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Ghost Bites (British American Tobacco | Burstone | De Beers | EOH | Growthpoint | Hyprop | Momentum | Orion | Quantum Foods | The Foschini Group)

The Finance Ghost
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Ghost Bites (British American Tobacco | Burstone | De Beers | EOH | Growthpoint | Hyprop | Momentum | Orion | Quantum Foods | The Foschini Group)

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

British American Tobacco banks £1.5 billion (JSE: BTI)

The block trade of shares in the Indian business is complete

As noted earlier in the week, British American Tobacco decided to reduce its stake in ITC Limited in India by selling 3.5% of that company to institutional investors. It certainly didn’t take long to achieve, with £1.5 billion worth of shares placed in a matter of days.

The proceeds will be used to buy back shares in British American Tobacco, starting with £700 million in 2024. The group is trying to balance this against the need for ongoing investment and share buybacks, as well as the deleveraging towards the new target range of 2x to 2.5x adjusted net debt to adjusted EBITDA.

Burstone to acquire Neighbourhood Square from Investec (JSE: BTN)

The deal is part of a right of first offer that Burstone has over certain properties

Those with good memories may recall that Investec Property Fund was rebranded Burstone some time ago. The management team of Burstone was also internalised, at great cost I might add. As part of this, Burstone was granted a right of first offer over certain properties held by Investec. This lasts for 24 months after the closing of the internalisation transaction.

Investec is selling Neighbourhood Square and Burstone has exercised the right of first offer along with Flanagan and Gerard Frontiers Property Limited, who will buy it on a 50-50 basis from Investec for a total purchase price of R380 million.

With Checkers and Woolworths as anchor tenants along with Dis-Chem, this bodes well. The property is located in Linksfield, which is an upmarket suburb of Johannesburg. The net property income for the half-share is R15.3 million, which is a yield of 8.5%. The cost of debt is assumed to be 9.35% at the moment so the property would be loss-making if fully funded by debt.

That’s just how it is for property in this market.

De Beers reports further momentum in rough diamond sales (JSE: AGL)

This is encouraging news for Anglo American

De Beers, part of the Anglo American stable, has announced the rough diamond sales value for the second sales cycle of 2024. Sales came in at $430 million, up from $374 million in the first cycle of 2024.

Cycle 2 in 2023 was $497 million, so this number is still down year-on-year.

Demand is growing in India but remains a concern in China, with the narrative across those two massive emerging markets continuing to be in favour of India in most contexts. Overall, De Beers expects a gradual ongoing recovery throughout the year.

I don’t see many silver linings at EOH (JSE: EOH)

Just because a company has survived, doesn’t mean it is a good investment

EOH has been quite the story, hasn’t it? After fighting back from the brink of death because of widespread corruption, EOH eventually had to do a rights issue to sort out the balance sheet (something I was worried about at the time, leading to me selling my speculative position before the rights issue happened).

In the post-rights issue world, it’s also not rocket science to see that EOH is unlikely to do exciting things for a portfolio. What exactly is appealing about providing technology solutions to the public sector and large corporates? This is a bright red ocean of competition, which means margin pressure is almost unavoidable.

I’m unfortunately being proven correct once more with this company, as results for the six months ended 31 January reflect a drop in continuing revenue of between 2% and 4% year-on-year, along with operating profit collapsing from R142 million to between R5 million and R15 million. If adjusted EBITDA is a metric you’re willing to use, that fell from R171 million to between R90 million and R105 million.

The headline loss per share is between 10 cents and 12 cents, which is at least an improvement vs. the headline loss per share of 17 cents in the comparable period. This is thanks to having far less debt on the balance sheet than before, a direct result of the capital raising activities. The interest charge was down from R102 million to R68 million.

Weirdly, despite the drop in operating profit, cash from operations jumped from R5 million to between R190 million and R210 million. Once you read all the way through the announcement, you find that it was because of the early receipt of a large amount in the foreign operations, with the payable only settled after year-end. You have to be very careful with cut-off issues in working capital. The company did a good job around explaining this, noting that cash from operations would’ve been between R28 million and R34 million without that distortion.

If we consider momentum instead of year-on-year movements, then EOH’s six-month performance is better than the immediately preceding six months. The poor trading at the end of the last financial year continued into this half for three months or so before improvements came through.

For me, it’s all just too difficult with no obvious catalyst for major upside in performance. Those who supported the rights issue at R1.30 are in the red, with the share price currently at R1.19.

The V&A is still the jewel in Growthpoint’s crown (JSE: GRT)

Tourism in Cape Town is flying

Growthpoint released results for the six months to December 2023 and they reflect pressure on distributable income per share, with that metric down by 8.6%. The dividend followed suit in terms of percentage movement, coming in at 58.8 cents per share.

As the largest of the JSE-listed REITs, Growthpoint boasts a portfolio in which only 53.7% of total assets are found in South Africa. The offshore stuff takes the form of strategic stakes in listed funds like Growthpoint Properties Australia, Capital & Regional (also on the JSE) and Globalworth Real Estate Investments in London, with exposure to properties in Poland and Romania.

On top of all this, they have Growthpoint Investment Partners. This section of the group effectively serves as an incubator for specialist funds in areas like healthcare and student accommodation.

One of the challenges at the moment is that the loan-to-value has moved higher for both the South African calculation (34.8%) and the group calculation (42.0%). This comes at a time when debt is expensive, putting pressure on distributable income.

The V&A Waterfront remains the superstar in terms of growth, achieving a 13.7% increase in distributable income. Another positive is that the South African portfolio vacancy rate has decreased from 9.2% to 8.8%, with the office portfolio improving from 19.2% to 17.8%. That’s still very high of course, but it’s slowly getting better.

Distributable income per share fell 13.4% at Hyprop (JSE: HYP)

As we learnt earlier in the week, there’s no interim dividend

The six months to December 2023 marked an unhappy time for Hyprop shareholders. This is despite metrics that really don’t look too bad at face value, like decent growth in tenant turnover and a positive rent reversion for the period – even for offices attached to the malls!

The office vacancy, by the way, is 32.8%. The retail vacancy rate is just 1.3%.

Despite encouraging metrics, distributable income for the South African portfolio fell from R459 million to R448 million.

In the Eastern European portfolio, tenant turnover growth was in the double digits and the vacancy rate was just 0.3%. Despite what sounds like a great story, distributable income was also lower. It came in at R229 million vs. R243 million in the comparable period.

We then get to Sub-Saharan Africa, where the devaluation of the naira has worked the same magic that has hurt the likes of MTN. Distributable income collapsed from R26 million to -R8.6 million.

So, at group level, distributable income fell 8.3%. Due to the dividend reinvestment programme that led to many more shares being in issue, distributable income per share was down 13.4%. Ouch!

The full-year guidance is a drop of between 10% and 15%, so it’s an unpleasant year for shareholders like yours truly.

Based on this guidance, the risks to the naira and the group’s worries around Pick n Pay as the anchor tenant in its properties, there is no interim distribution. I assume that the worry is Pick n Pay needing to renegotiate rentals. Hopefully Hyprop holds firm, as these are high quality malls and I can’t imagine why rental concessions would be needed for those stores.

The acquisition of Table Bay Mall should be implemented before 1 April 2024, with R500 million in cash and R250 million of bank facilities earmarked for that acquisition. They paid a hefty price for Table Bay Mall and I hope it will work out.

IFRS changes make it trickier to understand Momentum’s numbers – but the direction of travel is up (JSE: MTM)

Higher interest rates have helped them

Momentum Metropolitan has been applying the new Insurance Contracts accounting standard from 1 July 2023, so this limits the comparability of the numbers for the six months to December 2023 to the prior period. To address this, the company shows restated comparable numbers.

On that basis, HEPS is up by between 46% and 51% – a very large jump indeed! If it wasn’t for the restatement, they would’ve been up by between 18% and 21%. A period with a new accounting standard is always a major distortion.

