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Unlock the Stock: Harmony Gold

The Finance Ghost
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Unlock the Stock: Harmony Gold

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 25th edition of Unlock the Stock, we welcomed Harmony Gold for the first time to talk to investors about the recent performance and the way forward.

As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:

Ghost Bites (Bidvest | Hyprop | PPC | Southern Sun)

The Finance Ghost
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Ghost Bites (Bidvest | Hyprop | PPC | Southern Sun)

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

Bidvest swallows the brave pill: an Aussie acquisition (JSE: BVT)

The facilities management operations in Australia will be doubled in size

South African corporates don’t have a fantastic track record in Australia. Bidvest is trying to buck that trend, with shareholders able to take some comfort from the fact that the company already has operations in the country. This is a bolt-on acquisition that doubles the size of the Australian operation.

The target is Consolidated Property Services, a private company established in 1977. The company services more than 145 sites across Victoria, New South Wales and South Australia. Many of the customer relationships span in excess of ten years. With a team of around 3,500 people, this is a big business. Another point that Bidvest highlights is that 80% of the current management team worked their way up from the operations.

I can certainly see the appeal here, particularly in creating a larger overall business in Australia. The deal is small in the group context and this is only a voluntary announcement, so we don’t know what the acquisition price is. Bidvest has done many a deal, so hopefully they haven’t overpaid.

Hyprop scales back its payout ratio (JSE: HYP)

Property funds are trying to keep more equity on the balance sheet

If you look at the high level metrics at Hyprop, they really do look good. Retail vacancies are low and trading densities are significantly higher, up 11.8% in SA and 16.9% in Eastern Europe. Foot count is up across both portfolios.

Net operating income is up 9.6%, a pretty decent outcome but one that does also show the inflationary cost pressures in the system. Distributable income per share is up by a solid 18.3%, so this is usually the moment when investors rub their hands together in anticipation of a juicy dividend.

But alas, the dividend per share is only up by 1.9%. The new dividend policy is to pay an interim dividend based on 90% of the distributable income from the South African portfolio, with a final dividend that takes the annual distribution to 75% of distributable income from the local and Eastern European portfolios.

The payout ratio last year worked out to 85.7%. This year, it’s only 73.9%. Instead of going to shareholders, a chunk of cash will be used to strengthen the balance sheet and fund capex.

There’s a further attempt to retain cash, with a dividend reinvestment alternative (DRIP) with a maximum reinvestment amount of R500 million. Hyprop did this successfully in 2022, retaining R500 million on the balance sheet and using that to help reduce the loan-to-value ratio (36.3% in June 2023). This is usually done at a discount to market price to entice shareholders to choose to reinvest their dividends.

The outlook for FY24 is concerning, despite the strength in the Hyprop portfolio. Distributable income per share is expected to drop by between 10% and 15% due to high interest costs. Again, this demonstrates why they are trying to retain equity to keep the debt as low as practically possible.

The announcement came out after the market closed, so keep an eye on Hyprop in the morning.

PPC’s volumes are still dropping in South Africa (JSE: PPC)

The company needs economic growth and investment in infrastructure

I always find it sad to read that PPC’s volumes continue to come under pressure in South Africa. We are a developing country and supposedly one of the most exciting emerging markets in the world, so where is the infrastructure and private sector investment?

For the five months ended August, PPC’s volumes fell by 6% in South Africa and Botswana Cement. Thankfully, selling price increases of 10% took the revenue performance in this segment into the green. Growth in revenue of 5% was matched by growth in EBITDA of 5%, so margins were stable at 11% as the company focused on profitability in this low-growth segment.

Gross debt in this segment is unchanged since March 2023 but cash has increased, so net debt has dropped from R800 million to R648 million.

The company can’t do much about the economy, but it can do a lot about its own strategic execution and focus on profitability. On those metrics, PPC has performed well. It’s also worth highlighting that the Materials business in South Africa and Botswana is now marginally positive at EBITDA level.

The story gets a lot better when you look at the subsidiaries in the rest of Africa, where infrastructure investment seems to be booming.

In Zimbabwe, cement sales volumes increased 42% and the average selling price (US$ parallel rate) was up by 12%. These are obviously strong numbers, with EBITDA margin skyrocketing from 14% to 27%. That’s vastly higher than 11% in South Africa and Botswana. The cash is even making its way to the mothership, with a $3.5 million dividend received in July 2023 and another dividend expected in November. After a repurchase of shares under a previous indigenisation structure, PPC now holds 90% of PPC Zimbabwe and will receive 99.5% of dividends until notional funding has been repaid.

Rwanda is also a great story for volumes, up 13%. The impact of competition is being felt though, with pricing increases of only 6% and growth in EBITDA of 9%, which is revenue growth. Although EBITDA margin contracted from 32% to 29%, Rwanda has the highest EBITDA margin in the group.

In terms of outlook, the focus in South Africa remains on cash generation and profitability in an environment of low demand. In Zimbabwe and Rwanda, the focus is on growth and market share.

If you would like to find out more about PPC, you can refer to the presentation from the RMB Morgan Stanley Off Piste Conference at this link.

Southern Sun gets a boost from events (JSE: SSU)

But you need to look at adjusted HEPS to see it

Southern Sun released the prepared comments from the AGM and a preliminary trading statement for the six months ending September. You have to read the earnings ranges quite carefully.

Before we get to the earnings, we need to talk about the underlying metrics. Occupancy was 55.3% for the five months to August, up from 44.2% in the comparative period. Importantly, it’s only 190 basis points below the 57.2% achieved in 2019.

The big difference between Southern Sun and the likes of City Lodge is that Southern Sun has also enjoyed pricing power. Average room rate is up 13% year-on-year and 26% compared to 2019.

