Sasol’s performance for the first six months of 2024 continued to be negatively impacted by the continued volatile macroeconomic environment, with weaker oil and petrochemical prices, unstable product demand and continued inflationary pressure. Despite some operational improvements in South Africa, persistent underperformance of the state-owned enterprises involved in Sasol’s value chain and the weaker global growth outlook continue to impact Sasol’s business performance.
Revenue of R136,3 billion is lower than the prior period of R149,8 billion, mainly as a result of the lower chemical product prices across all regions.
Earnings before interest and tax (EBIT) of R15,9 billion is R8,3 billion (34%) lower than the prior period.
The variance to the prior period is mainly due to lower revenue and lower gains on the valuation of financial instruments and derivative contracts, offset by lower chemical feedstock prices in Europe, Asia and the United States of America (US).
The current period includes remeasurement items of R5,8 billion mainly due to:
Impairments of the Secunda liquid fuels refinery cash generating unit (CGU) of R3,9 billion driven by a further deterioration assumed of the macroeconomic outlook, including Brent crude oil and electricity prices, resulting in the full amount of capital expenditure incurred during the period being impaired; and
Impairments of the Chemicals Africa Chlor-Alkali & PVC and Polyethylene CGUs of R1,2 billion due to lower selling prices associated with reduced market demand.
The prior period included impairments of R6,4 billion mainly due to the Secunda liquid fuels refinery CGU (R8,1 billion), Chemicals SA Wax CGU (R0,9 billion), China Essential Care Chemicals CGU (R0,9 billion), offset by a reversal of the US Tetramerisation CGU impairment (R3,6 billion).
The Energy business, including Mining, EBIT increased by 22% to R12,9 billion compared to the prior period with both periods impacted by remeasurement items. Excluding remeasurement items, EBIT decreased by 10% due to lower export coal prices, higher external coal purchases to support Secunda Operations (SO) coal requirements and increased maintenance and electricity expenditure. This was partially offset by improved production at SO, better refining margins, higher export coal sales volumes and the weaker exchange rate.
EBIT for the Chemicals business decreased by 93% to R0,7 billion, compared to the EBIT of R9,6 billion in the prior period with both the current and prior periods impacted by remeasurement items. Excluding remeasurement items, EBIT decreased by 68% compared to the prior period with margins and associated profitability under pressure due to challenging market conditions.
These conditions included macroeconomic weakness especially in China and Europe and continued customer destocking which negatively impacted demand. The average sales basket price for the first half of 2024 (H1 FY24) was 24% lower than the first half of 2023 (H1 FY23), driven by a combination of lower oil, feedstock and energy prices and weak market demand. Despite these continued market headwinds, H1 FY24 total chemicals sales volumes were 4% higher than H1 FY23, largely due to higher ethylene and polyethylene sales in the US, improved production and supply chain performance in Africa offset by continued lower demand in Eurasia.
Core HEPS decreased from R24,55 per share in the prior period to R18,39 per share. The decrease in Core HEPS is due to the decline in EBIT detailed above.
At 31 December 2023, our total debt was R124,1 billion (US$6,8 billion) compared to R124,3 billion (US$6,6 billion) at 30 June 2023. Sasol issued R2,4 billion in the local debt market under the domestic medium term note (DMTN) programme during the reporting period. The US$1,5 billion (R27,5 billion) bond will be repaid in March 2024.
Cash generated by operating activities decreased by 31% to R14,7 billion compared to the prior period in line with the decrease in EBIT and the movement in working capital.
Capital expenditure, excluding movement in capital project related payables, amounted to R15,9 billion compared to R15,6 billion during the prior period. Capital expenditure relates mainly to Secunda shutdown activities, the Mozambique drilling campaign and continued spend on Synfuels renewal and environmental compliance activities.
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Higher finance costs hit AECI’s business (JSE: AFE)
HEPS has decreased year-on-year
AECI has released a trading statement for the year ended December 2023. HEPS is expected to decrease by between 7% and 16%. This means an expected range of between R10.77 and R11.99 for HEPS, with the share price currently trading at around R95.
If you’ve been following the company, you’ll know that the business in Germany has been a source of headaches. Finance costs are also biting, with the balance sheet needing to support revenue growth through higher working capital levels.
Altron’s HEPS moved higher in continuing operations (JSE: AEL)
As for total operations, the story looks different
Altron had to recognise some non-cash adjustments in the first half of the year that ruined the full-year result. This included issues in Altron Nexus and Altron Document Solutions of R334 million and R95 million respectively, as well as an impairment of R33 million related to Altron Nexus. Both of these businesses are recognised as discontinued operations for the full year numbers, which is why the HEPS result looks so different for continuing vs. total operations.
Starting with continuing operations, HEPS will be between 16% and 24% higher. For total operations, this swings horribly from HEPS of 29 cents in the comparable period to a headline loss per share of between -21 cents and -16 cents for this period.
Altron Document Solutions and Altron Nexus are the subject of active disposal processes. In other words, just ignoring them as discontinued operations is dangerous. If they do badly, they may not be easy to sell and hence Altron shareholders could continue to suffer losses. The other discontinued operation is Altron Rest of Africa.
Looking deeper, the group notes Netstar as a highlight of the second half of the year, reaching over 1.7 million subscribers and over 2 million connected devices. They can’t help but mention Big Data (including the capital letters), of course.
CA Sales Holdings just keeps delivering (JSE: CAA)
This company just keep impressing
The CA Sales Holdings business is all about helping FMCG product providers reach their market. The model is based on driving volumes, which can grow even in a slow growth market through winning market share.
The results speak for themselves, with the company achieving HEPS growth of 23% to 28% in the year ended December 2023. This has been achieved through growth in existing and new clients.
Clientele releases the 1Life acquisition circular (JSE: CLI)
This is a category 1 transaction, so it’s a big one for Clientele
Clientele announced this deal back in November 2023, with the plan being to acquire 100% of 1Life from Telesure Investment Holdings. The idea is that this will create a larger mass and middle income insurance business with a combined embedded value of around R7.8 billion and 1.5 million contracts. The scale benefits are obviously part of the plan here.