The performance was driven by better investment income (thanks to higher interest rates) and other improved operational performance metrics like persistency and sales volumes.

Orion releases its half-year financials (JSE: ORN)

This is very much still a development company

Orion’s interim report kicks off with the Prieska Copper Zinc Mine, where this period saw an update to the Mineral Resource Estimate and the commencement of trial mining and dewatering. There are 166 on-site employees already!

At the Okiep Copper Project, a drilling programme is underway with the goal of completing the bankable feasibility study by the third quarter of 2024.

There are other projects in the group as well, but they are sitting on the fringes in comparison to those two major opportunities.

Development is expensive, with an operating loss of AUD5.65 million for the period.

Ongoing drama at Quantum Foods (JSE: QFH)

The “feathers fly” pun is hard to avoid here

The Quantum Foods shareholder register is quite the hotbed of activity at the moment. After Country Bird bought the shares held by JSE-listed Astral Foods, crazy things happened to the share price and Quantum Foods had to release an announcement giving the market some idea of what was going on.

The drama continues, with one of the three major shareholders (Braemar Trading) demanding a shareholders meeting to propose the removal of the chairman of the board and two directors, with a Braemar’s nominee to be appointed as director.

Quantum Foods has taken legal advice and the view is that the demand is not legally compliant. The board will therefore not convene a shareholders meeting.

Whatever is going on here, it’s big.

In a separate announcement, Quantum announced that Country Bird Holdings has issued a letter to the board of Quantum confirming that the company has no intention of making a takeover bid for the company.

The Foschini Group is bringing a new retail brand to SA (JSE: TFG)

A franchise agreement with JD Sports Fashion has been agreed

The Foschini Group has signed an agreement with JD Sports Fashion to be the company’s exclusive retail partner in South Africa. As the name suggests, JD Sports Fashion focuses on sports and casual wear (so, yet another seller of Nike and Puma etc.) and has strong private labels as well.

One wonders how many sports retail brands a market possibly needs, as The Foschini Group already owns Sportscene, Totalsports and Sneaker Factory. Small tweaks in the style of the store, the music being played etc. seem to make a difference.

More than 40 stores will be opened over the next five years in South Africa, so that’s good news for retail mall owners!

Little Bites:

  • Director dealings:
    • The company secretary of Truworths (JSE: TRU) sold shares worth R1.6 million. This seems to mostly relate to taxes and loans due under legacy share schemes, but there’s also a comment about a desire to rebalance the personal portfolio and so that counts as a sale in my books.
    • The CEO of Sirius Real Estate (JSE: SRE) bought shares in the company in a self-invested pension. The value was £6.5k.
    • The non-executive chairman of Primary Health Properties (JSE: PMR) has reinvested dividends into shares in the company worth £2k. His wife did the same to the value of £1.2k.
  • Cognition Holdings (JSE: CGN) announced that the comments made by Caxton and CTP Publishers and Printers (JSE: CAT) regarding an offer having been made for Cognition are incorrect. Although an offer has been lodged with the board of Cognition, the TRP still needs to approve it.
  • As if the situation around disgraced ex-Bytes CEO Neil Murphy (JSE: BYI) couldn’t get more ridiculous, his very long list of undisclosed trades in the company’s shares can now be added to be Alison Murphy, a close associate. There were many acquisitions from 2021 to 2023, followed by disposals. It’s truly mind-blowing.
  • Southern Sun (JSE: SSU) has repurchased shares representing 3% of issued share capital since the general authority granted in September 2023. The average price per share paid is R4.97, which is slightly below where the share is currently trading.

Ghost Bites (Attacq | Brait | British American Tobacco | Capitec | Homechoice | Hyprop | MC Mining | Old Mutual | Truworths | WeBuyCars)

The Finance Ghost
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Ghost Bites (Attacq | Brait | British American Tobacco | Capitec | Homechoice | Hyprop | MC Mining | Old Mutual | Truworths | WeBuyCars)

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

Attacq: improved income guidance and a full exit from MAS (JSE: ATT)

The net asset value per share has dipped slightly over the past year, though

Attacq has released results for the six months to December 2023 and they reflect some important strategic steps. For example, this was the period in which the major deal with the Government Employees Pension Fund for Waterfall City was implemented.

Although not captured in the results to December, the group has also taken the significant step of agreeing to sell the entire remaining shareholding in struggling Eastern European property fund MAS (JSE: MSP) at a price of R16.75 per share, which is actually a slight premium to the current MAS price of R15.95 a share. This will unlock cash of R773 million for Attacq to invest. The buyer is PKM Developments Limited.

Now, back to the numbers. Attacq’s interim dividend has moved ever so slightly higher from 29 cents to 30 cents per share, with the net asset value per share dropping from R17.35 to R17.25. Group gearing decreased from 37.3% to 25.3%, giving Attacq one of the strongest balance sheets in the property sector.

Guidance for full year distributable income per share growth has been revised higher to between 10.0% and 12.5%.

And if you can believe it, even occupancy in the office properties has moved higher between June 2023 and December 2023!

The market has very little love for Brait (JSE: BAT)

This is despite Virgin Active now having over 1 million members worldwide

The sad and sorry state of the Brait share price is quite something to behind. Even the most H2O-ready boets at Virgin Active couldn’t lift this thing:

Premier is separately listed these days (JSE: PMR), so you can get everything you need to know about that investment within the Brait stable from the pre-close announcement that Premier recently released to the market. The TL;DR of it is that revenue growth slowed to low single digits as inflation moderated on the food items that Premier mainly operates in. The company is on track to improve its leverage ratio despite a significant capital investment programme.

The market pays a lot of attention to the Virgin Active numbers though, as this is not separately listed. Virgin Active South Africa now has 625k members (up from 606k as at the end of September 2023) and worldwide membership at Virgin Active has surpassed the 1 million mark. All territories other than Australia are now EBITDA positive.

Run-rate EBITDA has increased to £55 million, up from £30 million as at 30 September 2023.

At New Look, the UK fashion business, average selling prices were higher over Christmas and volumes were down. The net result was a reduction in revenue. Management focused on margin retention.

Brait is still busy figuring out how to extend the December 2024 maturities for the convertible bonds and exchangeable bonds. No agreement has been reached as of yet.

An interesting capital allocation step at British American Tobacco (JSE: BTI)

The company is selling down the stake in India to fund further share buybacks

British American Tobacco has announced that it will sell-down a stake of 3.5% in Indian business ITC. This would take the company’s stake down to 25.5%, which is still a significant minority holding.

The sentiment around India is largely positive at the moment, particularly as China’s economy has stalled. It seems as though British American Tobacco is taking advantage of this, with a view to getting a good price on the shares from institutional investors and then using those proceeds to repurchase British American Tobacco listed shares that are trading at a modest multiple.

At this stage we don’t know what the pricing of the stake will be, but this is a solid capital allocation strategy and many a listed company could take notes here. Importantly, I don’t think it really makes a difference whether the stake is 25.5% or 29% in terms of control and influence, so this is purely a financial consideration around capital allocation rather than a larger strategic decision.

It’s also interesting that this buyback is happening while the company is also working towards a decrease of overall leverage to reach a level of 2x – 2.5x adjusted net debt to adjusted EBITDA.

Capitec increases its stake in Avafin (JSE: CPI)

This is a further investment in international operations

Capitec currently has a 40.66% stake in Avafin, an international consumer lending group. This is moving up to 97.69% at a purchase price of €26.3 million. The original stake was acquired back in 2017, so Capitec has already walked a multi-year road with this business.

The small residual amount in the business will be held by Avafin’s management team.

Avafin provides online consumer loan products in Poland, Czechia, Latvia, Spain and Mexico. This is therefore geographical diversification for Capitec, with the banking group noting that Avafin’s “small challenger” status in its markets of operation make it a good culture fit.

The numbers on the fact sheet provided to the market by Capitec are outdated (key financials are for 2022), so that’s not super helpful. For that year, net profit was €8.3 million and return on equity was 56%.