Events like the Netball World Cup in Cape Town and the BRICS summit in Sandton were a significant boost in this period. It’s not all good news though, as some offerings (like the more basic Sun1) haven’t recovered fully. This is another really useful insight for City Lodge, as Southern Sun also isn’t achieving great pricing in that segment of the market.

In general, my view is that leisure and destination hotels stand to benefit from consumers who learnt a hard lesson from Covid and are now ticking off their bucket lists at a much faster rate. The same simply isn’t true for cheaper, more business-focused hotels. Covid has had the opposite lasting effect, with the use of video calling as an accepted alternative to in-person meetings for all but the most important discussions.

As a final bit of context before we look at HEPS, Southern Sun’s recent repurchases have reduced the numbers of shares in issue by 6.7%. That’s obviously very helpful for HEPS.

Against this backdrop, you may find it very surprising that HEPS is down by between 23% and 36%. The trick is that the comparable period included a R313 million after tax payment from Tsogo Sun for the separation agreement, with the gain recognised in HEPS.

To split this out, the group reports adjusted HEPS from continuing operations. This has jumped from just 1.2 cents in the comparable period to between 14.5 cents and 17.4 cents.

Adjusted HEPS for the six months to September 2019 was just 6.9 cents, so this has been a strong recovery.

Little Bites:

  • Director dealings:
    • Stashed away at the bottom of an announcement dealing with vesting of shares to directors, we also find the news of Des de Beer buying another R2.8 million worth of shares in Resilient REIT (JSE: RES)
    • The company secretary of MTN (JSE: MTN) has sold shares worth R1.2 million.
    • A non-executive director of Richemont (JSE: CFR) has bought shares worth R720k.
    • A director of Libstar (JSE: LBR) has bought shares worth nearly R28k.

Ghost Bites (Aspen | Capital Appreciation | Grand Parade | ISA Holdings | Mustek)

The Finance Ghost
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Ghost Bites (Aspen | Capital Appreciation | Grand Parade | ISA Holdings | Mustek)

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

Aspen lands an important manufacturing contract (JSE: APN)

The company is making progress with filling capacity in Gqeberha

If you’ve been following recent news at Aspen, you’ll know that the company is working on filling the manufacturing capacity at the R6 billion plant in Gqeberha. This is obviously very important to that city’s economy, as the Eastern Cape isn’t exactly seen as an economic powerhouse on a good day.

The latest contract sounds like a big one, with Aspen set to manufacture human insulin for Novo Nordisk. The collaboration aims to supply 1 million patients in 2024, ramping up to 4 million patients by 2026.

I like Aspen’s positioning as a gateway to Africa for global pharmaceutical giants. Not only does it reduce the carbon footprint of transporting drugs (something Aspen points out), but it makes our country less vulnerable to supply disruptions for important medicines. Let’s not forget the job creation angle as well, with Aspen deploying 250 people for this project when it commences in 2024.

Good news indeed!

Capital Appreciation’s business is under pressure (JSE: CTA)

Even the technology industry cannot escape the realities of our economy

Capital Appreciation released a “business update” for the six months to September, which is heavy on narrative and light on financial details. Shareholders will have to wait for results to come out on 4 December before getting all the details. In the meantime, investors must read between the lines in this announcement.

The software division isn’t really a problem, with revenue up high single digits excluding the acquisition of Dariel. With that acquisition included, revenue is up by more than a third. Although this is below management’s expectations and profit has been adversely impacted by revenue below plans, it’s still unlikely to be a bad outcome.

The payments division is a different story. The announcement doesn’t give specific revenue guidance but the narrative isn’t encouraging, noting a reluctance by customers to upgrade their terminals and invest in equipment in current economic conditions. Linked to this, customers are interested in leasing rather than buying terminals, which does at least provide annuity income at the expense of short-term profits. My view is always that when management teams are shy to give detailed guidance, it’s usually because the numbers aren’t great.

As a brief comment on GovChat, Capital Appreciation will limit further funding of that business and attributable losses will be materially lower. The Competition Tribunal recently decided in GovChat’s favour, giving it the right to intervene in the Competition Commission’s prosecution of Meta.

The good news is that the balance sheet remains incredibly strong, with R500 million in cash and no debt.

Grand Parade swings into the green (JSE: GPL)

The share price didn’t give much of a reaction, closing 3% higher

For the year ended June 2023, Grand Parade Investments swung from a headline loss per share into a profit.

Compared to a headline loss per share of 3.2 cents last year, the company has reported HEPS of between 2.24 cents and 2.88 cents.

ISA Holdings expects a juicy jump in earnings (JSE: ISA)

A trading statement sent the share price 9.8% higher in late afternoon trade

ISA Holdings has a market cap of roughly R200 million, so this is small even by small cap standards. The technology company is doing well though, releasing an initial trading statement that the market liked.

For the six months to August, HEPS will be at least 20% higher. With wording like “at least” and the fact that this is an “initial” trading statement, the eventual growth could be a lot higher.

Mustek moves the HEPS dial in the right direction (JSE: MST)

The share price closed 8.9% higher on decent volumes by small cap standards

With a market cap of well under R1 billion, Mustek is one of the more interesting members of the small cap universe on the local market. This inevitably means relatively low valuation multiples, with the share price closing at R15.74 based on HEPS for the year ended June of 375 cents per share. The dividend per share is 77 cents, so that’s a P/E multiple of 4.2x and a dividend yield of 4.9%.

Another way to look at it is return on equity of 15% vs. the net asset value per share of R27.24 and closing share price as mentioned of R15.74. This means the effective return on equity (based on what investors are actually paying per share) is roughly 26%. You calculate this by taking 15% of R27.24 (ROE x NAV per share) and then comparing it to the share price.

Whichever method you choose to use, the conclusion is the same: Mustek doesn’t trade at a demanding valuation. This is why HEPS growth of just 5% is enough to give the share price a boost, as expectations aren’t high.

