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Ghost Bites (ADvTECH | Brimstone | Murray & Roberts | Mustek | Quilter | Sea Harvest)

The Finance Ghost
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Ghost Bites (ADvTECH | Brimstone | Murray & Roberts | Mustek | Quilter | Sea Harvest)

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

Growth continues at ADvTECH (JSE: ADH)

Enrolments at the schools are in line with targets for 2024

ADvTECH has released a trading statement for the year ended December 2023, reflecting growth in HEPS of between 16% and 21%. That’s really good. They also report normalised earnings per share to strip out corporate action costs and once-off transactions, with that metric up by between 17% and 22%.

Whichever way you cut it, the numbers seem to be appealing. ADvTECH notes that all divisions contributed to the performance and that enrolments at the schools are in line with targets for 2024, so that bodes well for the new financial year as well.

Brimstone: debt reduction and share buybacks (JSE: BRT)

But why such a high dividend?

Brimstone is an investment holding company that holds a wide variety of interests. Some are controlling stakes and others are minority holdings, so you end up with a rather odd scenario of an investment holding company preparing consolidated accounts with all the different line items. I don’t think that is helpful for decision makers, so I ignore the income statement.

The balance sheet and supporting notes is where I think you’ll find what you need here. The intrinsic net asset value (or INAV) is management’s view of what the assets are worth. They show it in great detail and arrive at R12.13 per share, down from R13.25 per share a year ago. The share price closed 17% lower at R4.56, so the discount to INAV is vast.

How does this discount get closed? Much of it is structural, of course. Still, a strategy of disposing of assets at a price close to or at the INAV and then buying back Brimstone shares at a deep discount does wonders in companies like these. It just requires the directors to consciously decide to make the group smaller, which is where this often becomes a problem.

Brimstone is selling off certain investments and has reduced debt by R307.5 million since the end of December. During the year ended December 2023, the company repurchased shares worth R21.6 million, with more repurchases of R7.2 million subsequent to year-end. That all sounds like good stuff.

Unfortunately for shareholders, the company also insists on paying out a high proportion of HEPS as a cash dividend, despite the discount to INAV. This immediately makes me feel that the group is more of a cash cow for the controlling shareholders rather than a serious attempt at reducing the gap to INAV for minority shareholders. With HEPS of 71.6 cents and a dividend of 40 cents per share despite the vast discount to INAV, this is why I don’t hold shares in Brimstone.

Losses have narrowed at Murray & Roberts (JSE: MUR)

The debt also looks far better, but there’s a long way to go here

Murray & Roberts has lived through troubled times recently. Although revenue and EBITDA have both moved higher, the real highlight is the massive swing from an attributable loss of R2.5 billion to just R95 million. A loss should never be celebrated, but the context is important here.

The diluted headline loss per share from continuing operations came in from 16 cents rather than 27 cents in the comparable period, so losses have also narrowed on a headline basis with impairments and other issues stripped out.

The most important line is net debt, which has improved dramatically from R1.97 billion to R247 million.

Based on these numbers, it shouldn’t surprise you that no dividend will be declared for the full year ending June 2024. At least you’ve been warned. Instead, the company will be focusing on a sustainable capital structure and bedding down the new operational structure that sees the managing directors of the four operating companies all appointed to the group board.

Group CEO Henry Laas has agreed to stick around until August 2025.

Mustek will want to forget about 2023 (JSE: MST)

Cheap stocks can stay cheap – and still rise and fall with earnings

When you’re buying a stock on a low earnings multiple, you need to still be careful of a value trap. There needs to be some kind of catalyst for the multiple to move higher sustainably, otherwise all that happens is the multiple stays consistently low and the share price flaps around based on the financial results anyway.

At Mustek, the low trailing multiple turned out to be a sensible approach from the market. Investors were wary of whether the good times could continue. Spoiler alert: they couldn’t.

For the six months to December 2023, revenue fell 13%, gross profit margin contracted by 70 basis points to 13.4% and operating profit was down 25.3%.

By the time you get to HEPS, it’s down 58.81% from 221.74 cents to 91.34 cents. Although this is only an interim number, the share price of R10.34 suddenly doesn’t look like such a bargain.

And in case you’re wondering, the joy of capitalist competition is playing out in green energy products. This has been a major source of the reduction in gross profit. When you are thinking about a business, you always have to consider the threat of competition in a lucrative space and what this would do for prices.

Quilter celebrates record profitability (JSE: QLT)

Go with the flows

Quilter is a UK-based asset and wealth management business that understands the importance of a distribution strategy to attract inflows. In simple terms: they are quite good at selling investment products. This is absolutely critical to manage periods of tough returns in the market. When times are good, this is a flywheel effect that leads to great profits.

How do you measure this? Core business net inflows. Although they will definitely be volatile each year (as we saw at Quilter in 2023 where they were far lower than the prior year), the point is that inflows are good and outflows are bad. Provided assets are still growing, the asset manager is doing the right thing.

With Assets under Management and Administration up 7%, of which 1% is attributable to net inflows, revenue increased by 3%. Thanks to costs decreasing by 3% as the group focused on profitability, adjusted profit before tax was up 25%.

It’s interesting to see how financial distortions come through. HEPS has actually fallen severely from 12.6 pence to 3.2 pence, yet adjusted diluted earnings per share increased from 7.9 pence to 9.4 pence. The difference seems to be due to policyholder tax outcomes.

Cash, as always, is king. The dividend per share moved higher from 4.5 pence to 5.2 pence. The share price is roughly 25% higher over the past 12 months.

Finance costs eat up the profits at Sea Harvest (JSE: SHG)

Yet another example of banks getting the benefit of corporate growth

At Sea Harvest, we can see an income statement profile that has played out in many corporates in the past year.

Revenue increased by 6% and gross profit was up 13%, which is great as this means that gross profit margin moved higher. The theme here is improved pricing that more than offset lower sales volumes. The weak rand also plays a role here.

None of it helped at operating profit level sadly, which fell 2%. Load shedding related costs jumped from R25 million to R46 million for the year.

We then arrive at the net finance costs line, which jumped by a whopping 79%. This is a combination of interest rates being much higher than the previous year, along with higher average borrowing levels.

Thanks to the bankers getting such a great outcome, HEPS was down 5%. Despite this, the final dividend moved higher from 38 cents to 40 cents per share.

Looking ahead, the South African business will look to take advantage of the 5% increase in the Total Allowable Catch. The rest of the business will focus on managing the usual supply-demand fluctuations in the broader seafood market. And of course, there will be a lot of attention on the deal to acquire 100% of Terrasan’s pelagic fish business and 63.07% of Terrasan’s abalone business.

Little Bites:

  • Director dealings:
    • In a very unusual transaction, directors of Stor-Age (JSE: SSS) have been able to sell shares that were acquired via a scheme that included an interest-bearing loan from the company. This is a typical structure in the property sector, with dividends on the shares applied against the interest. What makes this unusual is that an institutional shareholder has made an offer to the directors to buy their shares under the scheme, thereby allowing them to settle the debt and pocket the difference. The price for the trade is R14, which is only slightly below the current market price. Three directors sold a collective R104 million worth of shares in this trade.
    • As part of a funding transaction with a financial institution, CEO of Sibanye-Stillwater (JSE: SSW) Neal Froneman exercised a put option to sell R96.4 million worth of shares in the company at R66.24 per share. For context, the current share price is R19.50!
    • A director of Gold Fields (JSE: GFI) sold shares worth R11.75 million. These are vested performance shares all the shares were sold, not just the portion to settle taxes.
  • Lighthouse (JSE: LTE) has sold shares in Hammerson worth just over R1 billion. This unlocks a lot of capital for Lighthouse to pursue yield-accretive direct property acquisitions.
  • MTN Uganda (JSE: MTN) released results for the year ended December 2023. Service revenue increased by 16.1% and EBITDA was up 16.3%, so at least margins are consistent. Capital expenditure moved 5.5% higher and the final dividend was 16.4% higher. This is a better trend than we’ve seen in MTN’s other African subsidiaries.
  • Eastern Platinum (JSE: EPS) announced that the initial soft start of the Zandfontein underground operations at the Crocodile River Mine is now fully operational. They will now focus on ramping up underground efforts and bringing material to the surface, with the first batch of run-of-mine processing scheduled for the second quarter of this year. The goal is to achieve a mining run rate of 40,000 tons per month by the end of 2024.
  • Clientele (JSE: CLI) has appointed Angela Pillay as Executive Financial Director. She has extensive experience in financial services.
  • It says something about the maturity and strategic direction of Jubilee Metals (JSE: JBL) that the company has appointed formal boards for both the South African and Zambian businesses. Separately, the company announced that an option holder will exercise 9 million options at an average price of 2.11 pence per option, so be careful of ongoing dilution here.
  • The end is nigh at Ellies (JSE: ELI), with the latest news being the resignation of the CFO and an independent non-executive director.
  • Afristrat (JSE: ATI) will proceed with a liquidation application as the company is commercially insolvent.
  • Luxe Holdings eventually put us all out of its misery by delisting in November 2023. This hasn’t stopped the JSE from issuing a public censure and fine of R7.5 million against Helena Dorothea Grewar, who was CEO at the time. She sold shares worth R12 million in the closed period, which absolutely isn’t allowed. To make it worse, the JSE says she didn’t even engage with regulatory correspondence, which isn’t a smart strategy. On top of the fine, she has been disqualified from holding office as a director of any JSE listed company for a period of 5 years.