Homechoice had a decent year in 2023 (JSE: HIL)

The total dividend ended up being 7% higher

Homechoice is one of those JSE-listed companies that you’ve probably not spent much time thinking about. The group is focused on fintech solutions and it seems to be working, with the Weaver business contributing 92% of group operating profit. It contributes far less in the way of revenue though, with fintech revenue of R1.9 billion vs. total revenue of R3.7 billion.

Operating profit is up 28.4% to R619 million despite retail sales decreasing by 23.6%, so fintech really is driving the story here. In case you’re wondering what they do, a good example is the PayJustNow offering of buy-now-pay-later (or BNPL) solutions. This is a payment solution that has taken off globally in the past few years, with PayJustNow having a strong position in the local market.

HEPS has increased by 7.2% to 309.3 cents and the total dividend for the year was up 9% to 153 cents.

A disappointing update from Hyprop (JSE: HYP)

REIT investors hate to see a dividend go

Hyprop is exposed to many of the best retail shopping malls in South Africa. I’m a shareholder in the fund for that reason, having bought in with a multi-year view on rates coming down and higher quality malls still performing decently.

Then along came not just Pick n Pay, but also Hyprop’s exposure to Nigeria. The latter isn’t a surprise. The former feels like very dicey justification to me, as we are all aware that Pick n Pay is facing plenty of pressure but it’s very hard to imagine a world in which flagship stores in leading malls shut down. Nothing is ever impossible, but really?

Hyprop is worried enough about this Pick n Pay issue (and the devaluation of the naira and the impact this has on the Ikeja City Mall) to not pay an interim dividend “until these risks subside” – which feels extremely open-ended. If they are hoping that the Pick n Pay or Nigerian issues will magically be sorted out in the next few months, they are dreaming.

Distributable income per share for the six months ended December 2023 came in 13.4% lower, with an increase in the number of shares after the dividend reinvestment programme. Distributable income (i.e. not on a per-share basis) was only down by 8.3%.

The market felt as frustrated by this update as I did, with the share price down 4% for the day. There were no shortage of disgruntled voices, particularly in the context of how much Hyprop recently paid for Table Bay Mall.

I decided to express my annoyance with a meme:

Well, so much for the MC Mining bidding war (JSE: MCZ)

As quickly as they appeared, Vulcan Resources has disappeared

In a very odd sequence of events, Vulcan Resources went from submitting an indicative non-binding proposal (with a pricing range) on 8 March, to walking away from the opportunity just four days later. Vulcan will not be proceeding with a formal offer to shareholders of MC Mining.

Now, it is common for non-binding proposals not to go ahead. The clue is in the name, right? What I don’t understand is how it happened in just four days.

Very, very odd indeed.

This leaves Goldway Capital as the only bidder at the moment, with the independent board of MC Mining recommending that shareholders do not accept that offer.

Old Mutual’s numbers looked good for 2023 (JSE: OMU)

This puts the group back in the headlines for the right reasons

Old Mutual has released a trading statement for the year ended December 2023 that reflects strong growth in HEPS of between 18% and 38%. This has been driven by an improvement in results from operations (basically their measure of operating profit) of between 6% and 26%.

You may want to use adjusted HEPS instead, as this excludes hyperinflation in Zimbabwe. This metric has increased by between 14% and 34%, so that isn’t too different to the change in HEPS.

Old Mutual has been at the centre of quite a bit of controversy on local social media recently, with consumer activists calling for people to move their policies. Whether this will actually have an impact on the numbers will only be seen in 2024. Old Mutual is a very large organisation.

Truworths distances itself from Truworths Zimbabwe (JSE: TRU)

The Zimbabwean business is immaterial to the Truworths group

The Zimbabwe Stock Exchange has agreed to a voluntary suspension from trading of Truworths Zimbabwe, in which Truworths has a 34% shareholding.

This is because the company needs to address going concern issues and comply with listings requirements, which means the creation of a roadmap to resolve current challenges.

The investment in Truworths Zimbabwe has been held since 2002 and has been fully impaired by Truworths in prior years, so the issue in Zimbabwe is essentially immaterial to the rest of Truworths.

The WeBuyCars pre-listing statement is available

The listing date has been set as 11 April

If you’re a shareholder in Transaction Capital (JSE: TCP) like I am, then this is an important update. The pre-listing statement has been released by WeBuyCars, with the company set to be separately listed on 11 April.

Having originally been founded in the early 2000s by brothers Faan and Dirk van der Walt, WeBuyCars is a great example of how to spot a gap in the market and really go for it. I’ve written multiple times before on how impressed I’ve been by the growth story.

With 2,800 employees and around 14,000 vehicles traded each month, the company has come a long way. Due to troubles at Transaction Capital, it will now be set free to stand on its own feet.

This will give investors an opportunity to take a pure-play view on used car sales, with no noise from car rental or new car operations. WeBuyCars is also a dividend paying firm, with a policy to declare between 25% and 33% of headline earnings as a dividend going forward.

As for growth prospects, they believe that they can grow from the current level to around 23,000 vehicles per month in the next 4 to 5 years. Alongside this goal, there are plans to drive the in-house IT capabilities and to improve the finance and insurance penetration rates.

There are a number of complicated transaction steps along the way from a Transaction Capital perspective, with the group planning to unlock cash of between R900 million and R1.25 billion to help sort out its balance sheet. Transaction Capital’s shareholder in WeBuyCars is anticipated to be between 57.5% and 67.5% immediate prior to the listing and unbundling.

The capital raising activities imply a valuation for WeBuyCars of R7.5 billion.

If you would like to view the abridged pre-listing statement, the company has placed it in Ghost Mail at this link. I highly recommend signing up to attend the Unlock the Stock event this Thursday 14th March at midday, as that is your chance to ask questions directly to the management team. Attendance is free but you must register here.

Little Bites:

  • We don’t have any details behind the rise in earnings, but Grand Parade Investments (JSE: GPL) released a trading statement reflecting growth in HEPS of between 11% and 31% for the period ended December 2023. We will have to wait for the release of results on 20 March to find out more.

Listing of WeBuyCars and Abridged Pre-Listing Statement

Sponsored Content
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Listing of WeBuyCars and Abridged Pre-Listing Statement

“Despite the headwinds presented by the economic environment, our revenue for the four months to 31 January 2024 grew by double digits (at 16,2%), illustrating the resilience and adaptability of our business model. Moreover, our profitability has also shown double digit growth (at 19,7%), demonstrating the effectiveness of our cost management strategies and operational efficiencies.

This impressive financial performance not only fortifies our position in the market but also underscores our ability to generate sustainable value for our stakeholders. Our commitment to innovation and customer satisfaction has yielded remarkable results with growth in the majority of our key operational performance indicators. This reaffirms our dedication to delivering unparalleled value to our customers while fostering long-lasting relationships built on trust and reliability.”

CEO of WeBuyCars, Faan van der Walt

To engage directly with the management team of WeBuyCars, register for the Unlock the Stock event on 14 March at midday. Attendance for this online event is free but you must register here. Unlock the Stock is an initiative by The Finance Ghost, Keyter Rech Investor Solutions and Coffee Microcaps.

VIEW THE ABRIDGED PRE-LISTING STATEMENT BELOW

Listing-of-WeBuyCars-on-the-JSE-and-abridged-Pre-Listing-Statement

We Buy Cars Logo

South Africa’s leading pre-owned vehicle trader, WeBuyCars is a reputable, trusted, household brand in the South African market.

It spans South Africa with a robust multi-channel strategy, connecting seamlessly with a diverse customer base.
www.webuycars.co.za

Private Credit: The Bold ‘Bank Heist’

Harris Gorre, Grovepoint Investment Management LLP
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Private Credit: The Bold ‘Bank Heist’

Unlocking the world’s leading private credit managers

Harris Gorre, CFA is a Partner at Grovepoint Investment Management LLP

A swift “private credit” Google search confirms that the giants of alternative asset management, aptly named after Greek gods such as Apollo and Ares, have successfully captured the majority of Wall Street’s corporate lending business; along with its top talent and attractive double-digit returns they generate from making loans to U.S. middle-market companies.