It’s important to split the operational performance from the effect of the balance sheet. Revenue increased by 14% and EBITDA by 12%. A concern is that cash from operations fell by 35%, so that’s a big disconnect from EBITDA. If you dig into the cash flow statement and supporting notes, you’ll see that an increase in debtors is to blame, so that’s not ideal.

The other important point is that financing costs are much higher than before. In fact, the finance cost in FY23 was higher than FY22 and FY21 combined! This is why EBITDA growth of 12% didn’t translate into exciting HEPS growth.

Still, here’s the benefit of trading at low valuation multiples at a time when technology has enjoyed strong demand:

Little Bites:

  • Director dealings:
    • A director and the company secretary of Omnia Holdings (JSE: OMN) collectively sold shares worth R863k.
    • An independent non-executive director of City Lodge Holdings (JSE: CLH) purchased shares worth R150k.
    • An independent non-executive director of STADIO Holdings (JSE: SDO) purchased shares worth R150k.

Ghost Wrap #46 (Libstar | Gemfields | FirstRand | Metair | Growthpoint)

The Finance Ghost
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Ghost Wrap #46 (Libstar | Gemfields | FirstRand | Metair | Growthpoint)

The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.

In this episode of Ghost Wrap, I looked at some of the more interesting stories in a busy few days of news.

  • Libstar is a great reminder of why I’m bearish on SA consumer stocks.
  • Gemfields has reminded the market that the risks extend beyond just the rubies.
  • FirstRand isn’t aiming for heroics in this environment, but the share price is demanding more growth.
  • Metair could well be the unluckiest company on the local market.
  • Growthpoint is a perfect example of how tough things are in the property sector right now.

Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

The Finance Ghost
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Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

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

No dividend at AfroCentric (JSE: ACT)

HEPS has fallen sharply

In the year ended June, AfroCentric could only grew revenue by 2%. That’s not going to cut it, with HEPS down by 34%. The dividend of 34 cents a share last year is just a distant memory as no dividend will be declared for the year ended June 2023.

Although once-off restructuring costs were part of the story here, the lack of revenue growth is the real concern. The pharmaceutical cluster normalised after heightened trading during 2022, which explains the year-on-year move. The medical scheme administration business isn’t exactly a rocketship either, but put in a steady performance with a 2.6% increase in revenue.

The strategic focus will be on bedding down the Sanlam relationship after the group took a 60% controlling stake in AfroCentric in May 2023.

AngloGold sells its stake in Gramalote (JSE: AGL)

Bidders were non-existent, so the joint venture partner is buying it

AngloGold is selling its 50% stake in the Gramalote Project for a total consideration of up to $60 million. The buyer is B2 Gold Corp, which already owns the other half. Both parties wanted to sell Gramalote and couldn’t find any buyers willing to make an acceptable offer, so B2 Gold was basically the only buyer in town for this stake.

AngloGold will receive a payment of $20 million at closing date, with the balance dependent on various project and production milestones at the project. The deal unlocks some cash for AngloGold and allows the group to focus on its core assets.

Fairvest delivers a pre-close update (JSE: FTA | JSE: FTB)

Investors have been brought up to speed on the year ending September 2023

Fairvest has a portfolio with a gross lettable area split of 49.2% retail, 25.8% industrial and 25.0% office. That split would’ve looked good before the pandemic. As we all know though, office property hasn’t been a happy story in the aftermath of Covid. The vacancy rate in that portfolio is 11.5% vs. 4.4% in the retail portfolio and just 1.2% in industrial.

It’s not surprising that recent property disposals have been focused on office properties, although a couple of retail and industrial sales have also been in the mix.

The group level result is vacancies of 5.3%, positive rental reversions of 2.3% and a loan-to-value below 34%. The guided distribution per B share is between 40.5 cents and 42.0 cents. The B shares closed the day at R3.28, so that’s a yield of roughly 12.6% based on guidance.

If you would like to read the full presentation, you’ll find it here>>>

Gemfields completes its third best year for emeralds (JSE: GML)

It’s just a pity that the final auction of higher quality emeralds won’t work out

At the latest auction of commercial quality emeralds, Gemfields’ offering contained a higher than usual mix of lower value grades. Recent emerald production at Kagem has been of lower quality and quantity than usual, which is why the company has withdrawn from the higher quality emeralds auction scheduled for November.

This means that emerald auctions are now finished for Kagem for 2023, with total auction revenues of $90 million. That’s the third best auction year ever for Kagem, slightly below $92.3 million in 2021 and way below the bonanza in 2022 of $149 million.

That tough base in 2022 has put the share price under pressure recently, with investors realising how quickly the price/earnings multiple is going to unwind this year.

Mondi finds a way out of Russia (JSE: MNP)

The Syktyvkar asset has found a buyer

Mondi’s share price closed 2.6% higher after the market received the happy news that the overhang related to the Russian operation may soon be a thing of the past. It’s been a struggle to sell the Syktyvkar asset, but there’s now a deal with Sezar Invest LLC to dispose of the business for RUB 80 billion. That works out to roughly R16 billion.

The very good news is that regulatory conditions have been met, so this deal is ready to close provided the buyer can make the various payments. There are six monthly instalments to be paid, with the first due at the end of September 2023. The asset will transfer after four payments and the final two will be secured by a letter of credit.

Mondi plans to distribute the proceeds to shareholders once all instalments have been made.

The Russian buyers are absolute winners here, picking up the asset for a profit before tax multiple of 1.7x. Who says that (war) crimes don’t pay?

Oceana gives the market a peek at its performance (JSE: OCE)

Management hasn’t given any overall commentary though

Usually, a voluntary trading update gives the market a useful summary from the management team about the group level performance. This isn’t the case at Oceana, where it dives straight into the segmental performance.