Ghost Bites (Curro | MultiChoice | Nedbank | Premier | Shoprite | Sibanye-Stillwater | WBHO)

The Finance Ghost
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Ghost Bites (Curro | MultiChoice | Nedbank | Premier | Shoprite | Sibanye-Stillwater | WBHO)

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

Curro hasn’t been shy with fee increases (JSE: COH)

The financial impact is positive for now, at least

The South African middle class is finding things very difficult right now. Curro is also finding it rather tricky to fill the schools that have been built, perhaps because of these problems plaguing the middle class. In a rather risky strategy from a long-term perspective, Curro seems to be addressing the issue of empty seats by hiking fees where there is a bum on a chair, putting even more pressure on those consumers.

Tuition fees increased by 12%, driving a revenue increase of 15%. The weighted average number of learners only increased by 2%. The rest of the revenue growth is explained by ancillary revenue, which was 33% higher.

Don’t be fooled into thinking that the teachers are getting rich. Employee costs were up 7% and other costs increased by 19% (both on a like-for-like basis).

This means that margins moved sharply higher, with EBITDA up 25% net of head office expenditure. HEPS increased by 19%. Recurring HEPS increased by 32%.

Cash from operating activities only increased by 9%, so the balance sheet has some catching up to do to the income statement performance.

When you consider the extent of tuition fee increases, it’s surprising that Curro makes the statement that the primary focus in the short to medium term is to support and increase the capacity utilisation of existing facilities. That goal doesn’t sound congruent with an approach of above-inflation fee hikes. I worry about how sustainable this approach is.

The MultiChoice offer is up to R125 a share (JSE: MCG)

This is an interesting structure

If you’ve been following the news around MultiChoice, you’ll know that Canal+ needs to make a mandatory offer to shareholders of MultiChoice. The price would’ve been around R105 per share, but to try and expedite the process of a transaction, Canal+ has increased it to R125 per share and MultiChoice has agreed to cooperate in this regard.

Although we don’t know for sure yet, this implies that the MultiChoice independent board is more likely to support this offer than the last one. Having said that, they’ve behaved in an unpredictable manner before. Anything is possible.

Nedbank hit a number of key targets in 2023 (JSE: NED)

Growth in the final dividend of 18% is a solid outcome for investors

Nedbank’s share price enjoyed a strong day on the market, closing 3.3% higher in response to a strong set of numbers for the year ended December 2023. Goodness knows it was a tough year for the economy, with banks reaping the rewards of higher interest rates and larger balance sheets from inflation. There weren’t many winners in the economy outside of the banks!

Nedbank managed to grow revenue for the year by 12%, with net interest income up 14%, non-interest revenue up 6% and associate income up 64%. A 30% jump in impairments blunted the growth at HEPS level, which came in at 11%. The positive surprise here was that the credit loss ratio improved significantly in the second half of the year, coming in at 109 basis points for the full year vs. 121 basis points in the interim period.

This strong end to the year saw Nedbank meet several key financial targets, including a return on equity ahead of the cost of equity (15.1% vs. 15%) and a cost-to-income ratio below 54.0%.

Thanks to these efforts, the final dividend is up 18% at a payout ratio of 57%. The full-year dividend is 15% higher than the prior year.

After a 14-year innings, Mike Brown steps down as CEO and hands over to Jason Quinn. Having had the pleasure of engaging with Mike very early in my banking career, I know that he did an excellent job of navigating an exceptionally disappointing period for the South African economy. Quinn will need to make sure his old red ties are right at the back of the cupboard, with only green ties coming out as he leads the bank through a period that doesn’t look to be getting any simpler in our country.

Premier is on track for a maiden dividend (JSE: PMR)

The focus has been on reducing debt and improving the balance sheet

With Premier attending the Bank of America Sun City conference this week, the company has released an update on recent trading performance.

After the first six months of the year showed the slightest growth in HEPS (up 0.8% despite revenue being up 7.1%), investors couldn’t exactly have been expecting a rocketship for the second half of the year. Indeed, as inflation in soft commodities has settled down, revenue growth has moderated to low single digits.

This means that Premier has focused on maintaining margins, which are in line with the margins for the first six months of the financial year.

Interestingly, the company isn’t pulling back on organic investment opportunities. In fact, capital expenditure for the second half of the financial year is expected to be higher than guidance.

Despite the higher capex, the company has focused on reducing debt on the balance sheet and improving its leverage ratio. The company believes that it is on track to pay a maiden final dividend for the year ending March 2024.

Market share gains yet again for Shoprite (JSE: SHP)

If only we had a reliable electricity supply…

The snowball effect in the grocery market is quite something to witness, with Shoprite continuing to charge forwards and Pick n Pay whimpering in the corner. Somehow, Spar manages to eek out a living and Woolworths is trying to remain relevant to consumers by being more aggressive on price. It’s rather hectic out there.

After strong growth in sales in Supermarkets RSA of 17.5% last year, a 14.6% increase in sales in the latest interim period is an impressive result. The rest of the market could only manage growth of 7.6%, according to NielsenIQ data quoted by Shoprite.

The main thing that has continued to impress me is Shoprite’s ability to grow at every part of the income curve. Everyone talks about Checkers this and Checkers that, yet Shoprite and Usave casually increased sales by 13.1%. They have done some astonishing things in that business to create meal solutions for very low income workers. Checkers and Checkers Hyper grew by 13.7%, so as great as Checkers is, it doesn’t deserve all the attention.

Checkers Sixty60 grew by 63.1%, so the turquoise scooter army rides on.

Taking a geographical view, Supermarkets non-RSA grew 6.2% and Supermarkets RSA grew 14.6%, so the group’s decision to focus on winning in the South African market is paying off. Within the local business, customer visits were up 6.4% and average basket spend increased 7.7%, so Shoprite is winning the sales volumes war at a time when most FMCG businesses in South Africa are only achieving growth through hiking prices.

Gross margin increased ever so slightly from 23.5% to 23.6%, with higher volumes through the tills creating efficiencies back in the supply chain.

Unfortunately, the broader operating conditions (read: load shedding) really blunted the benefit of this sales growth by the time we reach the profit lines on the income statement. Trading profit was up 10.7%, with trading margin down 20 basis points to 5.5% due to R500 million spent on diesel for generators.

Thanks to Eskom, operating profit was up by “only” 8.1%, despite the substantial growth in sales. You can now clearly see why competitor Pick n Pay is getting crushed at the moment, with modest sales growth and the same expense pressures.

Profit after tax only grew by 4.2% at Shoprite and HEPS was up 7.3%, with the dividend per share up by 7.7% as the payout ratio was increased.

For the first six weeks of new financial period (the second half of 2024), Supermarkets RSA has grown 10%. Inflation has slowed down from 7.7% to 5.3%, so that should cause a dip in the growth rate. Shoprite is also quick to remind investors that they are lapping a very strong base.

Sibanye-Stillwater hopes for better PGM prices (JSE: SSW)

The company believes that price weakness in PGMs is temporary rather than structural

Sibanye has certainly had a year to forget, with a massive decrease in the share price as the PGM market fell apart. Revenue for the full year was 18% lower than in 2022, with nickel prices also doing their fair share of damage.

The loss for the period was a colossal R37.4 billion. The good news is that non-cash impairments were R47.5 billion, so the cash situation wasn’t anywhere near that bad. Still, there’s no final dividend, so the full-year dividend was entirely comprised of the interim dividend of 53 cents per share.