Yet, despite private credit emerging as the fastest growing alternative asset class in the past decade, investing with leading private credit managers presents multiple challenges to investors seeking exposure to this asset class. As a result, investors remain underexposed, forgoing the diversified and asymmetric returns on offer.

However, there is a straightforward and effective approach to invest in premier private credit managers, while preserving daily liquidity and realising impressive double-digit USD returns.

Guided by the five principles below, investors can access a well-diversified and resilient portfolio portfolio of high-quality senior secured loans to private companies across the United States, managed by the world’s leading private credit managers.

1. Bigger is Better

  • Private credit is often defined as lending by non-bank financial institutions to middle-market companies. In the U.S. these are companies earning between $10 mn and $1 bn per annum (EBITDA1).
  • There are almost 200,000 of these companies across America employing over 50 million people. In fact, 87% of companies with > $100 mn in revenue in the U.S. are private.2
  • This makes the U.S. middle-market the 3rd largest economy on earth; around 3x bigger than the whole of the United Kingdom.
  • The size of the U.S. market matters. The larger the market, the greater the number of high-quality corporate borrowers within sectors and across industries.
  • The U.S. middle-market depth and liquidity makes it easier to construct a robust portfolio of loans to recession-resistant businesses in defensive sectors.

2. The Trend is your Friend

  • U.S. middle-market lending is dominated by non-bank lenders.
  • The migration of middle-market lending from U.S. banks started in the 1980s. By 2008, banks had lost 2/3rds of their market share to non-bank lenders and faced increasing regulatory headwinds.
  • Today U.S. banks control less than 15% of the lending to middle-market companies.


The dominance of private credit managers in the U.S. is important. It means you can construct an optimally diversified portfolio of thousands of loans spread across a broad range of borrowers and sectors; while avoiding cyclical industries such as energy, hospitality, aviation and retail.

3. The Good, the Bad and the Sub-Scale

  • High-quality non-bank lenders consistently generate better returns.
  • Historically, credit losses have been concentrated amongst the bottom 75% of private credit managers.3
  • Investing alongside high-quality managers with direct origination platforms, control of lending documentation and a deep, experienced bench of talent is fundamental to reaping outsized returns through economic cycles.
  • Again size matters, as larger lenders lend to larger borrowers who default less and recover more. In addition, these lenders have more diversified loan books, reducing idiosyncratic risk.

4. Don’t Pay for Stuck Money: The Liquidity Arbitrage

Traditionally, investors in middle-market loans receive a premium in exchange for relinquishing liquidity, i.e. investors expect a higher return for the same level of credit risk when they cannot trade their investment freely. This illiquidity premium can be as much as 4% p.a. for a similar level of credit risk.

As an example, at the end of 2023 direct lenders were originating senior secured loans at an average floating rate of 11.5% p.a. significantly more attractive than public bond markets.

  • Pre-2004, the only way to access middle-market loans and capture the associated illiquidity premium was via a private credit fund that locked your money up for 5 – 7yrs+, but this started to change in 2008 when many non-bank lenders began listing private credit vehicles on the NYSE and Nasdaq4. Raising additional permanent capital from public market investors meant they could take advantage of the lending constraints banks were facing following the Great Financial Crisis (“GFC”) in 2008.
  • These listed private credit vehicles shared pro rata in the loans originated by the same established direct lending teams who were managing the lock-up funds, enabling private credit managers to scale up faster and capture further market share from the banks. While non-bank lenders have had the ability to go public since the 1980s, the GFC served as a catalyst for the expansion of listed private credit vehicles.

Today there are over 130 private credit vehicles listed on the NYSE and Nasdaq. These include vehicles managed by leading credit managers such as Apollo, Ares, Bain, Barings, Blackstone, Carlyle, Golub, KKR, New Mountain, Oaktree, Owl Rock and Sixth Street.


Listed private credit vehicles now represent over 40% ($350 bn+)5 of private credit AUM.

Investing in these listed credit vehicles is significantly more attractive than investing in their illiquid private credit cousins due to the scale, diversity and liquidity of the listed market and the opportunity to invest in the same high-quality loan portfolios at a price below their fair value.6

5. Always Underwrite a Recession

  • High-quality managers have historically experienced lower defaults in their loan portfolios and higher recoveries (and therefore lower realised losses) than the average middle-market lender, due to their scale, diversity, focus on senior secured lending and underwriting quality.
  • Higher recovery rates result in lower realised losses whilst cash flow yields (10%+ p.a.) generated by well diversified loan portfolios have been more than sufficient to absorb losses (<0.6% p.a.).
  • Large, scaled non-bank lenders can benefit from market selloffs as they are able to acquire existing loan portfolios from stressed smaller managers at discounted prices and originate new loans to high-quality borrowers at attractive all-in floating rate yields.
  • Navigating through economic cycles requires steadfastly adhering to a disciplined value-oriented approach; capitalising on market dislocation to invest in high-quality private credit vehicles at discounted prices relative to their intrinsic value and crystallising gains when the market is overpaying for the yield they generate.
  • Investing at a discount to the fair value of the loan portfolio not only serves to mitigate potential downside in a recession but also forms the foundation for generating superior future returns.

By integrating these guiding principles into a disciplined and active investment framework, experienced investors can construct a well-diversified portfolio of leading private credit managers; unlocking a valuable and stable source of diversified return whilst retaining daily liquidity.

Sources:

  1. Earnings Before Interest, Tax and Depreciation.
  2. Source: National Center for Middle Market, Capital IQ, 2022.
  3. Source: SNL Financial and SEC filings, 2009 – 2023.
  4. The New York Stock Exchange (“NYSE”) and the National Association of Securities Dealers Automated Quotations Stock Market (“Nasdaq”) are the two largest stock exchanges in the world with a combined market capitalisation of over $45 trillion (source: Statista 2024).
  5. Source: Bloomberg, 31 Dec 2023.
  6. Listed non-bank lenders are regulated by the Securities & Exchange Commission and are required to produce consistent, transparent and robust quarterly reports including the fair value of their loans. This determines their book value. High quality managers have historically traded at an average of 1x book value.

Editor’s note: the JSE-listed AMC that invests into the Grovepoint Investment Management private credit portfolio trades under the code JSE: GIMLPC. More information is available on the UBS website at this link.

Ghost Bites (Absa | EPE Capital Partners | Lighthouse | Metair | Remgro | RFG Holdings)

The Finance Ghost
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Ghost Bites (Absa | EPE Capital Partners | Lighthouse | Metair | Remgro | RFG Holdings)

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

Absa’s retail businesses took a major knock in 2023 (JSE: ABG)

At group level, earnings went sideways

In a year that should’ve been very strong for banks, Absa could only grow HEPS by 0.6% on an IFRS basis or 1.1% on a normalised basis that adjusts for the Barclays separation. Whichever way you cut it, it’s a disappointing outcome for Absa that is well behind what peers achieved.

If you dig through the financials, you’ll see what the retail banking operations were the pressure point. The Product Solutions Cluster focuses on lending products (like mortgages and vehicle finance) and Everyday Banking is the retail banking solution. They both went significantly in the wrong direction, offsetting the good result achieved in Corporate and Investment Banking:

There was a substantial increase in loans written off for home loans, vehicle finance, card debts and other loans. This drove the decrease in earnings in the retail banking businesses and resulted in group return on equity decreasing from 15.3% in 2022 to 14.4% in 2023.

The Absa share price has underperformed its peers in the past year and pressure will be coming through from major shareholders for an improved performance in 2024.

EPE Capital Partners suffers a drop in NAV per share (JSE: EPE)

The ongoing pressure on the Brait share price doesn’t help

EPE Capital Partners, also called Ethos Capital, has a portfolio of unlisted and listed investments. The TL;DR over the history of this fund is that the investments tend to underperform and significant fees are paid to the managers of the fund, so shareholders end up with a disappointing outcome.

