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South African M&A Analysis Q1-Q3 2023

Marylou Greig
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South African M&A Analysis Q1-Q3 2023

The recent World Cup win by the boys in green and gold brought much needed relief, albeit for a fraction of time, from the daily bombardment of negative news that has become a way of life for South Africans. But like all good things, this hype has faded, and our attention is once again focused on making the best of, let’s face it, a very difficult setting.

M&A activity is, by its very nature, resilient in tough times – rather, it is the type of deals completed that changes. Nevertheless, the industry has come under pressure. For the period from January to end-September 2023, deal activity declined 26% year-on-year, and almost 40% when compared with deal activity in 2021. Private Equity, an important driver in the dealmaking space, also declined – down 36% on the previous year.

Share issues and repurchases continue to characterise the general corporate finance activity in 2023, with R222 billion raised from the issue of shares and R260 billion the value of shares repurchased. The repurchase programmes of Prosus, Naspers and Glencore account for most of this value, while the aggregate value of Richemont’s issue of A shares (conversion of depositary receipts) reported in Q1 was R196,56 billion.

A worrying trend is the exit of companies from Africa’s largest stock exchange, the JSE. Over the past six years (excluding 2023), an average of 25 companies have delisted each year. For the year to end-September, 19 companies have delisted, with a further five set to do so within the coming months. New listings have all but dried up. Private equity has been identified as one reason for the loss of listings, providing financing in softly regulated private markets. In 2017, the JSE welcomed 21 new listings; in the year to September 2023, this figure had dropped to three. Secondary listings on A2X continue to increase, with 18 recorded for the period under review.

It is becoming increasingly clear that South Africa’s approach to foreign affairs will play an important role in determining investment and growth outcomes for the country. While investor interest is present, with a good supply of deals in the pipeline, the challenge is getting them across the line. Investor sentiment – weighted down by the macroeconomic environment, geo-political influences, and the impending local elections – is adopting a wait and see attitude.

DealMakers Q1-Q3 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).

DealMakers Q1-Q3 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za

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

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

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

Exchange-Listed Companies

Having failed to persuade Teck Resources’ minority shareholders earlier this year, to merge the Teck operations with that of Glencore’s, Glencore has reached an agreement with Teck to acquire a 77% stake in its steelmaking coal business Elk Valley Resources (EVR) for US$5,93 billion in cash, on a cash free debt free basis. Nippon Steel Corporation will hold a 20% stake in EVR and POSCO the remaining 3% – both of whom have existing relationships with Glencore. The company remains committed to the demerge of the combined businesses, believing that a standalone company containing its combined coal and carbon steel materials business, including its stake in EVR, would attract strong investor demand given its yield potential.

Absa’s Mauritius subsidiary has reached an agreement to acquire the domestic Wealth and Personal and Business Banking business of The Hongkong and Shanghai Banking Corporation (HSBC) in Mauritius. Financial details were undisclosed.

Deneb Investments is to dispose of the property situated at 34 Kinghall Avenue, Epping in Cape Town to Gerber Advisory Specialists for R64,35 million. The property is not considered core to Deneb’s strategy.

Unlisted Companies

Pineapple, the local digital insurance provider, has announced the conclusion of a R400 million funding round. The round was led by new investors, Futuregrowth, Talent10 and Mineworkers Investment Company while the business received additional investment support from existing investors including Old Mutal ESD, Lireas Holdings, ASISA ESD Fund and E4E Africa. Pineapple’s technology allows it to service customers at 20% of the cost of traditional insurance providers.

Local proptech startup Neighbourgood has acquired Cape-based traveltech startup Local Knowledge in a move expected to transform the travel and hospitality experience. The deal will combine Neighbourgood’s 1000-plus living and working spaces with the Local Knowledge’s ability to provide the next-gen with unforgettable travel experiences via its technology.

Convergence Partners has increased its stake in African broadband infrastructure company CSquared through the acquisition of the stake held by Google. In addition, the pan-African impact investment management firm took part in CSquared’s US$25 million equity capital raise.

ASX-listed Vanadium Resources (VR8) has increased its interest in Steelpoortdrift by 4.59% to 86.49% through the completion of a transaction with Math-Pin, its BEE party. The acquisition is payable via a combination of R2,930 in cash and 8,092,810 share options to acquire VR8 shares, which will on exercise, represent 1.48% of the issued share capital of VR8.

Private Equity fund managers 1K Africa and Ascension Capital, have announced an investment in South Africa’s payment profile hosting credit bureau, Consumer Profile Bureau (CPB). The undisclosed investment will be used to help CPB scale its market position and services including its unique technology for tracing, credit verification and debtor profiling.

UK global sports media business LiveScore Group has increased its stake in Wonderlabz, a Cape-based software development and talent hub, from 25% to 100%.

UK headquartered online trading services provider ATFX, has acquired Khwezi Financial Services, a South Africa over-the-counter derivative provider. Financial details were undisclosed.

Liquid Intelligent Technology has received R900 million in funding from the IFC and Rand Merchant Bank to be used to scale affordable broadband access in the Eastern Cape Fibre Project.

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

Weekly corporate finance activity by SA exchange-listed companies

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

This week was all about share repurchases and profit warnings.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 6 – 10 November 2023, a further 4,351,713 Prosus shares were repurchased for an aggregate €124,7 million and a further 326,470 Naspers shares for a total consideration of R1,04 billion.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of US$1,2 billion by February 2024. This week the company repurchased a further 10,010,000 shares for a total consideration of £43,88 million.

Super Group has concluded an intra-group repurchase of 5,309,812 shares at a price of R34.51 per Super Group share for an aggregate R183,24 million. The shares will be delisted.

Quilter plc has repurchased 15,798,423 shares in terms of its odd-lot offer. A total of 15,798,423 shares were acquired – 291,711 shares at 88.10 pence and 15,506,712 shares at R20,08 per share.

Five companies issued profit warnings this week: Quantum Foods, Dipula Income Fund, Trematon Capital Investments, Capital Appreciation, Afine Investments and AH-Vest.

Cognition was the only company this week to issue a cautionary notice. The company is in discussions with its holding company, Caxton and CTP Publishers and Printers which, it says may result in an offer by Caxton to acquire those shares in Cognition not already held. Will this be another delisting from the JSE?

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

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

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

DealMakers AFRICA

Nigerian B2B marketplace for auto dealers, Shekel Mobility, has raised over US$7 million in a debt and equity seed round. Ventures Platform, MaC Venture Capital, Y Combinator, Rebel Fund, Unpopular Ventures, Maiora Capital, PageOne Lab, Phoenix Investment Club, Heirloom VC, Pioneer Ventures and other angel investors provided the US$3,2 million equity funding with the remaining US$4 million in debt financed by Zedvance, VFD Microfinance Bank, Zenith Bank, Fluna and others. This is the second time the mobility fintech has raised funds this year – in January the team announced a US$1,95 million oversubscribed pre-seed round led by Ventures Platform. Other investors included Y Combinator, Voltron Capital, Zedcrest and some angel investors.

RMB has provided N$500 million in new debt funding and has refinanced a N$100 million loan for Oryx Properties to help fund the acquisition of Dunes Mall in Walvis Bay, Namibia. The property fund announced the acquisition in May and undertook a ‘rights offer’ to part fund the N$620 million purchase price among other things. The rights offer was 82.4% taken-up, raising N$312,9 million.

The Namibia Infrastructure Development and Investment Fund (NIDIF), managed by Eos Capital, has acquired a minority stake in the Namibian business of Lightstruck, a fibre infrastructure company specialising in open access last-mile fibre networks. Financial details were undisclosed.

Lapaire, an African eyecare business headquartered in Abidjan, Côte d’Ivoire and operating 54 optical shops across seven African countries, has raised an undisclosed sum from Beyond Capital Ventures. The investment forms part of Lapaire’s Series B investment round. The Series B funding will aid the company’s plans to launch in five new markets including the DRC, Ghana, Guinea, Nigeria and Tanzania.

Pan-African tech company, CSquared Link Holdings (Mauritius), announced an equity capital raise from both new and existing investors. The US$25 million in funding came from Convergence Partners Digital Infrastructure Fund (CPDIF), the International Finance Corporation (IFC) and the International Development Association’s (IDA) Private Sector Window Blended Finance Facility. It was also announced that CPDIF had acquired Google LLC’s stake in CSquared.

PZ Cussons Nigeria has notified shareholders that the offer by majority shareholder PZ Cussons (Holdings) to acquire the remaining 26.73% held by minorities for ₦21 per share announced in September, has been increased to ₦23 per share.

Union Bank of Nigeria plc disclosed that the offer price to minorities had been increased from ₦7 per unit to ₦7.70 per unit. Titan Trust Bank acquired a majority stake in December 2021 and offered to buy out the remaining 6.59% stake from minorities through a mandatory offer in October 2022. The Bank is currently finalising the process of obtaining approval to delist from the NGX.

African Export and Import Bank (AFREXIM) has signed a debt funding package with Oando plc comprising a US$500 million senior secured reserved based lending facility and a US$300 million receivables backed term loan facility. The deal was signed at the Intra-Africa Trade Fair in Cairo, Egypt.