If there are any highlights here, it’s that net debt to adjusted EBITDA is 0.58x. The other highlight is the turnaround in the gold operations, helped of course by the higher gold price. The gold operation is too small to save the day by itself though, particularly when you compare its EBITDA for the six months to December (positive R1.148bn) to the losses in the nickel business of R701 million. The net contribution is very small relative to the PGM operations.

In other words, for Sibanye to work out, the PGM price needs to move heavily in the right direction. The recent shift in sentiment away from battery electric vehicles could help here. This is why I’ve very gingerly topped up my PGM exposure in literally the past week, as I think the hype around EVs is finally starting to do what I believed would always happen: disappear.

I’m well aware that any PGM position requires an extremely strong stomach and modest position sizing.

WBHO declares an interim dividend (JSE: WBO)

There is a substantial improvement in profitability at WBHO

Construction companies have a long sales cycle. They first need to secure a strong order book before revenue starts to flow in, so investors have to be patient. The efforts in the order book in the prior period have paid off at WBHO for the six months to December 2023, with revenue from continuing operations up 29% and HEPS coming in at 897 cents vs. 630 cents in the comparable period (growth of 42%).

The net asset value of the group has jumped from R3.3 billion to R4.4 billion. In further good news, the strong order book is still there, sitting at R32.3 billion vs. R32.6 billion as at June 2023.

This has allowed the group to declare an interim dividend of 230 cents per share vs. no interim dividend in the comparable period.

    Little Bites:

    • Director dealings:
      • The CEO of Bidcorp (JSE: BID) has sold a substantial R26.7 million worth of shares in the company. After the run in the price over the past couple of years, I would take careful note of this.
      • The outgoing CEO of Aveng (JSE: AEG) sold all the share options that vested on early retirement, for a total of almost R4.4 million. That counts as a sale in my book, as executives usually only sell the portion required to pay the tax.
    • Gold Fields (JSE: GFI) has finalised the sale of its 45% interest in Asanko Gold Mine for gross proceeds of $170 million plus a 1% net smelter royalty. $65 million in cash has been received, as well as shares in the acquirer Galiano Gold. The balance of the price is receivable over the next couple of years.
    • There is very little liquidity in Putprop (JSE: PRR) so I’ll give the latest financial results a passing mention here. The company owns a portfolio of 13 properties. Net asset value moved from R16.14 to R16.29 over the past year. The dividend per share increased from 4.25 cents to 6 cents.
    • If you are interested in Omnia (JSE: OMN), then the company’s presentation at the Bank of America Global Research 25th Annual Sun City Conference 2024 (yes, it’s that much of a mouthful) will be useful for you to read. You can find it here.
    • Libstar (JSE: LBR) released a trading statement that has an update to the HEPS guidance based on the exclusion of insurance proceeds from the Denny fire incident. Total HEPS (without adjustments for this issue) will be between 3.5% and 8.5% higher for the year ended December 2023.
    • The dilution continues for shareholders in Kibo Energy (JSE: KBO), with the company issuing shares worth £30k to settle a service provider’s outstanding invoices.

    Nedbank Group Annual Results for the 2023 FY

    Sponsored Content
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    Nedbank Group Annual Results for the 2023 FY

    Annual Results for the year ended 31 December 2023

    All 2023 targets met – a strong foundation from which we shift focus to deliver on our medium-term targets.

    While we were pleased to have achieved all our 2023 targets while operating in a more difficult economic environment, we aspire to deliver ongoing improvements in ROE to increase shareholder value. Our strong financial performance in 2023, together with the progress made in executing on
    our strategy and underlying momentum in the business, gives us confidence in delivering on our medium-term targets* and, in particular, our aim to increase our ROE to 17% by 2025 and above 18% in the long term.

    Mike Brown – Chief Executive

    VIEW THE FULL INVESTOR SUITE HERE >

    VIEW THE SHORT FORM ANNOUNCEMENT BELOW

    Nedbank-Group-Annual-Results-2023

    Nedbank Group is one of South Africa’s four largest banks, with Nedbank Limited as their principal banking subsidiary.

    They offer the following solutions through their frontline clusters, Nedbank Corporate and Investment Banking, Nedbank Retail and Business Banking, Nedbank Wealth and Nedbank Africa Regions: 
    – a wide range of wholesale and retain banking services
    – a growing insurance

    www.nedbankgroup.co.za

    Interim Financial Results released by RCL Foods

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    Interim Financial Results released by RCL Foods

    For the six months ended December 2023

    RCL Foods delivers pleasing Interim Results in a challenging environment.

    • Muted demand persists in a challenging economic environment
    • Rainbow turnaround yields positive result
    • Continued good Sugar performance
    • Service levels restored in Pet Food and Pies
    • Load-shedding direct costs continue to impact earnings
    • Receipt of Vector Logistics sale proceeds improves cash position

    We remain committed to our overarching business strategy as previously communicated, which includes improving shareholder returns as we seek to GROW WHAT MATTERS for all our stakeholders. I am pleased to say that we are on track with our strategy delivery plan for the 2024 financial year, supported by the rollout of our Purpose across our Value- Added Business.

    RCL FOODS’ Chief Executive Officer, Paul Cruickshank

    VIEW THE FULL INTERIM RESULTS SUITE OF DOCUMENTS >

    VIEW THE RESULTS ANNOUNCEMENT BELOW

    RCL-Interim-Results-Announcement-2024

    RCL FOODS is a deeply-rooted South African consumer goods business that produces some of the country’s most-loved brands: Yum Yum peanut butter, Nola mayonnaise, Ouma rusks, Pieman’s pies, Number 1 mageu, Sunbake and Sunshine bread, Supreme flour, Selati sugar, Simply Chicken, Rainbow chicken, Bobtail and Canine Cuisine dog food, Catmor and Feline Cuisine cat food, and Molatek and Epol animal feed, to name a few. It also produces a wide range of speciality and private label products.

    Headquartered in Westville, Durban, the business employs over 16 000 people across 8 provinces in its Value-Added and Rainbow operations. At the heart of its culture and strategy is its Purpose – WE GROW WHAT MATTERS – which encapsulates its belief in collectively doing that little more to create a positive impact that matters.

    www.rclfoods.com

    Artificial Intelligence: Fad or future – and how best to invest

    Nico Katzke
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    Artificial Intelligence: Fad or future – and how best to invest

    By Nico Katzke, Head of Portfolio Solutions at Satrix*

    Just over a year ago we were all enthralled by the emergence of a technology that promised to disrupt all facets of our lives.

    What started as a live social experiment of opening large Natural Language Processing (NLP) algorithms, in the form of ChatGPT, to answer the public’s unscripted questions, soon proved so effective that most see it as a technology with the potential for hard-to-even-comprehend disruption.

    Most of us are currently observing, with both interest and anxiety, the rapid rise of this technology, wondering how this will impact and reshape the industries we work in.

    Many observers’ enthusiasm was somewhat curbed in recent months by the realisation that physical limitations exist in building larger and ever more capable training models. It turns out, when we ask ChatGPT a question online, somewhere a machine is whirring and crunching numbers. It is, after all, not magic. Nor is it a tireless sentient being answering our questions – it is simple a set of machines doing complex math. The more we ask of it, the bigger it needs to be.

    Despite clear physical and hardware challenges, to many it seems the future domination of Artificial Intelligence (AI) through Large Language Models (LLMs) is inevitable. Others are more sceptical.

    First, it is costly. Building, training and maintaining these models require incredible costs and expensive manpower, access to enormous datasets and advanced chip making infrastructure. In fact, Sam Altman, CEO of OpenAI, the creators of ChatGPT, is reportedly looking to raise up to $7 trillion to further boost GPU-chip supply, critical in building more capable algorithms able to power the truly disruptive promise of AI. That number is greater than Apple and Google’s market caps combined, and while other executives (notably the CEO of Nvidia, the leading chip maker) have been critical of these numbers, most estimates suggest a chip making industry worth several trillion dollars in the near future.

    Apart from hardware limitations, other key drawbacks include the environmental costs associated with training and managing these energy hungry algorithms, the inherent biases that undocumented training could embed in model responses with limited recourse, the inability of modelers to reverse engineer parameters (making it a black-box process by design), as well as the lack of ethical scrutiny required to ensure it is safely deployed on society.

    Proponents of AI’s unbridled growth might point to these being fixable problems; eggs broken in the pursuit of a sentient omelette.

