Thursday, April 3, 2025
Subscribe
Home Blog Page 72

Ghost Bites (AVI | Bowler Metcalf | Cashbuild | Clicks | Jubilee Metals | Karooooo | Woolworths)

The Finance Ghost
-
0
Ghost Bites (AVI | Bowler Metcalf | Cashbuild | Clicks | Jubilee Metals | Karooooo | Woolworths)

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

AVI proves that we keep eating our stress away (JSE: AVI)

The biscuit and snacking business has improved its margins

When it comes to consumer goods, my theory is that the most defensive branded products are the ones that we turn to in a time of need. In other words: the naughty treats. When it’s time to throw calories at our problems, we want the branded stuff with a taste we trust. Private label will do for day-to-day things, but not for that skelm snack just before bed.

In AVI’s trading update for the six months to 31 December 2023, Snackworks reported revenue growth of 9.8%. That’s not the most impressive growth in the group, with that honour going to Entyce Beverages with growth of 16%. The difference is that Entyce couldn’t fully recover cost pressures through pricing, as consumers are price sensitive on drinks. Instead, that business managed to protect margins by increasing volumes and achieving manufacturing efficiencies. Snackworks, in contrast, was able to recover input cost pressures thanks to consumers being less price sensitive, improving margins in the process.

Within the group revenue growth performance of 7.1%, the important laggard was I&J. Fish sales volumes fell 17.1% due to poor catch rates, aggressive competition and inefficiencies at Cape Town’s port. The taxi strike also didn’t help. Combined with the costs of a new B-BBEE structure, I&J’s operating profit is “materially lower” year-on-year.

Thankfully, the rest of the group pulled through and delivered HEPS growth of between 16% and 18%. That’s a strong performance, which is why the share price was trading 6% higher in late afternoon trade.

Bowler Metcalf: hold on to your hats (JSE: BCF)

The packaging and plastics company has delivered a big jump in earnings

Bowler Metcalf has a black hat as its corporate logo and possibly the worst website on the JSE. The share price has been volatile and isn’t the most liquid thing around either, but there’s little doubt that the market will appreciate the latest trading statement.

Thanks to higher sales in the packaging segment and resultant benefits of economies of scale, HEPS for the six months to 31 December 2023 is expected to be between 68.8 cents and 73.3 cents. That’s an increase of between 42.1% and 61.9%!

There’s very little growth happening at Cashbuild (JSE: CSB)

But at least the second quarter was better than the first quarter

Cashbuild released an operational update dealing with the second quarter of the year, which ended on 24 December 2023. This also gives us sales data for the first half of the year.

The second quarter was certainly a lot better than the first quarter, coming in at 5% growth in revenue. Like-for-like revenue growth was 3% and new stores contributed 2%. When combined with the first quarter to give the half-year result, we find growth of just 2%.

Selling price inflation was 3.2% as at the end of December. Transaction volumes were down 1% in existing stores over the period.

P&L Hardware is still going backwards, with a drop in revenue of 5% in the second quarter.

A strong retail performance at Clicks (JSE: CLS)

A drop in wholesale turnover blunted the overall turnover growth – but still a good set of numbers

The health and beauty market in South Africa seems to never stop growing. Attacq gave us a pretty good clue in the update on Monday and Clicks confirmed it at a much more macro level on Tuesday by releasing a trading update for the 20 weeks to 14 January 2024.

Retail turnover is up 11.8%, with Clicks having achieved its highest ever daily sales on Friday 22 December. People were clearly getting those headache pills ready in anticipation of a big Christmas weekend! Selling price inflation was 7.5% and sales in comparable stores increased by 8.4%, so Clicks achieved volume growth.

Clicks achieved market share gains across all core product categories in the first quarter of the financial year, which is genuinely impressive.

Moving on from Clicks retail, recently acquired chain Sorbet grew franchise and corporate sales by 12.3%. Franchise sales aren’t reported as part of Clicks’ sales, but the company earns royalties etc. on them.

The wholesale business didn’t do so well, with UPD’s total managed turnover declining by 6.3%. Wholesale turnover was down 0.8% due to a systems transition at UPD’s main distribution centre. Many a consumer goods business has been impacted by changes in systems and Clicks is no exception. As systems stabilised, wholesale turnover improved significantly, coming in at 6.9% for the six weeks to 14 January. This was hopefully just a bump in the road. It’s also worth noting that UPD has been strategically letting go of lower margin clients.

Unsurprisingly, the market gave this announcement a positive reaction.

Record quarterly chrome production at Jubilee (JSE: JBL)

The group is on track to deliver production guidance for FY24

Jubilee Metals released a production update for the second quarter of the 2024 financial year. This quarter covers the three months to the end of December. The good news is that FY24 production guidance has been affirmed thanks to a strong quarter.

Chrome production increased by 13.2% quarter-on-quarter, setting a new quarterly record in the process. PGM production was maintained at very similar levels to the first quarter, with no third-party production in the period. Copper production at Roan fell vs. the first quarter but the upgrade project is going to drive a strong second half of the year. It’s a pity that a delay at the Roan project has been experienced based on difficulties in sourcing certain electrical components.

Karooooo is still growing, but at a slower rate (JSE: KRO)

A deceleration in growth isn’t what the market likes seeing

Karoooooo is the owner of Cartrack (and a couple of other businesses – but that’s the main one). Cartrack is all about signing up new subscribers and increasing the base of recurring revenue. Investors have high expectations for growth, with the share price having been largely range-bound since mid-2022 as the company tries to grow into its valuation.

The good news is that the business is still growing, with Cartrack subscribers up by 14% year-on-year in the third quarter. The bad news is that the rate of growth has slower, with fewer net new subscribers in this quarter than a year ago.

Total revenue is up 16% as reported or 14% on a constant currency basis. Subscription revenue increased by 17% as reported and 14% on a constant currency basis, so there’s your proof that most of the revenue is recurring in nature. Importantly, Cartrack is growing in every region in which it operates.

Cash generated from operations is an important measure for the group and it increased by 55%.

The sooner the pain in Carzuka ends, the better. The failed attempt at entering the used car market lost R28 million this quarter. It lost R15 million in the comparable quarter. They are winding it down, which is why cost of sales was larger than revenue. Stock needs to be cleared.

Karooooo Logistics is telling a far better story, with adjusted EBITDA jumping from R2.6 million to R7.9 million. It’s still small (and particularly tiny vs. adjusted EBITDA of R447 million at Cartrack), but isn’t a drag on group earnings.

Woolworths is treading water (JSE: WHL)

The recovery has suffered a significant wobbly

After a few periods in which the apparel side of the business at Woolworths was starting to tell a better story than Woolworths Food, the organic yoghurts fought back and delivered the best numbers in the group. Sadly, this is less to do with brilliance at Woolworths Food and more to do with a poor result in Fashion Beauty and Home.

The group numbers need to exclude David Jones to be comparable, as that disaster is finally out of the group in this period but was still there in the base. With that adjustment in place, sales increased by 5.4% as reported or 4.4% in constant currency terms for the 26 weeks to 24 December 2023. Woolworths is quick to point out that the base period was strong and that makes the comparison tougher, but the reality is that this wasn’t a good performance.

If there is a silver lining, it’s that sales growth accelerated to 7.2% in the last six weeks of the period. Those Woolworths mince pies are working hard here.

Speaking of the Christmas goodies, Woolworths Food grew turnover by 8.4% overall and 7.2% on a comparable store basis. Underlying product inflation was 9.1%, which means volumes growth was negative i.e. consumers pulled back. This is despite price increases at Woolworths being below headline food inflation, which remains one of my key concerns about the group. The pricing power enjoyed a few years ago doesn’t seem to be present anymore.

