Japanese equities perhaps don’t get the attention they deserve. But their returns in the last year have put them back in the spotlight
Market commentators love their catchy phrases and tags. One you often hear today is The Magnificent Seven, a group of seven technology shares that captured the imagination last year, thanks to the hype around generative artificial intelligence (AI).
The Magnificent Seven (which by the way get their name from the famous Hollywood western of the 1960s of the same name) returned 111% in 2023, beating the S&P 500 and Dow Jones by some margin, as well as the MSCI All Country index which was up 22.8%.
Catchy terms serve a purpose (before the Magnificent Seven, there were the FAANGs, and long before that, the Nifty Fifty), but they tend to keep the spotlight on a handful of shares or a sector, when there are often other, less “sexy” markets that have also delivered great value for investors.
Interestingly, the name The Magnificent Seven gives us a clue of a perhaps less glamorous market (until recently) that’s also done very well for investors, the Japanese equity market.
Movie buffs will remind us that the Hollywood movie was based on an iconic Japanese movie called Seven Samurai. In this case, the Samurais have served investors very well.
Over 2023, the Japanese benchmark Nikkei 225 returned 28.2% for investors, while the TOPIX returned 25%.
And in February, the Nikkei 225 passed its best ever level, just below 39,000, a level last seen at the end of 1989.
Leading global investors have also seen the worth of the Japanese market. Warren Buffett’s Berkshire Hathaway last year increased its holdings in Japanese stocks, while BlackRock, the world’s largest asset manager, last year upgraded its view on Japanese equities.
What has driven this recovery in Japanese equities, a market that had underperformed for decades?
One reason is the economic policies introduced by the late Prime Minister Shinzo Abe. His administration implemented aggressive fiscal and monetary stimulus programmes and took action to improve corporate governance, making companies more accountable to shareholders.
The depreciation of the yen in 2022 helped to boost the international competitiveness of Japanese companies – although the currency has recovered some ground. While inflation in Japan picked up in 2022 and 2023, it remains lower than in other OECD countries, and the yen is still relatively cheap on a purchasing power parity basis.
In this environment, the Bank of Japan has been able to maintain a far looser monetary policy than its developed market peers, leading to increased confidence in the manufacturing and service sectors.
The Japanese equity market now represents good relative value, especially compared to US equities, based on the cyclically adjusted price-to-earnings ratios. Furthermore, the Japanese corporate sector has become the largest net buyer of its own stocks, providing an underpin to the market.
Finally, while the Japanese market may not seem as “sexy” as the US tech market, it should be noted that indices such as the Nikkei and TOPIX have significant exposure to the tech industry, through names such as Fujitsu, Hitachi, Sony and Softbank. The Nikkei also includes chipmakers such a Screen, Tokyo Electron and Advantest.
The implication is Japan will also benefit over time from gains in the US and other technology markets.
To return to the movie theme, while the Western, The Magnificent Seven is perhaps the more famous movie, its Japanese inspiration, Seven Samurai, is regarded by movie buffs as one of the most iconic movies of all time. In a similar vein, should investors perhaps look beyond the US blockbusters and embrace the quality of the Japanese market?
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Clientele’s earnings are impacted by IFRS 17 (JSE: CLI)
For whatever reason, they opted to give minimal detail on this in the trading statement
Clientele needed to release a trading statement because they know that HEPS for the six months to December 2023 will be between 37% and 57% lower than the comparable period. This is well above the 20% move that triggers a trading statement.
The frustrating thing is that much of this move will no doubt be attributable to the adoption of IFRS 17, which requires detailed disclosure to understand properly. The company is only going to explain the IFRS vs. operational move when interim period results are released on 22 March, so for now this trading statement isn’t helpful at all.
All we know is that IFRS 17 has resulted in a significantly higher net asset value for the group, yet earnings have been negatively impacted by the new way of measuring insurance contracts.
Libstar: a much better second half of 2023 (JSE: LBR)
The release of full-year results shows an 11.2% drop in normalised HEPS
I must begin this section by pointing out that Libstar’s normalised HEPS was down 44.9% for the first half of 2023, so to claw that back to a full-year drop of “only” 11.2% is impressive. They aren’t joking when they talk about much better trading results in the second half of the year.
Gross profit margin seemed to be the biggest source of improvement vs. the first half. It was up 10 basis points for the year, which is a major jump vs. the interim period where it was down by 210 basis points. They talk about production efficiencies and cost management as the driver of this improvement.
Looking at the year as a whole, revenue was up 5.2%, with selling price inflation and mix changes contributing +10.0% and sales volumes -4.8%. This is a similar pattern to what we’ve seen at other foods producers.
Normalised EBITDA was down 3.3% for the full year, which isn’t good news when a company has debt on the balance sheet. Sure enough, net finance costs were up 53.3%, hence why HEPS took the knock that it did.
Aside from a second half of the year that clawed back a lot of pain, the other highlight is that cash generated from operations was up 3.3%. That’s strong cash management when you consider that EBITDA was down 3.3%!
The margin improvement in the second half of 2023 has been sustained during the first 8 weeks of the new year. The group is strongly focused on finding efficiencies in its operations, including through restructuring processes where necessary.
The share price closed 5.4% higher in response to this update. Still, it’s lost a third of its value over the past 12 months.
MC Mining: offers, going concern assumptions and more (JSE: MCZ)
There’s a lot going on here
If you’ve been following the story of MC Mining, you’ll know that the company has been at the centre of a rather juicy takeover battle. Goldway wants to acquire all the shares in the company and the independent board is pushing back, saying the offer undervalues the company.
One thing is for sure: it’s a lot easier to convince shareholders of this fact when the interim report doesn’t have an entire section that draws attention to material uncertainty regarding the group’s ability to continue as a going concern. The directors have made strong statements that they believe that cash flow forecasts suggest that the group will be fine. Either way, this creates room for debate.
It also doesn’t really help that despite an 80% increase in revenue, cost of sales increased to such an extent that gross profit fell from $3.9 million to $1.1 million. The loss for the period worsened from $1.3 million to $5.8 million.
Cash and cash equivalents fell from $7.5 million to $2.0 million.
The debate around whether the Goldway offer is opportunistic or fair is going to be one to keep watching.
Montauk Renewables saw a 59% drop in HEPS (JSE: MKR)
And they make literally zero effort to help the market understand their business
Most companies on the market really try to help investors get a deeper understanding of what is going on. They release SENS announcements that give a proper narrative to the numbers, explaining the key drivers of performance.
Not so at Montauk Renewables, which does the bare minimum investor relations effort despite a market cap of nearly R13 billion.
If you have the time and inclination, you can work through the 135 pages of the annual report that was filed with the SEC (because the company is listed on the Nasdaq).
I’ll just focus on the numbers, which is all that the company does on SENS anyway. Revenue fell 15% and HEPS fell 59%.
The share price has lost roughly half its value just this year.
Oceana’s US operations are doing the heavy lifting (JSE: OCE)
This is the benefit of diversification, as local operations come under pressure
Over the past couple of periods, the highlight in Oceana’s numbers could be found in the Lucky Star business. For the six months to March 2024, it looks like the trend has changed.
For the five months to 25 February, Lucky Star’s revenue was down 8.7%. There’s a strong base effect here, as the comparable period had exceptionally high volumes as customers bought ahead of pricing increases. Another knock to the South African operations came from a 36.3% drop in fishmeal and fish oil revenue, with lower sales volumes. Production volumes also dropped as the company implemented factory upgrades, so that hit margins as well.
In the wild caught seafood segment, SA horse mackerel performance was impacted by lower catch rates and an important vessel suffering an unplanned major breakdown. Things were better in Namibia at least, with improved catch rates. Hake catch rates were below historical averages, but European demand was strong and sales volumes increased. In squid, poor fishing conditions impacted catch rates. Overall, this segment saw revenue drop by 18.4%.
We now arrive at the good news, which is that revenue in the fishmeal and fish oil business in the US has more than doubled. This was thanks to higher inventory levels and improved global pricing. This makes such a huge difference to the numbers that it far more than offsets the challenges in the South African operations. For the six months to March 2024, Oceana expects group HEPS to be at least 60% higher year-on-year, which is an incredible jump when you consider the South African side of things in these numbers.
Looking ahead to the second half of the year, Oceana expects improvement at Lucky Star. Anchovy and red eye landings between March and July will be key to the local fishmeal and fish oil business. On the global side, there are supply considerations in Peru that the market is watching carefully as an indication of pricing.
If nothing else, the detail I’ve gone into here hopefully shows you the vast array of external factors that influences Oceana’s performance in each period.
It’s interesting to see this disclosure approach from Remgro
Mediclinic is no longer separately listed, yet Remgro seems to want to continue with separate disclosure for Mediclinic due to the group’s significant contribution to Remgro’s overall value. That’s good news for investors. More disclosure is always good news.
The release focuses on the six months to September 2023 (which is quite outdated now) and comments on the outlook for the year ending March 2024, which is nearly complete.
The results for the interim period showed 5% growth in group revenue (measured in US dollars) and a 4% decrease in adjusted EBITDA. Margins went backwards in Switzerland and Southern Africa, with the Middle East moving higher. Adjusted earnings were flat at $81 million.
In other words, my overall opinion that hospital groups are unexciting investments isn’t being changed by those numbers.
The full-year outlook is for flat revenue in Switzerland, growth of 6% in Southern Africa and growth of 9% in the Middle East. EBITDA margin for Switzerland is expected to be down from 14.7% to 13% (a significant decrease), with Southern African dropping from 19.4% to 18%. The Middle East is also expected to dip at margin level, from 14.4% to 14.0%.