In the results for the six months to December 2023, the unlisted portfolio saw its NAV decline by 3% despite the top investments growing revenue and EBITDA by double digits. On the listed side, Brait’s share price tanked over the period and hence there was even more pressure put on the EPE NAV.

If Brait is valued based on its share price, the NAV of EPE dropped by 15% to R7.31. If Brait is valued based on its own NAV per share, then the NAV of EPE fell by 5% to R9.89. With the share price trading at R4.54 in morning trade, you can see that the market puts a fat discount on EPE regardless of the approach taken with the Brait value.

The portfolio somehow manages to have dual exposure to Nigerian telecoms, with positions in MTN Zakhele Futhi and a private company called Optasia that counts Nigeria as one of its key markets. On top of everything else that Brait etc. has to deal with, EPE has an added layer of pain from the devaluation of the naira.

Due to the substantial discount to the NAV, EPE’s strategy is to monetise the asset base and return capital to shareholders. I wouldn’t hold my breath for that to be a quick process.

Lighthouse prepares for a year of acquisitions (JSE: LTE)

The company believes that conditions are right to acquire retail malls

Lighthouse Properties has released its results for the year ended December 2023. Total distributable earnings per share came out at 1.76 EUR cents per share for the year. As the company has been doing for a while, distributions are being supplemented from retained earnings, with the total distribution for the year at 2.70 EUR cents. A scrip distribution alternative will be offered.

The loan-to-value ratio decreased from 23.84% to 14.04%, with the commentary in the announcement suggesting that it has subsequently moved higher to 27%. They are looking for further acquisitions of shopping malls in 2024, as they believe that yields on quality assets have risen and interest rates have stabilised.

The forecast distribution for 2024 is between 2.40 and 2.50 EUR cents, with some dependence on a distribution from Hammerson to help the company achieve this.

Metair has some wind in its sails again (JSE: MTA)

The unluckiest company on the JSE seems to be turning the corner

Metair really has attracted enough bad luck to last a lifetime. They’ve had an extremely tough time with all the usual South African challenges, along with natural disasters in both South Africa and Turkey! The share price has lost over half its value in the past year as a result. The 23.5% rally in the share price on Monday went a long way towards improving this!

The good news is that 2023 was much better than 2022, with the group profitable again and able to have positive conversations with lenders. It still wasn’t smooth sailing though, with improved conditions in the South African automotive components business (revenue up 45%) on one hand and a 17% decrease in battery sales volumes on the other, driven by the loss of export volumes in Mutlu Akü in Turkey as the business stopped selling to Russia and also lost a key client in the US.

Revenue growth was in the double digits for the year and EBIT margin (excluding hyperinflation and impairments) is between 6.8% and 7.8% vs. 7.6% the year before. It’s just as well that revenue growth was strong and EBIT margins were fairly steady, as net finance costs increased by more than 90%!

Headline earnings per share (HEPS) is between 128 cents and 140 cents for the year. That’s a vast improvement from a headline loss per share of 17 cents in the comparable period.

Digging deeper, the problematic Hesto business managed to agree a commercial price adjustment with key client Ford, allowing Hesto to make a profit in the second half of the year. The first half was so bad that Hesto still reported a full-year loss though. This is accounted for as an Associate and so losses are not included in the 2023 financial results, but Hesto’s performance is a consideration for debt covenant conversations with banks.

Of critical importance is that the revolving credit facility of R525 million due in April 2024 has been extended for an additional year. Lenders remain supportive and management is working on a debt restructure programme.

Before you allow yourself to believe that Metair’s luck has turned completely, I must highlight that Romanian subsidiary Rombat is under investigation by the European Commission for potentially violating EU antitrust rules between 2004 and 2017.

Remgro didn’t grow (JSE: REM)

Heineken Beverages was one of the major challenges – but not the only one

Remgro has released results for the six months to December 2023 and they reflect a substantial drop in HEPS of 35% to 45%. This is before making adjustments.

Now, some of these adjustments make sense, being once-offs related to various operations and corporate actions. I’m less convinced that the negative fair value adjustment on the Natref stock at TotalEnergies South Africa is appropriate to split out, even though that business is held for sale. This also happens to be the largest individual adjustment.

HEPS on an adjusted basis will be between 8% and 15% lower. This means that the core business went the wrong way, with the blame laid at the door of Heineken Beverages (volumes have fallen and so have margins), Community Investment Ventures Holdings (higher finance costs) and a special dividend from FirstRand in the comparative period that didn’t repeat in this period.

Volumes are still negative at RFG Holdings (JSE: RFG)

Pricing increases are taking revenue growth into the green

RFG Holdings has released a trading update for the five months ended February. Revenue was up by 5.1% thanks to price increases of 7.9%. Volumes fell by 5.2%, with the rest of the change explained by mix and forex effects.

The international vs. regional results tell very different stories. Regional revenue was up 6.7%, with price growth of 10.8% and volumes down 5.7%. International revenue was down 3.7%, with pricing 7.8% lower (but there’s a 6.8% forex offset) and volumes down 2.7%. Export volumes were unfortunately impacted by the challenges at the Cape Town port.

Long story short, consumers are under pressure (as we know) and RFG has pushed through pricing increases to make up for it. They are focused on protecting the operating margin rather than chasing sales growth at any cost. This doesn’t seem to be the strategy of everyone in the market, as RFG notes increased competitor promotional activity as a factor in the market i.e. more aggressive pricing.

The pie category has continued to buck the trend in terms of sales volumes, with the ready meals enjoying ongoing support from convenience-oriented consumers who are generally in higher income groups.

Other good news is that load shedding costs (i.e. diesel) have come down significantly.

The outlook for the business is largely positive, with the Easter period expected to support volumes. Either way, the group will continue with the focus on margins, assisted by efficiency gains from recent capital investment programmes. On the exports side, the local crop has been a success in terms of high quality fruit. RFG can only do so much though, as much will depend on the issues at the port being sorted out.

Little Bites:

  • Director dealings:
    • CEO Designate Mary Vilakazi has bought shares in FirstRand (JSE: FSR) worth R8.6 million.
    • A non-executive director of BHP (JSE: BHG) has bought shares in the company worth $57.7k.
  • Certain directors of Quantum Foods (JSE: QFH) sold shares to cover the tax on recent phantom share rights. This isn’t unusual. What is unusual is that the purchaser (an unnamed independent third-party) entered into an agreement directly with the directors to acquire those shares at R5.30 per share, rather than waiting for them to be sold on market. The total value is R1.7 million. There’s a lot of activity around the Quantum shareholder register at the moment.
  • Investment holding company Astoria (JSE: ARA) is acquiring shares in Leatt Corporation from RECM Worldwide Opportunities Prescient QI Hedge Fund at a price of $13.67 per Leatt share. The total value is $5.3 million. It will be settled through the issuance of Astoria shares at $0.738 per share and a cash payment of $840,000. This increases Astoria’s holding in Leatt from 2.3% to 8.84%. The pricing of both the Leatt and Astoria shares for the transaction is higher than the current market prices, with the Astoria shares being issued at a price close to NAV (the 30 September 2023 NAV was $0.7443 per share).
  • Accelerate Property Fund (JSE: APF) is selling off assets to try and reduce debt, but that isn’t always an easy thing to execute. The deal to dispose of Cherry Lane Shopping Centre has fallen through, with terms being negotiated with a potential new purchaser. In some good news at least, the fund has sold three other properties for R43 million, with the proceeds used to reduce debt.
  • Those of you who are interested in debt structuring will want to know that Grindrod Shipping (JSE: GSH) has announced a new $83 million reducing revolving credit facility. There’s also an optional reducing revolving accordion credit facility of $30 million that could be added on top. No, I’m not making any of these terms up. Yes, debt financing can get complicated. The purpose of the debt is to refinance an existing $114.1 million senior secured term loan facility.
  • Shaftesbury Capital (JSE: SHC) has completed the acquisition of 25 – 31 James Street, Covent Garden for £75.1 million before costs. This is a good example of the company recycling capital, as it comes after recent disposals to the value of £145 million (achieved at an 8% premium to the balance sheet valuation of the properties).