UAE-based Sky One has acquired a substantial stake in Libyan airliner Fly Oya. Financial terms were not disclosed.

ASX-listed 88 Energy has, through a newly formed subsidiary Eighty Eight Energy (Namibia), signed a three stage farm-in agreement with Monitor Oil and Gas Exploration (Namibia), a wholly-owned subsidiary of Monitor Exploration, to earn up to a 45% non-operated working interest in onshore Petroleum Exploration Licence 93 (PEL 93) located in Namibia’s Owambo Basin. The farm-in agreement schedule consists of three stages. Stage one: [20% working interest] the payment of US$3,7 million in consideration for past costs and the first US$3 million of the 2024 work programme. Stage two: [17.5% working interest] payment of US$7,5 million of the first well gross cost. Stage 3: [7.5% working interest] option to fund the first US$7,5million of the second well gross cost.

Holcim has announced the sale of its businesses in Uganda and Tanzania. In Uganda, Hima Cement has been sold to Sarrai Group for an enterprise value of US$120 million. In Tanzania, the 65% stake in Mbeya Cement Company has been sold to Amsons Group for an undisclosed sum.

Moroccan transport and logistics startup, CloudFret, has raised €2 million (US$2,1 million) from AfriMobility and Azur Innovation Fund. Operational in Morocco since 2021, the company expanded to Marseille and now looks to expand further with the introduction of an innovative solution geared towards optimising empty truck returns, with a focus on the intra-European market.

Akhdar has announced a six-figure investment from Value Maker Studios (VMS). The Egyptian edtech is an Arabic language platform that provides audiobook summaries. The funding will be used to expand its existing presence in Saudi Arabia.

SPE Capital and Proparco have sold Amanys Pharma to Laprophan for an undisclosed amount. The pair acquired the company in 2020 (known at the time as Saham Pharma) and this sale marks the second exit for SPE AIF.

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

South Africa: new JSE rules to encourage listings

Lydia Shadrach-Razzino, Tanya Seitz and Shamila Mpinga
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South Africa: new JSE rules to encourage listings

In Brief

The Johannesburg Stock Exchange (JSE) has seen listings halve in the past two decades, mostly because of reduced foreign investment and challenging macroeconomic conditions. However, the stock exchange’s onerous listing requirements have arguably led to increased compliance costs and an unprecedented number of delistings. In addition, issuers have been less optimistic about the prospects of raising capital on the JSE, with many trading at double-digit discounts. As a result, the JSE has announced numerous changes to its listing requirements to encourage new entrants and prevent delistings, including the most recent announcement to simplify the JSE Listings Requirements.

In Detail

The JSE has seen listings halve in the past two decades, from 616 in 2000 to just below 300 in 2023. This is likely as a result of reduced foreign investments into the country due to the unfavourable global macroeconomic climate. However, some analysts have noted that the JSE’s listing requirements are onerous and have arguably led to increased compliance costs and an unprecedented number of delistings in the past five years. While delistings are an ordinary part of capital markets, the scarcity of new listings is a cause for concern.

One of the primary reasons that companies list on the main board of the JSE is to raise capital. However, issuers have been less optimistic about the prospects of raising capital on the JSE in recent times, as many have been trading at double-digit discounts to their net asset values. This has significantly reduced the attractiveness of the JSE to private companies, hence its current efforts to encourage listings. The JSE has, therefore, announced numerous changes to its listing requirements to encourage new entrants and prevent delistings, with the most recent of these changes becoming effective as of 17 July 2023.

The changes to its listing requirements include (i) the introduction of dual-class share structures; (ii) the reduction of free float for new listings; (iii) changes to free float assessments for institutional investors; (iv) changes to the listing requirements for special purpose acquisition companies (SPACs); and (v) making financial reporting disclosures less onerous. Although the changes have been well received by market participants as a means to encourage new listings, they appear to be more geared towards attracting IPOs, rather than adding significant value for existing issuers.

Finally, in September 2023, the JSE announced its intention to completely overhaul the JSE Listings Requirements (Requirements) in an attempt to simplify the Requirements and cut red tape, which is welcomed.

Dual-class shares
In essence, dual-class share structures exist where a shareholder’s voting control over a company is dispro-portionate to their economic interest in that company. A dual-class share structure typically involves a company having two classes of shares that are identical in every respect but voting rights. One class of shares is a “low vote” share, carrying one vote per share (typically Class A shares), while the other class of shares is a “high vote” share, typically carrying 10 or 20 votes per share (typically Class B shares). Prior to the current amendments, the JSE did not allow companies with dual-class shares to list on the exchange. It also prohibited existing listed companies from issuing dual-class shares. An exemption applies to companies with dual-class shares that were listed before 1999. These exempted companies were allowed to issue additional shares of that class. The amendments relating to dual-class shares are forward-looking and apply to new listings. They do not affect companies that are already listed.

A major concern associated with dual-class share structures is the concen-tration of power in the hands of man-agement, with little to no shareholder oversight. This could lead to dubious corporate governance practices, which makes it important for shareholders to maintain a watchful eye over these companies.

The JSE’s introduction of dual-class shares as “weighted voting shares” has been widely accepted, subject to guardrails to mitigate the abovementioned risks. These include (i) requiring a maximum weighted ratio of 20:1; (ii) requiring that dual class shares be held only by directors of the company; and (iii) capping all shares to one vote regardless of the class for certain matters, such as changes to independent directors and auditors, variation of rights attaching to any class of shares, a reverse takeover, liquidation, or delisting. Dual-class share structures are commonplace on stock exchanges globally, as seen on the New York Stock Exchange, the Nasdaq, and the Toronto Stock Exchange. What remains to be seen is whether there is investment appetite for companies with dual-class share structures on the JSE.

Free float and new listings
Free float refers to a company’s issued share capital that is held by public investors. Prior to the amendment, the JSE required main board issuers to have a free float of 20%. To keep abreast of international developments in Europe, and to encourage new listings, the JSE has reduced the free float requirement to 10%. Making a large portion of the company’s shares freely tradeable can be unsettling, particularly for large companies where there are few shareholders willing to sell their shares. Therefore, this is great news for high-growth companies and those with private equity and venture capital investors, which consider free-float requirements a strong deterrent when considering where to list.

Reducing the free float requirement to 10% will allow new issuers flexibility to structure their IPOs, and open markets to issuers wishing to initially raise smaller amounts of equity. The requirement to float 10% is in line with other local exchanges, such as the Cape Town Stock Exchange, thereby making the JSE competitive in the local market. The fact that the free float requirement has been largely unchanged for over 20 years has been detrimental to Africa’s largest exchange, and has impacted the JSE’s competitiveness as a primary and secondary listing jurisdiction. For in-stance, it is strange that companies that were compliant on premier inter-national exchanges would fall short of qualifying for a secondary listing on the JSE for failing to float 20% of their shares. Therefore, this change is a move in the right direction, as it reduces the burden of shareholder dilution.

Institutional investors and free float assessment
There are limited security holdings that qualify as free float. One type of holding that previously did not qualify was a shareholding of 10% or more. This was not ideal, given that it is common for institutional investors, such as fund managers and portfolio managers, to hold more than 10% of an applicant issuer on listing. As an exception, the JSE allowed institutional investor holdings of more than 10% to qualify as free float. The exemption applied where the interest held was in more than one fund and each fund held less than 10% of the shares in the applicant issuer. This exemption was not the saving grace that it set out to be, as it was rather limited and complex to apply. Therefore, the JSE has resolved to change the rules to recognise institutional investors for free float purposes, provided that they have no relationship whatsoever with the directors and family of the applicant issuer.

The JSE has widened the scope for free-float assessments in two major ways. Firstly, the JSE has removed the 10% exclusion altogether, provided there is a minimum number of shareholders. Requiring a minimum number of shareholders will ensure that the floated shares are not held by only one shareholder and will encourage a competitive share price. The JSE’s second amendment is to exclude shareholders who exercise control (>35%) from the free float assessment. Given that 90% of monthly trades on the JSE are driven by institutional investors, they will benefit significantly from this amendment.

Additional Amendments: SPACs and Financial Reporting Disclosures
In its efforts to retain and attract listings, the JSE has amended its requirements relating to financial reporting disclosures and SPACs, respectively. The JSE introduced SPACs in 2013. This type of company is primarily incor-porated to raise capital to acquire viable assets, with the aim of listing on an exchange. Viable assets are those that qualify for a listing on an exchange. SPACs are a viable investment vehicle and become more attractive in a volatile economic environment when traditional listings become riskier. We witnessed a SPAC boom in 2020 and 2021, when the markets became volatile during the COVID-19 pandemic, but global interest in SPACs has since dwindled. Despite the reduced interest, the JSE has amended its requirements to make SPACs more attractive for listings, should the demand for them increase.

To retain listings, the JSE has reduced the compliance burden for issuers, who will no longer have to produce an abridged version of their financial results along with their audited annual financial statements. Furthermore, where the previous set of annual results had to be accompanied by a modified opinion, issuers’ interim results will no longer have to include an auditor’s opinion. The JSE has admitted that the previously mandated financial reporting disclosures added no regulatory value or benefit to investors. As such, these amendments have received overwhelming support.