    But a bigger problem might lurk in its current design that should give even the most optimistic pause: the lack of Intelligence, or the “I” in AI. People are mesmerised by Generative AI’s output and the illusion of understanding that it possesses. It also doesn’t help that researchers and companies at the forefront of its development have strong incentives to feed this illusion with anthropomorphic language like learning, intelligence and reasoning.

    But at its core, the models we interact with are simply computer algorithms trained on human supplied information (think all the public Reddit, Wikipedia, etc. pages), that take text as input and produce answers by predicting what word (or what pixel, when drawing) should come next.

    It is, ultimately, super-efficient predictive text strung together in a way that, given its vast library of human conversational data for training, seem intelligent and human-like. But it is a parrot, not a mind.

    A remarkable achievement in mimicry and information collation, but not sentient and completely void of understanding. It is simply pattern matching at unprecedented scale, meaning its current design will always scupper its ability to “think” outside the (very black) box. Even if a methodology is identified that can bring us to the holy grail of Artificial General Intelligence (AGI), that doesn’t mean that it will necessarily be achieved. Think the decades long pursuit of nuclear fusion which is theoretically possible.

    While we believe the destination of broad-based adoption of some form of AI across industries is still a way off, we have been thrust upon a path to discover its full potential. But the path still needs to be paved, sidewalks erected and streetlamps put in.

    The biggest current opportunities therefore are likely with companies able to harness their size and scale to access the best minds and computer hardware needed to build the foundation for tomorrow’s application. Small and nimble are not traits that help with securing trillion-dollar chip deals or access to enormous computing warehouses.

    A sensible proxy for investing in the future of AI may very well be an index comprised of larger, more established tech companies, like the Nasdaq 100. Despite returning more than 50% in US$ in 2023, if the future is indeed broad-based adoption of AI, then which sentient being currently dares bet against the established tech giants in the Nasdaq?

    *Satrix is a division of Sanlam Investment Management

    Satrix Logo

    Disclaimer
    Satrix Investments (Pty) Ltd is an approved FSP in terms of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.

    While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, their shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaim all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

    Ghost Bites (AfroCentric | Aspen | AVI | Bidvest | Hulamin | MAS | Merafe | Metrofile | Netcare | Raubex | RCL Foods)

    The Finance Ghost
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    Ghost Bites (AfroCentric | Aspen | AVI | Bidvest | Hulamin | MAS | Merafe | Metrofile | Netcare | Raubex | RCL Foods)

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

    Afrocentric is struggling to find growth (JSE: ACT)

    This isn’t an easy way to make money

    AfroCentric owns a portfolio of healthcare-related enterprises that are finding it tough going at the moment. Aside from the overall lack of economic activity to drive growth, the company has had to contend with contracts with low levels of profitability. In some cases, the company has walked away from such contracts.

    After all the excitement of the deal with Sanlam last year, there isn’t any excitement at all in the financials. For the six months to December 2023, revenue grew by just 1.4% and HEPS dropped by 2.4%. If there are going to be any exciting synergies with Sanlam, we aren’t seeing them yet.

    At least there is an interim dividend of 11 cents per share vs. no dividend in the comparable period.

    Not much to write home about at Aspen (JSE: APN)

    Revenue growth hasn’t translated into profits

    The six months to December 2023 were filled with interesting strategic news at Aspen, like a distribution and promotion agreement with Lilly, as well as the product purchase agreement with Viatris for Latin America and the acquisition of the Sandoz business in China.

    The benefits of these initiatives will hopefully come through in the second half of the financial year, as the first half hasn’t been exciting. Although revenue increased by 10% as reported, HEPS was down 6% as reported or up 1% on a normalised basis.

    The highlight was the 44% growth in operating cash flow per share, with the cash conversion rate way up from 58% to 89%. A reduction of investment in heparin inventory was the key here. They call it a permanent shift, which is good news.

    Net debt has increased considerably from R22.2 billion to R27.3 billion. Although overall debt levels are comfortable, debt isn’t a cheap source of growth right now.

    Shareholders will pay very close attention to the second half of the year, which is when the benefits of recent strategic initiatives are expected to be realised.

    AVI: masters of operating leverage (JSE: AVI)

    The beverages and snacks businesses led the charge

    AVI has released results for the six months to December 2023. They reflect an increase in revenue of 7.1%, which is decent by FMCG standards in this environment. More impressively, the company achieved growth in HEPS and the interim dividend of 17.4%.

    At segmental level, Entyce Beverages is the second-largest revenue contributor and also grew the most, up by 16%. Snackworks is the bigger hero though, with the largest revenue and operating profit contribution and an excellent increase in profit of 35.1% off just a 9.8% increase in revenue. It turns out that biscuits really are good for you!

    Fish? Not so much. I&J saw revenue fall 5.1% and operating profit plummet by 56.0% due to poor catch rates and loss of export sales.

    The company has warned that growth in the second half of the year may not be as exciting as the first half, as they are lapping a strong fourth quarter in the comparable period.

    Bidvest reminds the market why it is so respected (JSE: BVT)

    There’s a strong performance at trading profit level

    Bidvest has released results for the six months to December 2023. Revenue grew by 8.8% and trading profit by 11.8%, showing solid operating leverage that shareholders love to see. Cash generated by operations almost doubled to R3.7 billion!

    Five of the seven divisions reported double digit trading profit growth, so the group can be proud of that. Automotive took a significant knock, with trading profit down 11.4% due to oversupply of new vehicles and a resultant knock-on effect in the used market. The brand mix at McCarthy’s is problematic as Bidvest doesn’t have exposure to new brand entrants that are doing well.

    These strong numbers were blunted somewhat at HEPS level, with HEPS up by 5.3% and normalised HEPS up by 6.9%. The final dividend followed suit, up 6.9%. It won’t surprise you to learn that net finance charges were to blame here, up 41.5% excluding IFRS 16 and other fair value adjustments (in other words: a pure view on the increase due to debt).

    The jump in finance costs was driven by higher average gross debt (of which R3.2 billion was due to corporate actions) and an increase in average cost of funding from 5.2% to 6.1%.

    Return on Invested Capital of 15.8% is down on 16.3% in the prior year but still ahead of the weighted cost of capital.

    Hulamin was all about the cash in this period (JSE: HLM)

    Despite normalised EBITDA dropping by 7%, cash flow from operations skyrocketed

    It is critically important for companies to manage both the balance sheet and the income statement, particularly when they are serious about driving return on capital higher. If a company doesn’t focus on return metrics like those, run away as fast as you can. This is why looking at the change in working capital and the extent of capex is just as important as looking at the income statement.

    In Hulamin’s numbers for the year ended December 2023, a drop in volumes and EBITDA didn’t set an encouraging scene. Thanks to a substantial effort in reducing working capital requirements and simplifying the business, cash flow from operations was 503% higher at R363 million. That’s still not a great conversion rate vs. EBITDA of R620 million, but it’s a lot better.

    Capex was R311 million, so shareholders seem to get very little cash out of this thing. Investors also won’t be enthralled by the performance in HEPS, which fell by 11% as reported or 27% on a normalised basis.

    MAS could have a tougher route forward than expected (JSE: MSP)

    The balance sheet outlook is proving to be difficult to solve

    In the six months to December 2023, MAS grew adjusted earnings per share by 6%. The tangible NAV per share was up 10% in euros. This is good stuff, so why has the share price dropped sharply in the past year?

    Despite the best efforts of the company on the income statement and the management of the properties in the portfolio, the trouble lies in the EUR300 million Eurobond that was issued in 2021. The goal was to reach investment grade and refinance the debt by 2025 / 2026. Nothing ventured, nothing gained.

    Sadly, it’s not going to happen due to various factors. The bond market for non-investment grade issuers has completely dried up, which means the refinancing of the debt in 2025 / 2026 will be much more difficult and more expensive than hoped.

    To the company’s credit, they are trying hard to get ahead of this problem. They are raising secured debt on unencumbered properties and they suspended the dividend.

    A further recent setback is that banks are viewing MAS and the joint venture with Prime Kapital as a single group from a credit perspective. This is hurting the ability to borrow for both MAS and the joint venture, due to credit exposure limits that banks place on groups.

    The net result isn’t pretty. Either MAS will have to raise debt with dividend restrictions post the 2026 calendar year, or there might even be a rights issue. A sale of assets may also be needed, which takes the group even further from an investment grade rating.

    When credit markets move against you, life becomes hard in property funds.

    Higher earnings and cash at Merafe (JSE: MRF)

    2023 was a decent year in the end

    Like all local mining groups, Merafe has had to negotiate failing South African infrastructure and all the other challenges that come with being in this industry. Nonetheless, a trading statement tells us that HEPS for the year ended December 2023 increased by between 4% and 24%. That’s solid.