Ghost Bites (African Rainbow Minerals | Capital & Regional | Capitec | Caxton | Fortress | MC Mining | Mondi | Mpact | Quantum Foods)

The Finance Ghost
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Ghost Bites (African Rainbow Minerals | Capital & Regional | Capitec | Caxton | Fortress | MC Mining | Mondi | Mpact | Quantum Foods)

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

Commodity prices and inflation hit African Rainbow Minerals (JSE: ARI)

Earnings fell sharply in the latest period

African Rainbow Minerals released results for the six months to December 2023 and they tell a story of a very painful period for the company. Mining is exceptionally cyclical, with profits rising and falling due to factors completely outside of the control of the company.

Headline earnings per share fell by 43% to R15.07 per share. The interim dividend is down from R14 to R6 per share, so the payout ratio has decreased as the company takes a more cautious approach.

This just shows how important it is for our infrastructure to work consistently. In the comparable period when commodity prices were higher, Transnet was terrible. Goodness knows Transnet is still bad, but at least there wasn’t industrial action in this period. Sadly, commodity prices had already fallen by then, so an improvement in volumes couldn’t offset the loss of revenue due to lower prices on key commodities. The pain was at least mitigated to some extent by the weaker rand and higher average realised export iron ore prices.

On top of this, unit production costs were a struggle because of lower production volumes, higher electricity costs and general inflationary pressures, contributing to the drop in HEPS.

There are a number of operations in the group, with ARM Platinum worth highlighting for a momentous negative swing from headline earnings of R1.33 billion to a headline loss of R282 million.

Capital & Regional grows its dividend (JSE: CRP)

Footfall moved higher and new leases are at higher rates than before

Capital & Regional is a REIT focused on the UK market and specifically community shopping centres. The audit for the year ended December 2023 is still being finalised, but the group has released an update on key metrics in the meantime.

New lettings were achieved at a 6.8% premium to the previous rent, so that’s very good news indeed. Footfall is up 1.5%, yet is still only 86.7% of the levels seen in 2019. Occupancy declined slightly from 94.1% to 93.4%. Adjusted profit was over 23% higher for the year, which is a great outcome.

Like-for-like property valuations increased 2.6% for the year, with the Gyle property up 4.0% as the company paid a good price for it and there have already been strong renewals there.

The Gyle acquisition did impact the balance sheet, with the loan to value up from 40.6% as at December 2022 to 43.6% as at December 2023. The other impact is that the EPRA NTA per share (a measure of net asset value per share) dropped from 103p to 89p because of the additional shares in issue from the equity raise in September that funded the Gyle acquisition.

The total dividend for the year came in 8.6% higher.

Capitec achieved further earnings growth (JSE: CPI)

As we saw at Nedbank, the credit loss ratio improved recently

Capitec has released a voluntary trading statement. This is because although earnings are higher, they aren’t more than 20% up (the level that triggers a trading statement). Group HEPS will be between 14% and 16% higher for the year ended February 2024, which is still a solid outcome.

The second half of the financial year was a strong performance, particularly thanks to tighter credit granting criteria that led to an improved credit experience in the second half of the year. Although loan book growth is obviously a core part of Capitec’s strategy, the performance was boosted by double-digit growth in net transaction and commission income based on client transactional activity.

Results are due to be released on 23 April.

This hasn’t been a great period for Caxton (JSE: CAT)

The silver lining is the balance sheet

For the six months to December 2023, revenue at Caxton and CTP Publishers and Printers fell by 3.3% and profit for the period was a down by a rather ugly 30.8%. The drop in HEPS was far less severe, with a 6.2% decrease. Like in the comparable interim period, there’s no dividend per share.

We need to dig deeper to understand the result. For example, revenue would actually have been slightly up were it not for the closure of a subsidiary, so the top line result isn’t as bad as it looks. Having said that, a constrained consumer environment isn’t good news for Caxton’s community newspapers, as media advertising drops in this environment. Notably, advertising revenue in Johannesburg showed a sharp decline.

If you can’t see the decay everywhere in Joburg and the clear trend, then I can’t help you. The money is moving to the coast and at frenetic pace.

The packaging business was therefore the highlight for this period, with turnover growth of 8.1%. Although this sounds strong, margins came under pressure here.

In response to the difficult conditions, Caxton focused on reducing costs. If we exclude the closure of a subsidiary, staff costs were up 3.3% and operating costs increased 4.4%. Although this is below inflation, it looks like the group still struggled to maintain margins even if we exclude the closure.

The cash is the highlight here, up by 59% over 12 months. It’s slightly down since June 2023 (the last year-end) but this is due to seasonality. The current cash balance is already R360 million higher than it was at the end of December 2023. With high interest rates, this is driving much higher net finance income.

Of course, Caxton shouldn’t be making money for shareholders by putting cash on deposit. Investors are looking for far more than that. Caxton is sitting on significant firepower and there are multiple pressures in the market. This does create a recipe for some acquisitive activity, but there’s nothing confirmed yet.

Finally, there’s a dividend at Fortress Real Estate (JSE: FFB)

Sorting out the share class structure led to a significantly smaller holding in NEPI Rockcastle

Fortress has released results for the six months to December 2023 and they reflect a major shift at the company, as the share class structure has been simplified and that is shown in these results. This makes per-share comparability completely useless, as there is now only one class of shares vs. two. The other impact is that the shareholding in NEPI Rockcastle has reduced from 24.2% to 16.2%, as NEPI shares were used to achieve the collapse of two share classes into one.

This means that there is finally a dividend, coming in at 81.44 cents per share for the interim period. For reference, the share price is R16.39. On an SA REIT Best Practice disclosure basis, the NAV per share is R16.24 but as an eagle-eyed reader pointed out to me, that includes the previous FFB shares in the calculation. The NAV today is quite a lot higher, so there is a discount to NAV that is more in line with what we usually see on the market. Another important consideration is that the dividend is taxed as a dividend rather than as income, as Fortress is not a REIT.

If we dig into the portfolio itself, the good news is that net operating income grew by 9.2% in South Africa and 14.3% in the logistics portfolio in Central and Eastern Europe. The loan-to-value ratio is 34.2%.

Note: the Fortress sector has been updated after engagement with a reader who picked up the NAV issue

There’s a bidding war underway for MC Mining (JSE: MCZ)

This is when things can get exciting

The independent board of MC Mining must be feeling rather smug right now, having advised shareholders to not accept the offer of A$0.16 per share from Goldway Capital Investment. Out of nowhere, a competing bid has come in from Vulcan Resources (which owns the largest steelmaking coking coal mine in Africa) for between A$0.17 and A$0.20 per share.

This offer range is subject to a due diligence, but at least we know that the range is higher than the Goldway offer. At this point the independent board obviously cannot give a view on the Vulcan offer as nothing binding has been received yet.

This is usually where things can get exciting for shareholders. The ball is now in Goldway’s court to consider increasing its offer!

Mondi and DS Smith are proposing a merger (JSE: MNP)

Mondi shareholders would own 54% of the enlarged group

Difficult markets frequently lead to a consolidation strategy in which major players look to join forces to become more competitive. This is the route that Mondi looks to be taking, with a proposal to acquire DS Smith in exchange for shares to be issued by Mondi. The net result would be that existing Mondi shareholders would own 54% of the enlarged group and DS Smith shareholders would have 46%.

The groups have of course identified a number of synergies, like the combined geographic footprint and the strength in the value chain for products like containerboard. The groups will need to publish an estimate of the synergies that the merger can realise, so I can guarantee that there are some very highly paid people currently running around trying to figure that out.