I really don’t understand the appeal here, but then I’m not a billionaire. They clearly see something to get excited about.
York Timber’s HEPS dropped as hard as the trees (JSE: YRK)
I still think this is an eternal value trap on the local market
York Timber is one of those companies that occasionally gets people excited, shortly before disappointing punters once again. The share price is down nearly 27% in the past 12 months. Over 5 years, it’s up 8%. I think that watching the trees grow could be a more exciting activity than being a long-term holder here.
Results for the six months to December 2023 are expected to reflect a drop in HEPS of between 62% and 67%. If you strip out the fair value adjustments to the biological assets and just focus on what they call core EPS, a loss in the prior period of 2.62 cents has worsened to a loss of between 9.98 cents and 10.11 cents.
One day, someone smarter than me at understanding the logic behind IFRS will have to explain to me why the value of the biological assets seems to have little reference to the profits (or lack thereof) that York manages to extract from them.
Little Bites:
Director dealings:
It comes through as a director dealing because the founder of the investment advisor to Aristotle Africa sits on the board at Quantum Foods (JSE: QFH), but I would see this trade as the allocation of institutional funds. Still, there’s a purchase here by Aristotle of R11.5 million worth of shares in an off-market deal at R7.75 per share.
An executive director of Richemont (JSE: CFR) has sold shares in the company worth R1.7 million.
There’s a mixed bag of approaches by directors of Lucky Star, which is part of Oceana (JSE: OCE). Three of them received vested shares and two of the directors sold in full it seems, for a total value of R1.3 million. The other director only sold enough to cover the tax and retained R553k worth of shares in Oceana.
The CEO of Argent Industrial (JSE: ART) has sold shares in the company worth R1.15 million.
A director and the company secretary of AVI (JSE: AVI) both received shares in the company and sold the whole lot, rather than just the taxable portion. The total value is around R300k.
One of the founders of Brimstone (JSE: BRN) bought N ordinary shares in the company worth R11.8k.
MiX Telematics (JSE: MIX) announced that the proposed transaction with PowerFleet has now met all outstanding conditions. The merged group, trading under the PowerFleet name, will be listed on our local market from 26 March.
Accelerate Property Fund (JSE: APF) shareholders voted almost unanimously in favour of the proposed disposal of Eden Meander Shopping Centre. They know that the company needs to bring the overall debt level down as soon as possible.
Hammerson (JSE: HMN) has completed the disposal of Union Square for £111 million.
As has been the standard approach in recent periods, Lighthouse Properties (JSE: LTE) is offering a scrip dividend alternative to shareholders. I suspect that we will see the major shareholders choose to receive shares instead of cash here.
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ARC is putting more focus on its growth investments (JSE: AIL)
Rain and Tyme Group are major focus areas, but Kropz Plc is hungry for capital
African Rainbow Capital Investments (ARC Investments) reported an intrinsic net asset value (INAV) of R11.15 per share as at the end of December 2023. This was up 12.9% year-on-year but down 2.3% from the interim period.
During the year, the group raised equity capital of R750 million. Debt in the fund was reduced by 21% to R1.775 billion and further investments were made in Rain (R81 million), Tyme Group (R76 million) and Kropz Plc (R379 million).
Both TymeBank and Linebooker reached breakeven in the past six months. Philippines-based GOtyme reached 2 million customers within 13 months.
A lot of work has been done to make the portfolio simpler, with the top 12 investments now contributing 89% of the portfolio value.
Rain is 27.2% of the fund value, with EBITDA of over R2 billion for the year ended February 2024 expected. Tyme Group is 20.3% of fund value, with breakeven achieved in December 2023 and sustained profitability expected. Kropz is 11.3% of fund value and mining is never an easy game, with the ramp-up of mining operations progressing slower than anticipated and an impairment recognised on this investment. Alexforbes is 6.6% of the fund value and has been doing well recently.
Aside from Kropz that is starting to look like an increasingly deep hole for capital, things are looking up at the group. At some point, Tyme Group will surely be IPOd on a growth-friendly market like the Nasdaq. If we are really lucky, the JSE might even get some of that action, giving us a rare thing on our market: a genuine growth asset.
Unsurprisingly, Caxton’s offer for Cognition is a modest premium (JSE: CAT | JSE: CGN)
This is because the bulk of Cognition’s value sits in cash anyway
There is finally a firm intention announcement related to Caxton and CTP Publishers and Printers wanting to take Cognition private. The price on the table is R1.07 per share, which is a premium of 2.88% over the price per share on the day before the first cautionary announcement was released.
Caxton currently owns 75.52% of Cognition’s shares.
Whilst this may sound like a cheeky offer, the reality is that Cognition is deriving the bulk of its value from cash at the moment (after the sale of Private Property) and this is more of an exit mechanism for minority shareholders than an opportunity to earn a premium on the shares. The independent board has recommended acceptance of the scheme and I’m not surprised.
Holders of 11.6% of shares in issue have indicated that they will vote in favour of the scheme.
Exxaro reports a 22% drop in HEPS for 2023 (JSE: EXX)
The good news is that there’s a substantial special dividend, though
At Exxaro, revenue for the year ended December 2023 fell by 17% and HEPS was down 22%. Although the final dividend was also lower, there’s a substantial special dividend to ease the pain. This special dividend of R5.72 (in addition to the ordinary dividend of R10.10) is because of the solid net cash position of the group.
For reference, HEPS was R46.81 per share, so even with the special dividend included there’s only a modest payout ratio here.
The coal business contributes the bulk of group EBITDA (R12.2 billion out of R13.4 billion) and earnings fell 36% as a result of revenue dropping 18%. This tells you that the energy and ferrous segments did well (up 24% and 51% respectively), leading to a smaller drop in group HEPS than would otherwise have been the case.
And in case you’re wondering, export sales fell by 2% due to lower rail performance at Transnet. To mitigate the impact, Exxaro transported export coal to alternative export ports using road transport. Some coal that would otherwise be exported had to be sold in the domestic market.
Things heat up at MC Mining (JSE: MCZ)
Goldway has responded to the “target’s statement”
Those who have been following this story will know that Goldway Capital made an offer to acquire all of the shares in MC Mining for A$0.16 per share. A potential other bidder then emerged and disappeared within the space of a week, leaving Goldway as the only current bidder in town once more.
In the meantime, the independent board of MC Mining released what is known as a target’s statement – basically a response to the offer and the recommendation to shareholders. The board recommended to shareholders that they do not accept the offer.
Goldway is allowed to respond to the target statement and they have now done so. A serious allegation has been raised by Goldway regarding a potential breach of the Corporations Act. Goldway holds more than 30% of the voting rights in MC Mining and this means that an independent expert report should’ve accompanied the target’s statement.
There are a bunch of other responses as well, with the board of MC Mining having accused Goldway of making an opportunistic bid and undervaluing the operations. This wording from Goldway made me laugh for just how matter-of-fact it is:
The Makhado Project has been at Definitive Feasibility Study (DFS) status and ‘shovel ready’ for over a decade and has never produced any coal.
This gives you a flavour of the overall Goldway response, which basically highlights that simply pointing to what the assets might be worth one day isn’t good enough. Goldway has valued them based on what the assets are producing today and what the likely outcomes are, none of which are without risk.
This, however, was my favourite jab:
The IBC (independent board committee directors) are all long-term directors of MC Mining and have never bought a share in YOUR company, despite their view that MC Mining is significantly undervalued. In contrast, the Bidder Parties have invested considerable capital in MC Mining.
The ball is now in the court of the independent board committee. Aside from why they will need to explain the alleged lateness of the independent expert’s report, they will also need to respond to this rather juicy piece of corporate finance.
Resilient’s dividend in 2023 was slightly ahead of guidance (JSE: RES)
The total dividend for the year is down 7.3%
There are two types of REITs at the moment: those that pay dividends in line with reduced earnings and those that make excuses. Resilient is one of the former thankfully, paying a dividend despite pressures from interest rates and lower distributions from investee companies.
In South Africa, the portfolio grew net operating income by 7.1% for the year. Rentals on lease renewals were 4.6% higher than expiring rentals. For new tenants, leases were up 26.5% vs outgoing leases. The blended reversion was therefore positive 7.9%, which is strong.
Resilient is also invested in a portfolio in France alongside fellow listed group Lighthouse, where several retailers with private equity structures failed in the past year. French vacancies increased from 7.2% to 9.0% by the middle of the year and reduced to 7.9% by December 2023. Resilient also has an investment in Spain, with an agreement to recently acquire the dominant regional shopping centre in Castellon on a net initial yield of 7.7%.
The group also has an investment in Nigeria, but not for much longer. Those malls are being sold to equity partner Shoprite for R1, with Shoprite taking full responsibility for the debt in the structure.
Finally, the company sold its stake in Hammerson during the year and received proceeds of R1.2 billion, having originally paid R746 million for the shares. This will be used for energy initiatives.
It’s also worth highlighting that Resilient owns 30.8% of Lighthouse Properties.
Resilient’s net asset value per share is R65.71 and the loan-to-value ratio is 35.2%. Based on the full year dividend of 406.24 cents, the share price of R46.01 is a trailing yield of 8.8%.
Standard Bank grew HEPS strongly in 2023 (JSE: SBK)
The bank took advantage of favourable conditions
As I’ve written a few times now, 2023 should’ve been a strong year for banking thanks to higher interest rates and larger balance sheets. Some banks took advantage and others lost out. Standard Bank is firmly in the former category.
HEPS grew 26% for the year, the dividend is 18% higher and return on equity improved from 16.3% to 18.8%. The cost-to-income ratio improved from 53.9% to 51.4%. It all looks very good.