I have an overall fear that the South African upper middle class is simply becoming too poor for the Woolworths Food model to show strong growth. Just look around you at the relative explosion of Chinese cars on the road vs. the German models that were everywhere 10 or 15 years ago. The overall level of wealth is dropping.

At least we are still happy to spend over Dezemba, with sales in Woolworths Food up 8.6% in the last six weeks of the period at a time when inflation was up 7.9%. This means positive volume growth!

Space grew 3.3% over the period, so Woolworths is still investing. Online sales were up 46.6%, contributing 5.1% of South African sales.

Moving on to Fashion Beauty and Home, sales for the 26-week period were hit by poor availability of stock. The summer range was delayed at the ports. Turnover grew by a paltry 2.2% and comparable store sales were up just 1.5%. That’s a pretty horrible outcome when price movement was 11.4%, as it means that volumes were sharply negative. The last six weeks of the period weren’t much better, up 3.8%. Trading space was up 0.3% and online sales grew 26.9%, contributing 5.4% of South African sales.

This means that we are nearly at the point where online sales penetration in Woolworths Food will exceed penetration in Fashion Beauty and Home. I firmly believe that Checkers can be thanked for that, with other retailers benefitting from market acceptance.

Woolworths Financial Services grew the book by 4.9%. The annualised impairment rate increased from 5.5% to 6.3%, reflecting the strain on consumers. Importantly, it’s lower than at the end of the previous year.

Moving across the pond, Country Road Group saw sales fall by 5.0% overall and 9.5% in comparable stores. The company had a very strong base to contend with, as Australians in particular emerged from post-Covid lockdowns to dodge spiders and snakes on their way to the shops. Sales growth in the last six weeks moved slightly positive, up 1.3%.

Despite the performance in Australia, trading space increased by 6.6% in this period. Woolworths is clearly looking through the cycle here and investing. It’s also worth noting that online sales increased marginally to 26.8% of total sales, so that gives you an idea of how underdeveloped online shopping still is in South Africa.

With all said and done, HEPS from continuing operations will be down by between 5% and 10%. Including David Jones in the base leads to a HEPS drop of 25% to 35%, but that’s not a fair comparison.

Little Bites:

  • Director dealings:
    • The CEO of RH Bophelo (JSE: RHB) bought shares worth R790k.
    • Acting through Protea Asset Management, Finbond (JSE: FGL) director Sean Riskowitz has bought shares worth R68k.
  • Reinet (JSE: RNI) confirmed that its net asset value (NAV) per share increased by 2.1% between September 2023 and December 2023. The company has achieved a compound annual growth rate (including dividends) of 8.5% since March 2009, measured in euros.
  • Coronation Fund Managers (JSE: CML) announced its total assets under management as at 31 December 2023. The number came in at R629 billion. They never bother to include the comparative number, forcing me to go digging for old SENS announcements. The number as at 31 December 2022 was R602 billion. This means they grew assets under management by 4.5% in the past 12 months.
  • The CEO of Eastern Platinum (JSE: EPS) wrote a letter to shareholders in which he reminded them of the significant expected change in production mix from 2023 to 2026. Chrome production made up most of the mix in 2023, yet PGMs will be 80% of 2024 revenue and the split will then move to 65% – 35% in favour of PGMs in 2025 – 2026. Although PGM prices are under a lot of pressure currently, the hope is obviously that they improve significantly by the time Eastern Platinum is producing a material amount of PGMs. It also helps matters that the whistleblower allegations of related party transactions were found to be unsubstantiated. For the work required to get the PGM operations going, the company has funding from the rights offer completed in May 2023 and an Investec pipeline finance facility.
  • Orion Minerals (JSE: ORN) has acquired important surface rights at its New Okiep Mining Project, clearing the way for more drilling. The company says that this clears up any conflicting land use interests, which previously prevented Orion from accessing the surface area to conduct validation work.
  • In its share buyback programme that started in November 2023, AB InBev (JSE: ANH) has repurchased 0.51% of total shares outstanding. This is an investment of $647 million in its own shares.
  • Since the general authority was given in July 2023, Santova (JSE: SNV) has repurchased 3.1% of its shares for R30.8 million. The average price paid was around R7.50 per share, which is slightly below the current market price.

UFC: The business of bliksem

Dominique Olivier
-
7
UFC: The business of bliksem

They say there’s no better prize than winning in the name of your country. While that’s certainly a sweet sentiment, I’m willing to bet that Dricus du Plessis is equally happy about the reported $1 million that he just won in his fight against Sean Strickland.

The majority of us probably had no exposure to the UFC before we sat on our couches at 05:00 on Sunday morning, bleary-eyed but totally ready to watch two half-clad men beat each other up in the name of national pride. For the sake of transparency, I’ll make no secret of the fact that I knew nothing about the UFC (or MMA as a whole, for that matter) until the swelling chorus of support around Dricus “Stillknocks” du Plessis and his quest for the world championship caught my attention.

With the fight won (well done Dricus!) and my curiosity piqued, I set out on a little Sunday-afternoon research expedition, which then turned into a full-on dive down the rabbit hole that is competitive fighting.

Here’s what I learned:

There’s a market for combat

For as long as human beings have existed, we’ve wanted to fight each other. And practically for as long as we’ve wanted to fight each other, we’ve also enjoyed watching other people fight. Thus, we not only invented things like boxing, wrestling, karate and jiu-jitsu for self defence, but also, to some degree, for showmanship.

In the early 1990s, a man named Art Davie decided that he wanted to monetise this showmanship in a new way. Now, charging an audience a fee to watch a fight was not a new idea by a long shot. But usually when people fought in the ring, fight organisers would do their best to make sure that the opponents were evenly matched in terms of their size and skill. Art Davie reckoned the only way to inject some real excitement into competitive fighting was to turn that tradition on its head.

Art was fascinated by the “Gracies in Action” videos that he had seen. This was a video-series, produced by the Gracie family of Brazil, which featured Gracie jiu-jitsu students defeating martial artists of various disciplines such as karate, kung fu, and kickboxing in unarmed, full-contact matches. With this seed planted in his brain, Art approached director and producer John Milius and jiu-jitsu master Rorian Gracie with the idea to host an eight-man single-elimination tournament called “War of the Worlds”. The competition would showcase martial artists from diverse disciplines engaging in unrestricted combat, with the goal of determining the superior martial art.

In other words: a classically trained boxer could take on a karate master in the ring, with no weight classes separating them. Obviously, there was massive entertainment potential here. Davie spearheaded the business plan, and a group of 28 investors chipped in the startup cash for WOW Promotions, all geared up to turn the tournament into a television sensation under John Milius’ direction. Fast forward to 1993, and WOW Promotions was on the hunt for a TV partner, which they found in Semaphore Entertainment Group (SEG).

Reading through anecdotes of how that first WOW event came together really gives you a taste of how unrestricted the 1990s were. For starters, the event was marketed to both investors and potential audiences as “a real-life version of Street Fighter or Mortal Kombat”. And then there’s the creation of the signature Octagon, which came about because organisers Davie and Gracie were unhappy with the idea of a traditional roped ring.

Claiming that a roped ring would give fighters too many opportunities to “escape” their opponents, they instead suggested such alternatives as 1) a moat full of alligators, 2) a razor-wire barrier, 3) a line of men in togas or 4) an electric fence. While all of these sound like they have spectacular viewing potential, it is perhaps best for all fighters involved that set designer Jason Cusson came up with the much tamer chain-link Octagon, which is the shape still associated with the sport today.

The moer the merrier

This inaugural WOW match – which was retrospectively dubbed UFC 1 – was met with massive amounts of enthusiasm and almost equal amounts of criticism. In 1996, US Senator John McCain was appalled when he saw a tape of an earlier UFC fight. He thought it was abhorrent and decided to lead a campaign to ban the UFC and what he called “human cockfighting.”