The price is based on the embedded value of 1Life being calculated in a similar way to that of Clientele, plus a premium of 6.23% for control. This is a modest control premium, with the trick here being that Telesure will receive shares in Clientele as consideration for the deal. Don’t feel too bad as a Clientele shareholder, because Telesure is receiving the shares at a price of R16.25 per share. That’s much higher than the current market price of Clientele shares, reflecting the embedded value per share rather than the market’s view on value.
Long story short, this is a deal based on embedded value for embedded value, with a small control premium for 1Life. That seems like a sensible approach to me. I must also give credit to Clientele for managing the deal in such a way that expenses are reasonable, coming in at under R9.5 million for the entire thing:
For a deal worth R1.9 billion, that’s a modest cost indeed. This tells me a lot about the Clientele management team. For all the details, get the circular here.
Jubilee is growing, but margins are taking strain (JSE: JBL)
Jubilee bucks the mining trend
Jubilee Metals has released results for the six months to December 2023. Group revenue is up 18.4%, driven by higher levels of production. EBITDA is only up by 13.6% though, which looks somewhat spectacular vs. other mining groups but reflects margins under pressure at Jubilee when you view it alongside revenue growth.
By the time we get to earnings per share, the increase is only 6.7%. It’s worth noting that a placing of shares took place in January, so earnings per share will have that headwind to contend with in the 2024 year as well.
Looking further into the numbers, the highlight is copper production increasing by 46.5% in Zambia. The growth in South Africa is far more modest, yet it remains a stable cash generating base for the group.
Normalised HEPS drops at Libstar (JSE: LBR)
And in this case, this is the right metric to look at
Libstar has released a trading statement dealing with the year ended December 2023. It’s a long one, giving far more details than a trading statement usually does.
The good news is that revenue growth improved from 4.0% in the first half to 7.3% in the second half, taking full-year growth to 5.8%. The pricing vs. volume analysis is quite something, with volumes down 4.8% and prices (and mix) contributing growth of 10.6%.
Gross profit margin was 21.2% in the second half, which is an improvement of 120 basis points vs. the first half. Full-year margin is 20.7%, which is slightly lower than the 2022 result.
Despite all the diesel costs of load shedding, operating expenses only increased by 1.9%. That’s an impressive display of cost control. Sadly, the banks got the bulk of the benefit, as finance costs were up a whopping 53.3% thanks to higher financing costs. This is despite net debt to normalised EBITDA decreasing from 2.1x at 30 June 2023 to 1.6x at 31 December 2023.
If you look at HEPS without normalisation adjustments, it includes insurance proceeds of R120 million related to the Denny Mushrooms fire incident. That’s not a sensible way to consider performance, so the group quite correctly reports normalised HEPS without this number.
Unfortunately, normalised EBITDA fell between 2.2% and 4.3% for the full year, as the second half performance couldn’t make up for the 18.3% decline in the first half. Combined with the impact of finance costs, this is why normalised HEPS from continuing operations fell by between 9.7% and 12.7%.
Lower revenue hits profits at Sasol (JSE: SOL)
There is also a notable decrease in the dividend payout ratio
Sasol has released results for the six months to December 2023, showing why the share price has come under great pressure. Weaker prices for the commodities are not a helpful environment alongside inflationary pressures on costs. Of course, there are also the challenges of poor local infrastructure to contend with.
Revenue has fallen by just over 9%, with lower chemical prices as the major driver. Operating leverage has worked against the company here, with EBIT down by 34%. Aside from the drop in revenue, there were other issues for EBIT like valuations of financial instruments and derivative contracts. On a segmental basis, the biggest loser was Chemicals Africa with a massive negative swing in EBIT from R8.99 billion to R3.44 billion. The rest of the Chemicals business (America and Eurasia) moved from the green into the red, reporting losses. A strong improvement in the Energy Fuels business from R5.1 billion to R9.6 billion couldn’t offset this.
Shareholders only enjoyed a slightly less severe impairment in this period than the prior period. After writing down its assets by R6.4 billion in the comparable period, this period saw write-downs of R5.8 billion.
Headline earnings excludes the impact of impairments, so the 34% drop in HEPS happens to be in line with the drop in EBIT in this period. The interim dividend is 71% lower though, so the payout ratio has decreased considerably.
The CEO of Marshall Monteagle (JSE: MMP) has acquired shares in an off-market transaction to the value of R13.7 million.
Sean Riskowitz, acting through Protea Asset Management, has bought another R726k worth of shares in Finbond (JSE: FGL).
The CEO and Dr. Christo Wiese are at it again, each buying shares in Invicta (JSE: IVT) worth R202k.
The company secretary of Trematon (JSE: TMT) has sold shares worth R135k.
An associate of a non-executive director of Mondi (JSE: MNP) has bought shares in the company worth R120k. Here’s the thing: the trade happened in April 2023 and wasn’t disclosed due to an “administrative oversight” – the punishment for undisclosed trades really does need to get more severe for it to be taken seriously.
The CEO of Primary Health Properties (JSE: PHP) has purchased shares worth £3.2k under the company dividend reinvestment plan.
Hammerson (JSE: HMN) has sold Union Square, a shopping centre in Aberdeen, for £111 millon in cash. Importantly, the net initial yield is 11% and the sale is at a discount of 8% to the 31 December 2023 book value, so that’s a disappointing price. This reduces net debt for the fund and concludes the £500 million non-core asset disposal programme communicated to the market at the start of 2022.
Sea Harvest (JSE: SHG) achieved 100% approval from shareholders who attended the meeting for the proposed acquisition of the businesses from Terrasan Beleggings. Related to the same deal, Brimstone (JSE: BRT) as the controlling shareholder of Sea Harvest received 99.95% approval from its own shareholders for the transaction.
Sibanye-Stillwater (JSE: SSW) released a mineral resources and mineral reserves declaration. This is really aimed at more technical modelling of mining company prospects so I don’t usually write on these in any detail in Ghost Bites. I thought it was worth a mention that mineral reserves for SA PGMs are down 10.4% and for SA gold are down 15.7%, impacted by a combination of depletion and cessation of activities in the case of gold. The shift towards green metals is clear in the group strategy.
Ellies (JSE: ELI) is in business rescue and it’s not hard to see why, with a headline loss per share of between 12.80 cents and 13.66 cents for the six months ended October 2023. Keep in mind that the share price is only R0.01!