The Africa business is performing well, contributing 42% of group headline earnings. Standard Bank has managed to achieve the toughest balance around: finding growth beyond South Africa’s borders but without falling foul of the risks of doing business in Africa.
Standard Bank expects 3 cuts of 25 basis points each starting in July 2024, with one 25 basis point cut in 2025. This suggests a 100 basis points decline in South African interest rates over the next year. As part of this overall bullish macroeconomic view, Standard Bank expects electricity supply and logistics constraints to both ease in the next year. I sincerely hope they are right on all three counts.
2024 return on equity is expected to be in the target range of 17% to 20%. The credit loss ratio is expected to be near the top of the through-the-cycle range of 70 to 100 basis points.
Little Bites:
Director dealings:
The group COO of Astral Foods (JSE: ARL) bought shares in the company worth R16.8k.
Woolworths (JSE: WHL) announced a change in leadership in the Woolworths Food business, with Zyda Rylands retiring as CEO of at the end of August 2024. Sam Ngumeni, currently group COO, will take over the position. He has 28 years of service with Woolworths and Rylands has retired after 29 years of service, so there’s proper institutional memory and consistency of leadership there.
South Ocean Holdings (JSE: SOH), which has absolutely nothing to do with fishing, released a trading statement for the year ended December 2023 that reflects a jump of 99% in HEPS! That means that HEPS doubled from 2022 to 2023. Full details will be available when results are released on 18 March.
Altria Group has reduced its stake in AB InBev (JSE: ANH) from 10.0% to between 7.8% and 8.1%, depending on whether underwriters exercise their options to purchase additional shares. Altria is achieving this through a combination of a public offering of the shares, as well as AB InBev agreeing to repurchase shares worth $200 million from Altria. There are no new shares being issued by AB InBev here. Only shares currently held by Altria are changing hands.
At Famous Brands (JSE: FBR), Chris Boulle looks set to take the role of chairman with effect from the AGM in July 2024. Santie Botha is stepping down after serving as chairman since October 2013.
Rex Trueform (JSE: RTO) released a trading statement reflecting a drop in HEPS of 62.2% for the six months to December 2023. African and Overseas Enterprises Limited (JSE: AOO) is part of the same group and also released a trading statement for the same period, reflecting HEPS down by 72.3%.
Southern Palladium (JSE: SDL) released its interim report for the period ended December 2023. This is firmly in development stage, with minimal revenue. The operating loss was A$3.1 million for the period.
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British American Tobacco banks £1.5 billion (JSE: BTI)
The block trade of shares in the Indian business is complete
As noted earlier in the week, British American Tobacco decided to reduce its stake in ITC Limited in India by selling 3.5% of that company to institutional investors. It certainly didn’t take long to achieve, with £1.5 billion worth of shares placed in a matter of days.
The proceeds will be used to buy back shares in British American Tobacco, starting with £700 million in 2024. The group is trying to balance this against the need for ongoing investment and share buybacks, as well as the deleveraging towards the new target range of 2x to 2.5x adjusted net debt to adjusted EBITDA.
Burstone to acquire Neighbourhood Square from Investec (JSE: BTN)
The deal is part of a right of first offer that Burstone has over certain properties
Those with good memories may recall that Investec Property Fund was rebranded Burstone some time ago. The management team of Burstone was also internalised, at great cost I might add. As part of this, Burstone was granted a right of first offer over certain properties held by Investec. This lasts for 24 months after the closing of the internalisation transaction.
Investec is selling Neighbourhood Square and Burstone has exercised the right of first offer along with Flanagan and Gerard Frontiers Property Limited, who will buy it on a 50-50 basis from Investec for a total purchase price of R380 million.
With Checkers and Woolworths as anchor tenants along with Dis-Chem, this bodes well. The property is located in Linksfield, which is an upmarket suburb of Johannesburg. The net property income for the half-share is R15.3 million, which is a yield of 8.5%. The cost of debt is assumed to be 9.35% at the moment so the property would be loss-making if fully funded by debt.
That’s just how it is for property in this market.
De Beers reports further momentum in rough diamond sales (JSE: AGL)
This is encouraging news for Anglo American
De Beers, part of the Anglo American stable, has announced the rough diamond sales value for the second sales cycle of 2024. Sales came in at $430 million, up from $374 million in the first cycle of 2024.
Cycle 2 in 2023 was $497 million, so this number is still down year-on-year.
Demand is growing in India but remains a concern in China, with the narrative across those two massive emerging markets continuing to be in favour of India in most contexts. Overall, De Beers expects a gradual ongoing recovery throughout the year.
I don’t see many silver linings at EOH (JSE: EOH)
Just because a company has survived, doesn’t mean it is a good investment
EOH has been quite the story, hasn’t it? After fighting back from the brink of death because of widespread corruption, EOH eventually had to do a rights issue to sort out the balance sheet (something I was worried about at the time, leading to me selling my speculative position before the rights issue happened).
In the post-rights issue world, it’s also not rocket science to see that EOH is unlikely to do exciting things for a portfolio. What exactly is appealing about providing technology solutions to the public sector and large corporates? This is a bright red ocean of competition, which means margin pressure is almost unavoidable.
I’m unfortunately being proven correct once more with this company, as results for the six months ended 31 January reflect a drop in continuing revenue of between 2% and 4% year-on-year, along with operating profit collapsing from R142 million to between R5 million and R15 million. If adjusted EBITDA is a metric you’re willing to use, that fell from R171 million to between R90 million and R105 million.
The headline loss per share is between 10 cents and 12 cents, which is at least an improvement vs. the headline loss per share of 17 cents in the comparable period. This is thanks to having far less debt on the balance sheet than before, a direct result of the capital raising activities. The interest charge was down from R102 million to R68 million.
Weirdly, despite the drop in operating profit, cash from operations jumped from R5 million to between R190 million and R210 million. Once you read all the way through the announcement, you find that it was because of the early receipt of a large amount in the foreign operations, with the payable only settled after year-end. You have to be very careful with cut-off issues in working capital. The company did a good job around explaining this, noting that cash from operations would’ve been between R28 million and R34 million without that distortion.
If we consider momentum instead of year-on-year movements, then EOH’s six-month performance is better than the immediately preceding six months. The poor trading at the end of the last financial year continued into this half for three months or so before improvements came through.
For me, it’s all just too difficult with no obvious catalyst for major upside in performance. Those who supported the rights issue at R1.30 are in the red, with the share price currently at R1.19.
The V&A is still the jewel in Growthpoint’s crown (JSE: GRT)
Tourism in Cape Town is flying
Growthpoint released results for the six months to December 2023 and they reflect pressure on distributable income per share, with that metric down by 8.6%. The dividend followed suit in terms of percentage movement, coming in at 58.8 cents per share.
As the largest of the JSE-listed REITs, Growthpoint boasts a portfolio in which only 53.7% of total assets are found in South Africa. The offshore stuff takes the form of strategic stakes in listed funds like Growthpoint Properties Australia, Capital & Regional (also on the JSE) and Globalworth Real Estate Investments in London, with exposure to properties in Poland and Romania.
On top of all this, they have Growthpoint Investment Partners. This section of the group effectively serves as an incubator for specialist funds in areas like healthcare and student accommodation.
One of the challenges at the moment is that the loan-to-value has moved higher for both the South African calculation (34.8%) and the group calculation (42.0%). This comes at a time when debt is expensive, putting pressure on distributable income.
The V&A Waterfront remains the superstar in terms of growth, achieving a 13.7% increase in distributable income. Another positive is that the South African portfolio vacancy rate has decreased from 9.2% to 8.8%, with the office portfolio improving from 19.2% to 17.8%. That’s still very high of course, but it’s slowly getting better.
Distributable income per share fell 13.4% at Hyprop (JSE: HYP)
As we learnt earlier in the week, there’s no interim dividend
The six months to December 2023 marked an unhappy time for Hyprop shareholders. This is despite metrics that really don’t look too bad at face value, like decent growth in tenant turnover and a positive rent reversion for the period – even for offices attached to the malls!
The office vacancy, by the way, is 32.8%. The retail vacancy rate is just 1.3%.
Despite encouraging metrics, distributable income for the South African portfolio fell from R459 million to R448 million.
In the Eastern European portfolio, tenant turnover growth was in the double digits and the vacancy rate was just 0.3%. Despite what sounds like a great story, distributable income was also lower. It came in at R229 million vs. R243 million in the comparable period.
We then get to Sub-Saharan Africa, where the devaluation of the naira has worked the same magic that has hurt the likes of MTN. Distributable income collapsed from R26 million to -R8.6 million.
So, at group level, distributable income fell 8.3%. Due to the dividend reinvestment programme that led to many more shares being in issue, distributable income per share was down 13.4%. Ouch!
The full-year guidance is a drop of between 10% and 15%, so it’s an unpleasant year for shareholders like yours truly.
Based on this guidance, the risks to the naira and the group’s worries around Pick n Pay as the anchor tenant in its properties, there is no interim distribution. I assume that the worry is Pick n Pay needing to renegotiate rentals. Hopefully Hyprop holds firm, as these are high quality malls and I can’t imagine why rental concessions would be needed for those stores.
The acquisition of Table Bay Mall should be implemented before 1 April 2024, with R500 million in cash and R250 million of bank facilities earmarked for that acquisition. They paid a hefty price for Table Bay Mall and I hope it will work out.
IFRS changes make it trickier to understand Momentum’s numbers – but the direction of travel is up (JSE: MTM)
Higher interest rates have helped them
Momentum Metropolitan has been applying the new Insurance Contracts accounting standard from 1 July 2023, so this limits the comparability of the numbers for the six months to December 2023 to the prior period. To address this, the company shows restated comparable numbers.
