in net finance costs, profit after tax fell by 25.2%.

The inflation rate is 17.2%, so I think we can all agree that negative real growth is particularly worrying here. As we are seeing elsewhere in the business, another worry is US dollar-denominated expenses, with the company trying desperately to stay ahead of the curve when earning local currency.

MTN Group got down to R90 before turning higher to R97. Let’s see what the share price does when group results come out, as the market usually does a fairly poor job of watching the African results as a pre-cursor to the group performance.

NAV growth and a dividend at Redefine (JSE: RDF)

And perhaps most importantly, a more positive outlook

Redefine is a typical example of a large local REIT with a diversified portfolio. In these conditions, that isn’t necessarily a good thing. Being a focused REIT with a small portfolio does have its perks.

To give you an idea of the spread, 65% of Gross Lettable Area (GLA) is in Gauteng, 14% is in the Western Cape, 6% is in KZN and 8% is spread across the rest of South Africa. The remaining 7% is international.

There’s significant exposure to office property, with R22.2 billion worth of office property out of a total property portfolio of R78.8 billion.

Despite the broad exposure and numerous challenges in the property sector at the moment, the SA REIT GLA vacancy rate improved from 6.8% for the year ended August 2022 to 6.6% for the year ended August 2023.

Loan to value has moved higher, from 40.7% in 2022 to 42% in 2023. Including foreign currency debt and derivatives, the cost of debt has increased by 110 basis points to 7.1%. For those who haven’t had experience with balance sheet structuring and yield curves in different countries, you’ll find it interesting to compare the ZAR cost of debt (8.7%) to the EUR (2.6%) and USD (5.3%) denominated loans.

Focusing on the returns to shareholders this year, the dividend was 1.9% higher at 43.80 cents and the NAV per share has increased by 6.4% to R7.6596. The share price is R3.59, so Redefine is trading on a yield of around 12.2%.

In the outlook section, Redefine has some optimism that the property cycle has bottomed out. The guidance for distributable income for FY24 is between 48.0 and 52.0 cents vs. 51.53 cents in FY23. In other words, sideways or slightly down is still the expectation for the next 12 months, but the worst seems to be behind the sector.

Sibanye strikes a wage deal at Kroondal (JSE: SSW)

The average increase over five years is 6.4% per annum

Sibanye-Stillwater has been having an incredibly tough year thanks to plummeting PGM prices and inflationary pressures in costs. This has driven a need for some restructuring and retrenchment activities at certain mines, which perhaps sends a signal to the unions across the group.

The Kroondal PGM wage negotiation has been concluded without any disruptions. AMCU and the NUM have agreed to a five-year deal with inflation-linked increases similar to those agreed at Rustenburg and Marikana during 2022.

The average increase over the five-year period is 6.4% per annum.

Little Bites:

  • Director dealings:
    • Here’s an interesting one: the CEO of Capitec (JSE: CPI), Gerrie Fourie, has sold shares worth R11.5 million.
    • A director of a major subsidiary of Super Group (JSE: SPG) sold all the shares that vested under a share appreciation rights scheme, coming in at R1.95 million. Where an executive sells all the shares rather than enough to cover just the tax, that’s a genuine sale in my books.
    • Speaking of sales related to share awards, the selling by Truworths (JSE: TRU) executives continues. The company secretary has sold R1.4 million worth of shares, with part of the reason being a rebalancing of his investment portfolio.
    • Des de Beer has bought R1.4 million worth of shares in Lighthouse Properties (JSE: LTE)
    • A director of a major subsidiary of Bell Equipment (JSE: BEL) has bought shares worth R99k.
  • Go Life International (JSE: GLI), one of the most obscure companies on the JSE, is changing its name to Numeral Limited provided shareholders approve the change.

Unlock the Stock: Bell Equipment and Calgro M3

The Finance Ghost
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Unlock the Stock: Bell Equipment and Calgro M3

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

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 28th edition of Unlock the Stock, we welcomed Bell Equipment and Calgro M3 to the platform for the first time. The management team gave a presentation on the performance and strategy and took numerous questions from attendees.

As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:

Kool-Aid has an awful aftertaste

Dominique Olivier
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Kool-Aid has an awful aftertaste

Mention the name “Craig Warriner” at your next gathering of friends, and you’ll be able to identify the BHI burn victims by the looks on their faces.