There are two types of people in this world: those who know what Vantablack is, and those who are about to go on a rollercoaster ride of discovery.
Friedrich Nietzsche once famously said “If you gaze long into the abyss, the abyss also gazes into you”. I reckon he was only able to make that kind of statement because Vantablack wasn’t invented in his lifetime, because there’s no doubt that Vantablack represents the very essence of nothingness. There is no light and no life at the bottom of this shade of black. Nothing is reflected. Nothing gazes back.
How is it that scientists came to create a black so black that it absorbs 99.96% of light – and how did one artist manage to corner the market on it?
The science-y bit
The name “Vantablack” represents a category of ultra-black coatings that exhibit total hemispherical reflectance (THR) levels below 1% across the visible spectrum. In other words – if a surface or object is coated with Vantablack, it will absorb up to 99.965% of visible light. Furthermore, these coatings possess the remarkable quality of maintaining consistent light absorption from nearly all viewing perspectives, meaning that Vantablack is capable of creating the illusion of two-dimensionality even when applied to a three-dimensional surface.
Vantablack was invented by Ben Jensen, the founder and CTO of Surrey NanoSystems, in 2014. In case you’re wondering how it actually works, I’ll give you the high-level explanation: a forest of vertical carbon nanotubes is “grown” on a substrate using a modified chemical vapour deposition process. When light strikes Vantablack, instead of bouncing off, it becomes trapped and continually deflected amongst the tubes, absorbed, and eventually dissipated as heat.
The use case for the world’s blackest black is interesting, ranging from scientific applications right through to luxury (think watch faces and really expensive custom car paint jobs). Within the scientific realm, Vantablack created a stir regarding its potential applications in cameras, telescopes and sensors. Its unique attributes render it an appealing substance for a variety of purposes, ranging from enhancing cinema projectors and lenses to adorning luxury goods and design pieces. Moreover, its remarkable light-absorbing capabilities hold promise for revolutionising the efficiency of solar panels and cells.
Sharing is for the poor
Sadly, you can’t go to your local hardware store, pick up a litre of Vantablack paint and transform your kitchen into a black hole. That’s because Surrey NanoSystems does a great job of controlling access to Vantablack, outright refusing to supply it to private individuals. Samples are provided only for applications that the company deems “valid” (like when BMW was allowed to cover a whole X6 in Vantablack for the International Motor Show in Germany in 2019).
And yet, by some method of persuasion, the British artist Anish Kapoor managed to get Surrey NanoSystems to sell him the exclusive rights to use Vantablack S-VIS, a sprayable version of Vantablack, in artistic applications. As you can imagine, artists around the world were less than impressed that Kapoor could be allowed to corner the market on what is essentially a colour, thereby prohibiting everyone else from using it to make art. Many felt that Kapoor was given access to Vantablack due to his immense wealth and fame, rather than his artistic merit, and those critics decried what “more talented artists” could do if they were given access to the same materials.
The capitalist readers in the audience will remind us that Surrey NanoSystems is a business, and this is how business works: the highest bidder always wins. Yet there is undeniably still an emotional pull and a feeling of unfairness that kicks in when someone monopolises something as intangible as a colour. Obviously we know that Vantablack isn’t a standard colour, and it requires much more time, skill and money to produce than the standard black pigment, which is why it holds more value. But still, that doesn’t erase the image of Anish Kapoor as the petulant child at the kindergarten table, holding onto the black crayon so that no-one else can colour with it.
Sooner or later, the other children at the table get tired of waiting for their turn. And in 2016, one artist decided to take a crack at Kapoor’s monopoly.
The revolution will be pink
Stuart Semple is a painter who has been mixing his own pigments since his varsity days. One of these pigments was a fluorescent shade of pink, which Semple dubbed “the pinkest pink”. Frustrated by the Vantablack situation, Semple introduced sales of The World’s Pinkest Pink pigment through his online store in 2016, accompanied by the following caveat:
“By adding this product to your cart you confirm that you are not Anish Kapoor, you are in no way affiliated to Anish Kapoor, you are not purchasing this item on behalf of Anish Kapoor or an associate of Anish Kapoor. To the best of your knowledge, information and belief this paint will not make its way into the hands of Anish Kapoor.”
Of course it didn’t take long for troops of equally-irritated artists to rally behind Semple and his pink. Orders began trickling in initially, then quickly escalated to a surge, and eventually, an inundation. Five thousand jars were demanded, prompting Semple to recruit his family for assistance in grinding ingredients and fulfilling orders.
Artists who bought Semple’s pink went on to create art with it, and shared their pink creations online under the hashtag #sharetheblack. For anyone out of the loop at that time, it must have been a twilight-zone-esque experience to see so many people on the internet making art with pink while talking about black.
Of course it was only a matter of time before Kapoor rose to Semple’s challenge and got his hands on a tub of The World’s Pinkest Pink. And when he did, he promptly did this:
Nothing stays exclusive forever
For the longest time, Kapoor appeared to be doing nothing with Vantablack aside from hoarding it, which obviously didn’t endear him any further to his fellow artists. In the meantime, Semple kept at his one-sided feud, developing The Glitteriest Glitter as well as a cherry-scented superblack pigment called Black 2.0, both of which – you guessed it – were available to buy by anyone but Anish Kapoor. After Black 2.0 came Black 3.0, and then Black 4.0, which is capable of absorbing 99.96% of visible light. And unlike the highly technical, expensive and difficult-to-work-with Vantablack, Semple’s Black 4.0 is non-toxic and can be applied with a normal brush. It costs only $49.99 for a 150 ml bottle and can be bought online in just a few clicks.
It seems like too much of a coincidence that Semple went live with sales of Black 4.0 right before the debut of Kapoor’s first ever collection of Vantablack paintings at the Venice Biennale in 2022. The works on display apparently took 10 years of experimentation, scientific collaboration and careful application to create, which is how Kapoor is justifying selling each of them for £850 000 ($1.04 million, or roughly R20.03 million).
Spite is a powerful motivator. And while Stuart Semple will never make nearly as much money from his pigments as Anish Kapoor will make from selling one Vantablack painting, he will go down in history as the man that made the blackest black available to everyone.