I must also tell you that most mergers fail hopelessly to deliver on the promised synergies, so be sensible and apply a significant haircut to whatever number the companies put forward. Spreadsheets are easy; real life is hard.

Mondi has until 4 April 2024 to either announce a firm intention to make an offer for DS Smith or to announce that it does not intend to make an offer. The UK Takeover Code doesn’t allow things to hang in the air forever.

Mpact moved forward in a very tough environment (JSE: MPT)

The group has focused on margins and working capital management

Mpact has released results for the year ended December 2023. Revenue increased by 3.6%, despite sales volumes being 10.7% lower. This tells you that pricing increases saved the day, which also benefits margins. This led to a record result for cash generated from operations of R2 billion, which is literally double the 2022 number.

The paper business grew revenue by 3.3%, with an 11.2% reduction in volumes due to subdued demand and a decrease in fruit exports because of the weather. Mpact helped manage its working capital by choosing downtime of around 16% of total capacity at Felixton and Mkhondo Mills. This is to avoid being in an overstocked situation. The paper business grew underlying operating profit from R1.1 billion to R1.2 billion.

The plastics business grew revenue by 5.9%, with sales volumes down 3.8%. Underlying operating profit moved in the wrong direction unfortunately, from R198 million down to R189 million.

Due to higher average net debt and interest rates, net finance costs increased from R183.8 million to R284 million. Ned debt at the end of the period was R2.67 billion, up from R2.33 billion.

HEPS increased by 8% from total operations and just 3% from continuing operations. It’s very much a game of inches out there, especially with debt on the balance sheet. The total dividend for the year was 4% higher.

Despite this, Mpact believes in the core business in South Africa and continues to invest. Due to the difficulties in 2023, return on capital employed for continuing operations fell from 18.5% to 16.6%. Shareholders will want to see an improvement in this metric.

With the sale of Versapak (the discontinued operation) still in progress, Mpact is looking forward to improved conditions in the fruit sector, with the caveat being that port infrastructure could hurt exports. The containerboard side is less exciting, with an oversupply globally and ongoing risk of being overstocked that Mpact needs to manage. The plastics business looks set to be a mixed bag, with significant improvement in some areas and lower sales in others.

There’s activity on the Quantum Foods shareholder register (JSE: QFH)

Country Bird Holdings swooped in on a few shareholders, including Astral

There was some crazy activity in the Quantum Foods share price during the week. I’m not exaggerating. Take a look at this share price chart:

The activity was driven by the news that Astral Foods sold its entire interest in the company. What we now know is that the buyer is Country Bird Holdings, which acquired a 9.77% stake directly from Astral for R7.25 per share. Quantum had no knowledge of this.

Country Bird Holdings seems to be negotiating with other shareholders as well, with various prices being offered for the shares – all of which are below R9.50 per share based on the disclosure in the Quantum Foods announcement. Where Quantum is aware of discussions, including with other potential buyers, the price being put forward is R7.75.

At this stage, no formal offer or even notification of a potential offer for shares has been received from Country Bird Holdings. Quantum notes that Country Bird holds 15.8% in the company. The other two major shareholders are Aristotle Africa with 34.2% and Braemar Trading at 30.8%.

Little Bites:

  • Director dealings:
    • The company secretary of NEPI Rockcastle (JSE: NRP) has sold shares in the company worth R1.75 million.
    • Two directors of Sasol (JSE: SOL) (one of the group company and one of the South African subsidiary) sold shares worth a collective R888k.
    • A director of a subsidiary of AVI (JSE: AVI) received shares under the company incentive scheme and sold the entire lot for R818k.
    • A director of Harmony Gold (JSE: HAR) sold shares worth over R321k.
    • The wife of the CIO of Primary Health Properties (JSE: PHP) has bought shares worth £9.9k.
  • Things are tough at Pick n Pay (JSE: PIK), with the company releasing an announcement related to the group company giving financial assistance to subsidiaries in relation to the loan facilities with FirstRand and RMB. This isn’t really anything new, but it shows that the negotiations with banks are happening in the background as the banks waive the covenants and debate the terms and conditions with Pick n Pay.
  • Maria Ramos is retiring as chairman and director at AngloGold Ashanti (JSE: ANG), with existing director Jochen Tilk appointed unanimously by the board as her replacement.
  • The Schwegmann family has increased its interest slightly in Stefanutti Stocks (JSE: SSK). The reason we know this is because of the move through the 10% mark for one of the family members, which triggers an announcement.
  • Life Healthcare (JSE: LHC) has obtained SARB approval for the special dividend. It will be paid on 8 April.
  • Tiny little Telemasters (JSE: TLM) released a trading statement that expects a more than 100% improvement in headline earnings per share for the six months ended December 2023. Considering that the comparable period was a headline loss per share of -1.02 cents, this means a swing into the green.
  • In a good reminder of just how terrible things can get for a company, Afristrat (JSE: ATI) can’t move ahead with a voluntary liquidation application because a creditor liquidation application is awaiting a new date for the matter to be head. It’s over, we just don’t know how yet.

Bad business and the bother with boycotts

Dominique Olivier
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Bad business and the bother with boycotts

Nestlé has been the largest publicly-held food company in the world, measured by revenue and other metrics, since 2014. It is also the company on the receiving end of the longest continuous boycott in history. What do these two facts tell us about supersized businesses and the consequences of behaving badly?

I don’t have many vices, but one of the few that I’ve had since childhood is a hot cup of Milo on a chilly day. In my opinion, there is no other malted drink that compares in taste (sorry, team Ovaltine). This is a tough thing for me to deal with, because while I love that signature Milo flavour, I’m deeply conflicted about the business practices of its parent company, Nestlé.

You might attempt to solve this moral conundrum for me by suggesting that if I feel so strongly about Nestlé’s practices, then I should avoid buying their products. A reasonable idea, but much harder to execute than you might imagine, considering the vast amount of brands and products that Nestlé owns. Besides, when you look at Nestlé’s market share, you really have to ask yourself: is a boycott even remotely worth it?

Source: https://donegood.co/blogs/news/what-companies-does-nestle-own-and-can-you-avoid-them

How Nestlé got on the naughty list

In 1974, a document was published that would change public perception of the Nestlé brand forever. Titled “The Baby Killer”, this investigation by journalist Mike Muller was an unflinching exposé of the dodgy tactics used to market baby formula in third-world countries, particularly Africa. While the piece was directed at formula makers in general, there was no escaping the implication that Nestlé was one of the biggest culprits, with the company’s “Mother’s book” (a booklet handed out to new mothers in maternity wards, for free) referenced multiple times in the report.

From a marketing perspective, these tactics seem clever and effective. Scores of Nestlé brand representatives, dressed in nurse’s uniforms, were sent into maternity wards across Africa, Chile, India, Jordan and Jamaica, armed with free samples of baby formula. In the wards, they would speak to new mothers about the benefits of infant formula, a modern Western innovation that, according to them, far surpassed ordinary breastmilk in terms of nutritional value.

Impressed, many of these new mothers would test the formula sample on their babies, unaware that the milk in their own breasts would dry up by the time the sample tin was finished. Now imagine the tin is empty, the baby has become accustomed to the taste of formula, and the mother has no breastmilk left to offer as a substitute. There is no choice but to keep purchasing the product, despite its high cost (in Nigeria at the time, the cost of formula-feeding a 3 month old infant was approximately 30% of the minimum urban wage). Desperate mothers, trying to “stretch” the amount of formula in the tin, would stray from package guidelines, over-diluting their formula by adding as much as three times the amount of water required. Despite the fact that they were feeding their babies regularly, they were filling their tummies with mostly water, which cannot provide the calories or protein that a growing infant needs to thrive.