Simplification Project
The JSE has announced its intention to simplify the Requirements. Essentially, the JSE plans to rewrite the Requirements using plain language for the benefit of all stakeholders. This process will include a substantial reduction in the volume of the Requirements, and cutting red tape to ensure that only rules that are fit for purpose survive the purge. The JSE has created a dedicated portal for this project, which will run in stages over 18 months, including public participation throughout the process. We look forward to reviewing the suggested amendments.

Final thoughts

The JSE certainly has its work cut out for it, particularly given the rise of other exchanges locally and the success of private equity and venture capital financing in South Africa. With less stringent compliance burdens, competitor exchanges and alternative forms of financing have become more attractive methods of raising capital, thus posing a challenge for the JSE.

In its efforts to encourage new listings and curb delistings, the JSE, through its initiatives to cut red tape, must find a balance between reducing compliance burdens and protecting investors. The previous listing requirements had been in place for over 20 years; therefore, the recent changes are testament to the JSE’s commitment to self-assessment and improvement to encourage capital market reform.

Coupled with the recent amendments to the Requirements, their complete overhaul presents an opportunity for the JSE to reform and regulate listings in a manner that accommodates potential issuers, listed companies, sponsors, shareholders and investors. Balancing these interests is no small feat, but by engaging market participants, the JSE can allay such challenges and pave a path for a renewed stock exchange that can withstand the cyclical nature of global economic conditions.

Lydia Shadrach-Razzino is a Partner and Co-Head, Tanya Seitz is a Director Designate, and Shamila Mpinga, a Candidate Attorney, Corporate/M&A Practice | Baker McKenzie Johannesburg.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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

Unlocking private equity exits in the face of increasing SA uncertainty

Thabo Ndimande and Hauke Schotola | RMB
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Unlocking private equity exits in the face of increasing SA uncertainty

Despite the economic and political challenges in South Africa, multinational companies and investors with long-term capital continue to drive investments across various industries, particularly those with strong growth prospects, led by entrepreneurial management teams and attractive competitive positioning.

RMB is assisting a number of private equity clients to exit their investments in various sectors in South Africa, a trend expected to continue into 2024. For instance, in the last 18 months, private equity clients have been helped to achieve some of the largest PE exits in the SA market, with excellent outcomes for the sellers.

This includes the sale of EnviroServ Holdings to a consortium made up of French multinational SUEZ, Royal Bafokeng Holdings and African Infrastructure Investment Managers, and the sale of Amrod by Alterra Capital Partners to Oppenheimer Partners. The acquisition of EnviroServ will enable SUEZ to reinforce its positioning as an international leader in industrial and municipal waste treatment activities, and to strengthen its position on the African continent.

Multinational companies continue to evaluate investment opportunities in sub-Saharan Africa, but have become more selective in exploring acquisition opportunities in this region, especially when compared with targets in other emerging markets. Longer-term investment horizons and an entrepreneurial background are some of the key attractive characteristics that investors with access to capital are looking for. In addition, existing management teams (and founders) that are expected to remain invested (to some degree) and drive the future growth of these businesses are appealing. RMB continues to expect healthy transaction activity in the next twelve months as we head into the uncertainty of the outcome of the 2024 general election.

Another interesting development is the growing interest in industries which, on the surface, aren’t immediately attractive, but where one can find businesses that are thriving despite economic malaise. Resilient financial performance and strong opportunities for further growth make specific companies in these niche sectors attractive investments, which supports the case for more of a bottom-up vs top-down approach to investing.

Volatile market conditions make it particularly important to have the right tools and understanding of a business and its operating context to generate and sustain interest with potential buyers, thereby driving successful exits.

Clients on the sell side have to make critical judgement calls in selling businesses, and need experienced teams to help them navigate through cycles and a challenging market.

Thabo Ndimande and Hauke Schotola are Lead Transactors in Corporate Finance | RMB.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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

Ghost Bites (African Media Entertainment | Brait | Caxton | Dipula | Ethos | MultiChoice | Ninety One | Novus | Reinet | Telkom | Woolworths)

The Finance Ghost
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Ghost Bites (African Media Entertainment | Brait | Caxton | Dipula | Ethos | MultiChoice | Ninety One | Novus | Reinet | Telkom | Woolworths)

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

African Media Entertainment’s recovery continues (JSE: AME)

This isn’t a great environment for advertising, but at least events are back

It seems counterintuitive, considering we were all stuck at home over that period, but the worst of the pandemic was actually really tough for the radio industry. Live events are a big part of their revenue streams and obviously those didn’t happen during COVID. Although we are clearly in an environment where advertising budgets are stretched, outside broadcasts and events are possible once more and the benefit seems to be coming through in the numbers.

That’s my theory at least, as African Media Entertainment’s trading statement is very light on narrative. What we do know at this stage is that HEPS for the six months to September 2023 will be between 30.8% and 44.2% higher, coming in at between 195 cents and 215 cents.

There is very little liquidity in the stock, with a current bid-offer spread of R30.11 to R37.99!

Brait’s NAV per share drops further (JSE: BAT)

And Virgin Active is still carried at a very ambitious valuation within that NAV

In Brait’s earnings announcement for the six months to September 2023, we find that net asset value (NAV) per share has dropped from 840 cents at the end of September 2022 to 706 cents at March 2023 and then 684 cents at September 2023. Those aren’t the gains that the personal trainers at Virgin Active are pushing for.

Speaking of Virgin Active, that business is 65% of Brait’s assets. Membership sales generally seem to be good, except for in South Africa where affordability issues are impacting growth. I still find it absolutely ridiculous that Brait values Virgin Active on a two-year forward EBITDA multiple of 9x. The peer group is valued at 8.4x and even that seems insane to me. The Brait share price of just R2.28 (a huge discount to NAV) suggests that I’m not the only one who feels this way.

Premier is 24% of Brait’s assets and is separately listed now. That business has performed very well in difficult conditions.

New Look is 7% of Brait’s assets and the troubles in this UK fashion retail business seem to be back. Revenue fell 11.3% and EBITDA tanked by 28.4%.

Of the R3.6 billion in proceeds from the Premier listing, R2.1 billion was used to settle debt and R756 million was invested into Virgin Active as Brait followed its rights to fund growth initiatives.

Caxton is lining up a take-private of Cognition (JSE: CGN | JSE: CAT)

2024 might be the end of Cognition’s JSE listing

Cognition has “commenced formal discussions” with holding company Caxton and CTP Publishers and Printers regarding a take-private of the company. It makes sense, as there’s really no benefit to the ongoing separate listing of Cognition.

The last price that Caxton paid for Cognition shares was 99 cents, so an offer wouldn’t be below this level. As Caxton is really the only buyer in town for Cognition, I also wouldn’t bank on a huge premium to that price.

Cognition has also made it clear that an offer is unlikely to be received before interim results are released in February 2024.

The current share price is R1.05.

At Dipula, don’t look at the per-share numbers this period (JSE: DIB)

The significant change to the share structure has skewed the results

Right at the end of the 2022 financial year, Dipula implemented the scheme of arrangement that saw B shares issued in exchange for A shares. This means that there are now far more B shares in issue than before, so the earnings and dividend per share have fallen sharply as a result.

This can’t be blamed entirely on having more shares in issue, as the underlying business is under pressure. Revenue only increased by 3% and distributable earnings fell by 6.9%. It didn’t help matters that the average interest rate moved from 8.4% to 9.2%.

The group net asset value increased by 2.1%, so this definitely didn’t work well as an inflation hedge in this period. Having 17% of the portfolio in office properties doesn’t do anyone any favours at the moment.

Ethos gives more details on the drop in NAV (JSE: EPE)

The listed portfolio had a tough time this quarter

Ethos Capital Partners experienced a decrease of 4.3% in net asset value (NAV) per share in the quarter ended September. The unlisted portfolio returned 1.5% in that period, so the pressure was in the listed portfolio (Brait and MTN Zakhele Futhi).

As announced a few days ago, the fund is not making any new investments and is now focused on managing the existing portfolio.

MultiChoice would love load shedding to go away (JSE: MCG)

It’s hard to justify a subscription when the TV doesn’t work

In the six months to September, MultiChoice experienced a 2% decrease in the 90-day active subscriber base. Load shedding was a huge problem here, as Rest of Africa actually achieved 1% subscriber growth. The pressure was therefore in South Africa, with total customer numbers down by 5%. They previously had some kind of campaign that brought non-paying subscribers in the base. These subscribers were terminated, so the drop in revenue-generating customers was only 2%.

As a silver lining, the premium subscriber base grew by 5%, the first signs of life in that base for many years.

Although group revenue was only up 4%, pre-forex trading profit grew by 10% and that’s after the impact of significant investment in Showmax. The core business is showing promise, but the forex challenges in Africa continue to ruin the story. Net of those adjustments, trading profit fell 18%. Group headline earnings fell by 5%.

The most significant decline in this period was in free cash flow, which dropped by 40% because of difficulties in the South African business and the investment in Showmax.