McCain went all out, sending letters to the governors of all 50 U.S. states, urging them to hop on the ban(d)wagon. 36 states heard the call and enacted laws banning the “no-holds-barred” action, with New York dropping the ban hammer right before UFC 12, forcing the UFC to pack its bags and relocate to Dothan, Alabama. But still the show went on, airing on DirecTV PPV, even though it was playing to a more intimate crowd compared to the cable pay-per-view giants of the time.

While UFC 1 was promoted under the tagline “There are no rules”, a slew of injuries led to the introduction of new rules after practically every UFC event. In the face of constant criticism, the UFC decided to play nice and teamed up with state athletic commissions, making a few tweaks to its rulebook to keep things classy while holding onto the essence of striking and grappling.

By UFC 12, weight classes were in and fish-hooking (the practice of sticking fingers in an opponent’s mouth or nostrils and pulling outwards) was out. Fast forward to UFC 14, and gloves became a must-have, while kicking someone’s head when they’re down became a must-not. After UFC 15, some limits were put on hair pulling, as well as on strikes to the back of the neck and head, headbutting, small-joint manipulations, and groin strikes.

For the UFC and their TV partner SEG, it was a long and arduous battle to transform from a spectacle to a full-fledged sport, all without losing the interest of a rabid fanbase that wanted nothing more than the no-holds-barred violence they had been promised. After doing the hard yards to get sanctioning, SEG found themselves teetering on the edge of financial ruin.

Then, in 2000, the dynamic trio of Station Casinos bigwigs Frank and Lorenzo Fertitta, along with their business partner Dana White, swooped in with a proposition to buy the UFC. Fast forward a month to January 2001, and voila! The Fertittas sealed the deal, purchasing the UFC for a cool $2 million and giving birth to Zuffa, LLC, the proud parent company overseeing the UFC.

Nowhere to go but up

Fast forward past many, many milestones – including a merger with World Extreme Cagefighting in 2010, a seven-year broadcast deal signed with Fox Sports in 2011, the signing of Ronda Rousey (the first female UFC champion) in 2012, the 2016 sale to WME-IMG for $4.025 billion and the subsequent 2021 buyout of Zuffa by Endeavour – and it looks as though the history of the UFC is as nailbiting as the final round in a championship fight.

On September 12, 2023, Endeavor and WWE decided to join forces. They fused into a brand-new, stock-market-hyped company under the symbol “TKO,” with Endeavor’s CEO, Ari Emanuel, calling the shots. WWE’s shareholders snagged a 49% slice of the action, and Vince McMahon was named executive chairman. The UFC was valued at a whopping $12.1 billion at the time of the merger.

Not bad for a business that was built on bloodlust and tamed by sanctions, wouldn’t you say?

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Bites (Afrimat | Attacq | Brimstone – Sea Harvest | Datatec | Pan African Resources | Reinet | South32)

The Finance Ghost
-
0
Ghost Bites (Afrimat | Attacq | Brimstone – Sea Harvest | Datatec | Pan African Resources | Reinet | South32)

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

Afrimat is much closer to concluding the Lafarge acquisition (JSE: AFT)

These deals take a long time to finalise due to regulatory approvals

Back in June 2023, Afrimat announced that it was acquiring 100% of Lafarge South Africa from Holcim Group. This is a landmark transaction for Afrimat and important in the South African industry context, so various regulatory approvals needed to be obtained as part of finalising the transaction.

A few of these can now be ticked off the list, including the SARB, the Competition Authorities in Botswana and Eswatini and the Minister of Mineral Resources and Energy of South Africa in terms of section 11 of the Mineral and Petroleum Resources Development Act.

If you read that carefully, you would’ve noticed that the South African Competition Commission isn’t on the list of approvals. At this stage, the Commission has referred the transaction to the Competition Tribunal (which rules on larger mergers) and has recommended a conditional approval.

Importantly, the Tribunal doesn’t always follow the recommendation of the Commission. Also, we don’t know yet what the conditions of the approval will be and we’ve seen some pretty wild stuff from this regulator before.

This is the last remaining condition precedent for the deal, so Afrimat will be hoping for a timeous and successful outcome.

Attacq enjoyed strong festive trading (JSE: ATT)

Some of the underlying trends are particularly interesting

Attacq refers to its shopping malls as “retail-experience hubs” – a rather creative name that nobody else really uses. The name isn’t nearly as important as the performance, which in this case looks pretty strong. The company has released turnover and footcount numbers for November and December 2023 vs. the prior year i.e. covering Black Friday and Christmas trading.

At total portfolio level, November was up 6.4% year-on-year and December was up 10%. This means that in relative terms, Black Friday was less exciting this year than Christmas season trading. They make the point that December 2023 vs. November 2023 was a 40.3% increase in turnover, which is much higher than 35.6% last year. This suggests a return to December rather than November shopping.

Importantly, Mall of Africa was the standout performer in December with growth of 12.7% in turnover. In November, turnover was only up 5.2%. Perhaps the trend here is less about overall relative spend for Black Friday vs. Christmas and more about the online penetration of Black Friday vs. Christmas. My sense is that a lot of people look for online bargains for Black Friday, whereas December shopping is all about walking through the malls to buy for loved ones.

At category level, the top performances in December were apparel (up 19.4%) and health and beauty (up 15.4%). Restaurants managed 8.1% and take-out grew 7.4%, so that’s not great news for the likes of Famous Brands. It’s also interesting to note a significant drop in cinema attendance due to lack of movie releases. Perhaps most interestingly, the announcement notes that Game’s four stores in the portfolio grew by 14% year-on-year in December!

Brimstone saves us from the Sea Harvest announcement (JSE: BRT | JSE: SHG)

The Sea Harvest announcement is absolute overkill

Sea Harvest is going to acquire certain subsidiaries from Terrasan. Normally, a public announcement gives the basics of the deal and leaves the mechanics to happen behind closed doors. For some reason, this announcement gives all of the pre-deal restructuring steps in Terrasan in nauseating detail. I was very grateful that Brimstone released a much simpler announcement later in the day.

The impact on Brimstone of this transaction is significant, as it will no longer hold more than 50% in Sea Harvest once the Terrasan transactions are complete. This is because Sea Harvest will issue shares as part of the purchase price.

Long story short (literally, if you saw the Sea Harvest and Brimstone announcements next to each other), Sea Harvest will acquire 100% of the shares and claims in WP Fishing and Saldanha Sales and Marketing (catching, processing and sale of pelagic fish), as well as 63.7% of Aqunion (a vertically integrated abalone business).

The purchase price is around R965 million, of which roughly R365 million will be settled in cash and the rest in Sea Harvest shares. The eventual price may change based on the usual adjustments in these types of deals. There are also potential earnout payments based on 2023 and 2024 performance.

The full financial details will be available in the circular to be released to shareholders, as this is a Category 1 transaction for both Sea Harvest and Brimstone.

Datatec makes a small acquisition (JSE: DTC)

This represents a further push into cloud security services

Datatec announced that its subsidiary Westcon-Comstor has acquired Rebura, a London-based Amazon Web Services (AWS) consulting partner. The cloud industry has many companies that do this kind of thing, often specialising in either AWS or Azure (Microsoft) services – and occasionally both. The announcement makes it sound like Rebura is particularly strong in cloud security.

This is a voluntary announcement, so there’s no information on the price paid for the deal. We also don’t know how big Rebura is, so all we can really take from this is the strategic thinking at Datatec rather than the ability to assess the financial impact of the deal.

The price (whatever it may be) will be settled in cash.

Pan African Resources improved production at the right time (JSE: PAN)

The metrics look good for the six months to December 2023

The gold price has been doing some delightful things recently, with Pan African Resources noting a 13.7% year-on-year increase in the dollar gold price for the six months to December 2023. At exactly the right time, the group managed to increase gold production by 6.7%.