On that basis, HEPS is up by between 46% and 51% – a very large jump indeed! If it wasn’t for the restatement, they would’ve been up by between 18% and 21%. A period with a new accounting standard is always a major distortion.
The performance was driven by better investment income (thanks to higher interest rates) and other improved operational performance metrics like persistency and sales volumes.
Orion releases its half-year financials (JSE: ORN)
This is very much still a development company
Orion’s interim report kicks off with the Prieska Copper Zinc Mine, where this period saw an update to the Mineral Resource Estimate and the commencement of trial mining and dewatering. There are 166 on-site employees already!
At the Okiep Copper Project, a drilling programme is underway with the goal of completing the bankable feasibility study by the third quarter of 2024.
There are other projects in the group as well, but they are sitting on the fringes in comparison to those two major opportunities.
Development is expensive, with an operating loss of AUD5.65 million for the period.
Ongoing drama at Quantum Foods (JSE: QFH)
The “feathers fly” pun is hard to avoid here
The Quantum Foods shareholder register is quite the hotbed of activity at the moment. After Country Bird bought the shares held by JSE-listed Astral Foods, crazy things happened to the share price and Quantum Foods had to release an announcement giving the market some idea of what was going on.
The drama continues, with one of the three major shareholders (Braemar Trading) demanding a shareholders meeting to propose the removal of the chairman of the board and two directors, with a Braemar’s nominee to be appointed as director.
Quantum Foods has taken legal advice and the view is that the demand is not legally compliant. The board will therefore not convene a shareholders meeting.
Whatever is going on here, it’s big.
In a separate announcement, Quantum announced that Country Bird Holdings has issued a letter to the board of Quantum confirming that the company has no intention of making a takeover bid for the company.
The Foschini Group is bringing a new retail brand to SA (JSE: TFG)
A franchise agreement with JD Sports Fashion has been agreed
The Foschini Group has signed an agreement with JD Sports Fashion to be the company’s exclusive retail partner in South Africa. As the name suggests, JD Sports Fashion focuses on sports and casual wear (so, yet another seller of Nike and Puma etc.) and has strong private labels as well.
One wonders how many sports retail brands a market possibly needs, as The Foschini Group already owns Sportscene, Totalsports and Sneaker Factory. Small tweaks in the style of the store, the music being played etc. seem to make a difference.
More than 40 stores will be opened over the next five years in South Africa, so that’s good news for retail mall owners!
Little Bites:
Director dealings:
The company secretary of Truworths (JSE: TRU) sold shares worth R1.6 million. This seems to mostly relate to taxes and loans due under legacy share schemes, but there’s also a comment about a desire to rebalance the personal portfolio and so that counts as a sale in my books.
The CEO of Sirius Real Estate (JSE: SRE) bought shares in the company in a self-invested pension. The value was £6.5k.
The non-executive chairman of Primary Health Properties (JSE: PMR) has reinvested dividends into shares in the company worth £2k. His wife did the same to the value of £1.2k.
Cognition Holdings (JSE: CGN) announced that the comments made by Caxton and CTP Publishers and Printers (JSE: CAT) regarding an offer having been made for Cognition are incorrect. Although an offer has been lodged with the board of Cognition, the TRP still needs to approve it.
As if the situation around disgraced ex-Bytes CEO Neil Murphy (JSE: BYI) couldn’t get more ridiculous, his very long list of undisclosed trades in the company’s shares can now be added to be Alison Murphy, a close associate. There were many acquisitions from 2021 to 2023, followed by disposals. It’s truly mind-blowing.
Southern Sun (JSE: SSU) has repurchased shares representing 3% of issued share capital since the general authority granted in September 2023. The average price per share paid is R4.97, which is slightly below where the share is currently trading.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Attacq: improved income guidance and a full exit from MAS (JSE: ATT)
The net asset value per share has dipped slightly over the past year, though
Attacq has released results for the six months to December 2023 and they reflect some important strategic steps. For example, this was the period in which the major deal with the Government Employees Pension Fund for Waterfall City was implemented.
Although not captured in the results to December, the group has also taken the significant step of agreeing to sell the entire remaining shareholding in struggling Eastern European property fund MAS (JSE: MSP) at a price of R16.75 per share, which is actually a slight premium to the current MAS price of R15.95 a share. This will unlock cash of R773 million for Attacq to invest. The buyer is PKM Developments Limited.
Now, back to the numbers. Attacq’s interim dividend has moved ever so slightly higher from 29 cents to 30 cents per share, with the net asset value per share dropping from R17.35 to R17.25. Group gearing decreased from 37.3% to 25.3%, giving Attacq one of the strongest balance sheets in the property sector.
Guidance for full year distributable income per share growth has been revised higher to between 10.0% and 12.5%.
And if you can believe it, even occupancy in the office properties has moved higher between June 2023 and December 2023!
The market has very little love for Brait (JSE: BAT)
This is despite Virgin Active now having over 1 million members worldwide
The sad and sorry state of the Brait share price is quite something to behind. Even the most H2O-ready boets at Virgin Active couldn’t lift this thing:
Premier is separately listed these days (JSE: PMR), so you can get everything you need to know about that investment within the Brait stable from the pre-close announcement that Premier recently released to the market. The TL;DR of it is that revenue growth slowed to low single digits as inflation moderated on the food items that Premier mainly operates in. The company is on track to improve its leverage ratio despite a significant capital investment programme.
The market pays a lot of attention to the Virgin Active numbers though, as this is not separately listed. Virgin Active South Africa now has 625k members (up from 606k as at the end of September 2023) and worldwide membership at Virgin Active has surpassed the 1 million mark. All territories other than Australia are now EBITDA positive.
Run-rate EBITDA has increased to £55 million, up from £30 million as at 30 September 2023.
At New Look, the UK fashion business, average selling prices were higher over Christmas and volumes were down. The net result was a reduction in revenue. Management focused on margin retention.
Brait is still busy figuring out how to extend the December 2024 maturities for the convertible bonds and exchangeable bonds. No agreement has been reached as of yet.
An interesting capital allocation step at British American Tobacco (JSE: BTI)
The company is selling down the stake in India to fund further share buybacks
British American Tobacco has announced that it will sell-down a stake of 3.5% in Indian business ITC. This would take the company’s stake down to 25.5%, which is still a significant minority holding.
The sentiment around India is largely positive at the moment, particularly as China’s economy has stalled. It seems as though British American Tobacco is taking advantage of this, with a view to getting a good price on the shares from institutional investors and then using those proceeds to repurchase British American Tobacco listed shares that are trading at a modest multiple.
At this stage we don’t know what the pricing of the stake will be, but this is a solid capital allocation strategy and many a listed company could take notes here. Importantly, I don’t think it really makes a difference whether the stake is 25.5% or 29% in terms of control and influence, so this is purely a financial consideration around capital allocation rather than a larger strategic decision.
It’s also interesting that this buyback is happening while the company is also working towards a decrease of overall leverage to reach a level of 2x – 2.5x adjusted net debt to adjusted EBITDA.
Capitec increases its stake in Avafin (JSE: CPI)
This is a further investment in international operations
Capitec currently has a 40.66% stake in Avafin, an international consumer lending group. This is moving up to 97.69% at a purchase price of €26.3 million. The original stake was acquired back in 2017, so Capitec has already walked a multi-year road with this business.
The small residual amount in the business will be held by Avafin’s management team.
Avafin provides online consumer loan products in Poland, Czechia, Latvia, Spain and Mexico. This is therefore geographical diversification for Capitec, with the banking group noting that Avafin’s “small challenger” status in its markets of operation make it a good culture fit.
The numbers on the fact sheet provided to the market by Capitec are outdated (key financials are for 2022), so that’s not super helpful. For that year, net profit was €8.3 million and return on equity was 56%.
Homechoice had a decent year in 2023 (JSE: HIL)
The total dividend ended up being 7% higher
Homechoice is one of those JSE-listed companies that you’ve probably not spent much time thinking about. The group is focused on fintech solutions and it seems to be working, with the Weaver business contributing 92% of group operating profit. It contributes far less in the way of revenue though, with fintech revenue of R1.9 billion vs. total revenue of R3.7 billion.
Operating profit is up 28.4% to R619 million despite retail sales decreasing by 23.6%, so fintech really is driving the story here. In case you’re wondering what they do, a good example is the PayJustNow offering of buy-now-pay-later (or BNPL) solutions. This is a payment solution that has taken off globally in the past few years, with PayJustNow having a strong position in the local market.
HEPS has increased by 7.2% to 309.3 cents and the total dividend for the year was up 9% to 153 cents.
A disappointing update from Hyprop (JSE: HYP)
REIT investors hate to see a dividend go
Hyprop is exposed to many of the best retail shopping malls in South Africa. I’m a shareholder in the fund for that reason, having bought in with a multi-year view on rates coming down and higher quality malls still performing decently.
Then along came not just Pick n Pay, but also Hyprop’s exposure to Nigeria. The latter isn’t a surprise. The former feels like very dicey justification to me, as we are all aware that Pick n Pay is facing plenty of pressure but it’s very hard to imagine a world in which flagship stores in leading malls shut down. Nothing is ever impossible, but really?
Hyprop is worried enough about this Pick n Pay issue (and the devaluation of the naira and the impact this has on the Ikeja City Mall) to not pay an interim dividend “until these risks subside” – which feels extremely open-ended. If they are hoping that the Pick n Pay or Nigerian issues will magically be sorted out in the next few months, they are dreaming.
Distributable income per share for the six months ended December 2023 came in 13.4% lower, with an increase in the number of shares after the dividend reinvestment programme. Distributable income (i.e. not on a per-share basis) was only down by 8.3%.