Everyone except Anish Kapoor, that is.
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.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
AngloGold enjoyed a much stronger six months (JSE: AGL)
The second half of the financial year more than offset the first half
After the first half of the year ended December 2023 saw AngloGold report a free cash outflow of $205 million, shareholders will be relieved to know that the second half of the year was a free cash inflow of $314 million. This was thanks to an increase in production of 15% and a decrease in cash costs per ounce of 9%. It also helps that the average gold price moved higher in the second half of the year.
Other good news includes the important gold discovery made in Nevada in the US, which the CEO of the company refers to as the largest new discovery in the US in more than a decade. Of course, that’s also a great part of the world in which to strike gold – literally!
Perhaps the Bytes ex-CEO struggles with reading the rules? (JSE: BYI)
Or just doesn’t care?
With the news of Neil Murphy resigning suddenly at Bytes, the market started speculating about what the cause might be. We still don’t actually know. What we did learn at the time of the announcement is that there were undisclosed trades in the company shares.
Now, when this happens, it’s usually an isolated oopsie. Not so for Murphy.
There are well over 100 individual trades over the past three years that weren’t disclosed. He merrily bought up lots of shares in 2021 – 2022 and started selling them in 2023, all without telling the market.
I’m not sure what the punishment is for this, but it really is a pathetic situation that deserves the maximum possible punishment. There’s no point in having rules if people can break them to this extent.
City Lodge’s margins are under pressure (JSE: CLH)
I have great respect for the strategic pivot in this business in the post-pandemic period
The City Lodge management team really has done a lot to try and mitigate not just the way the pandemic changed behaviour, but also the ongoing challenges of operating in South Africa. There’s unfortunately only so much that they can do, particularly with an offering that still has a business travel angle. When you’re competing with Zoom and Teams as an alternative, you have a more cost sensitive customer than in the leisure travel space.
The six months to December 2023 is being compared to a period that was also free of COVID restrictions, so this is a proper view on the business. Occupancy moved higher from 57% to 61%, which speaks to some normalisation in consumer behaviour and solid resonance with customers, particularly as this is 600bps higher than the same period in 2019. Accommodation revenue is up 16%, with an increase in average room rates of 9%.
The food and beverage side is where the company has done particularly well, with revenue up 36%. This part of the business has been the major strategic pivot and now contributes R188.5 million in revenue vs. R806.7 million on the accommodation side. Food and beverage gross margin increased from 56% to 59%. Bravo!
The not-so-local-is-lekker part of the story is that total operating costs were up 11% per room sold and 19% overall. Substantial inflationary pressures on staff and property costs are a big part of the blame.
So, despite all the hard work, HEPS is only up by 10%. The group must be feeling more confident about the operating environment, with the dividend up by 20%. It seems as though trade in January and February is largely positive despite a slow start to the year.
Someone didn’t like what they saw in this update, with the share price down 7.7% for the day.
The turnover numbers at Dis-Chem look solid (JSE: DCP)
A trading update has been released that shows double-digit growth
Despite all the troubles for South African consumers, the health and beauty / pharmacy combination continues to work. You can see it not just at Clicks and Dis-Chem, but also the pharmacy businesses within other retailers e.g. at Spar.
The latest update is from Dis-Chem and it deals with the period from 1 September 2023 to 28 January 2024. Group revenue is up 12.2%, with an 11.2% increase in retail revenue and a 20% increase in external wholesale revenue.
Within retail, like-for-like revenue growth was 8.2% and selling price inflation was 6.8%, so volumes moved higher. On the wholesale side, total revenue (i.e. including internal customers) increased 11%, with externals up 20% as already noted and internal sales up 9.4%. They also specifically mention wholesale revenue from independent pharmacies, which increased 24.8%.
Revenue growth at The Local Choice was 14.5%, with the group now boasting over 200 franchise stores – up from 165 a year ago.
Mustek’s profits have more than halved (JSE: MST)
The share price closed 8.7% lower on the day
Mustek released a trading statement dealing with the six months to 31 December 2023. It’s not pretty, with HEPS expected to be between 55% and 65% lower than the comparative period.
The culprit? There are a few of them, actually. Aside from the general local economic conditions, there was a decline in the sale of green energy products vs. a strong comparative period. Whether this is due to more competition in the space or other reasons, we don’t know. Higher interest rates also impacted finance costs.
HEPS is expected to be 77.61 cents to 99.78 cents. The net asset value per share will be between R27.20 and R27.30, up from R25.75 as at 31 December 2022. The share price closed 8.7% lower at R11.23.
Quantum Foods seems to be navigating the HPAI outbreak (JSE: QFH)
Some of the relief has come from reduced load shedding
Quantum Foods has released an update on trading conditions for the four months ended January 2023. It says something about how bad load shedding was last year that the company is pulling off a better result than before, despite the outbreak of HPAI and all the difficulties that brings.
Some of the mitigating strategies included the importation of layer hatching eggs and the contracting of independent egg production farmers in geographical areas where the HPAI risk was lower. Despite these efforts, the egg supply was 60% down vs. the prior period. Egg prices were up more than 60%, so that managed to offset much of the revenue pain. It didn’t fix the cost problems though, as a large dip in supply means an under-recovery of overhead costs.
Egg production in South Africa is expected to remain muted for the next six to eight months and the HPAI risk is high.
On the broiler farming side, the Western Cape business improved significantly as the migration to Ross 308 genetics was completed before the start of the current period. Elsewhere in the country, the news wasn’t so positive – like in Hartbeespoort where operations were affected by HPAI.
In the feed business, the lower demand within Quantum because of HPAI impacted sales volumes. Total volumes fell by 14% vs. the prior period.
In the businesses in the rest of Africa, the company managed to navigate the more usual challenges (like feed costs) and took advantage of a solid recovery period that saw these businesses contribute “satisfactorily” to the company’s financial performance.
Sibanye has concluded the Section 189 process (JSE: SSW)
The job losses in the PGM business are lower than they could’ve been, at least
Sibanye-Stillwater has wrapped up the s189 process in the local PGM operations that was announced in October 2023. Initially, 3,500 employees and 595 contractors were expected to be affected.