While former-insurance-salesman-turned-investment-messiah Warriner whiles away the hours in his specially-requested private jail cell, hoodwinked investors are coming to terms with the fact that they may never see their money again. 

Sequestrator Cawood Attorneys is currently picking over the R4.78 million that remains in the BHI account (a shadow of the estimated R3 billion that Warriner lifted from investor pockets). Meanwhile, BHI trustees are considering an application to the high court to have the trust declared a ponzi scheme. 

None of this is news to anyone who’s read a financial publication in the last week or so. As South Africans, we aren’t strangers to the concept of ponzi schemes either, what with the ghosts of Mirror Trading International, Krion and Africrypt still looming large in the corners of many a courtroom (editor’s note: not all ghosts are good for you). Which leads us to the same question we always seem to ask when a new ponzi scheme makes the news cycle: how does something like this happen?

What Kool-Aid and cults have in common

If you’ve found yourself in conversations on the subject of BHI recently, you may have encountered or even used the term “drinking the Kool-Aid”. While the product itself may not have made its way onto South African shores (the closest comparison we have locally would probably be something like Drink-o-Pop sachets), our exposure to American-made films and series means that this particular phrase has wormed its way into our lexicon nonetheless. 

The meaning is clear though: when someone is “drinking the Kool-Aid”, they are committing to a possibly doomed or dangerous idea because of perceived potential high rewards. In case you’re wondering how such a bleak concept became associated with a sugary children’s drink, I’m happy to inform you – but be warned that the backstory is particularly macabre.

On November 18, 1978, roughly 918 people members of the People’s Temple cult – back then referred to as the People’s Temple Full Gospel Church – committed suicide by drinking cyanide-laced cooldrink at their compound in Guyana. Newspapers picking up the story reported that the compound was strewn with the empty Kool-Aid packets that had been used to create the deadly cocktail. Factually, this was incorrect – cult members had actually used a cheaper knock-off product called Flavor Aid – but that didn’t stop the image of those empty Kool-Aid packets from burning itself into the public subconscious. 

Cult members performed what they believed to be “revolutionary suicide” at the instruction of their leader, Jim Jones, who founded Jonestown as a refuge from the perceived threat of fascism in America. The incident became widely known as the Jonestown Massacre. 

Personality equals power

To understand how modern-day investors are able to fall into the trap of ponzi schemers, it actually helps to think about Jim Jones. Ask yourself: how did one man convince almost 1000 Americans to not only give him all of their income and assets, but to sell their houses, break ties with their families, quit their jobs and move to a jungle compound in South America? 

The answer is the same as it is with many cult leaders: he had a powerfully magnetic personality that drew people to him. Charming on the surface, yet dominant enough to silence those who would try to speak up against him. And he wielded that personality like a superpower, drawing in people from all walks of life until the size of his following alone was enough to start magnetising new recruits. 

Does that sound familiar? 

Victims of Craig Warriner’s scheme often refer to the fact that he made extensive use of his St Stithians College old boys’ network, and appears to have made multiple donations to the school. By paying above-average commission fees (as high as 5%) to brokers, Warriner created the illusion of a man who was not only very wealthy but magnanimous in his wealth. All he wanted to do was help other people get wealthy. And that carefully constructed facade is all it took to reel in the money. 

The case studies stretch beyond Warriner. Many who have met or worked with Steinhoff leader Marcus Jooste have commented on his strong and somewhat overwhelming personality which invited no questioning and practically demanded obedience. Bernie Madoff was renowned for bullying his detractors, while carefully crafting an image of rationality and competence to those whose opinion was important to him and his business. Charles Ponzi, the Italian immigrant who would take America for a ride and later lend his name to this phenomenon, is often described as “clever, charming and incredibly charismatic” by those who fell for his schemes. 

Ponzi-spotting for beginners

As much as we hate to admit it, we humans are herd animals. When enough of us start to move in one direction, the rest will start to lift their heads and wonder where we went. If you need clear evidence of this, consider that it is a well-established and studied fact that individual investors will follow the advice of their coworkers, even when the advice given contains no value-pertinent information. We value the advice and recommendations of those around us far more than we trust our own research and – in many cases – our own common sense. 

So, what can we take from this article and apply when the Next Big Opportunity comes along? 