In canned fish and fishmeal (Africa), Lucky Star grew volumes by 8% in the 11 months ended 27 August 2023. In the last five months though, volumes fell 5% because of base effects. Concerningly, margins are under pressure as pricing increases weren’t enough to offset inflationary increases in energy, tin can and other costs. The good news is that local canning production volumes increased by 15%, so there’s a lot of inventory to support demand going forward. Now the company just needs to see more demand!

South African fishmeal and fish oil saw a 32% increase in average rand selling prices over the period. Sales volumes were 8% lower and production volumes fell 24%.

Overall, the local operations incurred costs attributable to load shedding of R28 million.

Moving on to the US, they have electricity there but they also had fewer fish. Based on the 21-week season, landings were 5% lower than the prior period. Not only are there fewer fish, but the fish also had lower fat content, so fish oil yields have dropped. Strong operating inventory levels helped mitigate this impact, with sales volumes up 49% for fishmeal and 28% for fish oil. With major supply problems in Peru, a demand-supply imbalance caused fishmeal prices to rise 9% in dollars and fish oil prices to jump by 38%. With the rand being weaker and the Hurricane Ida insurance proceeds having been received, there’s a good outcome here for Oceana.

In the wild caught seafood division, horse mackerel sales volumes were slightly lower for the 11-month period and hake sales volumes fell by 38% due to a reduction in catch rates and days at sea. The impact of high fuel prices won’t help here either. As a mitigating factor, the weak rand supported export pricing.

Looking at the balance sheet, Oceana took the proceeds of R370 million after tax from the sale of the cold storage business and put them towards settling term debt in South Africa of R550 million. Term debt in the US was successfully refinanced.

Capital expenditure jumped from R154 million to R380 million, with investment in vessels and production facilities after fishing rights were renewed for 15 years. R50 million of a committed R115 million has been spent on the canned meat facility in the St Helena Bay region.

Detailed results are due on 27 November.

A new chapter begins for Prosus and Naspers (JSE: PRX | JSE: NPN)

Bob the Empire Builder is on his way out

With the capitalisation issue to undo the ridiculous cross-holding now complete, Prosus no longer holds any Naspers N ordinary shares. With that deal completed, the share buyback programme has now resumed.

That’s not the biggest news that the company released on Monday. No, that honour definitely goes to the “mutual agreement” that will see CEO Bob van Dijk step down as CEO. He will remain as consultant to the group until September 2024, although it’s hard to imagine why based on his track record.

Having been CEO of Naspers since 2014 and of Prosus since it listed in 2019, Bob earned an absolutely eyewatering amount of money while presiding over perhaps the most convoluted corporate structure in South African history.

His successor on an interim basis is Ervin Tu, the Chief Investment Officer at Naspers. Tu is an ex-Goldman Sachs and Softbank dealmaker and is based in San Francisco, so you can be sure that he loves a good revenue multiple when buying businesses.

Will it simply be more of the same for the company? Time will tell.

Volumes under pressure at RFG Holdings (JSE: RFG)

This is example number 593 of consumers cutting back

For the 11 months to the end of August, RFG grew revenue by 10%. Price inflation was 13.5%, so volumes were down. There were also forex movements and mix changes (as well as the acquisition of Today), so the group helps us out by confirming that volumes actually fell by a substantial 7.7%. The good news is that the first half of the year was a decline of 8%, so the second half has improved to a decrease in volumes of 6%.

Canned fruit and vegetables are under particular pressure based on consumer demand. The pie category is doing well thanks to the Today business. Overall, regional revenue is up 11% for the period with huge inflation of 16.4% and volumes down 6%.

In the international segment, revenue grew 6.7% but volumes fell 12.9% as the world normalised after the Greek peach crop failure in 2021. Operational pressures at the Cape Town port are a serious concern, with shipping lines bypassing the port in some cases due to waiting times.

And of course, against this backdrop of lower volumes, there is still load shedding to contend with.

Results for the year ending September will be released on 22 November.

Zeder sells most of Capspan to Agrarius (JSE: ZED)

The pome farming unit isn’t part of the deal

Zeder has been talking about a value unlock for as long as I can remember. The disposal of the 92.98% stake in Capespan is part of that strategy, even though Zeder is hanging onto the pome farming unit and will put in place a deal with Capespan for marketing and distribution of the related crops.

The minority shareholders in Capespan are also selling, so the buyer is getting 100% of Capespan. Speaking of the buyer, you’ve likely never heard of Agrarius Sustainability Engineered, a JSE-listed special purpose investment vehicle with a R10 billion Shariah-compliant note program. Managed by 27four Investment Managers, this is a good example of how the JSE offers various different listing structures.

Zeder’s interest in Capespan was valued at R1.046 billion as at February 2023. The disposal value is only R511 million but Zeder is quick to point out that this is in line with the previously reported value excluding the pome unit that is being retained. Zeder plans to distribute the proceeds to shareholders once the cash is received, with an effective date for the disposal expected to be in January 2024.

Little Bites:

  • Director dealings:
    • Three directors of property fund MAS (JSE: MSP) collectively bought shares worth R3.66 million.
    • The CEO of African Rainbow Minerals (JSE: ARM) bought shares worth R3.1 million.
    • The spouse of a co-founder of Mr Price Group (JSE: MRP) bought shares in the company worth R924k.
    • Brimstone (JSE: BRT) co-founder Fred Robertson bought N ordinary shares in the company worth around R112k.
  • Quilter (JSE: QLT) is making an odd-lot offer. It’s an unusual one, as the threshold for the offer is a holding of 200 shares rather than 100 shares. The company is offering a 5% premium to the market price to be calculated based on the 5-day VWAP until 20 October, but don’t get too excited. There’s another unusual twist in the tale, with the offer only being eligible to shareholders who held fewer than 200 shares on 28 April 2023 and who will still hold those shares on 10 November 2023. Based on how I read this offer, opportunistic plays to buy up 199 shares and lock in some beer money won’t work.
  • The mandatory offer by African Phoenix and concert parties to shareholders in enX Group (JSE: ENX) at a price of R6.41 per share was unlikely to be a showstopper when the current share price is R8.10. Indeed, only holders of 0.27% of the issued shares were happy to accept that price, taking the offerors to a collective holding of 49.07% in the company. It’s a very thinly traded stock, which must be why some people were happy to take the liquidity opportunity and move on.