The market felt as frustrated by this update as I did, with the share price down 4% for the day. There were no shortage of disgruntled voices, particularly in the context of how much Hyprop recently paid for Table Bay Mall.
I decided to express my annoyance with a meme:
Well, so much for the MC Mining bidding war (JSE: MCZ)
As quickly as they appeared, Vulcan Resources has disappeared
In a very odd sequence of events, Vulcan Resources went from submitting an indicative non-binding proposal (with a pricing range) on 8 March, to walking away from the opportunity just four days later. Vulcan will not be proceeding with a formal offer to shareholders of MC Mining.
Now, it is common for non-binding proposals not to go ahead. The clue is in the name, right? What I don’t understand is how it happened in just four days.
Very, very odd indeed.
This leaves Goldway Capital as the only bidder at the moment, with the independent board of MC Mining recommending that shareholders do not accept that offer.
Old Mutual’s numbers looked good for 2023 (JSE: OMU)
This puts the group back in the headlines for the right reasons
Old Mutual has released a trading statement for the year ended December 2023 that reflects strong growth in HEPS of between 18% and 38%. This has been driven by an improvement in results from operations (basically their measure of operating profit) of between 6% and 26%.
You may want to use adjusted HEPS instead, as this excludes hyperinflation in Zimbabwe. This metric has increased by between 14% and 34%, so that isn’t too different to the change in HEPS.
Old Mutual has been at the centre of quite a bit of controversy on local social media recently, with consumer activists calling for people to move their policies. Whether this will actually have an impact on the numbers will only be seen in 2024. Old Mutual is a very large organisation.
Truworths distances itself from Truworths Zimbabwe (JSE: TRU)
The Zimbabwean business is immaterial to the Truworths group
The Zimbabwe Stock Exchange has agreed to a voluntary suspension from trading of Truworths Zimbabwe, in which Truworths has a 34% shareholding.
This is because the company needs to address going concern issues and comply with listings requirements, which means the creation of a roadmap to resolve current challenges.
The investment in Truworths Zimbabwe has been held since 2002 and has been fully impaired by Truworths in prior years, so the issue in Zimbabwe is essentially immaterial to the rest of Truworths.
The WeBuyCars pre-listing statement is available
The listing date has been set as 11 April
If you’re a shareholder in Transaction Capital (JSE: TCP) like I am, then this is an important update. The pre-listing statement has been released by WeBuyCars, with the company set to be separately listed on 11 April.
Having originally been founded in the early 2000s by brothers Faan and Dirk van der Walt, WeBuyCars is a great example of how to spot a gap in the market and really go for it. I’ve written multiple times before on how impressed I’ve been by the growth story.
With 2,800 employees and around 14,000 vehicles traded each month, the company has come a long way. Due to troubles at Transaction Capital, it will now be set free to stand on its own feet.
This will give investors an opportunity to take a pure-play view on used car sales, with no noise from car rental or new car operations. WeBuyCars is also a dividend paying firm, with a policy to declare between 25% and 33% of headline earnings as a dividend going forward.
As for growth prospects, they believe that they can grow from the current level to around 23,000 vehicles per month in the next 4 to 5 years. Alongside this goal, there are plans to drive the in-house IT capabilities and to improve the finance and insurance penetration rates.
There are a number of complicated transaction steps along the way from a Transaction Capital perspective, with the group planning to unlock cash of between R900 million and R1.25 billion to help sort out its balance sheet. Transaction Capital’s shareholder in WeBuyCars is anticipated to be between 57.5% and 67.5% immediate prior to the listing and unbundling.
The capital raising activities imply a valuation for WeBuyCars of R7.5 billion.
If you would like to view the abridged pre-listing statement, the company has placed it in Ghost Mail at this link. I highly recommend signing up to attend the Unlock the Stock event this Thursday 14th March at midday, as that is your chance to ask questions directly to the management team. Attendance is free but you must register here.
Little Bites:
We don’t have any details behind the rise in earnings, but Grand Parade Investments (JSE: GPL) released a trading statement reflecting growth in HEPS of between 11% and 31% for the period ended December 2023. We will have to wait for the release of results on 20 March to find out more.
“Despite the headwinds presented by the economic environment, our revenue for the four months to 31 January 2024 grew by double digits (at 16,2%), illustrating the resilience and adaptability of our business model. Moreover, our profitability has also shown double digit growth (at 19,7%), demonstrating the effectiveness of our cost management strategies and operational efficiencies.
This impressive financial performance not only fortifies our position in the market but also underscores our ability to generate sustainable value for our stakeholders. Our commitment to innovation and customer satisfaction has yielded remarkable results with growth in the majority of our key operational performance indicators. This reaffirms our dedication to delivering unparalleled value to our customers while fostering long-lasting relationships built on trust and reliability.”
CEO of WeBuyCars, Faan van der Walt
To engage directly with the management team of WeBuyCars, register for the Unlock the Stock event on 14 March at midday. Attendance for this online event is free but you must register here. Unlock the Stock is an initiative by The Finance Ghost, Keyter Rech Investor Solutions and Coffee Microcaps.
A swift “private credit” Google search confirms that the giants of alternative asset management, aptly named after Greek gods such as Apollo and Ares, have successfully captured the majority of Wall Street’s corporate lending business; along with its top talent and attractive double-digit returns they generate from making loans to U.S. middle-market companies.
Yet, despite private credit emerging as the fastest growing alternative asset class in the past decade, investing with leading private credit managers presents multiple challenges to investors seeking exposure to this asset class. As a result, investors remain underexposed, forgoing the diversified and asymmetric returns on offer.
However, there is a straightforward and effective approach to invest in premier private credit managers, while preserving daily liquidity and realising impressive double-digit USD returns.
Guided by the five principles below, investors can access a well-diversified and resilient portfolio portfolio of high-quality senior secured loans to private companies across the United States, managed by the world’s leading private credit managers.
1. Bigger is Better
Private credit is often defined as lending by non-bank financial institutions to middle-market companies. In the U.S. these are companies earning between $10 mn and $1 bn per annum (EBITDA1).
There are almost 200,000 of these companies across America employing over 50 million people. In fact, 87% of companies with > $100 mn in revenue in the U.S. are private.2
This makes the U.S. middle-market the 3rd largest economy on earth; around 3x bigger than the whole of the United Kingdom.
The size of the U.S. market matters. The larger the market, the greater the number of high-quality corporate borrowers within sectors and across industries.
The U.S. middle-market depth and liquidity makes it easier to construct a robust portfolio of loans to recession-resistant businesses in defensive sectors.
2. The Trend is your Friend
U.S. middle-market lending is dominated by non-bank lenders.
The migration of middle-market lending from U.S. banks started in the 1980s. By 2008, banks had lost 2/3rds of their market share to non-bank lenders and faced increasing regulatory headwinds.
Today U.S. banks control less than 15% of the lending to middle-market companies.
The dominance of private credit managers in the U.S. is important. It means you can construct an optimally diversified portfolio of thousands of loans spread across a broad range of borrowers and sectors; while avoiding cyclical industries such as energy, hospitality, aviation and retail.
Historically, credit losses have been concentrated amongst the bottom 75% of private credit managers.3
Investing alongside high-quality managers with direct origination platforms, control of lending documentation and a deep, experienced bench of talent is fundamental to reaping outsized returns through economic cycles.
Again size matters, as larger lenders lend to larger borrowers who default less and recover more. In addition, these lenders have more diversified loan books, reducing idiosyncratic risk.
4. Don’t Pay for Stuck Money: The Liquidity Arbitrage
Traditionally, investors in middle-market loans receive a premium in exchange for relinquishing liquidity, i.e. investors expect a higher return for the same level of credit risk when they cannot trade their investment freely. This illiquidity premium can be as much as 4% p.a. for a similar level of credit risk.
As an example, at the end of 2023 direct lenders were originating senior secured loans at an average floating rate of 11.5% p.a. significantly more attractive than public bond markets.
Pre-2004, the only way to access middle-market loans and capture the associated illiquidity premium was via a private credit fund that locked your money up for 5 – 7yrs+, but this started to change in 2008 when many non-bank lenders began listing private credit vehicles on the NYSE and Nasdaq4. Raising additional permanent capital from public market investors meant they could take advantage of the lending constraints banks were facing following the Great Financial Crisis (“GFC”) in 2008.
These listed private credit vehicles shared pro rata in the loans originated by the same established direct lending teams who were managing the lock-up funds, enabling private credit managers to scale up faster and capture further market share from the banks. While non-bank lenders have had the ability to go public since the 1980s, the GFC served as a catalyst for the expansion of listed private credit vehicles.
Today there are over 130 private credit vehicles listed on the NYSE and Nasdaq. These include vehicles managed by leading credit managers such as Apollo, Ares, Bain, Barings, Blackstone, Carlyle, Golub, KKR, New Mountain, Oaktree, Owl Rock and Sixth Street.
Listed private credit vehicles now represent over 40% ($350 bn+)5 of private credit AUM.
Investing in these listed credit vehicles is significantly more attractive than investing in their illiquid private credit cousins due to the scale, diversity and liquidity of the listed market and the opportunity to invest in the same high-quality loan portfolios at a price below their fair value.6
5. Always Underwrite a Recession
High-quality managers have historically experienced lower defaults in their loan portfolios and higher recoveries (and therefore lower realised losses) than the average middle-market lender, due to their scale, diversity, focus on senior secured lending and underwriting quality.
Higher recovery rates result in lower realised losses whilst cash flow yields (10%+ p.a.) generated by well diversified loan portfolios have been more than sufficient to absorb losses (<0.6% p.a.).