  1. Beware the charming leader who requires blind obedience. Real genius doesn’t hide its methods. If you’re being persuaded to “just trust” someone, that’s reason enough to do the opposite. 
  2. Consider your sources, and then consider them again. Be aware of your own tendency to believe the people around you simply because they are friends or family members. Look past the person making the recommendation and examine the facts in the cold light of day. 
  3. Don’t believe the hype. There’s no such thing as an investment that only delivers returns. If you can’t find a trace of a market dip ever, or if the promised returns seem too high to be true, then there’s reason to be cautious. 

Remember: if investing was easy, we’d all be living in mansions. As much as you want to believe that there is a shortcut or an undiscovered path to the returns of your dreams, the chances of that being true are not worth risking your hard-earned cash on. 

And if you’re currently feeling the BHI burn – my sympathies, friend. Hindsight is frustratingly perfect, isn’t it?

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 (Clientele | Dis-Chem | Mantengu | Sephaku)

The Finance Ghost
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Ghost Bites (Clientele | Dis-Chem | Mantengu | Sephaku)

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

Clientele is acquiring 1Life Insurance (JSE: CLI)

We finally know what deal Clientele has been busy with

Clientele has been trading under cautionary for months now, with the first one having been released in June 2023. The guessing game around the potential deal is over, with the company announcing the acquisition of 100% of 1Life Insurance from Telesure.

The particularly interesting point is that the deal will be settled by the issuance of shares in Clientele to Telesure. In that respect, this is a merger more than an acquisition. Telesure will hold 26% in Clientele after this transaction.

Strategically, this is a good fit because 1Life is focused on the entry level mass market and mass affluent market, with Clientele having operated for 30 years in the entry level mass market. The announcement highlights that 1Life was the “first truly direct life insurer” when it commenced operations in 2006.

The combined businesses will boast almost 1.5 million contracts and an embedded value of around R7.8 billion. Embedded value is the basis on which life insurance houses are valued, with the price for 1Life set at R1.914 billion to be equal to the embedded value as at 30 June 2023, plus a control premium of 6.23%.

This is a modest control premium by usual dealmaking standards, which suggests that Telesure has bigger strategic plans with Clientele. If you need further proof of that, then lift your head from the 1Life price and just consider the price at which Clientele’s shares will be issued to Telesure: R16.25 (the embedded value of Clientele) vs. the current prevailing price of R10.90.

If you’ve ever heard of a “NAV for NAV” deal then, then this is the life insurance equivalent, based on embedded value.

In case you’re wondering about return equity, 1Life managed to generate profit after tax of R152.8 million for the year ended June 2023 off a net asset value of R1.7 billion. This is a return on equity of 8.9%. These returns aren’t good enough, so the benefit of scale and a combined effort will hopefully improve returns.

Clientele is one of the unsung dividend heroes that the market never talks about. The share price is up 1.9% this year and it trades on a dividend yield of just under 11.5%. The market response to this transaction was a flat share price, which is odd when you consider the size of this deal.

Dis-Chem’s first half performance needs a careful read (JSE: DCP)

The base effect and some once-offs appear to be skewing performance

When companies start trying to explain away poor numbers with excuses like the base effect and once-offs, you always need to be skeptical. In some cases, the explanations are perfectly justifiable. In others, they are rubbish.

If we look at Dis-Chem’s earnings for the first half, revenue growth was 9.4% and HEPS fell by 17.2%, with the dividend also down by 17.3%. That revenue number isn’t exactly a pedestrian performance, so the drop in HEPS is odd.

A further read reveals that the base year (FY23) had unusual seasonality, with a strong first half of the year that contributed 58.4% of the full-year earnings. The preceding two years were 48.5% and 47.1%. Again, this could simply mean that the second half of last year was a poor performance, so further reading is required.

H1’23 included a gain on a warehouse acquisition and the impact of COVID-vaccine related income. Added to this, the company acknowledges that reputational issues hit the H2’23 result, with those challenges spilling over into H1’24 (this period).

Until we see the second half of this financial year, we won’t know for sure whether the base period is the real reason for the drop in earnings in this period. Instead, it might be better to focus on the underlying revenue growth and gross margins, which aren’t impacted by the once-offs.