For now, the 4B shaft is being allowed to continue operations, provided there are no losses. This employs 1,496 employees and 54 contractors. Natural attrition of 467 staff helped reduce the impact further. 351 employees accepted transfers elsewhere within the group to fill vacancies. 1,281 employees were granted voluntary separation or early retirement packages. 47 employees were retrenched and 805 contractors were also impacted.
Thungela: another example of cyclical profits (JSE: TGA)
What went up has certainly come down
Eventually, investors will learn not to buy resources companies on high trailing dividend yields. Inevitably, it leads to a scenario where the dividends over a period of time aren’t even enough to offset the capital losses caused by a change in the cycle. Thungela peaked at over R375 in September 2022. Fast forward barely 18 months and the share price is R106.
A trading statement for the year ended December 2023 gives us a clue why. HEPS has decreased by between 72% and 76% and this is despite consolidating 85% of the results from the Ensham business since 31 August 2023.
Detailed results are expected to be released on 18 March.
Little Bites:
Director dealings:
The CEO of Datatec (JSE: DTC) has bought shares worth R2 million.
JD Wiese (yes, of that Wiese family) is a non-executive director of Collins Property Group (JSE: CPP) and has bought shares worth R367k.
An associate of a director of Huge Group (JSE: HUG) has bought shares worth R3.5k.
Shareholders of Textainer (JSE: TXT) have approved the merger proposal from Stonepeak.
Sasfin (JSE: SFN) announced amended terms for the disposal of the Capital Equipment Finance and Commercial Property Finance businesses to African Bank. Long story short, there are some amendments to conditions precedent and a couple of loan receivables have been excluded from the deal. This is a Category 1 deal and a circular will need to be sent to shareholders. The JSE has given the company an extension until 29 March.
In a good example of spraying a water pistol towards the sun and hoping it makes an impact, the JSE has censured Carl Grillenberger based on closed period trades at the end of 2022 in Advanced Health Limited shares. The company is no longer listed anymore and there’s no financial penalty for this, so I strongly doubt he cares about a public censure.
In this episode of Ghost Stories, Siyabulela Nomoyi returned to the platform once more to talk about two exciting product launches at Satrix.
Of course, The Finance Ghost couldn’t resist kicking off the show with a question around whether Siya stuck to his festive season savings goals that were discussed at the end of 2023 in a previous episode!
Moving on to all things ETF related, topics of discussion included:
How Satrix approaches the product design process.
An overview of the Satrix MSCI ACWI Feeder ETF and specifically how it differs from the MSCI World Index in giving efficient exposure to developed and emerging markets.
An overview of the Satrix JSE Global Equity ETF and how this gives investors an opportunity to tilt their portfolios towards locally-listed companies with more international exposure.
Related to the Satrix JSE Global Equity ETF, an important discussion on JSE index harmonisation.
Variability in ETF costs and what the building blocks of those costs are.
There’s so much in here, underpinned by Satrix’s commitment to South African investor education. To find out more about SatrixNOW, visit this link>>>
Listen to the show here:
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Disclosure
Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this podcast (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
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Anglo American to bulk up the Minas Rio asset in Brazil (JSE: AGL)
This announcement accompanied the results for the year ended December 2023
Let’s get the news of the deal out of the way first. Under the terms of the Minas Rio deal that Anglo American has agreed with fellow mining giant Vale, the latter will contribute Serpentina and $157.5 million in cash to acquire a 15% shareholding in the enlarged Minas-Rio operation, so this is really a merger of the two assets to create a much larger iron ore operation. Vale will have the option to acquire an additional 15% shareholding in the enlarged asset if certain events linked to future expansion occur.
There is a formula that could lead to an adjustment to the purchase price if the four-year average iron ore price is above $100/t or below $80/t.
The benefit to the parties? Scale and synergies, of course, along with shared infrastructure.
Now, we move on to the results at Anglo American for the year ended December 2023. The good news is that Quellaveco is fully ramped up and producing copper. Other good news is that Anglo American is on track to reduce annual costs by around $1 billion over the next three years. The bad news is that underlying EBITDA fell 31% in 2023, with PGMs and diamonds taking the shine off the numbers.
HEPS is down 59% to $2.06 from $4.98 in the comparable period. A 40% payout policy has been maintained, which means a dividend of $0.96 per share.
The results in subsidiaries like Anglo American Platinum and Kumba Iron Ore can be seen in the separate reports of those companies, so I’ll focus on the other stuff here, like a $1.6 billion impairment of the book value of De Beers in response to a tough market for diamonds. Rough diamond production was down 8% for the year as the group pulled back on production. EBITDA at De Beers crumbled from $1.4 billion to just $72 million.
This table does a great job of summarising the result:
Blue Label Telecoms: why I don’t buy things I don’t understand (JSE: BLU)
The share price is moving lower in response to a drop in earnings
I’m convinced that even the 4th year accounting lecturers at Wits (where I studied) don’t have it in their hearts to use Blue Label Telecoms as a case study for the students. I used to sit at varsity and wonder where the structures in the exams were dreamed up, as surely they don’t exist in practice.
They don’t exist very often, that’s for sure. Where they do, I avoid them. If it takes this much work to properly understand the numbers (as it always does at Blue Label Telecoms), then the risks are too high for me.
There are some in the market who profess to be experts on this company. I’m certainly not one of them. What I do know is that comparable core headline earnings fell 22% and core HEPS fell 23%. This is because a business called Comm Equipment Company experienced a drop in headline earnings of R119 million at a time when the rest of the group could only grew R19 million.
Here’s a perfect example of why I just cannot bring myself to even speculate here:
Here’s the share price, which is a language I think we all understand:
Caxton suffers a single-digit decrease in HEPS (JSE: CAT)
A more difficult trading environment is to blame here
Caxton and CTP Publishers and Printers has released a trading statement for the six months to December 2023 that reflects a decrease in HEPS of between 4.1% and 8.5%. That’s not bad, but it’s a move in the wrong direction. The company has noted the usual difficulties in the trading environment, leading to a decline in overall revenues and a margin squeeze, with cost control and an increase in net finance income helping to offset the problems.
The company had cash of R1.8 billion at the end of December. This has subsequently increased to R2.17 billion.