To add to the happy news, production costs are below guidance. All-in sustaining cost was $1,300/oz, which is below the FY24 guidance of $1,350/oz. Improved production leads to lower costs per ounce, but decent cost control was also required to achieve this number.

At this stage, guidance has been maintained for FY24. The company does acknowledge that it may be revised in due course based on the strong performance in the first half of the financial year. Importantly, annual output is going to increase substantially in FY25 following commissioning of the MTR project.

These projects don’t come cheap, with investment of $23.2 million on the MTR project driving an increase in group net senior debt from $18.9 million to $60.0 million. The group has also been investing heavily in solar PV energy solutions for obvious reasons.

Reinet Fund’s NAV moved higher at the end of 2023 (JSE: RNI)

The release of the fund NAV is always the precursor to the group NAV

Reinet Fund is where Reinet’s investments in Pension Fund Corporation, British American Tobacco and other investments can be found. This is why it represents the biggest part of Reinet’s balance sheet.

The net asset value (NAV) of the group differs from the fund as the group has various assets and liabilities that sit above the fund. Still, the direction of travel of Reinet Fund’s NAV gives a very good idea of where the group NAV is going.

From 30 September 2023 to 31 December 2023, Reinet Fund’s NAV increased by 2.1%. This is measured in euros.

South32 had a mixed quarter – not unusual for a group this size (JSE: S32)

Some of the production issues have affected guidance for FY24

South32 has released a production update for the first half of the financial year. As is always the case in mining groups of this size, there are strong areas (like record half year aluminium production) and weaker areas (a reduction in copper equivalent production guidance). Zinc and nickel also deserve a mention, each up 20% in the second quarter.

This gives you an idea of the diversification in the group and the breadth of production performance:

The group has been extremely focused on cost control and it shows, with several commodities enjoyed updated guidance that reflects operating unit costs either in line with or below original guidance. Of course, there are exceptions where costs have jumped due to production challenges.

Generally, the prices achieved for commodities in the six months to December 2023 were down year-on-year as demand moderated.

South32 invested $188 million of growth capital expenditure in the first half of the year to make progress on the Taylor zinc-lead-silver and Clark battery-grade manganese deposits. There are also various other exploration initiatives underway across the world.

Little Bites:

  • Director dealings:
    • An independent non-executive director of Sibanye-Stillwater (JSE: SSW) has sold shares worth $12.8k. The sale is denominated in dollars because the sale was actually of American Depository Receipts (or ADRs), which reference the local shares. For the purposes of director dealings, it’s like any other share disposal.
  • With the mandatory offer to shareholders of Brikor (JSE: BIK) having been concluded, Nikkel Trading has increased its stake from 68.01% to 84.20% in the company. With such a small float (the percentage held by public shareholders), there probably won’t be any liquidity in this stock.
  • The shareholders of Mantengu Mining (JSE: MTU) gave resounding support to the resolutions required for the specific issue of shares and warrants to GEM Global Yield as part of a R500 million facility to be made available to Mantengu.

Ghost Bites (Ascendis | Fortress | Novus)

The Finance Ghost
-
0
Ghost Bites (Ascendis | Fortress | Novus)

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

The Ascendis story takes another turn (JSE: ASC)

The latest SENS announcement raises more questions than answers

It seems as though Ascendis is now taking a piecemeal approach with its communications around the various allegations being thrown at the company on social media – and specifically Twitter/X, which is where all the action is when it comes to markets.

The first announcement this week was an acknowledgement that the circular is missing information and the meeting needs to be postponed. There’s no excuse for not disclosing this stuff properly, particularly in such a highly regulated environment. All this has done is put more steam behind the allegations.

The second announcement is a lot weirder, with the independent board stating that the presentation doing the rounds on social media isn’t a company document, has never been presented to the board and hasn’t been sanctioned by the board either. To add to the fun, the announcement also claims that the presentation has numerous factual inaccuracies.

Now, this is where things get really tricky for me.

Carl Neethling is the CEO of Ascendis, but has also spearheaded the proposed take-private. This puts him in a very tricky position, as he would presumably need to demonstrate that the best possible future for the company is one in which he takes it private with a consortium. For this to be true, there must (1) be no better alternative to going private and (2) the consortium must be the best bidder in town.

A lot of the social media stuff focuses on how the consortium is getting the shares for a bargain, profiting for themselves in the process. Look, I don’t know where some people have been all these years, but that’s how capitalism works. No take-private in history would’ve been completed unless the buyer thinks the price is appealing! Similarly, the sellers must be willing to accept the price, which they would only do in the absence of something better. I must also point out that nobody on social media is highlighting that this is an offer, not a scheme of arrangement. This means that shareholders can elect to retain their shares, provided they are willing to hold unlisted shares.

There are many other relevant questions that will likely add to the regulatory precedent in our market. For example, should the independent expert consider the offer based on the company’s existing reasonable prospects, or the value that the buyers will bring to the deal? In my view, it can only be the former. Ideas are easy and execution is hard.

When it comes to the presentation that is now the subject of a SENS announcement, I must point out that the independent board usually wouldn’t be privy to the documents that the consortium is using to raise funds. Unless I’m terribly mistaken, it has nothing to do with them whatsoever. The waters are muddied here because of Neethling’s position as CEO, which takes us back to the crux of the issue in my opinion: what was for the board and what was for the consortium? Most importantly, how has the conflict of interest been managed?

This story is going to be in the headlines for several months and is going to be absolutely fascinating in terms of how regulations are applied. Stay tuned!

Fortress gets strong approval for the plan to solve the share structure (JSE: FFA | JSE: FFB)

The dual share class structure of Fortress will soon be a thing of the past

If you’ve been following the Fortress story in recent times, you’ll know that the company holds the dubious honour of being the first Real Estate Investment Trust (REIT) to have lost that status on the JSE due to non-compliance with dividend distribution rules. This was caused by the dual-share class structure that effectively left the group hamstrung because the rules for distributions had never contemplated a downturn like we saw in the pandemic.

After attempts to find a solution with shareholders backfired, the company eventually threw in the REIT towel. It was a bit like the Y2K scare going into the year 2000. Nobody was quite sure what would blow up, and then nothing blew up.

Still, Fortress needed to sort it out and the recently proposed scheme has found support among shareholders. It cleverly uses NEPI Rockcastle shares to pay off the Fortress B shareholders, leaving only the Fortress A shares in issue (and a smaller stake in NEPI Rockcastle).

At the meeting to approve the scheme, it was given a resounding approval by both classes of shareholders.

Novus has been busy with share buybacks (JSE: NVS)

And there are many more to come

Since August 2023, Novus has managed to repurchases shares representing around 3% of total issued share capital. This comes to a total investment in its own shares of R45.5 million.

Importantly, the average price paid for share was R4.36 and the current share price is R4.51.

Under the general authority given at the last AGM, Novus can still repurchase another 16.99% of the shares that were in issue on the date of the authority. Of course, this doesn’t mean that the company will make those repurchases. The board must always consider the solvency and liquidity of the company when executing share buybacks, so it is common on the JSE to see buyback authorities from shareholders not being fully utilised.

Little Bites:

  • Director dealings:
    • Invicta Holdings (JSE: IVT) CEO Steven Joffe has turned the wick up on his purchases of shares alongside Dr. Christo Wiese. The two have each bought another R3.68 million worth of shares in the company.
    • A prescribed officer of Spear REIT (JSE: SEA) has sold shares worth R420k.
    • At a time when Kibo Energy (JSE: KBO) is already a source of major jitters for shareholders, the COO has sold shares in the company for R100k. That doesn’t send a great signal when the company is trading at one cent a share – literally the lowest price possible.
  • The group financial director of Sebata Holdings (JSE: SEB) has resigned with immediate effect. The current CEO will take over that role as well.
  • The mandatory offer period has closed for Brikor (JSE: BIK), with the offer having been triggered by Nickel Trading moving through the statutory threshold of 35%. Nikkel holds much more than that in practice, as they triggered the offer through a deal that got them to over 68% of the shares in issue! The TRP has issued a compliance certificate for the mandatory offer.