Large, scaled non-bank lenders can benefit from market selloffs as they are able to acquire existing loan portfolios from stressed smaller managers at discounted prices and originate new loans to high-quality borrowers at attractive all-in floating rate yields.
Navigating through economic cycles requires steadfastly adhering to a disciplined value-oriented approach; capitalising on market dislocation to invest in high-quality private credit vehicles at discounted prices relative to their intrinsic value and crystallising gains when the market is overpaying for the yield they generate.
Investing at a discount to the fair value of the loan portfolio not only serves to mitigate potential downside in a recession but also forms the foundation for generating superior future returns.
By integrating these guiding principles into a disciplined and active investment framework, experienced investors can construct a well-diversified portfolio of leading private credit managers; unlocking a valuable and stable source of diversified return whilst retaining daily liquidity.
Sources:
Earnings Before Interest, Tax and Depreciation.
Source: National Center for Middle Market, Capital IQ, 2022.
Source: SNL Financial and SEC filings, 2009 – 2023.
The New York Stock Exchange (“NYSE”) and the National Association of Securities Dealers Automated Quotations Stock Market (“Nasdaq”) are the two largest stock exchanges in the world with a combined market capitalisation of over $45 trillion (source: Statista 2024).
Source: Bloomberg, 31 Dec 2023.
Listed non-bank lenders are regulated by the Securities & Exchange Commission and are required to produce consistent, transparent and robust quarterly reports including the fair value of their loans. This determines their book value. High quality managers have historically traded at an average of 1x book value.
Editor’s note: the JSE-listed AMC that invests into the Grovepoint Investment Management private credit portfolio trades under the code JSE: GIMLPC. More information is available on the UBS website at this link.
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Absa’s retail businesses took a major knock in 2023 (JSE: ABG)
At group level, earnings went sideways
In a year that should’ve been very strong for banks, Absa could only grow HEPS by 0.6% on an IFRS basis or 1.1% on a normalised basis that adjusts for the Barclays separation. Whichever way you cut it, it’s a disappointing outcome for Absa that is well behind what peers achieved.
If you dig through the financials, you’ll see what the retail banking operations were the pressure point. The Product Solutions Cluster focuses on lending products (like mortgages and vehicle finance) and Everyday Banking is the retail banking solution. They both went significantly in the wrong direction, offsetting the good result achieved in Corporate and Investment Banking:
There was a substantial increase in loans written off for home loans, vehicle finance, card debts and other loans. This drove the decrease in earnings in the retail banking businesses and resulted in group return on equity decreasing from 15.3% in 2022 to 14.4% in 2023.
The Absa share price has underperformed its peers in the past year and pressure will be coming through from major shareholders for an improved performance in 2024.
EPE Capital Partners suffers a drop in NAV per share (JSE: EPE)
The ongoing pressure on the Brait share price doesn’t help
EPE Capital Partners, also called Ethos Capital, has a portfolio of unlisted and listed investments. The TL;DR over the history of this fund is that the investments tend to underperform and significant fees are paid to the managers of the fund, so shareholders end up with a disappointing outcome.
In the results for the six months to December 2023, the unlisted portfolio saw its NAV decline by 3% despite the top investments growing revenue and EBITDA by double digits. On the listed side, Brait’s share price tanked over the period and hence there was even more pressure put on the EPE NAV.
If Brait is valued based on its share price, the NAV of EPE dropped by 15% to R7.31. If Brait is valued based on its own NAV per share, then the NAV of EPE fell by 5% to R9.89. With the share price trading at R4.54 in morning trade, you can see that the market puts a fat discount on EPE regardless of the approach taken with the Brait value.
The portfolio somehow manages to have dual exposure to Nigerian telecoms, with positions in MTN Zakhele Futhi and a private company called Optasia that counts Nigeria as one of its key markets. On top of everything else that Brait etc. has to deal with, EPE has an added layer of pain from the devaluation of the naira.
Due to the substantial discount to the NAV, EPE’s strategy is to monetise the asset base and return capital to shareholders. I wouldn’t hold my breath for that to be a quick process.
Lighthouse prepares for a year of acquisitions (JSE: LTE)
The company believes that conditions are right to acquire retail malls
Lighthouse Properties has released its results for the year ended December 2023. Total distributable earnings per share came out at 1.76 EUR cents per share for the year. As the company has been doing for a while, distributions are being supplemented from retained earnings, with the total distribution for the year at 2.70 EUR cents. A scrip distribution alternative will be offered.
The loan-to-value ratio decreased from 23.84% to 14.04%, with the commentary in the announcement suggesting that it has subsequently moved higher to 27%. They are looking for further acquisitions of shopping malls in 2024, as they believe that yields on quality assets have risen and interest rates have stabilised.
The forecast distribution for 2024 is between 2.40 and 2.50 EUR cents, with some dependence on a distribution from Hammerson to help the company achieve this.
Metair has some wind in its sails again (JSE: MTA)
The unluckiest company on the JSE seems to be turning the corner
Metair really has attracted enough bad luck to last a lifetime. They’ve had an extremely tough time with all the usual South African challenges, along with natural disasters in both South Africa and Turkey! The share price has lost over half its value in the past year as a result. The 23.5% rally in the share price on Monday went a long way towards improving this!
The good news is that 2023 was much better than 2022, with the group profitable again and able to have positive conversations with lenders. It still wasn’t smooth sailing though, with improved conditions in the South African automotive components business (revenue up 45%) on one hand and a 17% decrease in battery sales volumes on the other, driven by the loss of export volumes in Mutlu Akü in Turkey as the business stopped selling to Russia and also lost a key client in the US.
Revenue growth was in the double digits for the year and EBIT margin (excluding hyperinflation and impairments) is between 6.8% and 7.8% vs. 7.6% the year before. It’s just as well that revenue growth was strong and EBIT margins were fairly steady, as net finance costs increased by more than 90%!
Headline earnings per share (HEPS) is between 128 cents and 140 cents for the year. That’s a vast improvement from a headline loss per share of 17 cents in the comparable period.
Digging deeper, the problematic Hesto business managed to agree a commercial price adjustment with key client Ford, allowing Hesto to make a profit in the second half of the year. The first half was so bad that Hesto still reported a full-year loss though. This is accounted for as an Associate and so losses are not included in the 2023 financial results, but Hesto’s performance is a consideration for debt covenant conversations with banks.
Of critical importance is that the revolving credit facility of R525 million due in April 2024 has been extended for an additional year. Lenders remain supportive and management is working on a debt restructure programme.
Before you allow yourself to believe that Metair’s luck has turned completely, I must highlight that Romanian subsidiary Rombat is under investigation by the European Commission for potentially violating EU antitrust rules between 2004 and 2017.
Remgro didn’t grow (JSE: REM)
Heineken Beverages was one of the major challenges – but not the only one
Remgro has released results for the six months to December 2023 and they reflect a substantial drop in HEPS of 35% to 45%. This is before making adjustments.
Now, some of these adjustments make sense, being once-offs related to various operations and corporate actions. I’m less convinced that the negative fair value adjustment on the Natref stock at TotalEnergies South Africa is appropriate to split out, even though that business is held for sale. This also happens to be the largest individual adjustment.
HEPS on an adjusted basis will be between 8% and 15% lower. This means that the core business went the wrong way, with the blame laid at the door of Heineken Beverages (volumes have fallen and so have margins), Community Investment Ventures Holdings (higher finance costs) and a special dividend from FirstRand in the comparative period that didn’t repeat in this period.
Volumes are still negative at RFG Holdings (JSE: RFG)
Pricing increases are taking revenue growth into the green
RFG Holdings has released a trading update for the five months ended February. Revenue was up by 5.1% thanks to price increases of 7.9%. Volumes fell by 5.2%, with the rest of the change explained by mix and forex effects.
The international vs. regional results tell very different stories. Regional revenue was up 6.7%, with price growth of 10.8% and volumes down 5.7%. International revenue was down 3.7%, with pricing 7.8% lower (but there’s a 6.8% forex offset) and volumes down 2.7%. Export volumes were unfortunately impacted by the challenges at the Cape Town port.
Long story short, consumers are under pressure (as we know) and RFG has pushed through pricing increases to make up for it. They are focused on protecting the operating margin rather than chasing sales growth at any cost. This doesn’t seem to be the strategy of everyone in the market, as RFG notes increased competitor promotional activity as a factor in the market i.e. more aggressive pricing.
The pie category has continued to buck the trend in terms of sales volumes, with the ready meals enjoying ongoing support from convenience-oriented consumers who are generally in higher income groups.
Other good news is that load shedding costs (i.e. diesel) have come down significantly.
The outlook for the business is largely positive, with the Easter period expected to support volumes. Either way, the group will continue with the focus on margins, assisted by efficiency gains from recent capital investment programmes. On the exports side, the local crop has been a success in terms of high quality fruit. RFG can only do so much though, as much will depend on the issues at the port being sorted out.
Little Bites:
Director dealings:
CEO Designate Mary Vilakazi has bought shares in FirstRand (JSE: FSR) worth R8.6 million.
A non-executive director of BHP (JSE: BHG) has bought shares in the company worth $57.7k.
Certain directors of Quantum Foods (JSE: QFH) sold shares to cover the tax on recent phantom share rights. This isn’t unusual. What is unusual is that the purchaser (an unnamed independent third-party) entered into an agreement directly with the directors to acquire those shares at R5.30 per share, rather than waiting for them to be sold on market. The total value is R1.7 million. There’s a lot of activity around the Quantum shareholder register at the moment.