The Slow Simunye: Are the Benchmarks Finally Becoming One?

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The Slow Simunye: Are the Benchmarks Finally Becoming One?

By Nico Katzke, Head of Portfolio Solutions at Satrix*

This short article describes the coming index harmonisation for the FTSE/JSE SWIX (Shareholder Weighted Index) and ALSI (All Share Index) methodologies in March 2024. We will discuss the what, the why and the when – while stressing that having a harmonised benchmark index matters for the integrity of our asset management industry.

The What …

Harmonising the SWIX and ALSI methodologies to have a single representative benchmark index is not a new topic. In fact, over the past few years there’s been much talk about the need for it, with the JSE initiating multiple public discourses on how to make this a reality. In the past, the differences between the SWIX and ALSI methodologies have been significant, making harmonisation a potentially disruptive exercise.

Following the natural alignment between the indices in the past few years, the time is now right for harmonisation to occur, given that there are only a few, somewhat arbitrary, remaining differences between the SWIX and ALSI indices.

Note that for the remainder, we will refer only to the SWIX and not the Capped SWIX as these are virtually equivalent currently following Naspers’ reduced index weight.

The Why …

While both the SWIX and ALSI index methodologies consider exactly the same constituents, the free floats for some companies differ. Notably, SA companies that moved their primary listings offshore before October 2011 (called grandfathered companies) are included at their full global float for the ALSI weight calculation1. The SWIX was introduced in 2004 to offer an alternative benchmark that considers only the locally available float on STRATE, thereby down-weighting the grandfathered companies. But corporate actions in recent quarters have meant that most of the float differences, notably for CFR (Richemont), BHG (BHP Group), ANH (AB InBev), OML (Old Mutual), HAR (Harmony Gold) and GFI (Gold Fields) to name a few, have converged.

The process of index harmonisation is thus less disruptive today than it would have been in the past. Consider, for example, the companies that had different SWIX and ALSI floats from just a year ago compared to the most recent rebalance in June 2023 (shaded floats in the June 2023 chart mean they are currently aligned):

Source: Satrix. Data: FTSE/JSE – 30 June 2022
Source: Satrix. Data: FTSE/JSE – 30 June 2023

1 Index weights are determined by multiplying shares in issue (SSI) with price and the ALSI or SWIX float factor.

From this, the only meaningful differences currently remaining between the two methodologies are for AGL (Anglo American), INP (Investec Plc) and MNP (Mondi), (with the underweights funding the few remaining grandfathered over-weights):

Source: Satrix. Data: FTSE/JSE – 31 August 2023

The When …

At the March 2024 rebalance, the JSE intends doing away with the ALSI methodology to align the benchmark indices to the SWIX methodology (using companies’ available local float as reflected on STRATE). The new indices will be called All-Share indices, which means all the current SWIX alternatives fall away and the ALSI effectively becomes the SWIX.

Importance

Having a single domestic equity market index is important for several reasons.

  • First, having multiple benchmark indices creates confusion for investors looking to compare the performance of their managers to an investable alternative. Having a single index will make broad performance comparisons simpler, with more transparency in terms of the value added by active differentiation. Ideally, a benchmark choice should not be a strategic decision.
  • Second, various managers have begun to benchmark their funds to peer averages. Given that the past two decades have seen the majority of active funds underperform both the ALSI and SWIX index alternatives, a comparison to active manager peers overstates aggregate performance relative to an investable index alternative. By the end of 2022 more than 20% of assets managed actively were done using the industry median as a stated benchmark (Morningstar). Having a single benchmark index should make peer-relative comparisons harder to motivate, as well as making it easier to know what a relevant and investable market performance would have been.

Conclusion

The performance differences between the SWIX and the ALSI indices have been significant in recent years. We’ve shown in the past that the choice between which index to track is a key strategic decision, with the realised tracking error of the SWIX being as high as the median active manager’s, relative to the ALSI.

Up to the end of June 2023, the one-year return difference between the ALSI and the SWIX was more than 7%, with the difference almost entirely explained by the ALSI’s comparative overweight to one company, Richemont. This meant that active managers with the SWIX as a benchmark would have performed significantly better on a relative basis simply because of one company’s return – an unfortunate function of our index methodology differences.

As the indices have begun to converge following corporate actions in recent years, index harmonisation is now finally achievable with limited disruption. From March 2024, we will finally have a single representative benchmark index for our local equity market. The benefits of this transparency and simplicity cannot be overstated.

*Satrix, a division of Sanlam Investment Management

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

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

Ghost Bites (Gold Fields | OUTsurance | Putprop | York Timber)

The Finance Ghost
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Ghost Bites (Gold Fields | OUTsurance | Putprop | York Timber)

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

Gold Fields gives an update on Salares Nortes (JSE: GFI)

There’s a delay in commencement of production and a decrease in near-term guidance

Gold Fields has announced that the Salares Nortes project commenced construction back in February 2021 and is now 97% complete. I’ve looked at enough classic car projects in my life to know that “97% complete” can mean that the last 3% really isn’t easy. That hopefully won’t be the case here, although there’s a two-month delay in commissioning the mills and filter presses. The original equipment manufacturer (OEM) needs to commission the plant for the warranties to be valid and that’s where the delay has come in.