If we exclude COVID vaccines, retail revenue grew by 9.2%. Wholesale revenue grew by 13.5%, with sales to Dis-Chem’s own stores up by 12.5% and external sales (including to The Local Choice franchises) up by 19.1%. The Local Choice is expanding quickly, growing from 153 to 180 pharmacies.

Excluding the gain in the prior period related to the warehouse acquisition, total income margin was 30.5% in this period vs. 31.3% in the base.

Looking through all the noise, a reduction in retail margin from 30.2% to 29.8% is worth paying attention to. There’s a comment that investment in promotional activity in personal care and beauty was the major factor here, which simply means that Dis-Chem had to be more aggressive on price in those key high-margin categories to retain market share.

I must also note that retail expenses were up a significant 11.3%, or 10.8% excluding depreciation. New stores are a factor here, but employee costs up 9.8% is a concern when gross margin is under pressure. Employees costs are 64% of Dis-Chem’s retail expenses. Pharmacists in particular are very high earners relative to any other in-store employees.

Looking at the balance sheet pressures, net finance costs were up 33.2%. If you exclude the endless stupidity of IFRS 16 as well on interest on the new term loan, financing costs on existing debt increased by 15.7%. Capital is expensive right now and growth in inventory of 9% means a bigger balance sheet that needs to be funded. Of course, capital expenditure also needs to be funded, like investment in additional warehouse capacity.

For the two months since the end of this period, revenue grew 12.1% over the comparable period. This gives some support to the base effect argument. Still, with a higher cost of funding and pressure on margins, shareholders might need to be patient to reap rewards here.

Mantengu takes the next step in the capital raise (JSE: MTU)

Mantengu Mining is looking to raise up to R500 million from GEM

Around a week ago, Mantengu Mining announced a plan to secure up to R500 million in equity funding from two entities that are part of the broader GEM group. It’s an unusual structure, as the R500 million would be invested over time as and when Mantengu needs the money.

In these scenarios, a commitment fee is common. The investor needs to plan to have the cash available for drawdown and expects to be paid something for the pleasure. In this case, the commitment fee is 2% of the facility, or R10 million. It can be settled in cash or in shares, with Mantengu obviously only too happy to settle it in shares.

Although shareholders still need to approve this transaction, the company has issued shares to an escrow account to be released to GEM if the deal goes ahead. The issue price is R1.13 and just the commitment fee represents 6.49% of the issued share capital of the company, which shows you how dilutive the full capital raise is for existing shareholders.

Sephaku flags a drop in HEPS (JSE: SEP)

This covers the six months to September 2023 – well, sort of

Sephaku’s financial reporting is a bit tricky. The group has a year end of March, but Dangote Cement (known as SepCem) is an associate of the group (which means Sephaku holds a large non-controlling stake in it) and has a year end of December.

So, when Sephaku releases earnings guidance for the six months to September, it includes numbers from Dangote for the six months to June. This is an unusual situation, but Sephaku doesn’t control Dangote and hence can’t force it to align its year-end.

For the six months to September 2023 (sort of), Sephaku expects HEPS to drop by between 27% and 35%.

Detailed results are due for release on 14 November.

Little Bites:

  • Director dealings:
    • Des de Beer has bought R754k worth of shares in Lighthouse Properties (JSE: LTE)
    • The selling by Mpact (JSE: MPT) executives continues, with the Brett Clark Family Trust (linked to the CFO) selling shares worth R1.4 million and a prescribed officer selling shares worth R560k.
    • Associates of the CEO of Spear REIT (JSE: SEA) sold shares worth R532k and bought shares worth R195k. This is part of a broader family restructure, although it’s obviously a net sale.
    • A non-executive director of Finbond (JSE: FGL) has bought shares worth R34k.
  • Octodec (JSE: OCT) announced a small related party transaction in mid-October. A fairness opinion is required for such deals, with BDO Corporate Finance opining that the deal is fair to shareholders.

Ghost Wrap #52 (MTN | Woolworths | Pepkor | Octodec | AB InBev)

The Finance Ghost
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Ghost Wrap #52 (MTN | Woolworths | Pepkor | Octodec | AB InBev)

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:

  • MTN’s African subsidiaries are causing headaches right now, with Uganda as the silver lining but too small to make up for the concerns in the others.
  • Woolworths is acquiring Absolute Pets and it’s a deal that makes a lot of strategic sense to me.
  • Pepkor is seen as a defensive retailer in South Africa, but does that thesis hold these days?
  • Octodec has growth its distribution per share despite a drop in distributable income – what does this tell us about REITs at the moment?
  • AB InBev must be cheering on the Springbok celebrations, as beer volumes have been under pressure this year.