As a final comment, Showmax is showing the typical growing pains that we’ve seen in streaming businesses across the world. Although revenue grew from R381 million to R555 million, the trading loss worsened from R279 million to R799 million. The economics in streaming are very difficult.

Note: if you would like to read the release in more detail, MultiChoice has placed the results in Ghost Mail at this link.

Ninety One needs a return to form for equity markets (JSE: N91 | JSE: NY1)

Asset management firms are exposed to broader market values as the basis for their income

For an asset manager like Ninety One to do really well, they need to enjoy a combination of net inflows of client funds and an increase in market prices that boost assets under management. Sadly, Ninety One had the exact opposite in this period, with a 5% drop in closing assets under management and net outflows of GBP 4.3 billion.

Headline earnings per share fell by 5% and the interim dividend per share was down 9%.

The staff shareholding at Ninety One is 29.4%, so that’s pretty solid alignment with insiders!

Novus printed many things in this period, including money (JSE: NVS)

Important financial metrics have moved in the right direction

Novus has released results for the six months to September 2023 and they reflect an increase in revenue of 36.8%. Before you get too excited, most of the revenue growth (R406 million of R544 million) relates to the inclusion of Maskew Miller Learning (MML) in the group results after that business was acquired.

Operating profit grew from R23.3 million to R168.6 million, with R100.2 million coming from MML.

In the Print segment, revenue increased by 19.6% and the business swung from an operating loss of R7.8 million to an operating profit of R34.9 million. Excluding the Department of Basic Education contract, volumes fell by 15.8% as magazines and retail inserts showed material declines. Interestingly, newspaper and book volumes increased vs. the prior period.

In Packaging, revenue dipped by 2.3% but gross margin improved from 16.3% to 19.2%, driving a 32.8% increase in operating profit to R38.6 million.

This puts into perspective just how important the MML deal is, as the operating profit in that business is significantly higher than the rest of the group combined.

The closing cash balance of R621.1 million was an increase of R228.8 million for the six months. The group is now in a net cash rather than net debt position, helped by the sale of the Linbro Park property. It also helped that the reduction in paper stock largely offset the seasonal investment in working capital.

Overall, the Print segment is the headache and the group is looking at ways to reduce costs. It is highly dependent on the level of retail advertising spend, which in turn is linked to the economy.

And in management news that I don’t think is a surprise to many, Andre van der Veen has been permanently appointed as CEO and Adrian Zetler has been appointed as Chairman.

Reinet’s net asset value fell 1.8% in the past six months (JSE: RNI)

There’s an inaugural dividend from Pension Insurance Corporation

Reinet Investments is the “stay rich” fund in the Rupert stable. It has supposedly defensive investments like British American Tobacco and Pension Insurance Corporation. Including dividends, the total return is a CAGR of 8.5% in euro terms since March 2009, so that has worked out decently for investors.

In the six months to September though, the net asset value (NAV) fell by 1.8%. NAV per share is up year-on-year though, from EUR 29.93 to EUR 30.89.

In addition to the dividend of EUR 65 million received from British American Tobacco during the period, a dividend of EUR 57 million was received from Pension Insurance Corporation. Additional commitments worth EUR 39 million in respect of new and existing investments were made during the period.

Telkom has achieved a significant increase in earnings (JSE: TKG)

I would definitely wait for full details before getting excited about this one

Telkom released a trading statement for the six months to September. Believe it or not, there’s some pretty good growth here!

There’s never a drama-free situation with Telkom, with this particular trading statement showing restated HEPS in the base period because of an accounting error in headline earnings that led to an overstatement by 4.3 cents per share. The correct base is therefore 131.6 cents. But however you cut it, a range of 186.1 cents to 199.4 cents for HEPS is strong growth of 40% to 50%.

Looking at the drivers of HEPS growth, both revenue and EBITDA improved. There was also lower depreciation (down 20%) after asset impairments in the prior year as well. Net finance charges have increased this year as one would expect, although an increase of 50% is still quite something to read even when you expected a big jump. Another factor that limited the increase in HEPS was R102 million in forex gains and fair value movements in the base period that didn’t recur in this one.

I’ll be very interested to unpack the drivers of this performance when results are released on 21 November.

Volumes have gone the wrong way at Woolworths (JSE: WHL)

Sales growth isn’t keeping up with inflation

Woolworths is an excellent example of an affluent business rather than a luxury business. Affluent customers feel the economic pinch in a big way. Although they can still afford a quality of life that is good by any standard, they cut back on the nice-to-haves in the basket. The Woolworths aisles are filled with nice-to-haves, as anyone who has walked those aisles on an empty stomach will know.

In a trading update for the 20 weeks to 12 November, turnover grew 4.7% in constant currency terms. What follows is a laundry list of all the things that make this environment difficult, along with a reminder that growth last year was 13.4% and thus Australia is quite a tough base.

Woolworths Food saw turnover sales grew by 8.4% at a time when product inflation was 9.4%. This means that volumes are negative, which is a very different tune to what Shoprite is singing at the moment. Checkers has disrupted their market and nobody is going to convince me otherwise. I can literally see it everywhere in my peer group. When you consider that space grew by 2.7% in this period, the numbers are even worse. At least online sales jumped by 46.2%, taking that contribution to 5% of South African sales.

Fashion Beauty and Home has been a great turnaround story, but this period was tough. The late arrival of summer ranges didn’t help, although Woolworths blames the ports for that. I’m pretty sure that competitors all use the same ports, so pointing to South African challenges to give context to poor performance only gets you so far. Turnover grew just 1.4% and price movement was 11.7%, so volumes were down by double digits. Net trading space fell by 0.2%. Online sales grew 23% and contributed 5.2% of local sales.

The Woolworths Financial Services book grew 10.7% year-on-year and the annualised impairment rate increased from 6.2% to 7.5%, reflecting a deteriorating credit environment.

In Australia, Country Road Group saw sales decline by 8.1%. Sales grew 36.2% in the base period, so this is a correction in trajectory after the post-COVID bonanza. Trading space increased 4.3% and online sales contributed 26% to total sales, which is roughly in line with the prior period.

Overall, I’m not surprised to see Woolworths Food struggling for volumes. The Fashion Beauty and Home result is a significant negative surprise that the market isn’t going to like.

Little Bites:

  • Director dealings:
    • Just when you thought Des de Beer is the only director that buys shares in Lighthouse Properties (JSE: LTE), a trust linked to director Mark Olivier bought shares worth R862.5k. It’s thoughtful of Des to let the others have a turn!
    • A director of Richemont (JSE: CFR) has sold 22 share warrants related to Richemont shares.
  • OUTsurance Group (JSE: OUT) is increasing its stake in OUTsurance Holdings Limited, the South African insurance group. This is happening through the issuance of listed shares to shareholders in the South African subsidiary who want to flip to the top of the listed structure. An issue of shares worth R3.3 million has been executed in a share swap, taking the OUTsurance Group stake in OUTsurance Holdings from 89.77% to 89.83%.
  • Deneb Investments (JSE: DNB) has agreed to sell a property in Epping for R64.35 million to Gerber Advisory Specialists, part of the Gerber Goldschmidt Group. The net asset value of the property in Deneb’s books as at 31 March 2023 was R60.3 million, so this price will result in a gain. For context, Deneb’s market cap is R900 million.
  • If you are interested in MTN (JSE: MTN), you can refer to the various materials from the MTN Nigeria capital markets day at this link.

Resilient operational performance and significant progress in expanding service offering

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Resilient operational performance and significant progress in expanding service offering

MultiChoice Group (MCG, or the group), Africa’s leading entertainment company, executed well on its operational objectives during the six months ended 30 September 2023 (1H FY24).

Note: this article has been provided by MultiChoice and does not reflect any views or editorial content by The Finance Ghost

Building on its track record of investing in technology to be ahead of the curve, and to accommodate shifts in consumer video consumption trends to support future growth, the group continued to transition strategically with an increased investment in Showmax, ahead of an exciting re-launch in the second half of this financial year.

“We remain focused on developing our leading entertainment platform that caters for consumer needs across sub-Saharan Africa, on leveraging our footprint to build a differentiated ecosystem and on developing additional revenue streams,” says Calvo Mawela, Chief Executive Officer.

The overall excitement around three world cups, culminating in the Springboks emerging victorious as back-to-back Rugby World Cup champions, supported subscriber activity. A highlight of the interim period was the South African Premium customer base, which grew 5%, a positive trend for the first time in many years.

Although profitability came under pressure due to ongoing power interruptions, cost of living pressures and sharp depreciation in local currencies against the US dollar, the impact was mitigated by a change in focus towards subscriber retention, an improved customer mix, as well as ongoing pricing and cost saving disciplines to protect the resilience of the business. As a result, the group maintained a positive trading profit margin of 3% in the Rest of Africa (a ZAR2.2bn organic improvement YoY) and delivered a 31% trading margin in South Africa.