A missed opportunity at Gold Fields (JSE: GFI)
The group didn’t capitalise on the higher gold price
Gold Fields didn’t win the hearts of investors in the year ended December 2023. Profit per share came in at $0.79 per share vs. $0.80 per share in the comparable period. Production challenges in South Africa, Ghana and Peru detracted from the result, with the Australian operation only managing a flat production performance that wasn’t enough to offset the troubles elsewhere.
Adjusted free cash flow was $367 million, down from $431 million. Net debt excluding lease liabilities increased from $310 million to $588 million.
Looking ahead, there is significant capex underway at the Salares Norte project. There’s also a significant increase in sustaining capital due to a $132 million investment in a renewable microgrid project.
Attributable production is expected to increase from 2.24M0z to between 2.33Moz and 2.43Moz. Excluding the renewables project, the all-in sustaining cost guidance is $1,350/oz – $1,400/oz. This is higher than $1,295/oz in 2023, so the gold price needs to keep helping Gold Fields for the results to look better.
A HEPS increase in perfect Harmony (JSE: HAR)
When mining goes well, it goes really well
After a period of underperformance, many investors in the gold sector might have wondered where the saying “it’s a gold mine” actually comes from – particularly when used in a positive context! Harmony Gold has just reminded the market that when the yellow metal goes to plan, things get shiny very quickly.
Of course, the mining group still needs to get the stuff out the ground, so operational execution is key. In a trading statement for the six months to December, Harmony did exactly what it needed to do to take advantage of higher gold prices. Recovered grades were up, as was gold production. As a sweetener, production of silver and uranium also increased at a time when average prices for those commodities also moved up.
Naturally, there were annoyances like higher energy costs and royalties, but these couldn’t offset the strong numbers.
HEPS will be between 937 cents and 976 cents, which is a vast increase vs. the comparable period of 293 cents. Detailed results are due on 28 February.
A major disconnect between EBITDA and cash flow at Mondi (JSE: MNP)
This is an unusual result
In most cases, EBITDA and operating cash flow at least move in the same direction. These concepts aren’t the same, despite some people using EBITDA as a proxy for operating cash flow. The big difference is net working capital movement (inventory / debtors / creditors) which is captured by operating cash flow and not by EBITDA. The usual case is that working capital would increase as EBITDA moves higher, but wouldn’t offset the benefit of higher profits. Similarly, as EBITDA moves lower, some working capital would be unlocked but it wouldn’t offset the impact of lower profits.
At Mondi, we’ve just seen the unusual scenario. Underlying EBITDA fell sharply from €1.85 billion to €1.2 billion, which is a margin contraction from 20.8% to 16.4%. Return on capital employed has diminished from 23.7% to 12.8%. But despite this, cash generated from operations increased from €1.29 billion to €1.3 billion.
The reason? A net inflow of €229 million based on lower inventory levels vs. an outflow of €419 million in the comparable year. This was enough to more than offset the impact of lower profits. If nothing else, I hope this shows you that EBITDA is a poor proxy for operating cash flow and using it in that way is a risky approach. It works in some companies, but in others the balance sheet can (and does) move sharply.
The dividend of 70 euro cents per share is consistent year-on-year. A special dividend of €1.60 per share was paid on 13 February with the net proceeds from the disposal of the Russian assets.
The nightmare continues at Pick n Pay (JSE: PIK)
Or is that Pick n Pray?
Well, the speculative exuberance around the Pick n Pay share price has been smashed back down to earth. After a strong rally from mid-January levels of R21 up to R27 in a matter of weeks, the Grim Reaper of Capital Raising visited the share price and slashed it back down to R22.
Why? Because despite how badly the market wants to believe in Sean Summers, the man can’t work miracles. As I’ve written many times, retail turnarounds are much harder than people think, even if he seems to be doing the right stuff. You have to distinguish between market exuberance (a real opportunity for traders but dangerous for investors) and a real, fundamental story.
Pick n Pay has released a sales update for the 47 weeks ended 21 January 2024. They’ve done this as part of a trading statement and news of a substantial capital raise. When group like-for-like sales reported just 2.9% growth during a period of heightened inflation, things are not looking good.
Boxer grew 17.1% over the period (and 7.3% like-for-like), which is great. Pick n Pay’s core business decreased by 0.1%, which is truly awful, especially when you remember that the excellent Clothing business (up 17.5% with like-for-like growth of 8.0%) is propping up that number. Rest of Africa was up 10.3%, taking total group sales growth to 5.3%.
Special mention must go to Pick n Pay Online, which grew 75.8%.
When trading is this bad, a retailer’s balance sheet quickly works against shareholders. Inventory piles up on the shelves, hitting the working capital cycle and overall cash generation. The retailer notes that good progress was made in recent weeks to sort out the cash generation, but the problems are there for all to see. Net debt has ballooned from R3.8 billion to R7.2 billion as at 21 January. A sale of property of R0.5 billion in February helps with this, but barely touches sides if we are honest.
Lenders have waived covenants on the debt facilities to give the company a chance to sort out the balance sheet. These are desperate times, with the group now expected to report a headline loss for the year ending 25 February, attributable “entirely” to the performance of the core Pick n Pay supermarkets business.
So, guess what? There’s a rights offer of up to R4 billion to try and fix this mess, along with an intended IPO of the Boxer business. The rights offer is expected to be in mid-2024 and the IPO towards the end of 2024. Although Pick n Pay is aiming to retain a majority stake in Boxer, the company will obviously free up capital by reducing its stake considerably.
It’s a mess.
Is the Tiger Brands share price rolling over again? (JSE: TBS)
Trading conditions look incredibly difficult
The Tiger Brands share price is as volatile and dangerous as the animal that the company is named after. To me, it looks like it has run out of puff once more and could roll over from this resistance level:
The company has been significantly restructured into six business units, all reporting to the new executive management team led by Tjaart Kruger. The next restructure is focused on the shared services side of the business, with support structures moving from head office back into the different business units to improve the speed of decision making. There’s also a lot of focus being placed on rationalising SKUs (the variety of products).
In case it’s not obvious, Tiger Brands is trying to respond to a very difficult operating environment. Shockingly, prices of essentials like sugar, veggies, meat, eggs and rice are up by almost 20% according to Stats SA, which obviously puts huge pressure on consumers and their ability to spend on luxury items – where the better margins are made.