Ghost Bites (Collins | MC Mining | MTN | Murray & Roberts | Pepkor | Sibanye-Stillwater | Textainer)

The Finance Ghost
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Ghost Bites (Collins | MC Mining | MTN | Murray & Roberts | Pepkor | Sibanye-Stillwater | Textainer)

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

Collins should become a REIT this year (JSE: CPP)

This will trigger the declaration of a dividend

Collins Property Group (previously Tradehold) released results for the six months to August. The net asset value (NAV) per share has increased from R12.40 at 28 February 2023 to R12.62, with the share price closing at R6.97 and reflecting a significant discount to NAV that is common on the JSE.

Strategically, the group is focused on offshore expansion, particularly in the Netherlands. They are also looking at Germany. The group already owns six assets in Austria. To fund this, properties in South Africa are being sold, although the group is happy to increase its exposure to the Western Cape.

Concerningly for the economy at large, vacant space in the portfolio of mainly industrial warehouses increased from 3% in February 2023 to 4.04%. This was due to smaller tenants downsizing or closing up shop entirely. Not good.

The group is currently trying to convert to a REIT. Once that process is completed, they intend to declare a dividend.

There might be a takeover on the table for MC Mining (JSE: MCZ)

Also, there might not be

MC Mining is also listed in Australia. If you know anything about Australians, you’ll know that they are very strict when it comes to rules. Their takeover code has some differences to South Africa and you don’t want to get on the wrong side of it, so you’ll sometimes see unusual terminology in announcements related to Aussie-listed companies.

This is why you’ll see “take no action” in the heading of the latest SENS announcement by MC Mining. This is because although MC Mining has received a proposal letter from Senosi Group and Dendocept, there are certainly regulatory dispensations being sought that make the offer conditional at best.

The letter is described as being on behalf of shareholders and associates representing in aggregate 64.5% of the issued capital in the company. Further down, Senosi is noted as owning 23.4% and Dendocept holds 6.9% of shares outstanding. The maths isn’t mathing here and I’m not 100% sure what the reason for the difference is.

The point is that these two parties want to form a consortium to make an off-market cash offer for all the shares not currently held by the consortium. A letter had been previously sent to the board in September about an indicative offer, but it was an incomplete proposal. A pricing range of A$0.20 to A$0.23 per share was given in that letter. The latest letter doesn’t give an idea of pricing, but the previous range is obviously an interesting anchor.

The market latched onto it, with the share price jumping over 17% after the release of the announcement.

For now, the board has advised the market to take no action in regard to this proposal until further guidance has been received from the independent board committee.

If only MTN Uganda was bigger… (JSE: MTN)

Here’s some strong growth ahead of inflation

After MTN Nigeria released a very worrying update and MTN Ghana put out big growth numbers that are sadly below in-country inflation (and thus reflect negative real growth), it was good to see MTN Uganda grow EBITDA by 15.6% in a country where inflation is only 3.3%.

It looks good on literally all metrics, with subscribers numbers up and service revenue growing by 15.2%. while data revenue grew 22% and fintech revenue grew 18.1%. EBITDA margin was stable at 50.6%, which is also quite a big deal in this environment. Another important number is capital expenditure, which only increased by 4.7%.

MTN Uganda is also declaring cash dividends.

Is this the jewel in MTN’s African crown? It just might be. For MTN shareholders, the pity is that this is one of the smaller jewels, even though it might be the brightest.

Murray & Roberts reflects on the year that was (JSE: MUR)

There’s also news on the balance sheet

Murray & Roberts has lost three quarters of its value this year. There have been some ugly performances on the market, but Murrays makes a strong case for itself as one of the biggest disappointments.

At the AGM, the company reflected on some of the major points in the last financial year. Essentially, the balance sheet broke and couldn’t sustain the Australian business, so they put that side of things into voluntary administration and focused on keeping the rest of the group alive.