Salient points for the 1H FY24 period included:

  • Group revenue: ZAR28.3bn, down 1% (up 4% organic) due to weaker local currencies and consumer pressure, offset by conversion benefits of a weaker ZAR on the group’s USD reporting segments and inflationary-led price increases in the majority of the group’s markets.
  • Subscription revenues: 3% higher on an organic basis, attributed to strong growth in Rest of Africa (+14%) and Showmax (+25%), offset by pressure in the South African business (-4%).
  • Group trading profit: increased 18% on an organic and like-for-like basis (excluding the additional investment in Showmax), reducing to a 10% improvement once the investment in Showmax is considered. On a reported basis, trading profit was 18% lower at ZAR5.0bn, impacted by foreign exchange headwinds of ZAR1.7bn, Showmax trading losses of ZAR0.8bn and a lower contribution from South Africa. Focus on cost optimisation delivered ZAR0.5bn in cost savings.
  • Total content costs: up 10% (+ 4% organic), driven by ongoing investment in local content (+16% YoY) and several World Cups hosted in the first half of the year.
  • Core headline earnings: ZAR1.9bn, down 5%, impacted by the same drivers weighing on trading profit, with some offset from realised gains on forward exchange contracts and lower tax and minorities in South Africa.
  • Adjusted core headline earnings (incorporating the impact of losses incurred on cash remittances in markets such as Nigeria): increased 25% to ZAR1.5bn, resulting from lower losses on cash remittances as the gap between the official and parallel naira rates narrowed following the material depreciation in the official naira rate during the period.
  • Free cash flow: ZAR1.1bn, impacted by the increased investment in Showmax and a lower contribution from the South African business.
  • Retained cash and cash equivalents of ZAR5.6bn and access to ZAR9.0bn in undrawn facilities; financial debt stable at ZAR8.1bn with Net debt:EBITDA of 1.30x.

The group continued to deliver compelling local content and enable its audiences to access internationally renowned entertainment shows. Playing a vital role in supporting and developing the continent’s wider video entertainment industry, it has increased its spending on local content by 16% YoY, taking its local content library to almost 80,000 hours. Going forward, the group plans to enhance the monetisation of each hour of content produced by leveraging both its linear and streaming platforms.

Several new titles were launched to maintain strong momentum in leading local language programming. In addition to the successful debut of Shaka iLembe on Mzansi Magic; Gqeberha: The Empire replaced The Queen in its time slot; and Umkhoka: The Curse continued to grow in viewership and social media engagement during the period. M-Net launched the higher-end series 1802: Love Defies Time on 1Magic. kykNET introduced a new medical procedural drama, Hartklop, and a new cooking reality show, Kokkedoor: Vuur & Vlam, both of which commanded strong audience share. Big Brother Naija entered itseighth season, delivering record advertising revenues in local currency.

Following on from the success of the FIFA World Cup in FY23, SuperSport yet again demonstrated its ability to deliver an exceptional sport offering, successfully broadcasting three World Cup events in the period – the FIFA Women’s World Cup, the Netball World Cup and the Rugby World Cup – followed by the Cricket World Cup, which aired post period-end.

As part of its broader “Here for Her” campaign, SuperSport provided a world-first all-female broadcasting crew to produce the Netball World Cup in Cape Town, which was shortlisted at the Sports Business Awards for “Best Sporting Event of 2023”.

Beyond World Cup coverage, SuperSport’s broadcast of the Comrades Marathon in June 2023 was the biggest production in SuperSport’s history. The group continued telling the best of local sport stories and is proud of its latest documentary series, Pulse of a Nation, which documents the history of football in South Africa. SuperSport also secured several rights in its portfolio to provide viewers with a wide variety of choice.

MultiChoice also remains committed to making school sport accessible to all levels of society through its SuperSport Schools platform, which grew its user base by 69% over the last six months, providing a valuable stage for identifying the next generation of South Africa’s sporting stars.

Operational performance review

South Africa

  • The challenging consumer environment persisted into 1H FY24. Loadshedding remained the most immediate challenge in terms of subscriber activity, with the number of active days per subscriber declining by 5% due to a significant increase in both frequency and intensity of loadshedding, especially in Q1 of the reporting period. Premium and Compact bases showed improved stability compared to the latter part of FY23.
  • The group reported a 5% decline in 90-day active customers to 8.6m (3% of which can be attributed to the decision to end the short-term campaigns implemented in the prior year to support customers during loadshedding), with active customers amounting to 7.8m. More stable trends in the mid- and upper segments of the customer base, along with inflation- linked average price increases of around 4%, helped limit the decline in monthly average revenue per user (ARPU) to 2%.
  • Various initiatives were implemented to protect the economics of the segment and to help offset macro and consumer challenges weighing on the performance of the business into the second half, a period which is typically affected by the seasonally higher cost of the football in decoder subsidies through increased device pricing in our linear business and the relaunch of DStv Stream, which has more than tripled its subscribers since March 2023, albeit off a low base. Encouragingly, over 90% of DStv Stream subscribers added in the period are new subscribers to DStv, who find the connected product without hardware installation more appealing. The pricing and value proposition of the DStv Business Play packages were also recalibrated which led to a 37% increase in month-on-month revenues for this segment in September 2023.
  • Revenues declined by 3% to ZAR16.5bn, impacted by a 4% decline in subscription revenues and a reduction in decoder revenues due to the shift in strategy, offset by 31% growth in insurance premiums and a doubling of DStv Internet revenues. The segment delivered a trading margin of 31%, with Showmax now reported as a separate trading segment. In absolute terms, the lower revenues and negative operating leverage resulted in trading profit trending 17% lower to ZAR5.2bn, impacted by the ongoing investment in local content and sport, partially offset by cost saving initiatives and reduced decoder subsidies.

Rest of Africa (RoA)

  • After adding 1.4m new subscribers in FY23, subscriber growth in the Rest of Africa was more subdued in 1H FY24. This was due to the impact of inflationary pressures in key markets like Nigeria, and similar trends to previous periods which followed a FIFA World Cup or northern hemisphere football off-season. A total of 0.1m subscribers were added to end the period at 13.0m 90-day active subscribers. The active subscriber base was broadly stable at 8.9m subscribers and subscription revenues grew 14% organically.
  • Revenue of ZAR10.5bn was flat (+13% organic) with a weaker ZAR against the USD on conversion, offsetting the impact of weaker local currencies relative to the USD. The RoA segment delivered a trading profit of ZAR330m (+ZAR2.2bn YoY on an organic basis) which was underpinned by specific cost interventions around decoder subsidies and content costs.
  • Weaker currencies remained a significant impediment to improvements in profitability, with average first half exchanges falling sharply against the USD. The sharp fall of the naira resulted in a large proportion of the previously recognised losses incurred on cash remittances now being recorded in trading profit. The net effect of these forex movements was a negative ZAR1.6bn impact on the segment’s trading profit for the period.

Showmax

  • The Showmax partnership with Comcast (owners of NBCUniversal, Sky and Peacock) was concluded on 4 April 2023 and significant progress has been made in preparing for launch later in this financial year. This service, which is set to benefit from rising connectivity and smart device uptake that enhances accessibility and scalability, will enable MultiChoice to double its customer base and deliver an additional USD1bn revenue in the medium term.
  • Showmax (now reported separately from the South African segment) saw its active subscriber base increase by 13% YoY, resulting in revenues growing 46% (+45% organic) to ZAR0.6bn. As the group continues to support the existing business and invest behind the new platform, operating costs increased in the short term, resulting in trading losses increasing by ZAR0.5bn to ZAR0.8bn.

Technology segment

  • Irdeto’s external business delivered 17% topline growth (+4% organic) due to the weaker ZAR against the USD, market share gains in its core media security business and the provision of its managed services. Irdeto’s connected industries initiatives continue to build momentum, most notably in the Keystone product line where Irdeto secured additional customer wins in the construction equipment space.
  • Trading profit was affected by once-off restructuring activities in the core media security business as the business adapts to the changing media landscape, and increased by a modest 1% on an organic basis.
  • On a standalone basis, Irdeto generated revenues of USD98m (ZAR1.8bn), down 7%. Trading profit of USD15m (ZAR0.3bn) was lower than the prior period as a result of the non- recurring benefit from elevated FIFA World Cup orders in the prior year, as well as the restructuring costs.

KingMakers

  • KingMakers continued to deliver strong underlying operating momentum despite the impact of the weaker naira and challenging macro environment in Nigeria. The business delivered organic revenue growth of 22%, led by strong growth in its online sportsbook which saw active users increase 17% and its revenue contribution grow by 40% YoY. The weaker naira resulted in reported revenues increasing only 2% to USD95m (ZAR1.8bn). KingMakers reported USD10m in EBITDA and narrowed its loss after tax to USD8.6m (ZAR0.2bn) for the first six months to June 2023.
  • The core development focus for KingMakers was preparations for the soft launch of SuperSportBet in South Africa on 9 November this year. The expertise of the KingMakers team combined with the strength of the SuperSportBet brand and exclusive partnerships uniquely positions the group to leverage the opportunity for future revenue and gain market share in this large and growing addressable market.
  • KingMakers is focused on optimising the profitability of its agency business and growing its higher-margin online business that, together with the opportunity presented by the new South African business, will support its path to sustainable profitability.
  • The product and market expansion plans are fully funded with KingMakers having USD134m (ZAR2.5bn) of cash at period end (being June 2023).