    The other good news is that cash and cash equivalents increased by just over R50 million in the six months from June to December, now at R1.656 billion. Admittedly, a chunk of this is set aside for future environmental rehabilitation obligations.

    Detailed results for the year are expected on 18 March.

    Metrofile is growing far too slowly (JSE: MFL)

    The bankers are getting more excitement here than shareholders

    In a world of exotic cocktails and food, Metrofile is like ordering the cheese sandwich on white bread, with a glass of tap water. It will fill you, but you might die of boredom midway through eating it.

    Revenue grew by 2% for the six months to December 2023 and EBITDA fell by 4%. Exciting, hey? Due to higher interest rates, HEPS sadly dropped by 13% as bankers got a proportionately larger share of the pie vs. the prior year. Net debt is up 3% to R507 million.

    The interim dividend is down 22% to 7 cents per share.

    In case your bull case is related to the United Arab Emirates and Oman, you should know that revenue increased 28% (yay) but operating profit fell by 48%. Oh man, indeed.

    Each to their own, I guess. This one isn’t for me:

    At Netcare, mental health activity remains above pre-pandemic levels (JSE: NTC)

    And revenue has grown by 5% for the first quarter of the year

    Netcare is participating in an investment conference this week, so the company has released a voluntary announcement for the benefit of the rest of us who aren’t invited to the cool kids party.

    For the five months to 29 February 2024, total paid patient days grew 0.3%. The announcement gives all kinds of different periods unfortunately, but the crux here is that growth is coming from revenue per paid patient day. For the first quarter of the financial year, total group revenue increased by 5% and total operating costs have been “well contained” despite the inflationary environment.

    It’s also worth highlighting that demand for mental health remains strong, which isn’t a shock for anyone dealing with adulting.

    Raubex grows despite Beitbridge having been completed (JSE: RBX)

    The company wasn’t expecting to grow against a tough base period

    Thanks to an increase in tender activity, Raubex has done better than they thought they would. The order book is strong despite the macroeconomic conditions, which is great news for investors.

    This is why the company expects HEPS to be between 0% and 10% higher for the year ended 29 February 2024. This may not sound like much of an achievement, but the Beitbridge Border Post Project was in the base period and not in this period. To be flat or slightly up from there is impressive.

    A pot of gold at the end of the RCL Foods rainbow (JSE: RCL)

    There has been a sharp recovery

    RCL Foods has released results for the six months ended December 2023 and they tell a great story. Revenue from continuing operations is up by 8.4% and EBITDA has jumped by 48.6%.

    By the time we reach HEPS, we see growth of 52.6% in continuing operations and 43.3% overall. The discontinued operation in question is Vector Logistics, which was sold in August 2023.

    Despite Avian Influenza in this period, Rainbow was one of the major areas of improvement for the period. It shows just how rough things were for poultry businesses in the comparable period.

    Sugar also improved, with higher market prices that more than offset the impact of lower crop yields. Across the other food businesses, it looks like performance was mixed.

    The Rainbow chicken business remains the lowest margin business in the group:

    The big news here is that Rainbow is set for an unbundling and thus separate listing on the JSE. This will allow investors to take a pure view on either the poultry or other foods businesses. Currently, investors have to accept a very mixed exposure when buying shares in RCL Foods.

    Due to the separation of Rainbow, RCL Foods has not declared an interim dividend.

    Little Bites:

    • Director dealings:
      • The CEO of RH Bophelo (JSE: RHB) bought shares worth just under R20k.
    • Canal+ has been granted an extension by the TRP until 8 April 2024 to make the mandatory offer that is required under local takeover law to the shareholders of MultiChoice (JSE: MCG).
    • MC Mining (JSE: MCZ) has formally responded to the takeover bid by Goldway Capital Investment, priced at A$0.16 per share. The independent board’s advice to shareholders is to not accept the offer. There is a substantial document released to substantiate this view, which you can access at this link. In summary, the independent board sees it an opportunistic offer that is between 20% and 30% below the pricing guidance in the initial non-binding takeover proposal.
    • Hyprop (JSE: HYP) announced that the acquisition of Table Bay Mall has been approved by the Competition Tribunal without any conditions being imposed on any party. The remaining condition precedent for the deal is the transfer of the property to Hyprop, anticipated to take place this month.
    • Kibo Energy (JSE: KBO) has sold shares in Mast Energy Developments (MED) to the value of £29k, with the proceeds being applied to reduce the outstanding balance on the RiverFort bridge loan facility.
    • Buka Investments (JSE: BKI) got off to a very slow start as a listed company, but has made some new director appointments that might be a precursor to some action.

    Rage against the machine: creatives vs. AI

    Dominique Olivier
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    Rage against the machine: creatives vs. AI

    No, this is not another fluff piece about the importance of humanity in creativity, designed to placate those who have lost their jobs to the heartless algorithm. This is the story of how creators around the world are standing up for their IP in unsurprisingly creative ways. Should artificial intelligence be quaking in its boots? Maybe a little.

    Picture the following scenario: you’re using an image generator like Midjourney or Dall-E to create a visual for a campaign marketing fashion accessories. You type in the prompt “woman carrying a handbag”. The image generator spits out an image of a fashionable young woman carrying a toaster. Perplexed, you retype the prompt: “woman carrying a HANDBAG” – and receive another image of a woman holding a toaster. Unsure why this prompt isn’t working, you decide to try something else. You type in “woman wearing a hat” instead. The AI happily returns an image of a woman with a three-tier cake stacked on top of her head.

    What is going on here?

    What I’ve described is the future of AI, as seen through the eyes of its would-be disruptors. But why would anyone want to make artificial intelligence less effective? The answer to that question starts with how artificial intelligence became so smart in the first place.

    The ethics of data scraping

    The New York Times. Elon Musk. John Grisham, George R.R Martin and Jodi Picoult. These are just a few of the big names that have filed lawsuits against OpenAI since the launch of its deep learning model, ChatGPT, in 2020.

    Generative AI systems, such as ChatGPT, work by interpreting user prompts through sophisticated algorithms. These algorithms are trained on extensive datasets, which are accessed by “scraping” and analysing billions of pieces of online text. At the heart of many of the lawsuits that OpenAI is facing is the question of who gave the company permission to access copyrighted materials for the training of its AI models.

    It all sounds very vague when we talk about the IP attached to written words or images, so let me illustrate the problem for you with a more tangible example.

    Imagine that you owned a bakery renowned for making a particular type of bread. One day, you come into your bakery to find a man in the corner who stands there all day, watching as you work. You did not give the man permission to be in your bakery and he won’t leave when you ask him to. The next day, he goes to the bakery around the corner and does the same thing there. And the day after that, he goes to a bakery two streets down and repeats the performance.

    At the end of the week, the man opens a stall in the town square and starts giving free lessons on how to bake bread, incorporating signature techniques that he saw in your bakery and the others he visited. The enthralled public flock to his stall, and many of them go home and start baking their own bread. Next week, your bread sales are halved.

    The authors who are filing lawsuits against OpenAI are making the case that the company is using material that they hold the copyright to without their permission (and, most importantly, without compensating them). Since OpenAI has been notoriously unforthcoming about where it sources its datasets from (remember, we’re talking about billions and billions of samples of text here), there is almost certainly a chance that they are drawing on copyrighted material from ebooks, scripts and online newspapers. Open AI has thus far neither denied nor confirmed whether this is the truth.

    Instead, OpenAI is countering these arguments using a very open-ended exception to copyright protection known as “fair use”, which allows for the limited reproduction of text for uses like commentary or criticism. If you apply that argument back to our bakery example, that would be the man in the bakery claiming that anyone in the bakery (customers included) could look over the counter at any time and see the methods you are using to bake your bread.

    It’s a tough argument to win and a bitter pill for creatives to swallow. While writers at the top of the bestseller lists are unlikely to be too affected by the rise in AI-generated writing, writers who work on a humbler scale (yours truly included) are working tirelessly to convince clients that their work is worth paying for. It’s hard not to feel that the whole situation is unfair.

    It seems highly unlikely that the man with the stall in town square will be going away anytime soon. Fortunately, creatives never encountered a problem they couldn’t find an interesting solution for.

    Define “sabotage”

    While writers are taking AI to court, creatives in visual media are showing that they aren’t afraid to get hands-on when it comes to protecting what’s theirs.