Ghost Bites (BHP | Kore Potash | Motus | Richemont)

The Finance Ghost
-
0
Ghost Bites (BHP | Kore Potash | Motus | Richemont)

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

BHP takes a knock in metallurgical coal (JSE: BHG)

Production of other commodities is in line with guidance at the halfway mark of the year

If you know anything about mining, you’ll know that it is fraught with production risks and things that can go wrong. Production updates are big news, as the mining house can control production but cannot control commodity prices. In many cases, management is measured based on production rather than anything else.

BHP is halfway through its financial year and is showing a strong first half in copper, iron ore and energy coal. It hasn’t been a good half for metallurgical coal due to a combination of planned maintenance and low starting inventory values. Full year guidance for BMA (the metallurgical coal) asset has been decreased, which means expected unit costs of production also go up. To achieve an appealing cost per unit, production needs to be running at high levels. This is true for any commodity.

Another headache for BHP is a sharp fall in nickel prices, leading to tricky production decisions. They refer to the problem as being a number of structural changes in the nickel industry and a cyclical low in realised pricing. Average realised prices for nickel are down 24% year-on-year for the first six months of the year.

Comparing the BHP share price to other mining giants like Glencore and Anglo American reveals that even when buying the large “diversified” groups, you still need to understand the underlying exposures:

Kore Potash: still awaiting PowerChina’s EPC proposal (JSE: KP2)

In the meantime, the CEO and CFO have both left the company

Doing business in a place like Republic of Congo is no joke. Not only does it take forever to get a proposal to build a mining operation because of all the complexities involved, but there are also notoriously difficult government departments to manage.

You can imagine how delicate the position is when the SENS announcement talks about having a “moral guarantee” from the government to keep supporting the project despite milestones not having been met, as well as the importance of a ceremony that was held at the site and attended by dignitaries.

Moving on from politics, Kore Potash has had its own management challenges. The CEO resigned in October 2023 and the acting CFO in December 2023. The current chairman has assumed the role of CEO and a “non-board CFO” has been appointed as well. The company is trying to save on costs and is avoiding making commitments to new people until the financing proposal for the project has been received from the Summit Consortium.

That funding proposal isn’t going to happen until the Engineering, Procurement and Construction (EPC) proposal is received from PowerChina. These contracts are exceptionally complicated and need to manage the risks for both parties. When you read of major construction companies losing a fortune or even going bankrupt, it’s usually because a specific contract went really badly. This is why PowerChina is investing heavily in getting the contract proposal right, including having boots on the ground for months now to properly assess everything from the design of the facility itself through to service corridors

PowerChina has confirmed that it has received all required information and that internal reports are being finalised. It’s do-or-die for Kore Potash, as I can’t see the project or the company surviving if this contract isn’t finalised and the financing proposal isn’t obtained shortly thereafter.

Motus confirms a substantial drop in HEPS (JSE: MTH)

The market seemed to fully expect this, with the share price in the green for the day

The car business is cyclical. Sales are impacted by all kinds of factors, ranging from interest rates through to inflation. The aftermath of the pandemic was a great time to sell cars because of supply shortages, forcing consumers to really pay up for new vehicles. Of course, distortions like that eventually experience a correction.

This correction has come to Motus, with the market seemingly expecting it based on the share price actually closing higher for the day despite HEPS for the six months to December 2023 falling by between 20% and 30%.

Interesting strategic nuggets include the company acknowledging oversupply of vehicles from the manufacturers, leading to discounts on new vehicles and a negative impact on margins. This is a complete turnaround from the post-pandemic supply shortages.

Despite this, the announcement notes double-digit revenue growth and stable operating profit for the six months to December 2023, so that doesn’t really make sense in the context of the commentary on pricing. The drop in earnings is mostly being attributed to higher financing costs because of working capital tied up on showroom floors and vehicles in the car rental business. Acquisitions made by Motus have also driven debt higher.

They are looking to reduce the rental fleet and unlock working capital savings. This should come through in the second half of the financial year as this is a seasonal business.

Unexpected riches at Richemont (JSE: CFR)

The market got this one totally wrong based on other luxury brands

Richemont is a gigantic company. To see a group this size put a 10% gain on the share price in one day is extraordinary. The sales update completely blew the market away, along with anyone who might have had a short position. Such a position would’ve been pretty logical based on what we’ve seen from other luxury brands like Burberry.

Of course, if the markets were easy, you wouldn’t even be bothering to read this.

For the three months ended December 2023, Richemont managed to grow sales by 8% at constant exchange rates and 4% at reported rates (being euros). The important news is that the company achieved growth across almost all regions, including the Americas where luxury has had a wobbly.

Asia Pacific grew 13% in constant currency. China, Hong Kong and Macau were good for a combined 25% growth. Europe fell by 3% with an overall reduction in tourist spending. The Americas grew by 8%, with Richemont believing that part of this is domestic purchasing by Americans rather than spending abroad (with Europe suffering as a result). It was Japan that really shone though, growing 18% in this quarter despite a whopping 43% growth in the prior year. Middle East & Africa grew 10%, with the UAE and Saudi Arabia as strong contributors.

I’m not surprised that online retail was down 5% in constant currency. It’s a very small component of the group, thankfully. I suspect it will stay that way as I don’t understand why people would buy a timepiece that costs the same as a family car (and sometimes a family home) online! The retail channel grew 11% and the wholesale and royalty channel was up 4%.

As a final comment on online, YOOX NET-A-PORTER (recognised as a discontinued operation) saw sales drop by 11% on a constant currency basis. Richemont notes a “continuing challenging environment” for pure online businesses in this space.

Looking at product categories, the Jewellery Maisons did particularly well with an increase of 12%. Specialist Watchmakers managed 3% and the Other segment dropped 1%. The Jewellery Maisons business contributes over 70% of sales revenue, so the segment that needed to perform is the one that did perform.

If we consider the nine months to December 2023 as a year-to-date view, sales increased 11% at constant rates and by 5% at actual rates.

All eyes will be on LVMH later this month. Where Richemont is genuine luxury (with a number of watchmaking brands that I can’t even pronounce), LVMH is exposed to mass affluent businesses like Sephora cosmetics stores and Hennessy Cognac. I could be way off the mark here, but I don’t think this positive surprise from Richemont is a guarantee that LVMH is going to deliver good numbers.

Little Bites:

  • Director dealings:
    • The company secretary of Trematon Capital Investments (JSE: TMT) sold shares worth R277k.
    • The matchy-matchy buying at Invicta (JSE: IVT) continues, with the CEO Steven Joffe and Dr. Christo Wiese each buying shares worth R202k in the company.
    • The chairman has bought shares in Life Healthcare (JSE: LHC) worth R185k.
    • An executive director of Santova (JSE: SNV) has bought shares worth R56.5k.
    • An associate of the CEO of Mantengu Mining (JSE: MTU) has bought shares worth R35k.
  • There’s a new executive management structure at PPC (JSE: PPC), including two major hires of internationally experienced executives. Although much progress has been made in turning the group around, it shows how much still needs to be done that there’s space for a Chief Strategy Officer and Chief Revenue Officer.
  • Sappi (JSE: SAP) is making some changes to its balance sheet by issuing a notice of early redemption for 5.25% convertible bonds issued by Sappi Southern Africa. Holders of bonds who do not want them to be redeemed would need to convert them into equity instead. The value of the bonds outstanding is well in excess of R1.1 billion.
  • If Kibo Energy (JSE: KBO) had a dollar for every time that the company releases a SENS announcement, by now the share price would be higher than one cent a share. The latest announcement relates to an extraordinary general meeting to amend rights related to shares. If you’re a shareholder in this thing, go check it out.
  • Steve Phiri served as CEO of Merafe (JSE: MRF) and then as a non-executive director some years ago. He has also been the CEO of Royal Bafokeng Platinum. Phiri has now joined the board of Merafe once more as a non-executive director.
  • In the unlikely event that you are a shareholder in Cafca Limited (JSE: CAC), one of the most illiquid stocks on the JSE, you may be interested in their financial results. The short-form announcement gives no details at all, which might explain why nobody ever trades in this thing.
  • Dan Marokane is stepping down from his role as interim CEO of Tongaat Hulett (JSE: TON) to take the reins at Eskom, perhaps the hardest job in the country. He will work with the team until the end of February to assist with the handover to current CFO Rob Aitken who will move into the CEO role.
  • Chrometco (JSE: CMO) has renewed the cautionary announcement linked to “circumstances relating to a material subsidary of the company” – it’s suspended from trading anyway, with caution or otherwise.