The balance sheet as at 30 June 2023 holds an important lesson. Net debt is only R300 million, but international groups are more complicated than simply a “net debt” number – and the clue is in the first part of that name. This is gross debt net of cash, but what if the gross debt and the cash are in two different places?

Murray & Roberts has R1 billion in debt in South Africa and its cash is predominantly offshore. To address this issue, the North American business units have revised their debt facility with their bankers and they will pay dividends to Murrays in January and June 2024. Other initiatives will add another R180 million to the pot for debt reduction, with the hope that South African debt will reduce from the current level to R300 million by June 2024.

It was R2 billion in March 2023, so that would be a massive improvement.

There’s a particularly interesting comment that the board is not considering a rights issue to reduce debt, but it is working towards a “sustainable capital structure” over the next six months, including a refinancing of debt. My view is that the risk is never gone until the balance sheet is completely fixed.

In other news, the Mining platform has grown its order book since June 2023. Sadly, the Power, Industrial & Water platform still has no “near orders” on the books. Finally, as previously announced, the company will still target opportunities in Australia on a selected basis.

It’s a smaller group now. Within the next year, it might even be a sustainable group. That won’t help shareholders recoup their losses in the near-term, but at least people will keep their jobs.

Pepkor’s like-for-like growth is still problematic (JSE: PPH)

There’s improvement at Ackermans, but HEPS for the year is in the red

Pepkor’s group revenue for the year ended September was 7.7% higher, but of course we need to dig a lot deeper than that. The first adjustment is for the 53rd trading week in this period. If we exclude that, revenue was up 6.5%.

It was firmly a tale of two halves, with growth of only 4.3% in the first half and a better performance in the second half.

Avenida in Brazil is working out well, now contributing 4.3% to group revenue vs. 2.4% in the prior year (as it was only acquired during that year). Most importantly, this is in line with guidance and well ahead of the original envisaged performance. I liked the thought of a South American expansion when that deal was first announced, as it feels like a more natural market for South Africans to enter.

Like-for-like sales growth is such an important metric, as it shows the underlying performance in the business. PEP managed 4.5% like-for-like growth for the full year, which means negative volumes because inflation was 7.3%. This is a direct result of pressure on local consumers. I must also point out that 4% of PEP’s sales are now on credit, vs. 0% historically.

Although Ackermans had a better second half after a disastrous first half, it could still only manage a like-for-like sales decline of 5.1%.

JD Group experienced a 2.1% decline in like-for-like sales and The Building Company was down 0.8%.

Due to impairments, there is going to be a collapse in reported earnings and Pepkor will report a loss. This is a function of underlying business performance and higher discount rates. Based on headline earnings from continuing operations, the expected drop is 5.2% to 15.2%.

The share price is down around 10% year-to-date.

Sibanye-Stillwater published a novel on SENS (JSE: SSW)

This quarterly update is huge

For the quarter ended September, Sibanye-Stillwater’s EBITDA was just over R3 billion. In the quarter ended June, it was R6.4 billion. In the quarter ended September 2022, it was R8.5 billion. Hopefully you now understand why (1) the share price broke and (2) this quarterly update is practically a published novel on the underlying performance.

In fact, it’s so huge that it has a table of contents!

You are welcome to go read the entire thing. The key points for the purposes of Ghost Bites are as follows:

  • EBITDA has gotten worse in all major operations, with the exception of zinc in Australia
  • The average basket price for the commodities has gone in the wrong direction (again, other than for zinc)
  • Against this backdrop of price pressure for commodities, all-in sustaining cost has increased because of inflationary pressure in costs
  • Restructuring activities are underway in the South African gold and PGM operations to try and address the slide in profitability

Sibanye’s share price has fallen 49% this year.

Textainer releases third quarter results (JSE: TXT)

Remember, the company is currently the subject of a takeover bid

Textainer has released numbers for the third quarter of 2023. Unfortunately, they also include this number:

Leaving aside the Dezemba levels of proofreading going on here, net income for the third quarter was $1.07 per share, down from $1.20 per share in the second quarter. Although the share repurchase program has been suspended in light of the potential transaction with Stonepeak, a dividend of $0.30 per share has been declared.