    In the same way that ChatGPT has disrupted the writing industry, AI-powered image generators have wreaked havoc in the art and design industries. The method for training these image generators also involves data scraping – and therein lies the crux of what might be AI’s undoing.

    It started with Glaze, a tool developed by a team at the University of Chicago under the leadership of professor Ben Zhao. Glaze allows artists to “mask” their own personal style by changing the pixels of images in subtle ways. These changes are invisible to the human eye, but are powerful enough to manipulate machine-learning models to interpret an image as something different from what it actually shows. You can think of Glaze as a set of curtains in front of a window, obscuring a clear view of what’s inside.

    While Glaze was designed as a countermeasure to IP theft, its sibling, Nightshade, takes a far more aggressive approach.

    Developed by the same team at UC, Nightshade is a data poisoning tool that has the potential to break deep learning models by feeding them incorrect data. This tool strikes at the heart of AI’s biggest weakness – it needs to access vast amounts of data in order to learn. When the data is manipulated, the machine doesn’t know the difference; it simply absorbs the information that it is given without questioning whether that information is right or wrong. If you tell an image generating tool enough times that hats are synonymous with cakes, pretty soon it will believe you.

    Just like many of the image generative tools that are out there, Nightshade is open source, which means that others are able to tinker with it, make their own versions, and distribute at scale. There’s a reason for this, according to team leader Zhao: the more people use it and make their own versions of it, the more powerful the tool becomes. The data sets for large AI models can consist of billions of images, so the more poisoned images can be scraped into the model, the more damage the technique will cause.

    When an image generator starts spitting out images of weird animals with six legs and three eyes when prompted with “dog”, getting to the root of the problem is anything but simple. The poisoned data is very difficult to remove, as it requires tech companies to painstakingly find and delete each corrupted sample, of which there could be thousands.

    As an artist who has always had a penchant for the surreal, I’d be lying if I said I wasn’t a little bit excited about the strange and twisted versions of reality that a poisoned image generator could produce. But I’m guessing the folks who are developing Google Gemini (and all the other models out there) are less excited about that prospect.

    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 (MTN | Northam Platinum)

    The Finance Ghost
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    0
    Ghost Bites (MTN | Northam Platinum)

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

    MTN’s profits have been decimated (JSE: MTN)

    The depreciation of the naira has ruined the numbers

    There really is no respite for MTN and the experience that the company has had in Nigeria. In a trading statement for the year ended December 2023, MTN announced that group numbers have been well and truly ruined by the naira. There are vast forex losses that have been a disaster for MTN as a whole, not just the Nigerian business.

    HEPS is expected to be between -60% and -80% lower, which means a range of 231 cents to 462 cents vs. 1,154 cents in 2022. The company notes that 889 cents of the problem (i.e. all of it) was attributed to non-operational items, like hyperinflation adjustments of 151 cents and forex losses of 715 cents. The naira depreciation was a problem worth 593 cents per share.

    As you might expect, the EPS result is even worse thanks to the impact of impairments, with that number expected to be between -70% and -90% lower.

    Separately, MTN Nigeria released its results for the latest quarter. The top-line revenue growth isn’t the problem, with 22.7% growth in FY23 in local currency service revenue and an acceleration in Q4 (up 25%). Sadly, much of the cost exposure (operating costs and finance costs) is dollar denominated, so the devaluation of the naira severely impacts the company. MTN Nigeria reported a loss after tax of N137 billion vs. a profit of N348.7 billion in 2022.

    Were it not for the forex losses, profit would have been N344.5 billion i.e. down by 14.3%. Free cash flow was up 11.6% to N631.6 billion. Sadly, we cannot simply ignore the impact of the naira.

    The MTN share price is down 41% in the past 12 months. Considering it peaked at over R200 in February 2022, the ride down to the current level of R84 has been painful.

    Despite earnings collapsing at Northam, there’s a dividend for this period (JSE: NPH)

    Profit margins sharply deteriorated in 2023

    This was an action-packed period for Northam Platinum, with the six months to December 2023 including some major corporate activity and the ugliness of a drop in PGM prices.

    Dealing with the former, Northam Platinum accepted the mandatory offer from Impala Platinum for Royal Bafokeng Platinum and obtained R9 billion in cash and a whole lot of Impala Platinum shares. This was because Northam effectively gave up on the bidding war for Royal Bafokeng. Northam subsequently disposed of the shares in Implats for R3.1 billion and recognised a R800 million loss. All in all, shareholders won’t look back on the Royal Bafokeng gamble with any joy.

    Moving on to the operational stuff, it’s never going to end well when the PGM basket price drops by 42.3% in a given period in ZAR. The pressure on the palladium price has been driven by lower demand for catalytic converters in internal combustion engine vehicles. The rhodium price has dropped because of substitution for platinum in the fibreglass industry, which sounds to me like a more permanent problem.

    Northam gives a bearish outlook that notes a depressed pricing environment for the next 12 to 24 months. They are therefore fully focused on preserving liquidity, which is why they got out of the Royal Bafokeng / Implats situation as quickly as they could, taking the tried and tested approach in the markets of the first loss being the best loss.

    Despite the focus on liquidity, the company declared an interim dividend of 100 cents per share despite HEPS collapsing by 92.5% to 121.4 cents. That’s a pretty high payout ratio for such a tough environment. The decision to declare this dividend would’ve been supported by the cash position of R11.8 billion in the group, with undrawn banking facilities of R11 billion.

    The real concern for Northam is the cash cost of the various operations vs. the current PGM price. Bearing in mind that the ZAR 4E basket price was R24,269 for the six months to December 2023, this unit cash cost guidance for 2024 is not encouraging:

    At these commodity pricing levels, only Booysendal is profitable. Eland is losing money at an alarming rate and Zondereinde is marginal. The group as a whole is therefore marginal as well.

    The Northam share price is down 30% in the past 12 months and unless there is a meaningful improvement in PGM basket prices, things won’t get better from here. The light at the end of this tunnel could be the world realising that EVs may not be the answer, with plenty of headlines suggesting that the EV-or-nothing silliness of global automotive manufacturers is being toned down significantly. This would be supportive of PGM prices.

    Little Bites:

    • Director dealings:
      • Johan Holtzhausen is a non-executive director of KAP (JSE: KAP) and has vast experience in corporate finance, so I would pay attention to the fact that an associate entity of Holtzhausen bought shares in battered and bruised KAP worth R750k. The average price was R2.21.
      • An associate of a director of Huge Group (JSE: HUG) bought shares worth R107k.
    • Stefanutti Stocks (JSE: SSK) has reached an in-principle agreement with lenders to extend the capital repayment profile of the loan out to June 2025. They are busy amending the current facility agreement, with a short-term extension given until 27 March 2024 to conclude the amendments.
    • Salungano Group (JSE: SLG) is going through a tough time at the moment and is suspended from trading. In positive news, the company has announced the appointment of three new independent non-executive directors, all of whom are highly experienced in various commercial roles.
    • London Finance & Investment Group (JSE: LNF) is one of those completely off-the-radar listed companies on the local market. For the six months ended December 2023, HEPS fell by 51.6% (measured in GBP) and the dividend increased by 9.1% to 0.60 pence per share.

    Ghost Bites (AB InBev | Choppies | Ellies | FirstRand | Fortress | Grindrod Shipping | Hammerson | Implats | Murray & Roberts | Pepkor | Sanlam | Santam | Shaftesbury | South32 | Spur | Truworths)

    The Finance Ghost
    -
    0
    Ghost Bites (AB InBev | Choppies | Ellies | FirstRand | Fortress | Grindrod Shipping | Hammerson | Implats | Murray & Roberts | Pepkor | Sanlam | Santam | Shaftesbury | South32 | Spur | Truworths)

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

    AB InBev’s Q4 profits dip despite revenue growth (JSE: ANH)

    Volumes fell in 2023, with pricing taking revenue growth into the green

    It was a lot more expensive to drink in 2023 than the year before. We know this because although full-year volumes at AB InBev fell by 1.7%, revenue was up by 7.8%. This can only be because of pricing increases.

    This makes things tricky for AB InBev, as manufacturing companies need volumes to keep growing in order for efficiencies to be realised. Normalised EBITDA margin for the full year contracted by 23 basis points to 33.6%. At least the fourth quarter impact was minor, down 2 basis points to 33.7%.

    Profits for the full year came in at $6,158 million vs. $6,093 million in the prior year, so there’s a small uptick there. For the fourth quarter though, they fell from $1,739 million to $1,661 million.