Water, of course, is the other massively overlooked problem in the formula recipe. Anyone who has ever had the experience of bottle-feeding a baby will know the tedious sterilisation routine required at almost every step of the process. In a West African hospital, a new mother has access to boiled water whenever she asks for it. Back home in her village, access to water is limited, as is the ability to boil it every time a bottle needs to be made. In some instances, baby formula is mixed with water collected from the nearest river. In young infants who were not yet of age to receive vaccinations against these diseases, this led to an uptick in cases of diphtheria, dysentery and typhoid, many of which are fatal.

Over-diluted formula, unsanitised bottles and unclean water led to the sickness, underdevelopment and eventual malnutrition of a huge amount of babies in third-world countries between the 1970s and 80s. Where third-world mothers had a perfectly nutritious, convenient and free resource available to them and their babies in the form of breastmilk, they were deliberately convinced of its inferiority in order to get them to make the commitment to formula.

Bring on the boycott

You can imagine the absolute uproar that this exposé was met with in the first-world. Boycotts were launched against Nestlé products in numerous countries, and an international marketing code (the ‘WHO Code’) was developed to prevent the comparison of manufactured baby milk with breastmilk. In response to the clamour (and perhaps in an effort to save some face), Nestlé introduced its own policy based on the code during the 1980s.

Unsatisfied that these steps were enough to curb irresponsible marketing, a UK-based group called Baby Milk Action has been running a boycott of Nestlé products since 1988. To date, this is the longest-running continuous boycott that the world has ever seen. Baby Milk Action has grown from a movement to a serious organisation with a network of over 348 citizen groups in more than 108 countries, all of whom encourage their members to boycott Nestlé’s products.

Idealistically, you would think that this is a real thorn in the side of Nestlé. Not only is that not the case (certainly not as far as the company’s market share is concerned), but it hasn’t even done that much to get Nestlé to change its ways.

In 2019, Nestlé’s own report found 107 instances of non-compliance with the baby milk marketing policy that it wrote for itself. A Changing Markets Foundation report from the same year found that Nestlé was still comparing its own products with human milk.

Too big to be held responsible?

I wish I could tell you that the formula debacle is the only questionable course of action that Nestlé has been involved in, but that’s not the case. From their memorable attempt to argue that water is not a human right (a useful win for a company that sells bottled water) to their decades-long entanglement with child slave labour in the plantations that supply their cacao, this company has proven time and time again where humans fall in their hierarchy of priorities.

While consumers like you and I aim to wield significant influence by voting with our spending, the uncomfortable truth is that the outcome of a boycott often hinges on the brand’s resilience, rather than consumer sentiment. Brands that are easily substituted are more susceptible to boycott pressure. Conversely, companies with substantial market dominance present a formidable challenge for the consumer-led movements that aim to impact their profits.

That’s because the fundamental obstacle for most boycotts lies in the intrinsic value companies imbue in their products, cultivating a perception of indispensability in consumers’ daily lives. In the case of Nestlé, an added complication is that the company is so big and owns so many brands that it takes a lot of legwork for even the most conscientious consumers to identify and avoid all of them.

So if we accept that individual purchasing decisions may not make that big of a difference to Nestlé’s bottom line, does that mean that the company is simply beyond reproach? I don’t think so. In the case of Nestlé, we’ve already seen how the original boycott in the 1980s led to the institution of the international marketing code.

Perhaps what’s needed is less consumer action and more rules that keep these mega-corporates in line.

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.

Satrix March Newsletter | One Small Step for Markets

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Satrix March Newsletter | One Small Step for Markets

What Difference Did the Extra Day Make?

The South African rand weakened to the US dollar by 3.1% in February , despite the strong start shown on 1 February. The Budget Speech delivered on 21 February also didn’t seem to arrest the slide, with the rand weakening sharply a day after the annual Budget. Domestic markets followed this trend, with the FTSE/JSE All Share Index (ALSI) ending the month down -2.44% after a sharp increase immediately after the Budget Speech, followed by an even sharper decline two trading days later.

Following back-to-back ALSI monthly declines of more than 2% each in 2024, local equity losses were almost entirely concentrated to Resource companies in February, with the Resource index declining 7.17% for the month. The Property index was up 0.8%, with Financials and Industrials indices marginally down -0.84 and -0.69% respectively. Local investors with offshore exposure saw some reprieve, with the MSCI World Index up 7,5% in rand terms (buoyed by its high exposure to US companies), and the S&P 500 Index returning 8.65% in rand terms.

This points to a deeper principle that seasoned investors abide by: having exposure to different assets, industries, and geographies. International funds solve this through country-specific exposure or by achieving an assortment of countries in one basket, ensuring that even if the rand slides, the investor stands to gain.

Growth in Leaps and Bounds

All international indices tracked by Satrix realised positive growth in dollar terms last month, including the MSCI China Index (up 11.8%% in rands), which we highlighted as an underperformer in our last two newsletters. The MSCI India Index returned 5.9% in rands, while the broader MSCI Emerging Markets Index, of which China makes up a quarter, climbed 8.05% in rand terms.

The newly listed Satrix MSCI ACWI ETF, which includes both developed and emerging market indices and is one of the most diversified indices, also achieved positive growth in February 2024, climbing 0.98% since listing on 22 February.

International investors will be hoping that 2024 bucks the historical trend of the US market contracting by 2% during leap years. According to CNN, leap years have returned 10.8% on the S&P versus non-leap year returns of 12.8%, on average. Locally, the ALSI has returned, on average, 18.8% annually since 1996 during non-leap years, while returning a pedestrian 3.5% average return during leap years (granted, 2008 was a leap year too). But before we leap to any conclusions, perhaps this year will be different.

A New Tax-Free Season

March 1 marked the beginning of the new tax season, which means a new opportunity to make the most of your investments by harnessing the benefits of the tax-free savings account (TFSA). Your TFSA allows you to invest in funds without having to pay income, interest, or capital gains tax to SARS on any returns you may earn (provided you stay within the legislated contribution limits across all of your tax-free savings accounts.

For more information about how the TFSA works and its opportunities, click here. 

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SatrixNOW is a no-minimum online investing platform from Satrix that allows you to buy and sell ETFs directly.

Ghost Wrap #64 (Mustek | Curro | Sea Harvest | Quilter)

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Ghost Wrap #64 (Mustek | Curro | Sea Harvest | Quilter)

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 covered these important stories on the local market:

  • Mustek is a lesson in two things: the danger of a value trap and the threat of competition in lucrative sector.
  • Curro is telling the market that it wants to fill its schools, yet the company increased fees by a much higher rate than inflation in 2023.
  • Sea Harvest is another good example of a corporate that saw a sharp rise in net finance costs, yet the dividend payout ratio moved higher.
  • Quilter is an offshore business that is doing a great job of growing its operations in the UK, making it a compelling rand hedge for South African investors. 

Ghost Stories #32: The Investec Nikkei 225 Autocall

The Finance Ghost
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Ghost Stories #32: The Investec Nikkei 225 Autocall

Brian McMillan of the Structured Products team at Investec is back on Ghost Stories, this time to talk about the Investec Nikkei 225 Autocall.

This product is designed to give investors exposure to the Nikkei 225 index over a period of up to five years with an enhanced return of up to 17% per annum in ZAR or 11.5% per annum in USD. Importantly, there is 100% capital protection provided the index does not drop by more than 30%.

To help you understand this opportunity, the topics covered include:

  • The history of the Nikkei 225 over the past three decades and how it became ignored by investors, with the narrative having improved significantly in recent times.
  • Reasons why the Nikkei 225 could be a compelling investment going forward.
  • The structure of an “autocall” product and exactly how it works over the time period of the instrument.
  • The way the upside works on this instrument, with a fixed return provided the index closes above the starting level.
  • The underlying credit risk in the instrument.
  • The liquidity in the note and the extent to which it is tradeable during the term.
  • The minimum investment amount required and how the fees work.
  • Confirmation of the types of investors allowed to participate.

The investment tranche is available until the 5th of April 2024.

As always you must do your own research and speak to your financial advisor before investing in a product like this. You can find all the information you need on the Investec website at this link.

Listen to the show using this podcast player:

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