Moment (Fintech)

  • The Moment joint venture made significant progress in integrating with group core payments infrastructure and remains on track to commercialise its local services in 2H FY24.
  • In addition, Moment prioritised payment service integrations for the Showmax business to support the streaming platform’s launch in 2H FY24. The platform is set to deliver returns equal to the initial investment within a 20-month timeframe and will become increasingly important to the success of the group’s ecosystem in future, providing simplicity to customer payment options, more integrated rewards platforms and B2B revenue opportunities.

Future Prospects

“MultiChoice has a compelling growth strategy in place, which is partly driven by the opportunity to capture sustainable long-term growth through our targeted investment in streaming and partly by the need to absorb increased external economic pressure on the business and its consumers in the short-term. Our priority is to navigate both sets of demands to ensure the group operates sustainably through the current economic cycle and long into the future, while delivering attractive shareholder returns.” says Mawela.

The focus remains on driving further efficiencies in operating expenditure, as well as working capital and capex decisions, to ensure consistent and optimal returns on all capital deployed. At the same time, the group continues to seek ways to support or improve the economics of the business through pricing decisions, optimising customer mix and content monetisation, as well as calibrating decoder subsidies according to the macro-economic backdrop.

The group is also carefully investing behind nascent or future business lines, taking into
account the strategic importance and prospects of success.

“The second half of FY24 will be an important period in our journey to expand our ecosystem beyond Africa’s leading linear pay-TV operator into a broader ecosystem of interactive entertainment and consumer services to enable us to double our customer base to 50 million over the next five years. The relaunch of Showmax, combined with KingMakers’ entry into the South African market with SuperSportBet, and Moment’s platform launch are all important milestones as we accelerate growth and drive additional scale, creating a ‘world of more’ for customers and additional value for shareholders.” Mawela concluded.

THE FULL RESULTS SUITE CAN BE VIEWED HERE >

VIEW THE RESULTS ANNOUNCEMENT BELOW

MultiChoice-Reviewed-Interim-Results-Announcement

Ghost Bites (Barloworld | Bidcorp | Capital Appreciation | Dipula Income Fund | Glencore | Netcare | Novus | Santam | Sibanye-Stillwater | Stor-Age | Trematon | Tsogo Sun)

The Finance Ghost
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Ghost Bites (Barloworld | Bidcorp | Capital Appreciation | Dipula Income Fund | Glencore | Netcare | Novus | Santam | Sibanye-Stillwater | Stor-Age | Trematon | Tsogo Sun)

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

Barloworld’s HEPS has inched forwards (JSE: BAW)

This is a perfect example of the importance of continuing vs. discontinued operations

When a group has either disposed of or shut down an important part of its business, the concept of continuing and discontinued operations becomes critical. If a business is no longer there, then obviously the total level of earnings is not comparable to the prior period in which it was there.

Where a business was loss-making, then excluding it makes the current results seem better than they really are on a year-on-year basis. When a successful business is sold or unbundled (as in the case of Barloworld and Zeda), then excluding them can make results look worse.

Barloworld has released a trading statement for the year ended September and the numbers are heavily skewed by the Zeda deal (and the disposal of Barloworld Logistics to a lesser extent), so the only year-on-year change worth looking at is HEPS from continuing operations, as this tells you how the rest of the group is doing.

For this period, HEPS from continuing operations grew by between 4.8% and 6.2%.

Bidcorp is still growing by double digits (JSE: BID)

Watch out for volatility based on the rand, though

Food services giant Bidcorp is one of the very best rand hedges on the local market. The company is a top performer and the vast majority of income is earned outside of South Africa. That’s good when the rand is weakening and bad when the rand is strengthening. This causes volatility in the JSE-listed share price because both the currency and sentiment about the underlying company have an impact.

Bidcorp has given the market an update on the four months to October, with headline earnings showing “real growth” in an environment of 8% inflation. In other words, headline earnings is up by more than 8%. It could be a fair bit more than that actually, as revenue for the four months is up 12.8% year-on-year. What we do know is that gross margin has dipped slightly year-on-year and operating costs as a percentage of net revenue improved by 10 basis points to 18.4%. This has offset the decline in gross margin, allowing EBITDA margin to remain steady at 5.8% of net revenue.

Looking at regional exposures, trading margins have improved in both Australia and New Zealand as well as Europe. Sales are doing well in the UK where food inflation sits at 12%, but it’s been difficult to pass on increases and so margins are underperforming. The Emerging Markets segment includes a huge number of countries and they haven’t given commentary on the margin performance as a whole. A comment that I wouldn’t ignore is that gross margin in China has come under pressure.

Capital expenditure of R1.4 billion is higher than R1.0 billion in the comparative period, with R1.0 billion going into replacement of capital equipment and R0.4 billion into creation of future capacity. There has only been one bolt-on acquisition in Australia in this period.

Capital Appreciation has gone slightly backwards (JSE: CTA)

The use of normalised earnings is helpful here

In a business update published towards the end of September, Capital Appreciation gave an idea of the difficulties being faced in this environment. This is distinct from the expected credit loss at GovChat, with R56.3 million raised in the prior period and R9.4 million in this period. This has obviously driven a very attractive jump in HEPS that isn’t reflective of the performance of the underlying business.

It’s important to note that this is because the credit loss is included in headline earnings, with the number for the comparative period having been restated to reflect this accounting treatment.

To give a better idea of how the core business is performing, the company has also reported normalised earnings. This excludes the GovChat impairments from the previous and current periods, showing a drop of between 7.3% and 5.5% in HEPS for the interim period. On this basis, it came in at between 7.19 and 7.33 cents,

The share price closed 4.6% higher at R1.15 per share.

Putting the dip in Dipula: interest rates are biting (JSE: DIB)

Distributable earnings have dropped under the pressure of interest rates

Dipula Income Fund has released a trading statement for the year ended August. It gives actual numbers rather than an estimated range.

Distributable earnings fell by 6.94% year-on-year. After the restructure of the capital structure that saw B shares issued for every A share held, there are vastly more shares in issue than before. Distributable earnings per share thus dropped by 22.2%.

Glencore acquires 77% in Teck’s steelmaking coal business (JSE: GLN)

If the name sounds familiar, it’s because Glencore has been flirting with Teck for a while now

Glencore has agreed with Teck Resources to acquire a 77% effective interest in Teck’s steelmaking coal business, Elk Valley Resources (EVR), for $6.93 billion in cash. There’s also the acquisition of shareholder loans worth between $250 million and $300 million on closing.

In a separate deal, Nippon Steel Corporation will roll its 2.5% interest in Elkview Operations up into equity in EVR. That company will also acquire equity in EVR from Teck such that it will hold a 20% interest in EVR on closing.

In case you’re keeping track of the maths, POSCO is going to exchange its 2.5% interest in Elkview Operations and its 20% interest in the Greenhills joint venture for a 3% interest in EVR.

In short, this gives Teck an exit from the steelmaking coal business. It gives Glencore a solid business in Canada, one which generated profit before tax of C$6 billion in the 2022 financial year. This makes it sound like the purchase price is a steal, if you’ll exclude a bad pun.

Within 24 months of the close of this deal, Glencore still hopes to move forward with a demerger plan that would see the coal and carbon steel businesses spun out as a standalone entity. Such a transaction would be triggered by sufficient deleveraging of the balance sheet.

Netcare’s HEPS is significantly higher (JSE: NTC)

This trading statement is the pre-cursor to results being released next week

Netcare has released a trading statement for the year ended September, reflecting strong growth in HEPS of between 35% and 38%. Adjusted HEPS grew by between 25.5% and 28.5%.

If we simply use HEPS as reported, the expected range is 99.9 cents to 102.1 cents. The share price closed 4.4% higher at R13.19, so that’s a Price/Earnings multiple of around 13x.

Detailed results are due on Monday, 20 November.

Novus gives an exact HEPS number for the interim period (JSE: NVS)

I’m not entirely sure what the point of this trading statement was

Novus will be releasing earnings on 15 November. I’m therefore not entirely sure why a further trading statement came out on 14 November, particularly when it gives the exact HEPS number for the interim period anyway.

Perhaps the company was just very eager to tell you that HEPS for the interim period will be 28.77 cents. The share price closed 2.4% lower at R4.10.

Santam is facing a difficult underwriting environment (JSE: SNT)

And this announcement came out before all the videos of the hail storm in Joburg

Short-term insurance has been a difficult game in South Africa, with some major loss events and a lag effect in premiums that has seen replacement and repair costs move substantially higher before insurance premiums could catch up. I’ve learnt through this process that inflationary conditions are tough for short-term insurers because policies are generally only revised once per year.

Santam is trying hard to improve the underwriting performance through various initiatives, including geo-coding that gives a comprehensive risk-based view of property locations. The hail storm this week is a perfect example of why over-exposure to a single area can be a disaster for insurance companies.