    Net debt to normalised EBITDA was 3.38x at 31 December 2023, an improvement from 3.51x at the end of 2022.

    Choppies has a good story to tell, but not at HEPS level (JSE: CHP)

    This is what happens when you issue lots of new shares under a rights offer

    Choppies has announced an interim dividend of 1.6 thebe per share. In case you didn’t know, the thebe is the cents currency of Botswana (i.e. 100 thebe equals 1 pula), which is where Choppies has its primary listing! This is compared to no interim dividend being paid last year, so there’s some good news for shareholders.

    This is because the company seems to be doing a lot better, with revenue up 21% and operating profit up 28%. Despite profit being up 41%, HEPS could only move 2% higher. This is because there are many more shares in issue after the recent rights issue.

    To give you a sense of the dividend payout ratio, HEPS was 5.3 thebe and the dividend was 1.6 thebe per share as mentioned, so they are still retaining a lot of earnings.

    Ellies is now technically insolvent (JSE: ELI)

    The tangible net asset value per share is negative

    At Ellies, the results for the six months ended October 2023 probably signal the death of the company, at least in its current form. Revenue is down 30.6%, the headline loss per share was a massive 13.27 cents and the net tangible asset value per share has moved from 12.3 cents to -7.3 cents.

    The group is now in business rescue. Good luck to Standard Bank getting their money back on the term facilities and general banking facility. Hopefully the notarial bond over moveable assets will work out well for them.

    As for equity holders, you can perhaps ask for the share certificates and frame them on the wall to remind you not to invest in basket cases.

    FirstRand: only keeping up with inflation (JSE: FSR)

    The dividend is up by 6%

    It’s tough for the large banking groups in South Africa, as there is practically no economic growth to help them. What does help of course is inflation and higher interest rates, offset to varying extents by impairments. A group like Standard Bank is growing strongly in Africa at least, whereas the others are reporting far more pedestrian numbers.

    FirstRand is the perfect example, with the ordinary dividend up by only 6% per share. Normalised return on equity has fallen from 21.6% to 20.6% for the six months to December. The highlight here is a 14% increase in normalised NAV per share, which is one of the key valuation inputs for the share price.

    Looking at top-line growth, it was all about net interest income (up 14%) rather than non-interest revenue (up just 4%). Operating expenses increased 9% and impairments were 28% higher, hence why normalised earnings were only up by 6%. The credit loss ratio has increased from 0.74% to 0.83%.

    The share price is down 3% over the past 12 months. In contrast, Standard Bank is up 8.9%. In both cases, this excludes dividends.

    Fortress expects to start paying dividends (JSE: FFB)

    This is thanks to the deal that sorted out the share structure by using NEPI Rockcastle shares

    After a long journey to try and sort out the dual-class share structure into something sustainable, Fortress must be feeling chuffed to announce that distributions are expected for the first half of the 2024 financial year. Distributable earnings themselves are up 19%, but the share structure has changed completely, so reflecting this on a per-share basis isn’t useful for comparability.

    It is useful for shareholders to see the anticipated dividend per share being 81.44 cents. The forecast for the second half of 2024 is 60.44 to 65.57 cents, with full year distributable earnings expected to be between 10.9% and 14.0% lower. This is due to the impact of the group having used a big chunk of the NEPI Rockcastle investment to settle shareholders.

    Grindrod Shipping reports a loss for the year (JSE: GSH)

    If you want a steady investment, stay far away from shipping

    All cyclical industries are painful, but some are more painful than others. After shipping made an absolute fortune during and immediately after the pandemic, the cycle turned with a vengeance and Grindrod Shipping generated a loss for the six months to December of $9.2 million as shipping rates dropped further.

    After modest profits in the first half of the year, the full-year loss was $7.9 million.

    The focus at this point in the cycle has been to reduce debt, with $56.9 million worth of debt cleared in 2023. Cost efficiencies across the fleet are also a priority, especially with shipping rates under pressure.

    The dividends continue at Hammerson (JSE: HMN)

    Key metrics are looking better for the group

    In its full year 2023 results, Hammerson has highlighted like-for-like gross rental income growth of 6% and a reduction in administrative costs of 14%. Adjusted earnings were up 11% thanks to these efforts.

    Importantly, net debt was down 23%. The loan-to-value came in at 34% after a disposal programme strengthened the balance sheet.

    After reinstating dividends at the half-year mark, the company has recommended a final dividend that brings the full-year dividend to 1.50p per share. The policy is to pay between 60% and 70% of annual adjusted earnings, so don’t expect a cash cow here like you’ll find in most SA REITs.

    Impala Platinum’s detailed interims are now available (JSE: IMP)

    As we already knew, they aren’t pretty

    The recent performance of PGM miners is no secret. We’ve had a few updates from the sector as a pre-cursor to the release of detailed numbers. It therefore might upset you, but shouldn’t shock you that HEPS at Impala Platinum is down by 77.9% for the six months to December 2023.

    With revenue down by 24.9% as PGM prices plummeted, the rest of the income statement never really stood a chance.

    There is no dividend for this period, with a free cash outflow of R4.76 billion vs. an inflow of R11 billion in the comparable period.

    With group unit costs expected to increase by between 6% and 10% for the full year, they really need PGM prices to go the right way.

    Murray & Roberts is still making losses (JSE: MUR)

    Yes, even from continuing operations

    Murray & Roberts is in esteemed company, as one of the many South African businesses that got a klap in Australia. We shouldn’t play cricket there and in most cases, we shouldn’t do business there either. Send the Bokke to represent us and be done with it.

    With the company’s Aussie subsidiaries having been placed into voluntary administration in December 2022, the size of the group has been significantly reduced. The balance sheet needed to get smaller too, with debt down to R400 million from R2 billion in April 2023. They need to refinance the remaining debt by June 2024.

    For the six months ended December 2023, the headline loss per share from total operations (i.e. including the loss from the deconsolidation of various entities) was between -29 cents and -24 cents. It’s a vast improvement from -322 cents in the prior period, but it’s still a loss.

    From continuing operations only, the group has improved slightly from a headline loss per share of -27 cents to an expected range of -19 to – 14 cents.

    And this, dear friends, is why the share price looks like an exciting thing to try on a snowboard in the winter:

    Pepkor says goodbye to The Building Company (JSE: PPH)

    Private equity buyers have swooped in to give Pepkor an exit from this asset

    The building materials sector hasn’t exactly been a great place to play recently, with Pepkor deciding to exit its investment in The Building Company. The main brands here are BUCO, Timbercity and Tiletoria.

    The buyer is Capitalworks Private Equity and selected members of management, so this is a classic management buyout deal. The price is R1.2 billion. This isn’t a categorisable transaction, so we aren’t getting any further details than that.

    A dig through the Pepkor financials reveals revenue for the building materials segment of R8.4 billion for the year ended September 2023. The disclosure is quite light in 2023, but I found a profit number for 2022 (off much the same revenue) of R462 million.

    I would guess that the profit multiple for this deal is around 3x, which tells us that Pepkor was just happy to get rid of the thing. Good luck to management and the new buyers!

    Sanlam’s HEPS has moved much higher (JSE: SLM)

    A solid result in the financial services business helped drive this outcome

    Ahead of the release of detailed 2023 results on 7 March, Sanlam released a trading statement noting a beautiful jump of between 44% and 54% in HEPS for the year ended December 2023.

    This was driven by a strong improvement in the cash result from financial services, which increased by between 15% and 25% on a per-share basis. Overall growth in the book and an improved risk experience in the life insurance business were helpful here, amongst other things.

    Net operational earnings per share was up by between 23% and 33%, with higher investment returns on the shareholder capital portfolio.

    Sanlam’s share price is up 20% in the past 12 months.

    Despite underwriting pressures, Santam’s HEPS grew strongly (JSE: SNT)

    The weather – and general life in South Africa – are making short-term insurance a tricky game

    For the year ended December 2023, Santam’s group insurance revenue increased by 9%. HEPS was up by 27%, with the vast gap between those numbers explained by a major uptick in the return on shareholders’ funds rather than by great underlying results in the insurance business.

    In fact, conventional insurance net underwriting margin deteriorated from 5.1% in 2022 to 3.5% in 2023. This is why underwriting profit fell by 26%, impacted by all kinds of weather-related problems and even the earthquake in Turkey!

    Importantly, the investments in India and Malaysia reflected revenue growth of 31%, with the Indian business as the major driver here.

    The dividend is 7% higher at 905 cents per share.