Steady state production is only expected by 2025, so 2023 and 2024 production will vary based on the ramp-up. The previous guidance was 15,000 – 20,000 gold equivalent ounces for 2023 and and 500,000 gold equivalent ounces for 2024. It looks like 2023 will be 1,000 ounces at best and 2024 will be between 350,000 and 400,000 ounces.

The all-in cost is expected to average $700/oz for the first six years of the mine’s life (2024 – 2029) and $780/oz over the total life of mine, which is out to 2033.

The total project capital estimate has increased by $20 million to $1,040 million due to capitalisation of costs based on the later commencement date for first gold.

Long story short: building mines isn’t straightforward and delays aren’t uncommon.

OUTsurance is a rare SA success story in Australia (JSE: OUT)

When we build from scratch, we seem to have a chance

OUTsurance Group is making sure that shareholders get something out. The ordinary dividend has skyrocketed from 65.5 cents to 134.8 cents. The share price is up 22% this year, providing once more that it’s possible to do well on the local market if you pick the right stocks.

OUTsurance Group owns 89.9% in OUTsurance, 100% in RMI Investment Managers and a portfolio of venture capital investments. Including cash, the group has guided that the non-OUTsurance portfolio is worth between R2.7 billion and R3.1 billion.

Normalised earnings from continuing operations (excluding Hastings which was disposed of in the prior period), increased by a lovely 62.2%. A drop in head office costs from R134 million to R80 million was a major driver here. To get closer to the core operational performance, we can look at the 39.3% growth in the share of earnings from OUTsurance.

Youi in Australia is a major part of this, contributing R1.385 billion of R2.924 billion to OUTsurance’s earnings in this period, way up from a contribution of R413 million last year. Rand depreciation of 8% against the Aussie dollar is only part of the story here, with juicy growth in gross written premium income and an improved claims experience. The cost-to-income ratio dropped and investment income increased. If there was a bingo card for the drivers of insurance earnings, this result would be marking every box.

In OUTsurance’s South African short-term business, gross written premium growth was 8.8%. The claims performance wasn’t positive, with all the usual South African problems ranging from load shedding to crime and of course inflation in repair costs. The cost-to-income ratio increased from 25.3% to 26.1%. That’s still more efficient than the Australian business at 31.6%.

OUTsurance Life achieved gross written premium growth of 17.8% and the Funeral business achieved growth of 49.6% in the same metric. Face-to-face sales were discontinued in June 2023.

The growth story is far from over here. Aside from organic growth in existing markets based on product innovations and partnerships, the company is planning to enter the Republic of Ireland. Let’s hope our pending destruction of the Irish rugby team (fingers crossed) won’t scupper that plan.

Jokes aside, the other major move is the exercise of the option to acquire the remaining 50% of the Youi shares owned by a non-executive director of the group for A$42.5 million. Deloitte & Touche Financial Advisory has opined that the terms of the deal are fair to OUTsurance shareholders, as this is a small related party transaction.

Putprop still trades at a massive discount to NAV (JSE: PPR)

The market wants dividends and the yield is sorely lacking

Putprop has a market cap of less than R150 million. This is absolutely tiny and especially by property standards, with property funds needing to be much larger to justify being listed. With a net asset value of R16.12 and a share price of R3.48, one wonders for how much longer this company will be listed despite going to the effort of a rather pretty annual report with a Monopoly theme.

You’ll be taking a Chance if you build a position here, as getting out of it will be very difficult because of limited liquidity. Most property investors want dividend income and Putprop is light on that, with a total distribution of 11.25 cents per share for the year ended June 2023. The dividend yield of 3.2% makes it difficult to attract investors.

The loan-to-value (LTV) ratio has also spiked from 37.0% to 41.6%, so that’s another cause for concern for investors.

Either the market is wrong or the net asset value is wrong. You decide.

York Timber: higher wood prices didn’t help (JSE: YRK)

You read that correctly

I’ll genuinely never understand the appeal of York Timber. I’ve looked at it a few times before and the argument is always that the biological assets are valuable. Unfortunately, the company hasn’t done a great job historically of turning those trees into cash flows.

The latest update is a trading statement flagging a huge drop in HEPS of at least 90%.

Aside from inflationary pressures on costs that couldn’t be recovered in selling prices, the major issue was reduced harvesting from York’s own plantations that drove an increase in external log purchases. The prices for those logs increased despite a drop in lumber selling prices, so York seems to be getting squeezed in the middle.

The strategy to increase the clear-fell age of the plantations seems to be happening at the wrong time. The bigger question is whether there is ever a right time for York Timber, as there always seems to be something hurting the story. The share is trading at a new 52-week low:

Little Bites:

  • Director dealings:
    • Acting through a trust, Terry Moolman has bought R515k worth of shares in Caxton & CTP Publishers and Printers (JSE: CAT).
    • Directors of Libstar (JSE: LBR) are buying the dip, with three directors buying shares worth a total of nearly R170k.
  • In what is surely a surprise to absolutely nobody, Labat Africa (JSE: LAB) is late with the release of its financial statements. The JSE has fired a warning shot, with a deadline of 30 September.

Ghost Bites (African Rainbow Capital | AfroCentric | FirstRand | Gemfields | Metair | Sibanye-Stillwater)

The Finance Ghost
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Ghost Bites (African Rainbow Capital | AfroCentric | FirstRand | Gemfields | Metair | Sibanye-Stillwater)

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

Is African Rainbow Capital finally making it rain? (JSE: AIL)

Intrinsic net asset value per share has shown decent growth

African Rainbow Capital Investments (commonly referred to as ARC) has been a disappointment for investors, with a history of large management fees at the expense of shareholders. A recent change to the management fee structure has started to address that issue, although there’s no way to claw back the original payments. The management fee for the year ended June 2023 was R98 million vs. R225 million in the prior year.