In an operational update covering the nine months to September, Santam announced that the Conventional Insurance side of the business achieved net earned premium growth of 7%, with positive contributions from all business units excluding Santam Re. This is because non-profitable business was cancelled in Santam Re. This is a theme throughout the announcement actually, with Santam referring to corrective measures taken on poorly priced insurance business.

The partnership with MTN seems to be going well, with almost 100,000 new policies sold to date. The transfer of the in-force book of MTN device insurance is still subject to regulatory approval.

Although top-line growth in Conventional Insurance looks alright, the net underwriting margin was below the target range of 5% to 10%. Natural disasters and property fires have been largely to blame.

The good news is that the investment return on insurance funds, a key part of the business, improved significantly year-on-year. The key float portfolio produced excess returns relative to the benchmark.

Moving on to the Alternative Risk Transfer business, the announcement has just one sentence that talks to strong growth, underwriting results and investment margins.

In the Sanlam Emerging Market partner business, disposal proceeds of EUR126.4 million were received in September for the disposal of the 10% interest in SAN JV to Allianz. These are gross proceeds of R2.6 billion, of which R2 billion was distributed to shareholders in the form of a gross special cash dividend of R17.80 per share. Shriram General Insurance achieved strong premium growth and saw underwriting margins improve.

The outlook doesn’t make for great reading, with an ongoing volatile environment as the backdrop to Santam’s efforts to improve the underwriting performance. The property book is the biggest focus area, particularly based on large fire losses.

Sibanye hosted a battery metals investor day (JSE: SSW)

The company regularly gives detailed strategic updates to the market

If you are interested in battery metals or if you are a shareholder in Sibanye, then you’ll want to refer to this presentation delivered by the company on Tuesday. This slide gives a very good idea of how Sibanye has developed over the past decade or so and where the group is headed:

Stor-Age’s dividend is higher, but only just (JSE: SSS)

Where so many property funds have faltered though, Stor-Age has been dependable

Investors in high quality REITs are generally looking for a hybrid return of debt and equity. This takes the form of a dependable dividend and some growth, ideally in line with inflation. Although Stor-Age has only managed to increase the dividend per share by 2% in the six months to September, there’s also an increase in net asset value of 7.2% to help the investment thesis.

Same-store rental income is up 13.6% in SA and 3.1% in the UK, with closing occupancy of 90.6% locally and 83.9% in the UK. The rental rate (i.e. the impact of just pricing, not pricing and occupancy etc.) increased by 9.6% in South Africa and 5.1% in the UK.

The loan-to-value ratio is 31.9% and over 75% of net debt is subject to interest rate hedging.

The full year dividend guidance is 118 to 122 cents per share. This is based on maintaining a 100% dividend payout ratio, which tells you a lot about how seriously Stor-Age takes its role as a dividend conduit for shareholders. Based on the current price of R12.20, this implies a six-month forward yield of 9.8%.

The net asset value is R15.58, based on SA REIT Best Practice Recommendations.

Trematon’s NAV went the wrong way (JSE: TMT)

Intrinsic NAV is the most sensible metric here

Trematon is an investment holding company, which means that using a metric like HEPS doesn’t make a lot of sense as some investments are consolidated and others aren’t. This doesn’t stop the company from including HEPS guidance in its trading statement, though I struggle to see the point. The move in HEPS is what triggered the release of a trading statement, coming in at less than half of the comparable period for the year ended August.

The thing to focus on is intrinsic net asset value, or INAV. This is the supposed to be the value of the portfolio assuming an efficient disposal of assets, net of debts and taxes. INAV per share has dropped by between 11% and 10%, coming in at 435 cents to 440 cents.

The share price closed slightly lower at R2.95, reflecting a discount to INAV that is typical of locally-listed investment holding companies.

The sun is shining at Tsogo Sun (JSE: TSG)

Part of this is the base effect of hotel management contract cancellations

Tsogo Sun published a trading statement for the six months ended September 2023, reflecting a massive jump of between 43% and 51% in HEPS. This equates to an expected range of between 83 cents and 87.5 cents.

The base period included the negative impact of hotel management contract cancellations, so this contributed to the substantial year-on-year move.

To fully understand this result, we need to wait for detailed results on 28 November.

Little Bites:

  • Director dealings:
    • The Chief Information Officer at Capitec (JSE: CPI) has sold shares worth around R10 million.
    • A director of a major subsidiary of Super Group (JSE: SPG) received a significant award of performance shares and sold the entire lot for over R9.3 million.
    • Des de Beer bought another R1.6 million worth of shares in Lighthouse Capital (JSE: LTE).
    • A non-executive director of Shaftesbury Capital (JSE: SHC) bought shares worth £56.5k.
    • A director of Harmony Gold (JSE: HAR) has sold shares in the company worth R741k, perhaps taking advantage of the spike after the release of results.
  • Orion Minerals (JSE: ORN) announced that Clover Alloys (SA) has notified Orion that it will not exercise the options expiring 30 November. Clover has a 9% stake in Orion and remains a supportive shareholder with representation on the board. Clover is just taking a measured approach here (according to Orion at least), with Orion’s work at the Prieska Copper Zinc Mine being funded by the IDC and the Triple Flag facility. In contrast, previous director Thomas Borman exercised his option to acquire shares at R0.20 for a total value of $2.27 million.
  • Universal Partners (JSE: UPL) released a quarterly update that shows a flat NAV vs. June 2023. The dental side of the business is growing and Universal followed its proportional rights, investing a further £1.4 million in payment-in-kind notes in that business. The UK contractor accountancy and payroll solutions business is holding its own in a tough market. Credit investing group SC Lowy achieved good performance in its funds. Recruitment group Xcede is unfortunately not doing so well in these conditions, although new management is having a positive impact. Despite “reinventing the toilet”, Propelair is still way behind the original business plan and is recognised at a nominal value.
  • There’s a rather unusual situation at Brikor (JSE: BIK), which is currently under offer by Nikkel Trading. The circular for the offer hasn’t been sent out yet, despite an extension having been granted by the Takeover Regulation Panel (TRP). A further extension has been granted, as they are now sorting out an issue related to the expiry of the irrevocable undertaking given by the CEO of the group. He previously gave an irrevocable not to participate in the offer. That irrevocable has expired and he refuses to give another irrevocable, which means Nikkel now needs to stump up a guarantee showing it can acquire all the planned shares plus those held by the CEO. It’s an extraordinary swing to see the CEO now potentially exiting his stake after the initial offer was made based on him not accepting it.

Ghost Bites (Alexander Forbes | Altron | Ethos Capital Partners | Harmony | Premier | Raubex | Shoprite | Vodacom | Zeda)

The Finance Ghost
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Ghost Bites (Alexander Forbes | Altron | Ethos Capital Partners | Harmony | Premier | Raubex | Shoprite | Vodacom | Zeda)

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

Alexander Forbes grew earnings sharply (JSE: AFH)

Despite this, the share price ended flat for the day

Alexander Forbes has released a trading statement for the six months ended September. It makes for attracting reading, with operating profit up by between 5% and 15%. The continuing operations benefitted from various factors, not least of all higher investment income driven by interest rates.

There are several other reasons for this year-on-year move, including once-offs in the base. Either way, HEPS from continuing operations is up by between 55% and 7%%, while group HEPS is up by between 85% and 105%.

For the interim period, group HEPS is expected to be between 26.1 and 28.9 cents. The share price is R6.00 and the market must’ve seen this coming, as it ended the day flat.

Altron achieved a meaningful increase in HEPS (JSE: AEL)

Is the “ugly duckling” of the Bytes spin-off turning the corner?

The Altron share price closed 6% higher on Monday in response to results for the six months to August. They came out early in the morning, as the company wanted the market to spend the day digesting and discussing them.

This is because the numbers are solid, with revenue up 11% and EBITDA up 26% if we exclude the ATM Business. Before you get worried about this adjustment, it makes sense as that business was sold with effect from 1 July 2023.

Operating profit improved by 25% and HEPS increased by 19% to 50 cents a share. The interim dividend jumped 56% to 25 cents per share, as the payout ratio increased from 40% to 50% of HEPS from continuing operations.

The blemish on the result is that EPS was flat, impacted by an impairment on Altron Nexus that is equivalent to 9 cents a share. That business is classified as a discontinued operation. The impairment refers to the restructuring that was necessitated by the loss of a major contract in Gauteng and the exposure to the City of Tshwane.

There are a number of highlights within the group, one of which must be 26% subscriber growth at Netstar. Enterprise customers grew by 13% and the consumer side was up 8%. They have a really fun stat in the announcement:

“At the end of the financial year 2023, Netstar was fitting one car every four minutes, Netstar now fits four cars every one minute.”

There are various other businesses in the group, which is half the problem. This is a classic case of a value unlock strategy that included the spin-off of Bytes, which has turned out to be exceptional for those who held onto it. Perhaps Altron is finally ready to reward shareholders as well!

Ethos Capital Partners won’t make more investements (JSE: EPE)

Shareholders are clearly tired of the discount to NAV

Ethos Capital Partners is expected to update the market on its NAV after Brait releases results on 15 November. Even if you knew nothing else about this company, this already tells you that you’re dealing with a multi-layer listed structure. This only ever means one thing: large discounts to NAV.