Investment holding company Astoria (JSE: ARA) is acquiring shares in Leatt Corporation from RECM Worldwide Opportunities Prescient QI Hedge Fund at a price of $13.67 per Leatt share. The total value is $5.3 million. It will be settled through the issuance of Astoria shares at $0.738 per share and a cash payment of $840,000. This increases Astoria’s holding in Leatt from 2.3% to 8.84%. The pricing of both the Leatt and Astoria shares for the transaction is higher than the current market prices, with the Astoria shares being issued at a price close to NAV (the 30 September 2023 NAV was $0.7443 per share).
Accelerate Property Fund (JSE: APF) is selling off assets to try and reduce debt, but that isn’t always an easy thing to execute. The deal to dispose of Cherry Lane Shopping Centre has fallen through, with terms being negotiated with a potential new purchaser. In some good news at least, the fund has sold three other properties for R43 million, with the proceeds used to reduce debt.
Those of you who are interested in debt structuring will want to know that Grindrod Shipping (JSE: GSH) has announced a new $83 million reducing revolving credit facility. There’s also an optional reducing revolving accordion credit facility of $30 million that could be added on top. No, I’m not making any of these terms up. Yes, debt financing can get complicated. The purpose of the debt is to refinance an existing $114.1 million senior secured term loan facility.
Shaftesbury Capital (JSE: SHC) has completed the acquisition of 25 – 31 James Street, Covent Garden for £75.1 million before costs. This is a good example of the company recycling capital, as it comes after recent disposals to the value of £145 million (achieved at an 8% premium to the balance sheet valuation of the properties).
Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:
Commodity prices and inflation hit African Rainbow Minerals (JSE: ARI)
Earnings fell sharply in the latest period
African Rainbow Minerals released results for the six months to December 2023 and they tell a story of a very painful period for the company. Mining is exceptionally cyclical, with profits rising and falling due to factors completely outside of the control of the company.
Headline earnings per share fell by 43% to R15.07 per share. The interim dividend is down from R14 to R6 per share, so the payout ratio has decreased as the company takes a more cautious approach.
This just shows how important it is for our infrastructure to work consistently. In the comparable period when commodity prices were higher, Transnet was terrible. Goodness knows Transnet is still bad, but at least there wasn’t industrial action in this period. Sadly, commodity prices had already fallen by then, so an improvement in volumes couldn’t offset the loss of revenue due to lower prices on key commodities. The pain was at least mitigated to some extent by the weaker rand and higher average realised export iron ore prices.
On top of this, unit production costs were a struggle because of lower production volumes, higher electricity costs and general inflationary pressures, contributing to the drop in HEPS.
There are a number of operations in the group, with ARM Platinum worth highlighting for a momentous negative swing from headline earnings of R1.33 billion to a headline loss of R282 million.
Capital & Regional grows its dividend (JSE: CRP)
Footfall moved higher and new leases are at higher rates than before
Capital & Regional is a REIT focused on the UK market and specifically community shopping centres. The audit for the year ended December 2023 is still being finalised, but the group has released an update on key metrics in the meantime.
New lettings were achieved at a 6.8% premium to the previous rent, so that’s very good news indeed. Footfall is up 1.5%, yet is still only 86.7% of the levels seen in 2019. Occupancy declined slightly from 94.1% to 93.4%. Adjusted profit was over 23% higher for the year, which is a great outcome.
Like-for-like property valuations increased 2.6% for the year, with the Gyle property up 4.0% as the company paid a good price for it and there have already been strong renewals there.
The Gyle acquisition did impact the balance sheet, with the loan to value up from 40.6% as at December 2022 to 43.6% as at December 2023. The other impact is that the EPRA NTA per share (a measure of net asset value per share) dropped from 103p to 89p because of the additional shares in issue from the equity raise in September that funded the Gyle acquisition.
The total dividend for the year came in 8.6% higher.
Capitec achieved further earnings growth (JSE: CPI)
As we saw at Nedbank, the credit loss ratio improvedrecently
Capitec has released a voluntary trading statement. This is because although earnings are higher, they aren’t more than 20% up (the level that triggers a trading statement). Group HEPS will be between 14% and 16% higher for the year ended February 2024, which is still a solid outcome.
The second half of the financial year was a strong performance, particularly thanks to tighter credit granting criteria that led to an improved credit experience in the second half of the year. Although loan book growth is obviously a core part of Capitec’s strategy, the performance was boosted by double-digit growth in net transaction and commission income based on client transactional activity.
Results are due to be released on 23 April.
This hasn’t been a great period for Caxton (JSE: CAT)
The silver lining is the balance sheet
For the six months to December 2023, revenue at Caxton and CTP Publishers and Printers fell by 3.3% and profit for the period was a down by a rather ugly 30.8%. The drop in HEPS was far less severe, with a 6.2% decrease. Like in the comparable interim period, there’s no dividend per share.
We need to dig deeper to understand the result. For example, revenue would actually have been slightly up were it not for the closure of a subsidiary, so the top line result isn’t as bad as it looks. Having said that, a constrained consumer environment isn’t good news for Caxton’s community newspapers, as media advertising drops in this environment. Notably, advertising revenue in Johannesburg showed a sharp decline.
If you can’t see the decay everywhere in Joburg and the clear trend, then I can’t help you. The money is moving to the coast and at frenetic pace.
The packaging business was therefore the highlight for this period, with turnover growth of 8.1%. Although this sounds strong, margins came under pressure here.
In response to the difficult conditions, Caxton focused on reducing costs. If we exclude the closure of a subsidiary, staff costs were up 3.3% and operating costs increased 4.4%. Although this is below inflation, it looks like the group still struggled to maintain margins even if we exclude the closure.
The cash is the highlight here, up by 59% over 12 months. It’s slightly down since June 2023 (the last year-end) but this is due to seasonality. The current cash balance is already R360 million higher than it was at the end of December 2023. With high interest rates, this is driving much higher net finance income.
Of course, Caxton shouldn’t be making money for shareholders by putting cash on deposit. Investors are looking for far more than that. Caxton is sitting on significant firepower and there are multiple pressures in the market. This does create a recipe for some acquisitive activity, but there’s nothing confirmed yet.
Finally, there’s a dividend at Fortress Real Estate (JSE: FFB)
Sorting out the share class structure led to a significantly smaller holding in NEPI Rockcastle
Fortress has released results for the six months to December 2023 and they reflect a major shift at the company, as the share class structure has been simplified and that is shown in these results. This makes per-share comparability completely useless, as there is now only one class of shares vs. two. The other impact is that the shareholding in NEPI Rockcastle has reduced from 24.2% to 16.2%, as NEPI shares were used to achieve the collapse of two share classes into one.
This means that there is finally a dividend, coming in at 81.44 cents per share for the interim period. For reference, the share price is R16.39. On an SA REIT Best Practice disclosure basis, the NAV per share is R16.24 but as an eagle-eyed reader pointed out to me, that includes the previous FFB shares in the calculation. The NAV today is quite a lot higher, so there is a discount to NAV that is more in line with what we usually see on the market. Another important consideration is that the dividend is taxed as a dividend rather than as income, as Fortress is not a REIT.
If we dig into the portfolio itself, the good news is that net operating income grew by 9.2% in South Africa and 14.3% in the logistics portfolio in Central and Eastern Europe. The loan-to-value ratio is 34.2%.
Note: the Fortress sector has been updated after engagement with a reader who picked up the NAV issue
There’s a bidding war underway for MC Mining (JSE: MCZ)
This is when things can get exciting
The independent board of MC Mining must be feeling rather smug right now, having advised shareholders to not accept the offer of A$0.16 per share from Goldway Capital Investment. Out of nowhere, a competing bid has come in from Vulcan Resources (which owns the largest steelmaking coking coal mine in Africa) for between A$0.17 and A$0.20 per share.
This offer range is subject to a due diligence, but at least we know that the range is higher than the Goldway offer. At this point the independent board obviously cannot give a view on the Vulcan offer as nothing binding has been received yet.
This is usually where things can get exciting for shareholders. The ball is now in Goldway’s court to consider increasing its offer!
Mondi and DS Smith are proposing a merger (JSE: MNP)
Mondi shareholders would own 54% of the enlarged group
Difficult markets frequently lead to a consolidation strategy in which major players look to join forces to become more competitive. This is the route that Mondi looks to be taking, with a proposal to acquire DS Smith in exchange for shares to be issued by Mondi. The net result would be that existing Mondi shareholders would own 54% of the enlarged group and DS Smith shareholders would have 46%.
The groups have of course identified a number of synergies, like the combined geographic footprint and the strength in the value chain for products like containerboard. The groups will need to publish an estimate of the synergies that the merger can realise, so I can guarantee that there are some very highly paid people currently running around trying to figure that out.
I must also tell you that most mergers fail hopelessly to deliver on the promised synergies, so be sensible and apply a significant haircut to whatever number the companies put forward. Spreadsheets are easy; real life is hard.
Mondi has until 4 April 2024 to either announce a firm intention to make an offer for DS Smith or to announce that it does not intend to make an offer. The UK Takeover Code doesn’t allow things to hang in the air forever.
Mpact moved forward in a very tough environment (JSE: MPT)
The group has focused on margins and working capital management
Mpact has released results for the year ended December 2023. Revenue increased by 3.6%, despite sales volumes being 10.7% lower. This tells you that pricing increases saved the day, which also benefits margins. This led to a record result for cash generated from operations of R2 billion, which is literally double the 2022 number.
The paper business grew revenue by 3.3%, with an 11.2% reduction in volumes due to subdued demand and a decrease in fruit exports because of the weather. Mpact helped manage its working capital by choosing downtime of around 16% of total capacity at Felixton and Mkhondo Mills. This is to avoid being in an overstocked situation. The paper business grew underlying operating profit from R1.1 billion to R1.2 billion.