Despite promotional activity around Black Friday and the festive season, trade fell short of expectations and volumes declined. Group revenue for the four months ended January 2024 fell by 1%, with volumes down 8% and prices up 7%. There were pockets of growth in volumes (like in Snacks & Treats and in Baby), but the overall picture was firmly in the red.
The slightly silver lining is that efforts to contain costs helped to keep gross margins stable despite the drop in volumes.
If you’re hoping for a positive outlook from the company, there isn’t one. Operating income for the six months ending March will be flat or lower year-on-year, with a recovery in the second quarter dependent on improved trading ahead of the Easter period.
Little Bites
Director dealings:
The CEO of Mr Price (JSE: MRP) has sold every single one of the 16,908 shares received under the forfeitable share plan. The sale is worth R2.86 million. It’s usually the case that executives only sell the taxable portion, not the entire amount, so I see this as a strong sell signal.
The CEO of Datatec (JSE: DTC) has purchased shares worth R244k.
Joffe and Wiese are at it again, with these directors of Invicta (JSE: IVT) each buying shares worth R53k in the company.
In an announcement dealing with the results of the voting at the AGM, Tharisa (JSE: THA) also gave further information on the investment in the Karo Platinum Project. The company has noted that the total investment for its 75% stake in Karo Mining Holdings (which in turn holds 85% in Karo Platinum) has come at a cost of $135.3 million. Once you work through the shareholdings, this implies a value for Karo Platinum of $212.3 million. The important point is that the recent rights issue by Karo Mining Holdings (in which the minority shareholder renounced its right and allowed Tharisa to move from 70% to 75%) implied a value of $457.8 million for Karo Platinum. Long story short, the company believes that the investment has created value based on longer-term sustainable PGM prices, even if current spot prices look ugly.
The founders of Transaction Capital (JSE: TCP) have done some restructuring of their affairs to the value of R1 billion. It doesn’t change their indirect interest in the company (they are just reshuffling some cards here), but it does make me wonder if they are gearing up for a bigger corporate action after the WeBuyCars unbundling. Time will tell. In a separate update, the company announced that Global Credit Ratings (GCR) has downgraded the group’s credit ratings by a notch and has put them on Rating Watch Negative.
With Stephen van Coller set to step down as CEO of EOH (JSE: EOH) on 31 March, Andrew Mthembu (currently independent non-executive chairman) will take the role of interim CEO for a period of up to six months while a successor is found. Considering that the announcement of van Coller’s departure came out in October 2023, why do they seem to be struggling to find a successor?
Anglo American has agreed to acquire and integrate the contiguous Serra da Serpentina orebody owned by Vale SA into Anglo American’s Minas-Rio mine in Brazil. In terms of the transaction, Vale will contribute Serpentina and US$157,5 million in cash to acquire a 15% shareholding in the enlarged Minas-Rio and will have the option to acquire an additional 15% stake. Anglo American will continue to control, managed and operate the Minas-Rio operation, including any future expansions that relate to Serpentina.
Unlisted Companies
Global multi-asset broker XS.com has acquired locally licensed financial services provider Ubutyebi Financial Services. The acquisition enables the FinTech and financial services provider to establish XS ZA, positioning XS.com as a strong player in the local market and providing a platform for expansion across the continent. Financial details of the deal were undisclosed.
MCI, a global leader in business process outsourcing (BPO) and customer experience (CX) solutions, has acquired Cape Town-based BYC Aqua. The acquisition merges MCI’s innovative approach and BYC’s deep understanding of the region and substantial cloud offerings, including certain unique AI offerings.
Pick n Pay has released details of a strategic response to the situation in which the company finds itself. Under the leadership of Sean Summers, the group intends to implement a two-step recapitalisation plan which will comprise a Rights Offer to existing shareholders of up to R4 billion, providing near-term liquidity, followed by an offering and listing of the Boxer business on the JSE. The rights offer is expected to take place mid-2024 followed by the IPO towards the end of 2024. The group intends to retain a majority stake in Boxer after the IPO.
Vukile Property Fund has raised R1 billion via an accelerated bookbuild. The company placed 68,493,151 shares at R14.60 per share, representing a 0.75% discount to the pre-launch share price on 19 February and a 4.85% discount to the 10-day VWAP.
Copper 360 has successfully raised just short of R100 million, placing 29,411,764 shares at R3.39 per share. This represents a 9.1% discount to the VWAP for the 30 trading days up to February 14. The company has indicated that it has negotiated a buy-back option with the investor (after six months) which would reduce the dilution effect of the issue. Proceeds will be used to fund its expansion strategy and short-term working capital requirements.
Primeserv has advised that during the period 12 December 2023 to 19 February 2024, the company repurchased an aggregate of 519,473 ordinary shares for a total value of R667,033. The shares, repurchased at an average price of R1.22 per share, represent 0.45% of the issued share capital of the company.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 12 – 16 February 2024, a further 3,484,866 Prosus shares were repurchased for an aggregate €101,93 million and a further 272,075 Naspers shares for a total consideration of R913,4 million.
AB InBev has repurchased a further 562,205 shares at an average price of €58.57 per share for an aggregate €32,93 million. The shares were repurchased over the period 12 – 16 February 2024.
A2X will welcome its first inward listing when LSE-listed Neo Energy Metals plc opens for trade on the local bourse on 27 February 2024. Neo Energy Metals is a mining and development company focused solely on uranium and strategic metals supply. The company’s main project, Henkries, is a low-cost eco-friendly uranium project located in the Northern Cape.
Four companies issued profit warnings this week: Northam Platinum, Super Group, Sibanye-Stillwater and Caxton and CTP Publishers and Printers.
Four companies issued, renewed, or withdrew cautionary notices this week: Salungano, Telkom SA SOC, Tongaat Hulett and Pick n Pay,
In recent years, there has been a notable increase in sell-side auction activity in South Africa, although it has yet to reach the levels observed in the United States and European markets. There is also a growing trend of increased auction activity in other countries across the continent. In the fast-paced world of mergers and acquisitions (M&A), the sell-side auction has become a key strategy for companies aiming to enhance value and orchestrate competitive transactions.
In the context of M&A, a sell-side auction refers to a process where a company that is seeking to be acquired, or to sell a lucrative asset, solicits bids from multiple potential buyers.