    Shaftesbury grows the dividend (JSE: SHC)

    The London-based portfolio is delivering growth

    In the year ended December 2023, Shaftesbury grew gross income by 10.4% on a like-for-like basis. Still, the environment of higher rates meant that the wholly-owned portfolio saw its valuation drop by 0.8%.

    Notably, the loan-to-value has increased from 28% to 31% over the past year. Anything in the 30s is pretty normal for a property fund.

    The final dividend of 1.65 pence per share takes the full-year dividend to 3.15 pence per share.

    The medium-term growth prospect is 5% to 7% per annum. Of course, the total return to investors will depend greatly on property valuations and the cap rates being applied.

    South32 sells Illawarra Metallurgical Coal (JSE: S32)

    At this valuation, I’m not surprised they’ve agreed to sell

    South32 has agreed to sell Illawarra Metallurgical Coal in Australia to Golden Energy and Resources and M Resources. The buyer is a lot less important than the price, with the deal being worth up to $1.65 billion, of which $1.05 billion is payable at completion. $250 million is payable in 2030 as deferred consideration and there’s a contingent amount of up to $350 million as well.

    Assuming the total is received, that’s a multiple of 7.2x average annual free cash flow. Although the deferred amount is years away and should be present valued at a suitable discount rate, thereby reducing the effective multiple being received, it’s still a strong price.

    Aside from unlocking the capital, the deal simplifies South32’s business and reduced its capital intensity.

    Spur reports impressive momentum (JSE: SUR)

    This was a positive surprise for me

    Spur has been doing really well lately, with restaurant brands that resonate with customers looking for value offerings and somewhere for the kids to have a jol. The fact that Spur is doing well in general isn’t a surprise for me. The results for the six months to December 2023 are a surprise though, as retail mall commentary for the period was that quick-service restaurants didn’t have a great time.

    So if Spur did well, are we in for a famous disappointment elsewhere? Time will tell.

    Sticking to those with a taste for life, turnover was up 10.4% in total and 9.0% excluding the Doppio Collection. There’s no debt on the balance sheet, so shareholders get the juicy benefits of a 16.4% increase in HEPS.

    The interim dividend is up by 15.8% to 95 cents per share.

    The group has highlighted the benefit of tourism numbers for the Western Cape (and to a lesser extent, KZN) restaurants in December.

    Spur’s share price is up 22% in the past year, which is an exceptional outcome relative to other consumer plays.

    Not much to write home about at Truworths (JSE: TRU)

    But at least earnings have moved higher, so that’s something

    Truworths has released results for the 26 weeks ended 31 December 2023. Apparel retailers had a pretty decent end to 2023, with Truworths reflecting 8.5% growth in sales of merchandise. Gross profit margins were steady at 53.6% vs. 53.5% in the comparable period. Operating margins unfortunately fell slightly by 20 basis points to 24.5%.

    Once we get to HEPS level, the increase is only 3.6%, with a 36.7% increase in finance costs playing a major role here. The interim dividend is 3.8% higher. It’s positive at least, but not by much.

    The highlight is probably cash generated from operations, which increased from R1.7 billion to R2.7 billion. Net debt is down from R854 million to R124 million, so the balance sheet looks better.

    At segmental level, the star of the show was the Office business in the UK, achieving growth of 33.1% in rands (and 15.6% in GBP). Truworths Africa was down 0.3%, so the group was a relative loser vs. some of its peers in South Africa.

    In terms of outlook, sales for the first seven weeks of the new period increased by 3.8%. South Africa is down 0.5% and Office is up 1.3% in GBP. On this basis, I would be careful of Truworths this year, as the UK carried it through 2023 and the growth there seems to have moderated.

    Little Bites:

    • Director dealings:
      • Sean Riskowitz, seemingly acting in his personal capacity for once, bought shares in Finbond (JSE: FGL) worth R5.34 million.
      • The wife of the CEO of Shaftesbury Capital (JSE: SHC) bought shares in the company worth £110k.
      • An executive of BHP (JSE: BHG) has bought shares worth A$70k.
      • A non-executive director of Primary Health Properties (JSE: PHP) has bought shares in the company worth £25k.
    • Equites (JSE: EQU) released a pre-close presentation that is worth digging into if you’re a shareholder. The loan-to-value ratio is down from 42.3% at August 2023 to an estimated 41.5% at February 2024, with disposals in the UK as the major positive driver and various acquisitions in South Africa limiting the decrease. The cost of debt in South Africa is up from 8.58% to 9.11% in the past year. In the UK, the cost of debt is down from 4.15% to 3.62% over the same time period. Dividend per share guidance of 130 – 140 cents per share for FY24 is unchanged.
    • MTN Ghana, part of MTN (JSE: MTN), released results for the year ended December 2023. Service revenue was up 34.6% in local currency and EBITDA margin increased by 230 basis points to 58.4%. Total capex was up 90.3% though, so the same story keeps applying around lack of cash coming from these businesses. With macroeconomic issues continuing, the African subsidiaries are focusing on in-country investments.
    • EOH (JSE: EOH) announced that the PAYE dispute between SARS and EOH Abantu has been settled, with the company owing R112 million to SARS before 1 March 2024. The company had already provided for this. EOH Abantu must also forfeit a tax receivable credit of R6.9 million, which hadn’t been provided for. The assessed loss of R34.5 million is also gone, with no impact to the financials as no deferred tax asset had been raised anyway. Standard Bank has increased the debt facility by R63 million, which is the shortfall for EOH Abantu to settle the tax.
    • Sirius Real Estate (JSE: SRE) has acquired a German business park for €13.75 million, marking the third German acquisition this year. The deal has been funded from the proceeds of November’s capital raise. For some reason, the announcement doesn’t mention the acquisition yield.
    • DRA Global (JSE: DRA) has released results for the year ended December 2023. Revenue may be down by 1% but profits are up by 190% to $19.7 million. No dividends have been paid for this period, despite the turnaround in financial performance. The group has noted a strong project pipeline and the share price closed 17.42% higher, admittedly on low volumes as usual.
    • Salungano Group (JSE: SLG) is currently suspended from trading and thus needs to release a quarterly update. The reason for the suspension is that FY23 results haven’t been released, with business rescue of yet another subsidiary causing further complications. They expect to release FY23 results by mid-April and interim 2024 results as soon as possible thereafter.
    • The listing of Collins Property Group (JSE: CPP) will be transferred to the Industrial REITs subsector of the JSE with effect from 18 March 2024. This is important in terms of index funds and even actively managed funds being able to hold the shares, as mandates of even actively managed funds can be quite narrow.
    • Earlier this week, Anglo American (JSE: AGL) and some of its subsidiaries announced good news regarding a renewable energy deal with Envusa Energy, in which Anglo American holds a 50% stake. The latest news is that Envusa has completed the project financing for its first three wind and solar projects in South Africa, collectively called the Koruson 2 cluster of projects. This is a wind and solar operation located on the border of the Northern and Eastern Cape. Anglo American Platinum, Kumba Iron Ore and De Beers have committed to 20-year offtake agreements.

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

    Marylou Greig
    -
    0
    Who’s doing what this week in the South African M&A space?

    Exchange-Listed Companies

    Capitalworks Private Equity has acquired The Building Company (TBCo) from Pepkor for R1,2 billion. Select members of TBCo’s management team are investing alongside the private equity company. The disposal will streamline Pepkor’s portfolio of businesses, while for TBCo the deal will position it strategically and operationally to pursue future growth.

    South32 has entered into an agreement with Golden Energy and Resources Pte and M Resource to dispose of Illawarra Metallurgical Coal. South32 will receive an upfront cash consideration of US$1,05 billion, a deferred cash consideration of $250 million and a contingent price-linked cash consideration of up to $350 million. The deal is in line with the company’s strategy to unlock value for shareholders.

    Sirius Real Estate is to acquire its third German business park this year for €13,75 million. The business park is situated in Klipphausen, near Dresden.

    Hammerson plc has disposed of Union Square, a 52,000m² shopping centre in Aberdeen, Scotland to US-headquartered Lone Star Real Estate Fund VI for £111 million in cash. The proceeds of the disposal will be used to strengthen the balance sheet. The sale of Union Square concludes the company’s £500 million non-core disposal programme initiated in early 2022.

    Kibo Energy has finally parted ways with the institutional investor-led consortium led by Proventure Holdings (UK) and announced a funding agreement with new strategic partner RiverFort Global Opportunities. The initial funding facility is up to £4 million. The funds will predominantly be used to fund the Pyebridge 9MW flexible power generation asset out of care and maintenance.

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

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