I still don’t think a 10% performance hurdle is appropriate though. These days, you can get that by just locking the money up in a fixed deposit for a few years! Performance fees are still too high.

A positive step is that the portfolio is more focused than before, with three major disposals and a particular focus on reducing exposure to listed shares. The best way to start closing a discount to intrinsic net asset value (INAV) per share is to own assets that investors can’t get elsewhere. If the assets are simply shares in other listed companies, then what is the point of the intermediary group even existing in the first place?

The top 13 investments now comprise 88% of the portfolio and the unlisted portion of the portfolio is 89%. The largest asset is Rain, contributing 27.6% of the fund’s value. The valuation increased in response to improved EBITDA and the acquisition of spectrum. TymeBank is 12.3% of the fund’s value has now has 7.4 million customers. Tyme Global is reported separately and is 4.8% of fund value.

There have been some substantial investments in portfolio companies, with debt in the ARC Fund increasing by 51% as a result. R664 million was invested in TymeBank and Tyme Global to fund the acquisition of Retail Capital and R883 million was advanced to Kropz Plc (which contributes 11.7% of fund value).

After a performance hurdle was met in the previous year and more shares were issued, NAV per share on an IFRS basis only increased by 13.5% despite the effective share of invested assets increasing by 19.8%.

The INAV per share is R11.41 and the share price is R6.00. That’s a discount of 47.4%.

AfroCentric flags a significant drop in earnings (JSE: ACT)

Once-offs are only partially to blame here

In a trading statement dealing with the year ended June 2023, AfroCentric guided a drop in HEPS of between 30% and 40%. This is based on Private Health Administrators being reflected as a discontinued operation in this period and the restated comparable period.

The company notes various once-off impacts in these earnings, like corporate and restructuring activities. The procurement of hospital surgery consumables has also been closed down, leading to write-downs of inventory and debtors. A normalisation of trading in the pharmaceutical cluster has also impacted profitability.

The good news is that the medical scheme administration cluster has been stable, with growth in private and public schemes during the year.

FirstRand’s cautious approach drives 12% growth in HEPS (JSE: FSR)

Normalised ROE increased to 21.2%

FirstRand is very proud of its credit loss ratio, which is below the through-the-cycle range. Being below the range isn’t necessarily a good thing though, as it suggests that the bank may not be taking enough risk! Being too cautious is almost as bad as being too risky, as a conservative approach can lose out on growth.

Growth in HEPS of 12% is nothing to sneeze at and normalised ROE of 21.2% wipes the floor with other banks. FirstRand has enjoyed structurally higher ROE for as long as I can remember.

Despite the cautious approach, the jump in impairments of 55% is much higher than growth in net interest income of 16%. Non-interest revenue grew 11%. Operating expenses were 12% higher, with a 14% increase in staff costs and a 5% increase in headcount. The cost-to-income ratio improved from 52.5% to 51.8%.

The top performing division (ignoring all the complicated stuff accounted for at the centre) was Wesbank, up 16%.

In terms of outlook, FirstRand expects the credit loss ratio to be marginally above the mid-point of the through-the-cycle range. ROE is expected to remain at the upper end of the 18% – 22% target range.

Where did the sparkly earnings at Gemfields go? (JSE: GML)

If it comes out the ground, it’s volatile

For the six months ended June, Gemfields has reported an ugly drop in adjusted headline earnings per share from 62.6 ZAR cents to 35.1 cents. The “adjusted” point is a reference to fair value losses in Sedibelo Resources, with a substantial write-down of $13.3 million because valuations have dropped for platinum group metals companies. HEPS as reported includes this fair value drop, whereas traditional impairments are usually excluded. That’s why I’m OK with using the adjusted number here.

If we look at the key operating assets, then Kagem’s revenue (emeralds) fell from $85.2 million to $64.6 million and MRM’s revenue (rubies) fell from $95.6 million to $80.4 million. Fabergé, a perennial disappointment, saw revenue drop from $9.5 million to $8.4 million, citing a softer luxury market.

Although not the reason for such a large drop in adjusted HEPS, having 3% more shares in issue on a weighted average basis doesn’t help matters.

This announcement was a trading statement rather than a release of detailed results, which are expected on 22 September.

Metair? Met debt, that’s for sure (JSE: MTA)

EBITDA and HEPS are telling completely different stories

Metair really has had to deal with a number of horrible things, ranging from hyperinflation and earthquakes in Turkey through to floods in KZN. The company just can’t catch a break, yet it is still standing and is profitable.

Unfortunately, they are working very hard so that their bankers can have a better life. EBITDA (earnings before interest and some other things) grew by 63% in the six months to June. HEPS (which is net of interest) fell by 9%. A quick look at the income statement shows you the culprit:

The problem isn’t just the quantum and cost of debt,, although it certainly doesn’t help when group net debt increased from R2.6 billion to R3.2 billion over the past six months. Because certain projects are still ramping up, return on invested capital (ROIC) was only 5.3% in this period vs. 11.7% in the comparable period.

Other than the known issues, it’s concerning that the Ford Ranger project seems to have been plagued with production challenges and higher than expected costs. They hope to recover at least some of these from Ford.

As a final example of the bad luck this company has been dealing with, Russia was an important export customer for the Mutlu battery business in Turkey. Due to sanctions and to preserve its reputation, the company ceased sales to Russia and export volumes fell 32% as a result, with a direct negative impact on hard currency earnings.

Overall, things really need to improve for Metair as the company is already on thin ice with its lenders, as covenants have been breached and needed to be waived. Lenders don’t have infinite patience with these things.