Strategic evaluation: advantages and disadvantages of a sell-side auction
In the realm of M&A, the utilisation of sell-side auctions presents a nuanced landscape with distinct advantages and potential pitfalls.
Foremost among its merits is the promise of maximised value, as the competitive environment, filled by multiple bidders, often leads to more lucrative deals. The efficiency and timeliness inherent in structured auction processes can expedite transactions, allowing companies to capitalise promptly on favourable market conditions. Casting a wide net during a sell-side auction ensures a diverse pool of potential buyers, increasing the likelihood of finding a party with optimal synergies. In addition, a sell side auction process enables the seller to take the lead in the transaction, streamline the selling process and accelerate decision-making. The competitive atmosphere encourages swift responses from bidders, potentially leading to faster transactions. The inherent characteristics of sell-side auctions frequently result in the formulation of inventive deal structures. This stems from the diverse perspectives brought by each potential buyer to the transaction, and their eagerness to enhance the appeal of their bids.
However, this approach is not without its challenges, as the resource-intensive nature of organising an auction demands careful consideration, and it may strain internal resources, both human and financial.
To best present its asset, the sell-side ordinarily finds itself compelled to conduct its own due diligence investigations, spare financial resources to regularise any red-flag outcomes identified during the due diligence investigations, and spend time and money on financial, legal and tax advisers. In addition, the risk of proprietary and strategic information being disclosed, uncertain outcomes that may be influenced by various external factors beyond the seller’s control, coupled with the potential for disruption within the organisation, introduces complexities that warrant meticulous evaluation. Despite these considerations, the strategic advantages of sell-side auctions, including enhanced negotiation leverage and confidentiality control for the seller, underscores its significance in the M&A landscape. As legal practitioners navigate this dynamic terrain, a judicious assessment of these advantages and disadvantages becomes imperative to guide our clients through successful transactions.
Sell-side auction processes and timelines
The sell-side auction normally involves the following key steps:
The seller assembles professional internal and external deal teams, which consist of lawyers and investment bankers/financial advisors;
The seller conducts a vendor due diligence investigation and prepares a report (VDD);
Pursuant to the VDD, the third step involves the preparation of a value proposition in the form of a confidential information memorandum (CIM) to offer potential buyers an overview of the asset on sale. The process also includes having a non-disclosure agreement (NDA) in place to protect the proprietary interest of the selling company.
The fourth step is strategic, and involves the seller identifying potential buyers and inviting them to take part in the auction. This is to increase the likelihood of receiving bids from multiple parties.
The Seller exchanges the NDA, and distributes the CIM to potential buyers. The potential buyers would then submit non-binding indications of interest, which the seller uses to narrow the list of potential buyers.
After gauging the interest in the asset and the quality of potential buyers, the sixth step usually involves drafting a definitive agreement for comments and review by shortlisted bidders, setting up a data room to facilitate and enable potential buyers to conduct their due diligence investigations and, where the seller would like to have a ‘clean exit’, the seller will shop for warranty and indemnity insurance, and negotiate the parameters of liability and non-binding indicators with the insurer for inception by a successful bidder.
At this point, shortlisted bidders are given access to the data room to conduct a detailed due diligence investigation, review and comment on the draft definitive agreement, and submit a binding offer.
In the final step, once the shortlisted bidders have all submitted their bids, the sell-side will consider the binding offers, having regard to, amongst other things, the price offered for the asset and the nature and extent of the proposed changes to the draft definitive agreement, including conditions to implement the transaction and the likelihood of fulfilling such conditions. The Seller would then select a successful bidder and exclusively negotiate the final terms of the deal with this Buyer.
The timelines involved in a sell-side auction vary, but it can take anywhere between six and 12 months to implement such a transaction, once the seller goes out to market and there is immediate interest shown in the asset.
Risk versus reward
The decision to embark on a sell-side auction is indeed a calculated risk that warrants careful consideration. While the potential for maximising value and securing favourable terms through heightened competition is enticing, the resource-intensive nature of the process and the risk of confidential and/or sensitive information leakage during selection poses inherent risks. One must weigh these potential drawbacks against the strategic advantages, taking into account the specific goals and circumstances of the selling company. For organisations seeking swift transactions, a diverse pool of potential buyers and maximum value, the benefits may outweigh the challenges. However, for those not willing to spend resources, preferring to engage and negotiate with a single potential buyer, safeguarding their confidential information, and with minimal disruption, a traditional approach may be more suitable. Ultimately, the decision to pursue a sell-side auction should align closely with the overarching objectives of the selling company and its tolerance for the financial and resource intensive exercise inherent in a sell-side auction process. Legal and financial advisers play a crucial role in guiding clients through this evaluation, ensuring that the risks undertaken align with the potential rewards in the pursuit of successful transactions.
In conclusion, the decision to embark on a sell-side auction in M&A demands a balancing act between potential risks and rewards. Ultimately, the determination of whether a sell-side auction is a risk worth taking hinges on aligning the chosen approach with the circumstances of the selling company, its unique goals, risk tolerance, and the human and financial resources at its disposal.
Gabi Mailula is an Executive, Kamohelo Masubele, an Associate and Asanda Lembede a Candidate Legal Practitioner in Corporate and Commercial | ENS.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Deon Lewis (co-founder of Futureneers) and James Rothmann (Projects Director and Tax Innovation Officer at Futureneers) joined The Finance Ghost to talk about the 12BA Renewable Energy Partnership and the opportunity it offers investors for a tax-enhanced investment in solar.
Listen to the show here:
On this podcast, we talked about topics including:
The background of Futureneers and the investment track record.
The return profile of the solar projects both with and without the tax benefits.
The way the tax works further down the line when there’s a potential sale of the project.
Whether this opportunity is relatively more attractive for potential investors who are in higher tax brackets.
The protections in place for investors.
For more information on Futureneers and to apply for this opportunity, you can follow this link.
As always, ensure that you do your own research and consult with your financial advisor. The Finance Ghost has no affiliation with Futureneers or involvement in the underlying investments and does not accept any responsibility for the financial returns. Futureneers is a registered Financial Services Provider (FSP 46996) and registered Section 12J Venture Capital Company.
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