Ghost Bites (Grindrod | Kibo Energy | Ninety One | Trustco)

The Finance Ghost
-
0
Ghost Bites (Grindrod | Kibo Energy | Ninety One | Trustco)

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

Grindrod’s investment in the Port of Maputo is telling a great story (JSE: GND)

And with the trajectory of South African infrastructure, that story could easily continue

Grindrod holds an indirect 24.7% stake in the Maputo Port Development company. The exciting news is that volumes handled by the port came in at a record level of 31.2 million tons in 2023, growing more than 16% vs. the previous year.

Of the 31.2 million tons, 25 million were made up of various ores. It’s also worth noting that 61% of volumes were handled by road and 39% by rail, representing a significant increase vs. the previous year in terms of rail use.

We can only dream as South Africa, with our headlines filled with a story about two Transnet coal trains crashing on the coal export line.

Kibo Energy: still full of dreams, but not funding (JSE: KBO)

Trading at just one cent a share, is anything ever going to happen here?

Kibo Energy really needs to catch a break. The company puts a lot of effort into regularly telling its story to the market. The problem is that the story is full of words like “concept stage” and “advanced project development” rather than anything to do with tangible cash flows. To add to this difficulty in convincing anyone to get excited, they make basic errors like getting the percentage shareholding in Mast Energy Developments wrong in the first version of the announcement.

When a company is trading at literally one cent a share, it can mathematically only double in price or go to zero from here. This is why speculative punters love a good penny stock. One piece of good news from Kibo could see ridiculous percentage returns. Of course, you can easily lose everything here.

The announcement highlights a potential joint venture with a multinational food and beverage producer to build and operate a pilot plant to produce bio-coal. If the pilot plant works and financing can be obtained (and those are big “ifs”) then the client would look to transition from fossil coal to bio-coal.

The other major news in the announcement is that conditional preliminary approval has been obtained for development funding for an existing waste-to-energy project. This is subject to due diligence and is from a development banking institution in Southern Africa. Although this is still far from guaranteed, perhaps this could be the catalyst for the share price to move off the one cent mark?

There are a number of other projects in the group, several of which are one step away from something exciting happening. That seems to always be the case though, which is why many punters have run out of patience. The lack of closure around the Proventure payment for the joint venture with Mast Energy Developments has been damaging to the company’s reputation in my opinion.

Ninety One reports a slight uptick in AUM (JSE: N91 | JSE: NY1)

Well, provided you look over three months rather than year-on-year

Ninety One announced its assets under management as at 31 December 2023, coming in at £124.2 billion. Although that is higher than £123.1 billion at the end of September 2023, it’s still well below the level seen a year ago at the end of December 2022 (£132.4 billion).

Remember, assets under management is impacted by two things: client flows and asset prices in the market. The former is more under the control of an asset manager than the latter.

Trustco is working on two deals with Riskowitz Value Fund (JSE: TTO)

A cautionary announcement has been issued

Trustco released a cautionary announcement dealing with two potential transactions with the Riskowitz Value Fund.

The first is a potential equity investment of up to NAD950 million by that fund. Oddly, the company notes that one of the value adding activities that this would unlock is further share buybacks. No, I have no idea why a company would issue shares for cash in order to do more buybacks, unless the issue for cash is at a much higher price (and why would that realistically happen?)

The second potential transaction is for Trustco to increase its stake in Legal Shield Holdings by 11.35%, taking the stake to 91.35%. The seller would be Riskowitz Value Fund, so there are a couple of negotiations underway at the moment.

Little Bites:

  • Director dealings:
    • The CEO of Marshall Monteagle Plc (JSE: MMP) bought R9.8 million worth of shares in an off-market transaction.
    • The controlling family of Acsion (JSE: ACS) has bought more shares, this time worth R22.6k.
  • Although I don’t usually mention asset managers increasing or decreasing their stakes in companies (as they do this all the time), I do think it is relevant that Allan Gray has bought shares in Pick n Pay (JSE: PIK) and taken its stake to 10.1139%. I guess they believe in what Sean Summers is doing!
  • RMB Holdings (JSE: RMH) has obtained approval from the SARB for the special dividend to be paid at the end of January.
  • The soap opera that is the PSV Holdings (JSE: PSV) business rescue continues. DNG keeps saying that it wants to proceed with a formal offer backed by proof of funds. The business rescue practitioners seem to be tired of waiting and want to follow a liquidation process. The liquidation application is set to proceed on 22 January and DNG will oppose that application.
  • And if you think PSV is full of drama, then wait till you look into Afristrat Investment Holdings (JSE: ATI). The company is so bad that business rescue isn’t even an option as there is no reasonable prospect of it being saved. The directors are simply waiting for the outcome of a liquidation application before acting on the conclusions in their assessment of the company.

Ghost Wrap #59 (Merafe | Pick n Pay | Frontier Transport | Tharisa + Northam Platinum)

The Finance Ghost
-
0
Ghost Wrap #59 (Merafe | Pick n Pay | Frontier Transport | Tharisa + Northam Platinum)

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 covered these important stories on the local market:

  • Merafe’s 2023 production numbers are a good reminder of the importance of not just availability of electricity, but also the cost thereof.
  • Pick n Pay has a critically important year ahead and Sean Summers has now appointed his executive team – can they save the share price?
  • Frontier Transport announced a substantial special dividend, rewarding shareholders who dig around on the JSE for cheap shares.
  • Tharisa and Northam Platinum announced recent production numbers, for the quarter and six months ended December 2023 respectively. Tharisa’s share price has been slightly shielded by chrome production in the past year, but both are well down as the PGM market has suffered.

Ghost Bites (Metair | Northam)

The Finance Ghost
-
0
Ghost Bites (Metair | Northam)

Metair (aka the JSE’s unluckiest company) has a new CEO (JSE: MTA)

Paul O’Flaherty is taking the top job

I meant what I said in the headline to this particular bite. I really cannot think of an unluckier company than Metair. If they aren’t dealing with floods in KZN and the impact on customers, they are trying to navigate hyperinflation in Turkey.

The share price is down roughly 40% in the past 12 months. This makes it a rather interesting speculative play, particularly when you look at this chart and realise how important the current level is:

The company has a new sheriff in town, with Paul O’Flaherty moving into the CEO role from 1 February after the resignation of Sjoerd Douwenga for health reasons. O’Flaherty comes with considerable experience in tough situations, having been in top executive roles in the construction and steel industries. He also once worked at Eskom, which might make Metair seem simple.

You might also recognise his name from the role he played in the separation of ABSA Bank from Barclays PLC.

This is a 36-month contract that will bring some stability to management. The bigger question is what it will bring to the share price!

Northam’s production moves sharply higher (JSE: NPH)

Purchases from third parties more than doubled in this period

Northam Platinum released a production update dealing with the six months to December 2023. This represents the first half of the financial year.