Little Bites:

  • British American Tobacco (JSE: BTI) announced that Soraya Benchikh will join the company as CFO from 1 May 2024. She is currently President, Europe at Diageo, one of the largest alcoholic beverage groups in the world.
  • They won’t win any corporate governance awards for this one, but Primary Health Properties (JSE: PHP) has announced the founder and CEO as the new non-executive chairman. Harry Hyman is stepping down as CEO, so he is moving straight into the chairman role. To make up for it, the company will beef up the independent non-executive directors.

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

Woolworths has announced its intention to acquire 93.45% of the shares in Absolute Pets from Sanlam Private Equity and Absolute Pets management. The remaining management-retained shareholding will be acquired by Woolworths over an agreed period post the completion of the transaction. While financial details were not disclosed as the deal value falls below the threshold for categorisation in terms of the JSE Listing requirements, the company did report that the purchase consideration would be settled in cash.

In September Senosi Group Investment and Dendocept, each substantial shareholders in MC Mining (23.4% and 6.9% respectively) made a confidential and incomplete, non-binding conditional and indicative offer to acquire the shares of the company for a cash offer in the range of A$0.20 – A$0.23 per share. The company this week received a letter signalling an intention to make an off-market cash takeover offer for the remaining shares in the company by the consortium comprising Senosi, Dendocept and shareholders and associates representing an aggregate 64.5% of the issued share capital of the company. The letter however did not provide a definitive offer price for the shares.

OUTsurance Holdings, an 89.7% owned subsidiary of OUTsurance Group, has acquired a further 2.64% stake in Australian insurance operation Youi from former CEO and founder of Youi for A$42,5 million. In March, the company acquired an initial 54,6 million shares. OUTsurance’s stake in Youi now sits at 94.64%.

Sibanye-Stillwater has exercised the option (due to expire on 5 November 2023) to acquire the Mt Lyell copper mine in Tasmania. Sibanye gained the option through its 2021 acquisition of New Century Resources. The mining group paid $10 million to Vedanta for the copper mine which was placed on care and maintenance in 2014. A feasibility study will be conducted to consider the re-establishment of the operation. Sibanye also announced the closing of its acquisition, from joint venture partner Anglo American Platinum, of the 50% stake in Kroondal and Marikana pool-and-share agreement, announced in early 2022.

The proposed R60 million disposal by Trustco of a 49% stake in Trustco Finance Namibia to Finbond has been terminated. The parties have, without giving reasons, agreed not to continue with the transaction but have indicated that they may revisit the deal in the future.

Unlisted Companies

Bushveld Minerals, the AIM-listed vanadium producer and energy storage solutions provider with vanadium mines and processing facilities in South Africa, has entered into a conditional agreement to acquire the remaining 26% stake in Bushveld Vametco. The minority stake is held by a BEE consortium which will receive 232,836,255 million Bushveld Mineral shares for the stake representing 13% of its enlarged share capital. 70% of the consideration shares will be subject to a six-month lock-in period.

Hollard International, SA’s largest privately-owned insurance group, has entered into an agreement to acquire a significant stake in Apollo Investments, the holding company APA Insurance which is headquartered in Kenya. Financial details of the deal were undisclosed. Hollard has an existing presence in the following African countries – Namibia, Mozambique, Zambia, Lesotho, Botswana and Ghana.

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

Kore Potash has announced the successful completion of a share subscription which has raised $2,5 million through the proposed issue of 542,250,000 new ordinary shares at a price of 0.38 pence. The funds, raised via a private placement, will for the most part be used to further advance work expected to lead to the delivery of an EOC contract for the Kola Potash Project announced in August.

The details of a proposed rights offer announced in February by Sable Exploration and Mining will now proceed with the offer of 52,213,608 shares at R1 per share. The offer will open on 13 November 2023.

Finbond is to go ahead with the proposed specific repurchase of 340,523,358 ordinary shares, representing c.38.55% of the total issued share capital as announced in August. The shares will be repurchased from Net1 Finance and Massachusetts Institute of Technology at 29.11 cents per share, representing a 19% discount to the 30-business-day VWAP on 9 August 2023.

Several listed companies reported repurchasing shares this week. They were:

Old Mutual announced in May it would commence with a share repurchase programme. The company has now confirmed that on October 16, 2023, it concluded the repurchase of 122,974,063 shares. The price at which the shares were repurchased, and the total amount paid were undisclosed other than to say that the company remained within the value specified in its announcement in May of R1,5 billion.