The board of Ethos has been engaging with large shareholders and the message was clear: focus on the existing 22 portfolio companies and realising value from them. No new fund commitments or investments are to be made.

Is this the start of the classic value unlock strategy, where management is lauded for trying to claw back some of the value that was lost? A 7.2% rally in the share price suggests that it just might be.

Harmony in tune with the market (JSE: HAR)

An 8% rally was the happy outcome of this update

Harmony released an operational update for the three months to September and the market clearly liked it. Gold production was up 17% and gold revenue jumped by 33%. Together with a drop in all-in sustaining costs of 7%, this created a ridiculous 278% increase in group operating free cash flow.

Net debt to EBITDA is now zero. Zero. Thanks to a seriously impressive performance, not least of all from the Hidden Valley mine in Papua New Guinea, the company managed to get rid of its debt.

It’s also worth highlighting that silver production was 35% higher and uranium production was up 50%. Major initiatives are in progress to bring copper into the mix as well.

The share price is up a rather glorious 48% this year!

Premier improved margins in this period (JSE: SHP)

It’s unusual to see a company this relaxed about load shedding

Brait spent a very long time dressing Premier up for listing. Liquidity is fairly light at the moment despite the R7.7 billion market cap, with the share price roughly flat since it debuted on the market (having given shareholders a scare to the downside along the way).

The business itself is doing very nicely, with revenue up 7.1% in the six months to September. EBITDA is up 23.9% and normalised HEPS has increased by 25.4%.

HEPS as reported is only up 0.8% because the prior period included foreign exchange moves and a once-off tax adjustment.

Interestingly, the company believes that load shedding was “only” a R17 million impact on EBITDA of R1 billion. Group EBITDA margin expanded by 150 basis points despite that challenge, thanks to Millbake (EBITDA up 27.3%) rather than Groceries and International (EBITDA down 4% because of issues in Mozambique).

As a further note on Millbake, that division’s revenue growth of 8.1% was thanks entirely to price and mix, with overall volumes flat. This period included some price relief to consumers due to softer commodity prices. There are still many other inflationary factors, like fuel prices and the rand.

Voluntary debt repayments of R357 million were made during the period.

Strategically, it’s interesting to note the acquisition of a 35% stake in UK-based niche skin care treatment range Science of Skin.

In terms of outlook, revenue growth is expected to moderate because of slowing inflation in soft commodities, driving an expected increase of low single digits in revenue for the second half of the year. The company believes that it can maintain the first-half margins. With less debt on the balance sheet, there’s also a boost to net profit from a reduction in finance costs.

Life after Beitbridge still looks good at Raubex (JSE: SHP)

Despite the completion of that project in the prior period, earnings have powered forward

For the six months to August, Raubex grew revenue by 14.5% and HEPS by 19.4%. That’s particularly impressive when you remember that the company cautioned shareholders that the flagship Beitbridge Border Post Project was completed in the year ended February. There were other reasons why they felt that the full-year was a bumper period.

But despite this, earnings for the first half of the new financial year are clearly very strong. The cash looks good too, with cash generated from operations up by 23.6%. The interim dividend has increased by 18.7% to 63 cents per share.

If you dig deeper, the Materials Handling and Mining Division was the star performer, with a 56.3% growth rate in revenue and an improvement in operating margin from 8.5% to 10.9%. Substantial improvement in the operations of recently acquired Bauba Resources seems to be the main driver here. Performance in the other two divisions of the group wasn’t fantastic, so be careful in extrapolating this result.

Shoprite is still hammering the competition (JSE: SHP)

But this has already been priced in, which is why I don’t hold the stock

At its AGM, Shoprite gave shareholders an update on trading conditions for the first quarter. The group marches on, with a whopping 13.3% growth rate in Supermarkets RSA during a period of inflation of 8.3%. This means substantial growth in volumes, with market share for the 52 weeks to September up by 124 basis points according to the company.

Shoprite has now achieved uninterrupted market share gains for 55 months.

Load shedding has been better recently, but the quarter to September still saw an incremental increase of R90 million in diesel costs vs. the comparative period.

Store growth in this part of the group continues, with a net 42 stores opened during the quarter. This includes eight Petshop Science, two UNIQ and two Checkers Outdoor stores. If you wondered why Wooloworths acquired Absolute Pets, perhaps the Shoprite strategy gives you a clue.

The numbers look good in the other segments as well, for the most part at least. Supermarkets non-RSA grew 9.7% as reported or double digits in constant currency. Store growth is minimal in that part of the business. In Furniture, sales were up by just 0.5% as consumers buckled under current pressures. Other operating segments grew 22.2%, with OK Franchise doing particularly well.

Overall, group sales for the quarter grew 13.2%. It’s another mega result, yet the share price closed 1.3% lower. This tells you just how much is priced in.

Vodacom shows why I still don’t like telecoms (JSE: VOD)

Organic growth is pedestrian

Vodacom fell 4% on Monday after releasing results for the six months to September. Vodafone Egypt is in these numbers, which means you need to be careful of things like a 35.5% increase in revenue, as this company now contributes 24.1% of Vodacom group revenue. The “pro-forma” numbers exclude the impact of that acquisition, showing revenue growth of 7.9% and EBITDA growth of 5.5%.

HEPS is where the rubber still hits the road, particularly when an acquisition is paid for with shares. Although the Vodafone Egypt earnings are now in Vodacom, there are many more shares in issue as a result. HEPS fell by 4.2% in this period.

The interim dividend per share is even worse, down 10.3%. Perhaps this free cash flow table will explain why there’s less to go around for Vodacom shareholders:

I am not a fan of this sector at the moment at anything higher than a very cheap valuation. The growth story is primarily in Africa (particularly in ancillary areas such as financial services, which contributed 5.6% of Vodafone Egypt’s service revenue) and the macroeconomic situation with currencies is just too difficult, even in East Africa where Vodacom has really staked its claim.

The share price is down 17% this year.

Zeda defies debt skeptics and rallies 14.5% on earnings news (JSE: ZZD)

These are impressive numbers

There have been experienced voices in the market who have been skeptical about Zeda and the balance sheet. I was less worried, having written on the company in Financial Mail back in June (you can read it here if you’re a subscriber). Spot was R10.19, my target was R14.00 and the current price is R12.40. On the whole, I felt that the company would manage to do well despite the debt.

It’s nice to occasionally get one right, with Zeda releasing a trading statement for the year ended September that the market loved. Although we don’t have full details yet, we know that revenue growth is over 10% and EBITDA growth is over 15%. Operating profit margins were sustained.

Although net finance costs did indeed jump sharply by over 60%, a net positive tax benefit vs. last year helped mitigate that impact. I’m certainly not going to suggest that I saw the tax benefit coming, but either way HEPS was up by between 15% and 20% and the jump in EBITDA was the primary driver of that gain.

Net debt as at the end of September is R5.1 billion, with the unbundling legacy debt having been fully settled. This bodes very well for the coming year.

HEPS is between 373.4 cents and 389.6 cents, which suggests a Price/Earnings multiple of roughly 3.3x at the mid-point.

Little Bites:

  • Director dealings:
    • A director of Vunani (JSE: VUN) sold shares worth R2.5 million in an off-market deal.
    • A number of Hyprop (JSE: HYP) directors chose the dividend reinvestment alternative, with a total value of nearly R800k split across several directors.
    • Des de Beer is back! He bought shares in Lighthouse Properties (JSE: LTE) worth R662k.
    • The CEO of British American Tobacco (JSE: BTI) reinvested dividend income in shares worth £5.9k.
    • An associate of a director of Wesizwe Platinum (JSE: WEZ) has sold yet more shares, this time worth R35.6k.
  • The Chairman of Sasol (JSE: SOL), Sipho Nkosi, has stepped down with a cautious approach to perceived conflicts of interest based on his business interests. This is of course the correct approach at that level. Current lead independent director Stephen Westwell will fill the role on a temporary basis.
  • Hudaco (JSE: HDC) announced that 85% held subsidiary Hudaco Trading has entered into a lease with Dufomo Investments in respect of its Ambro Steel division. The CEO of Hudaco is an 82% shareholder in Dufomo. This is therefore a related party transaction, but Ambro has been renting the same building for over 29 years so this is nothing new. This is a small related party deal, which means it can go ahead provided an independent expert opines that the deal is fair. Merchantec Capital was appointed as expert and has given the green light.
  • Kibo Energy (JSE: KBO) subsidiary Mast Energy Developments really is bending over backwards for its new joint venture partner, extending the payment date of the initial sum by the new partner yet again. The blame is on administrative and international banking transfer delays. I really do hope they get the money, or it will be terribly embarrassing.
  • Bytes Technology Group (JSE: BYI) has confirmed the exchange rate applicable to the interim dividend. A gross dividend of R0.6173591 per share will be paid to local shareholders.
  • In case you love staring at tables of numbers, AngloGold (JSE: ANG) has released gold production tables for the third quarter. This is a supplement to the previously announced numbers. Check out the SENS announcement if for some reason you want to read tables and tables of numbers with no commentary.
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