Total equivalent refined metal production from own operations was 10.6% higher, mainly due to a 14.9% increase at Booysendal and a handy contribution from Eland with a 51.8% increase. Zondereinde was 0.4% lower.

Equivalent refined metal purchased from third parties more than doubled, up 114.5%. This now represents 16% of total production including purchased material.

The total production metric is 19.9% higher year-on-year, with the company attributing the overall increase to a strategy of mechanisation. Despite this, Northam hasn’t escaped the carnage in the platinum sector, down 37% over the past year.

Little Bites:

  • Director dealings:
    • Two directors of major subsidiaries of Santova (JSE: SNV) exercised share options at significant discounts to the current market price. One director sold all the shares immediately and the other director sold just over 78% of the shares acquired. Finally, a director of the listed company sold shares worth R400k.
    • Acsion (JSE: ACS) is 77% held by the Anastasiadis Family Trust. This clearly isn’t enough for the family, as an associate of the director has bought further shares worth R65k. It’s a small purchase but you need to keep in mind that there isn’t much liquidity in this thing.
  • Mantengu Mining (JSE: MTU) has released the pro-forma effects for the proposed issue of shares and warrants. This is linked to the R500 million facility to be made available to Mantengu by GEM Global Yield. Basically, pro-forma numbers tell you what the financials would look like assuming the deal had already gone ahead. Think of it as a before and after at a specific imaginary date, in this case 28 February 2023. The impact is that the loss per share would’ve been 12 cents instead of 10 cents. This is the combined impact of R10 million in additional administrative expenses (a 2% commitment fee) and the issuance of many shares under the structure.
  • Although creditors have now approved the business rescue plan at Tongaat Hulett (JSE: TON), the company is still technically listed and so updates must be given on the process. The only information in the latest update that is relevant in my opinion is the news that Tongaat is seeking leave to appeal the judgement regarding sugar levies that was handed down in early December 2023. This is important for the broader sugar industry. Critically, the practitioners have reaffirmed their view that the business has a reasonable chance of being rescued – under the future ownership of the Vision consortium, of course.

Boeing, Boeing, gone!

Dominique Olivier
-
8
Boeing, Boeing, gone!

When a restaurant cuts costs to improve profit margins, diners may receive tougher-than-usual steaks. When a business like Boeing cuts costs, the consequences can be far more dire.

I used to think of aerophobia, or fear of flying, as an irrational fear. That was until Boeing started making headlines for all the wrong reasons between 2018 and 2019, and now again in 2024. Perhaps there’s nothing more rational than being afraid that your plane might drop out of the sky – particularly if you’re flying on a 737 Max.

If it’s Boeing, I’m not going

In 2018, a brand-new Boeing 737 Max 8 fell out of the sky shortly after taking off from Soekarno–Hatta International Airport in Jakarta, Indonesia, killing all passengers and crew onboard. While Boeing was very quick to point the finger at Lion Air pilots (who were operating the aircraft at the time), an investigation by Indonesia’s National Transportation Safety Committee attributed the crash to the aircraft’s MCAS system pushing the plane into a dive based on data from a faulty angle-of-attack sensor.

It felt like the ink was barely dry on those headlines before Boeing was in the spotlight again, less than six months later. Another 737 Max 8 – this time operated by Ethiopian Airlines – crashed just 6 minutes after takeoff. There were no survivors. Evidence collected from the crash site indicated that the aircraft was set up to dive, resembling the configuration of the failed Lion Air that had crashed in 2018. Ethiopian Transport Minister Dagmawit Moges made a statement that the crew “meticulously followed the procedures repeatedly issued by the manufacturer but were unable to regain control of the aircraft.”

Despite the evident issues with the 737 Max, the US Federal Aviation Administration (FAA) hesitated to ground the aircraft until after the occurrence of the second crash. By the time the FAA finally issued the grounding order, 51 other regulatory authorities had independently grounded the plane. As of March 18, 2019, all 387 aircraft in service had been grounded.

On November 18, 2020, the FAA officially lifted the 20-month-long grounding, marking the lengthiest suspension in the history of a US airliner. The series of accidents and subsequent grounding inflicted a substantial financial toll on Boeing, resulting in an estimated $20 billion in fines, compensation, and legal expenses, along with additional indirect losses exceeding $60 billion due to the cancellation of 1,200 orders. Commercial flights for the Max resumed in the U.S. in December 2020, and by January 2021, the aircraft had received recertification in Europe and Canada.

Earlier this month, the FAA once again issued a grounding order for the 737 Max (this time for the 737 Max 9) after an Alaska Airlines flight suffered a mid-flight blowout of a plug filling an unused emergency exit. This opened a hole in the side of the aircraft, which led to rapid decompression of the cabin and necessitated an emergency landing. Fortunately no lives were lost in this incident, although passenger retellings of the experience are believably horrifying. Multiple witnesses who were onboard the aircraft at the time describe small loose items such as headrest covers being sucked out of the cabin through the hole, while one anecdote describes a shirt being pulled off a child while his mother held on to him.

A runway to trouble

Once upon a time, The Boeing Company was the first and last name in passenger aeroplanes,
inspiring the popular phrase “If it’s not Boeing, I’m not going” among pilots. Founded in Seattle in 1916 by aviation pioneer William Edward Boeing, the business quickly established a reputation for unquestionable engineering precision and a steadfast commitment to passenger safety. This legacy of trust, reliability and American-built quality stood fast and practically unshakeable for just over a century.

So what went wrong with the 737 Max?

Some would argue that the trouble started in the M&A space. In 1997, Boeing orchestrated a momentous acquisition, assimilating its long-standing competitor McDonnell Douglas in what stood as the nation’s tenth-largest merger at that time. Despite maintaining the Boeing name, the merged entity not only adopted McDonnell Douglas’s brand but also absorbed its cultural and strategic blueprint.

This transformative period unfolded as a clash of corporate cultures, pitting Boeing’s traditionally pioneering engineers against the more financially-focused decision-makers from McDonnell Douglas. Unexpectedly, the smaller company emerged triumphant in shaping the post-merger trajectory. The consequence was a notable departure from Boeing’s historical commitment to groundbreaking engineering, ushering in what critics labelled as a more cut-throat (and cut-cost) culture.

This cultural shift prioritised cost containment and exhibited a preference for enhancing existing models over investing in wholesale innovation. The aftermath saw Boeing veering away from its historical penchant for groundbreaking engineering, reflecting a strategic pivot influenced by McDonnell Douglas’s business philosophy.

Prioritising shareholder value, once a marginal concern, became increasingly paramount. Many employees faced challenges adapting to this shift, perceiving it as a transformation in priorities where investors took precedence over passengers. The original passion for exceptional aircraft gave way to a new focus on affordability.

Competitive pressure

The decades-long rivalry between Boeing and its European competitor Airbus has played a crucial role in fostering innovation and elevating industry benchmarks. This competition has spurred the creation of more fuel-efficient aircraft, advanced safety features, and upgraded passenger experiences, ultimately contributing to the overall improvement of the global aviation sector. Unfortunately, this competition may also have been at the heart of Boeing’s missteps with the 737 Max.

Under pressure to deliver a new aircraft that could compete with Airbus’ A320 Neo, Boeing decided to fast-track the design process by making alterations to their existing 737 design, which had been the core of their fleet since 1968. The 737 Max was fitted with bigger engines, which increased the risk of the aircraft stalling at a certain angle. To counteract this risk, the Manoeuvring Characteristics Augmentation System (MCAS) was built in – the same system that would later send two 737 Max aircraft into uncontrollable nosedives.

In their haste to do whatever they could to keep up with Airbus, Boeing made a series of bad decisions that not only went against the engineering-first ethos that the company was built on, but ultimately led to the deaths of hundreds of people and a reputational freefall that I’m not quite sure they will recover from.