The share price chart for the past 12 months isn’t pretty:

SA Corporate Real Estate’s dividend falls 12.2% (JSE: SAC)

The company tries hard to get you to look at the cadence instead

Financial reporting is generally based on year-on-year movements. Most people actually don’t run their businesses like this, as it tends to make more sense to look at the recent monthly trend than the year-on-year numbers, except in seasonal businesses.

Property group SA Corporate Real Estate doesn’t have a great year-on-year story to tell, with the dividend down 12.2% for the six months to June 2023. Compared to the six months to December 2022, the dividend is up 1.8%. Similarly, net property income is down year-on-year but better than in the six months to December.

Including derivatives, the loan-to-value ratio is 36.3%. That’s an improvement from 37.8% at the end of December 2022.

The net asset value (NAV) per share is R4.17 and the share price is only R1.82, so it is trading at a 56% discount to NAV. The total distribution over the last twelve months is 22.57 cents, putting the group on a trailing yield of 12.4%. If the share price traded at NAV, the yield would be just 5.4%, which is precisely why the market isn’t interested in the NAV.

Sibanye-Stillwater enters a s189 process in the gold business (JSE: SSW)

This specifically relates to the Kloof 4 shaft

Sibanye has a problem in its local gold business. The Kloof 4 shaft has major operational constraints, including “seismicity” (how’s that for a word?) and cooling issues. There have been ongoing losses, even at the better recent gold prices. With a recent incident that caused damage to the shaft infrastructure, the situation has now reached breaking point.

A s189 process is a labour restructuring process i.e. retrenchments. This could affect 2,389 employees and 581 contractor employees. After significant labour issues in the gold business recently, this isn’t going to be easy to manage and isn’t fun for anyone involved.

Little Bites:

  • Director dealings:
    • The big dogs at Blue Label Telecoms (JSE: BLU) might have bought shares recently but other directors and directors of major subsidiaries have been net sellers, so read into that what you will. The latest trades are sales worth nearly R960k by three directors (including a group director).
  • Astoria (JSE: ARA) has renewed the cautionary announcement that has been in place since July 2023, with negotiations for a potential acquisition still ongoing.
  • If you are a shareholder in Tongaat Hulett (JSE: TON), you may want to attend the engagement session with the business rescue practitioners on 26 September. Refer to the SENS announcement for the Teams link.
  • Astral Foods (JSE: ARL) is hosting a pre-close briefing session on 21 September. If you want to attend, refer to the SENS for registration details.

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

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

Another week packed with company results and only a handful of acquisition announcements.

Exchange-Listed Companies

As per Brikor’s announcement last week Nikkel Trading 392 (NT392) acquired from major shareholders an aggregate 64.11% stake in Brikor in two tranches at 17 cents per share, triggering a mandatory offer to minorities. NT392 has offered to acquire the remaining 193,6 million shares (excluding Brikor’s CEO’s c.13% stake) for an aggregate R32,9 million.

Momentum Metropolitan announced in its financial results for 2023 that it had concluded a sale agreement with OUTsurance in terms of which the company will acquire OUTsurance’s stake in RMI Investment Managers. The acquisition will enable Momentum to increase its asset management market participation significantly.

Unlisted Companies

Ascension Private Equity Fund I has acquired a 45% stake in Paul’s Muesli for an undisclosed sum. In addition to being a manufacturer of muesli, granola and cereal bars, Paul’s Muesli sources, imports and supplies a wide range of oats and dried fruit, seeds and nuts to the retail and wholesale breakfast cereal market.

German chemical and ingredients distributor Brenntag is to acquire the operating business of Chemgrit Group, headquarter in Johannesburg. Chemgrit is an independent specialty chemical distributor with a focus on personal care, food and material science. The enlarged Brenntag Specialties business in South Africa will be scaled to other African markets, adding to Brenntag’s current African presence with local entities in Maghreb, Ghana, Nigeria, East Africa, Mauritius and SA. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

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

Following the results of the scrip dividend election, Capital & Regional plc will issue 5,082,996 ordinary shares in the company in lieu of an interim dividend, resulting in a capitalisation of the distributable retained profits in the company of R64,6 million. The shares represent c. 2.3% of the current issue share capital of the company.

Transpaco has concluded an agreement with Manufacturers Investment Company to repurchase 1,100,000 shares for a cash consideration of R30,61 million. The shares represent 3.67% of the issued shares of the company. The shares will be repurchased at R27.83 per Transpaco share, representing a 10.10% discount to the 30-day weighted average traded price as at 1 September 2023.

Argent Industrial has repurchased 310,376 ordinary shares representing 0.55% of the issued share capita of the company for an aggregate R4,93 million. The company is entitled to repurchase a further 10,83 million shares in terms of the general authority granted at the last annual general meeting.

Tsogo Sun has repurchased 138,044 shares in terms of its of its Odd-lot Offer to shareholders. The shares were repurchased at a repurchase price of R13.01 for a total consideration of R1,795,952.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 10,370,000 shares for a total consideration of £44,64 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 1,930,472 shares were acquired at an aggregate cost of A$6,34 million.

Investec Property Fund will trade under its new name Burstone Group from commencement of trade on 20 September 2023.

Following the restructuring of AngloGold Ashanti and the move of its primary listing to the New York Stock Exchange, the company’s secondary inward listings on the JSE and A2X will be effective from the commencement of business on 20 September 2023.

Following the acquisition by Impala Platinum of remaining shares in Royal Bafokeng Platinum (RBPlat) from minority shareholders, RBPlat’s listing on the JSE will terminate on 18 September 2023.

Four companies issued profit warnings this week: Old Mutual, Putprop, Gemfields and AfroCentric.

Five companies issued or withdrew a cautionary notice: Clientèle, Chrometco, Brikor, Tongaat Hulett, Astoria Investments.

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

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