According to the Q3 results, Textainer repurchased 996,403 shares at an average price of $40.12 per share during the third quarter. The company has, however, suspended its share repurchase programme pending the transaction with Stonepeak announced last week. The deal is expected to close in the first quarter of 2024.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 23 – 27 October 2023, a further 4,646,244 Prosus shares were repurchased for an aggregate €121,7 million and a further 304,926 Naspers shares for a total consideration of R891,95 million.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 9,830,000 shares for a total consideration of £43,5 million.

The JSE has advised that AH-Vest, Sasfin and Rex Trueform have failed to submit their annual reports within the four-month period as stipulated in the JSE’s Listings Requirements. If the companies fail to produce their annual reports on or before 30 November 2023, then their listing may be suspended.

The failure by Lux Holdings to remedy the various listing non-compliances since its suspension on 5 August 2022, has resulted in the removal of its listing from the JSE. The company listing will be removed from the commencement of business on 6 November 2023.

Following the fulfilment of the scheme conditions, the listing of Liberty Two Degrees will terminate at commencement of trade on 14 November 2023.

Six companies issued profit warnings this week: Sasfin, Renergen, enX, Astral Foods, aReit Prop and Pepkor.

Three companies issued or withdrew a cautionary notice: Astoria Investments, PSV and Tongaat Hulett.

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

AT Ghana (formerly AirtelTigo Ghana) has sign a joint venture agreement with UK private equity firm, Hannam Investments. Financial terms were not disclosed, but under the agreement, Hannam will, among other things, invest in state-of-the-art technology and infrastructure upgrades to create a leading 4G mobile telecommunications network.

Africa Finance Corporation (AFC) has sold its 35% stake in Atlantic Terminal Services (ATS) to Yilport Holdings. ATS is the concessionaire for the expansion of Ghana’s Takoradi Port. The transaction results in AFC exiting its equity investment, however it will remain a lender to the project. Financial terms of the exit were not disclosed.

Hollard International has acquired a significant interest in Apollo Investments, the holding company of Kenya’s APA Insurance. Financial terms were not disclosed. Hollard’s existing footprint in Africa covers South Africa, Namibia, Mozambique, Zambia, Lesotho, Botswana and Ghana.

ASX-listed Belararox has signed a non-binding term sheet with Chemopharm Limited to acquire the Solwezi East and Chantente exploration licences in the Zambian Copperbelt. The tenements consist of over 17,800 hectares in the Central African Copper belt. The purchase price consists of cash, shares and unlisted options. Upon completion of the deal, Chemopharm would hold a 7.49% stake in Belararox.

Ghanaian fintech, Zeepay Ghana, has secured a US$2 million equity investment from Injaro Investment Advisors. The inaugural investment by the Injaro Ghana Venture Capital Fund (IGVCF) forms part of Zeepay’s current Series A.5 funding round.

Chapel Hill Denham’s Nigeria Infrastructure Debt Fund has agreed to provide solar-based internet service provider, Tizeti Network, with an undisclosed long-term senior debt facility. Tizeti currently serves over three million subscribers in Nigeria. The debt funding will be utilised to build new internet infrastructure and purchase additional equipment to expand its services.

British International Investment has committed US$26,5 million to AFEX, a leading commodities platform. AFEX currently operates over 200 warehouses in Nigeria, Kenya and Uganda and serves over 450,000 farmers. The investment will be used to build 20 additional modern warehouses in the three countries.

African Development Bank has approved a US$196,43 million loan to Namibia to implement the second phase of its Transport Infrastructure Improvement Project. The loan will cover 51.8% of the total project cost, with the Namibian government covering the remaining 48.2%. The project consists of, among other things, 207 kms of new rail track using concrete railway sleepers and new rails, the construction of 16 bridges and renovations to two existing stations.

Global Ventures, the Bridge Fund (Proparco and Digital Africa), Wrightwood Investments (UK) and other international funds have invested in Egyptian healthtech, Almouneer. The seed funding, totalling US$3,6 million, will primarily support the development and expansion of DRU-MEA’s first patient-centric, digitally-enabled lifestyle and diabetes management platform.

My Easy Transfer, a Tunisian fintech, has raised €400,000 from 216 Capital. The fintech was started in 2022 and aims to evolve its platform to meet all the payment needs of the diaspora in a single mobile app.

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

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