Today’s share price, tomorrow’s problem

There’s a lot that businesses can learn from Boeing’s ongoing saga with the 737 Max, and many questions that we can ask. For starters, would it have made a difference to Boeing’s reputation if they had admitted that there was a problem with the 737 Max and grounded it themselves instead of waiting for a grounding order from the FAA (and therefore allowing a second crash to happen)? And why did they decide to keep making and selling “fixed”’ 737 Max models after the grounding order was lifted, instead of cancelling the entire project and starting something new?

The answer to these questions goes back to the clash in company culture that I highlighted earlier in this article. Before their merger with McDonnell Douglas, Boeing was an engineering business run by engineers. Their belief was that quality came first and profits followed, and for many decades, this was exactly the case. Boeing stayed ahead of its competitors through innovation and adherence to the highest possible standards of safety and reliability. Their stock market performance was a reflection of their stellar reputation in their field.

The story of the 737 Max is a cautionary tale about what happens when share price obsession takes root in a business that has a direct impact on human safety. We can argue all day about the role of the FAA and why adequate oversight was lacking. Yes, oversight and regulation are important when it comes to businesses that impact on our safety. But ultimately, the buck stops with the management team that turns a blind eye to concern and decides that profit and share price performance are more important than diligence.

To highlight this, consider that when Dennis Muilenburg was removed as Boeing’s CEO in 2019, he got $62.2 million in stock and pension awards. To truly put that number in perspective, each of the families of the 346 people who lost their lives in the 737 Max crashes got roughly $1.45 million from Boeing’s victim compensation fund.

And yet, despite everything, the share price gave a stronger reaction to the onset of COVID lockdowns than any of the disasters mentioned above. Even if we can’t put a price on the lives of our loved ones, it seems that the market can (and does).

About the author:

Dominique Olivier is a fine arts graduate who recently learnt what HEPS means. Although she’s really enjoying learning about the markets, she still doesn’t regret studying art instead.

She brings her love of storytelling and trivia to Ghost Mail, with The Finance Ghost adding a sprinkling of investment knowledge to her work.

Dominique is a freelance writer at Wordy Girl Writes and can be reached on LinkedIn here.

Ghost Bites (Frontier Transport | Merafe | Sappi | Schroder European Real Estate | Tongaat)

The Finance Ghost
-
0
Ghost Bites (Frontier Transport | Merafe | Sappi | Schroder European Real Estate | Tongaat)

Frontier Transport makes investors feel special (JSE: FTH)

The market clearly liked this, with a strong rally on the day

You always have to be careful when looking at the share price of illiquid small- and mid-caps. Frontier Transport is better than many others, but I still look at the volume traded along with the price moves, particularly when the stock closes nearly 22% higher on a single day. With volume on the day more than 3x average trading volume according to Moneyweb’s data tools, that suggests this was a proper rally rather than just illiquid distortions in the price.

The catalyst? An announcement by the company of a special dividend of 137.38 cents per share. The share price started the day at R6.07 per share, so that’s a big portion of the share price. Even at R7.40 where it closed, that’s a substantial cash payout as a percentage of the share price. This is what happens when a share trades at such a low earnings multiple!

The dividend is due for payment in February, provided the SARB approval is obtained in time. The SARB needs to approve all special dividends by JSE-listed companies. I can’t think of an example off-hand where the approval wasn’t given, but sometimes it can be delayed.

Merafe confirms the drop in production for 2023 (JSE: MRF)

Production was curtailed due to market conditions and electricity costs in winter

Merafe has announced its attributable ferrochrome production for the fourth quarter and year ended December 2023. I decided that this was best explained with a chart of quarterly production for the past three years:

I’ve made it very easy for you to spot the problematic quarter. Load shedding was so terrible this year and electricity costs were so high during the colder months that the Lion smelter was the only smelter in operation over the three-month peak demand season. Of course if Eskom was actually operating properly, then power availability and pricing would probably be more palatable.

Instead, we have a scenario where full-year production for 2023 was 300kt, well off 384kt in 2022 and 379kt in 2021. The 2021 and 2022 numbers show how reliable production can be when electricity is available at an economically viable cost.

Sappi shuts the Lanaken Mill (JSE: SAP)

The paper market in Europe is in a tough space

Back in October 2023, Sappi announced a consultation process relating to the possible closure of Sappi Lanaken Mill in Belgium. It employed 581 workers and produced coated woodfree paper that was sold into the European paper market.

You’ll notice the use of past tense there. Sadly, production of paper stopped in December 2023 once Sappi had completed and agreed on a social plan for the employees. The closure of the site is expected to be completed during the second quarter of 2024.

Financial information relating to the closure will be provided during the results announcement for the first quarter.

This is part of a broader strategic focus by the company on packaging, speciality papers, pulp and biomaterials. Exposure to the graphic paper segment is being reduced. The European business needs to be more resilient overall, which inevitably means difficult decisions like this one for uncompetitive assets.

Interestingly, production is being transferred to other Sappi facilities with no disruption to customers. This shows that there was just way too much capacity in the European business, leading to inevitable closure of the least competitive sites.

Valuations at Schroder European Real Estate Investment Trust are still moving lower (JSE: SCD)

The yield curve is still hurting European property

Schroder European Real Estate Investment Trust announced the updated independent valuation of its property portfolio as at 31 December 2023. The company does this every quarter.

The direction of travel is downwards, mainly due to the capitalisation rates being applied by the independent valuators. This is just a fancy term for the required rate of return on the properties, a rate which is directly influenced by the yield curve (the government bond rate curve).

When rates are higher, the valuation of the portfolio comes down. This is why property funds have been struggling in recent times. The shape of the curve also matters, as the valuation experts will likely use a longer-dated rate in these valuations.

In terms of valuation vs. the end of September, the direct property portfolio fell 1.8%, the portfolio office assets were down 2.5% and the portfolio industrial assets fell 1.2%. The German retail portfolio was flat, thanks to strong investor demand in that space. The “alternative assets” fell by 4.3%.

The portfolio loan-to-value is 33% based on gross asset value and 24% net of cash. That’s in line with September 2023 numbers. The fund is in good shape overall, with some valuation relief hopefully not too far away if we start to move into an environment of decreasing rates.

The Tongaat business plan has been adopted (JSE: TON)

By the time of the meeting, there was only one proposal left on the table

If you’ve been following the Tongaat-Hulett business rescue process, you’ll know that bidders other than Robert Gumede’s Vision consortium had walked away before the final meeting of creditors to vote on a business rescue plan. In other words, the vote was basically a formality unless creditors voted against having any plan at all, in which case they would lose everything and there would be a social catastrophe.

Thankfully, the plan was approved by roughly 98.5% of creditors. It has therefore been adopted and the plan is final and binding on all affected persons as defined in the legal process.

Little Bites:

  • Director dealings:
    • Argent Industrial (JSE: ART) is quite popular among local small cap enthusiasts, but the CEO isn’t doing the story any favours at all by selling shares worth R4.3 million in his own name and in a trust of which he is a trustee.
    • A divisional executive of Capitec (JSE: CPI) exercised options to acquire 1,555 shares at a strike price of R973.05. He borrowed some money to do it, as the total value is R1.5 million. It sounds like a major show of faith in the financial services group, but you also have to keep in mind that the current market price is over R2,000 per share and so it’s arguably a no-brainer at that strike price. What I did find interesting is that the financing is for a period of 6 years and 6 months, which implies a long-term holding strategy for them.
  • Rex Trueform (JSE: RTO) invested in just under R5 million worth of Texton (JSE: TEX) shares as an underwriter to the recent rights issue.
1...717273...194Page 72 of 194

Focuses on making market news and investment concepts accessible, understandable and fun!

Ghost Mail is free to read

SUBSCRIBE TODAY

Partner with Ghost Mail

CONTACT US

© Ghost Mail

Verified by MonsterInsights