The plastics business grew revenue by 5.9%, with sales volumes down 3.8%. Underlying operating profit moved in the wrong direction unfortunately, from R198 million down to R189 million.
Due to higher average net debt and interest rates, net finance costs increased from R183.8 million to R284 million. Ned debt at the end of the period was R2.67 billion, up from R2.33 billion.
HEPS increased by 8% from total operations and just 3% from continuing operations. It’s very much a game of inches out there, especially with debt on the balance sheet. The total dividend for the year was 4% higher.
Despite this, Mpact believes in the core business in South Africa and continues to invest. Due to the difficulties in 2023, return on capital employed for continuing operations fell from 18.5% to 16.6%. Shareholders will want to see an improvement in this metric.
With the sale of Versapak (the discontinued operation) still in progress, Mpact is looking forward to improved conditions in the fruit sector, with the caveat being that port infrastructure could hurt exports. The containerboard side is less exciting, with an oversupply globally and ongoing risk of being overstocked that Mpact needs to manage. The plastics business looks set to be a mixed bag, with significant improvement in some areas and lower sales in others.
There’s activity on the Quantum Foods shareholder register (JSE: QFH)
Country Bird Holdings swooped in on a few shareholders, including Astral
There was some crazy activity in the Quantum Foods share price during the week. I’m not exaggerating. Take a look at this share price chart:
The activity was driven by the news that Astral Foods sold its entire interest in the company. What we now know is that the buyer is Country Bird Holdings, which acquired a 9.77% stake directly from Astral for R7.25 per share. Quantum had no knowledge of this.
Country Bird Holdings seems to be negotiating with other shareholders as well, with various prices being offered for the shares – all of which are below R9.50 per share based on the disclosure in the Quantum Foods announcement. Where Quantum is aware of discussions, including with other potential buyers, the price being put forward is R7.75.
At this stage, no formal offer or even notification of a potential offer for shares has been received from Country Bird Holdings. Quantum notes that Country Bird holds 15.8% in the company. The other two major shareholders are Aristotle Africa with 34.2% and Braemar Trading at 30.8%.
Little Bites:
Director dealings:
The company secretary of NEPI Rockcastle (JSE: NRP) has sold shares in the company worth R1.75 million.
Two directors of Sasol (JSE: SOL) (one of the group company and one of the South African subsidiary) sold shares worth a collective R888k.
A director of a subsidiary of AVI (JSE: AVI) received shares under the company incentive scheme and sold the entire lot for R818k.
A director of Harmony Gold (JSE: HAR) sold shares worth over R321k.
Things are tough at Pick n Pay (JSE: PIK), with the company releasing an announcement related to the group company giving financial assistance to subsidiaries in relation to the loan facilities with FirstRand and RMB. This isn’t really anything new, but it shows that the negotiations with banks are happening in the background as the banks waive the covenants and debate the terms and conditions with Pick n Pay.
Maria Ramos is retiring as chairman and director at AngloGold Ashanti (JSE: ANG), with existing director Jochen Tilk appointed unanimously by the board as her replacement.
For those interested in Alphamin Resources (JSE: APH), the financial statements for the year ended December 2023 are now available at this link.
The Schwegmann family has increased its interest slightly in Stefanutti Stocks (JSE: SSK). The reason we know this is because of the move through the 10% mark for one of the family members, which triggers an announcement.
Life Healthcare (JSE: LHC) has obtained SARB approval for the special dividend. It will be paid on 8 April.
Tiny little Telemasters (JSE: TLM) released a trading statement that expects a more than 100% improvement in headline earnings per share for the six months ended December 2023. Considering that the comparable period was a headline loss per share of -1.02 cents, this means a swing into the green.
In a good reminder of just how terrible things can get for a company, Afristrat (JSE: ATI) can’t move ahead with a voluntary liquidation application because a creditor liquidation application is awaiting a new date for the matter to be head. It’s over, we just don’t know how yet.
Nestlé has been the largest publicly-held food company in the world, measured by revenue and other metrics, since 2014. It is also the company on the receiving end of the longest continuous boycott in history. What do these two facts tell us about supersized businesses and the consequences of behaving badly?
I don’t have many vices, but one of the few that I’ve had since childhood is a hot cup of Milo on a chilly day. In my opinion, there is no other malted drink that compares in taste (sorry, team Ovaltine). This is a tough thing for me to deal with, because while I love that signature Milo flavour, I’m deeply conflicted about the business practices of its parent company, Nestlé.
You might attempt to solve this moral conundrum for me by suggesting that if I feel so strongly about Nestlé’s practices, then I should avoid buying their products. A reasonable idea, but much harder to execute than you might imagine, considering the vast amount of brands and products that Nestlé owns. Besides, when you look at Nestlé’s market share, you really have to ask yourself: is a boycott even remotely worth it?
In 1974, a document was published that would change public perception of the Nestlé brand forever. Titled “The Baby Killer”, this investigation by journalist Mike Muller was an unflinching exposé of the dodgy tactics used to market baby formula in third-world countries, particularly Africa. While the piece was directed at formula makers in general, there was no escaping the implication that Nestlé was one of the biggest culprits, with the company’s “Mother’s book” (a booklet handed out to new mothers in maternity wards, for free) referenced multiple times in the report.
From a marketing perspective, these tactics seem clever and effective. Scores of Nestlé brand representatives, dressed in nurse’s uniforms, were sent into maternity wards across Africa, Chile, India, Jordan and Jamaica, armed with free samples of baby formula. In the wards, they would speak to new mothers about the benefits of infant formula, a modern Western innovation that, according to them, far surpassed ordinary breastmilk in terms of nutritional value.
Impressed, many of these new mothers would test the formula sample on their babies, unaware that the milk in their own breasts would dry up by the time the sample tin was finished. Now imagine the tin is empty, the baby has become accustomed to the taste of formula, and the mother has no breastmilk left to offer as a substitute. There is no choice but to keep purchasing the product, despite its high cost (in Nigeria at the time, the cost of formula-feeding a 3 month old infant was approximately 30% of the minimum urban wage). Desperate mothers, trying to “stretch” the amount of formula in the tin, would stray from package guidelines, over-diluting their formula by adding as much as three times the amount of water required. Despite the fact that they were feeding their babies regularly, they were filling their tummies with mostly water, which cannot provide the calories or protein that a growing infant needs to thrive.
Water, of course, is the other massively overlooked problem in the formula recipe. Anyone who has ever had the experience of bottle-feeding a baby will know the tedious sterilisation routine required at almost every step of the process. In a West African hospital, a new mother has access to boiled water whenever she asks for it. Back home in her village, access to water is limited, as is the ability to boil it every time a bottle needs to be made. In some instances, baby formula is mixed with water collected from the nearest river. In young infants who were not yet of age to receive vaccinations against these diseases, this led to an uptick in cases of diphtheria, dysentery and typhoid, many of which are fatal.
Over-diluted formula, unsanitised bottles and unclean water led to the sickness, underdevelopment and eventual malnutrition of a huge amount of babies in third-world countries between the 1970s and 80s. Where third-world mothers had a perfectly nutritious, convenient and free resource available to them and their babies in the form of breastmilk, they were deliberately convinced of its inferiority in order to get them to make the commitment to formula.
Bring on the boycott
You can imagine the absolute uproar that this exposé was met with in the first-world. Boycotts were launched against Nestlé products in numerous countries, and an international marketing code (the ‘WHO Code’) was developed to prevent the comparison of manufactured baby milk with breastmilk. In response to the clamour (and perhaps in an effort to save some face), Nestlé introduced its own policy based on the code during the 1980s.
Unsatisfied that these steps were enough to curb irresponsible marketing, a UK-based group called Baby Milk Action has been running a boycott of Nestlé products since 1988. To date, this is the longest-running continuous boycott that the world has ever seen. Baby Milk Action has grown from a movement to a serious organisation with a network of over 348 citizen groups in more than 108 countries, all of whom encourage their members to boycott Nestlé’s products.
Idealistically, you would think that this is a real thorn in the side of Nestlé. Not only is that not the case (certainly not as far as the company’s market share is concerned), but it hasn’t even done that much to get Nestlé to change its ways.
I wish I could tell you that the formula debacle is the only questionable course of action that Nestlé has been involved in, but that’s not the case. From their memorable attempt to argue that water is not a human right (a useful win for a company that sells bottled water) to their decades-long entanglement with child slave labour in the plantations that supply their cacao, this company has proven time and time again where humans fall in their hierarchy of priorities.
While consumers like you and I aim to wield significant influence by voting with our spending, the uncomfortable truth is that the outcome of a boycott often hinges on the brand’s resilience, rather than consumer sentiment. Brands that are easily substituted are more susceptible to boycott pressure. Conversely, companies with substantial market dominance present a formidable challenge for the consumer-led movements that aim to impact their profits.
That’s because the fundamental obstacle for most boycotts lies in the intrinsic value companies imbue in their products, cultivating a perception of indispensability in consumers’ daily lives. In the case of Nestlé, an added complication is that the company is so big and owns so many brands that it takes a lot of legwork for even the most conscientious consumers to identify and avoid all of them.
So if we accept that individual purchasing decisions may not make that big of a difference to Nestlé’s bottom line, does that mean that the company is simply beyond reproach? I don’t think so. In the case of Nestlé, we’ve already seen how the original boycott in the 1980s led to the institution of the international marketing code.
Perhaps what’s needed is less consumer action and more rules that keep these mega-corporates in line.
About the author:
Dominique Olivier is a fine arts graduate who recently learnt what HEPS means.Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.
She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.
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