Tuesday, November 19, 2024
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Letter from the Editor: You’ll probably never retire, but that’s OK

The Finance Ghost
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Letter from the Editor: You’ll probably never retire, but that’s OK

I promise that this isn’t designed to depress you. It is, however, designed to make you think. Sometimes, we have to think about things that are sub-ideal.

There was a time in this world when a single income household with 2.4 children could enjoy a perfectly adequate middle-class lifestyle. The kids were in decent schools and if they showed real academic ability, further studies were possible. There was enough money for a family holiday now and then. You get the idea.

Today, there are many dual-income households with crazy working hours, a threat to “rather chop it off” than have a third child and so much stress that mental health has been thrust to the forefront of our existence.

What the hell happened?

Whatever the reasons, people are getting tired of making more people

The United Nations reckons that on 15 November 2022, the world population reached 8 billion people. No, I’m not sure how they can be so precise, but anyway. It took 12 years to get from 7 billion to 8 billion. That same organisation reckons it will take 15 years to get from 8 billion to 9 billion, which means the rate of population growth is slowing significantly.

I wonder why that might be the case? Could it have anything to do with the ridiculous costs of having children and struggling to enjoy a similar standard of living to those a few generations earlier? I found this fascinating chart on the IMF website:

Source: https://www.imf.org/en/Publications/fandd/issues/2020/03/infographic-global-population-trends-picture

There’s obviously a really great humanitarian story underneath all of this, which is that mortality rates have plummeted as we’ve gotten far more advanced at keeping babies alive in even difficult circumstances. That’s a very good thing and it means that mothers don’t need to have more kids than they actually want, just to make allowance for terrible things that can happen. I just don’t think it fully explains the drop in birth rates and what people go through to have kids these days.

How did we get to this stage?

In 1950, the same IMF article that had the above chart tells me that the world had 2.5 billion people. From everything I’ve read and been told by older family members with a naughty look in their eyes, the sixties was a time of boosting the global population, usually at rock concerts. Either way, there are now more than three times the number of people on the planet and that’s in the space of seven decades, which means many people have seen that increase in their lifetimes.

It’s not like we have more space all of a sudden, so this explains why real estate costs have become ridiculous and very few people can have the typical suburban home that their parents enjoyed. Climate change is at the forefront of many conversations, perhaps because the same planet is now trying to support far more humans than ever before.

Despite Elon Musk’s opinion on the matter and certainly his practical approach to solving it, there are probably just too many humans.

What does this have to do with retirement, or lack thereof?

Assuming you went to university and that you plan to retire at 65, you’ve basically got 40 years to earn enough money to fully sustain yourself for 20 years (or more) after retirement.

Welcome to adulting.

During those 40 years, you’re probably going to have kids. That’s going to do things to your expenses that you never believed possible. Statistics aren’t really on your side in terms of divorce rates either, so that’s another potential financial nightmare. This is before we’ve even considered healthcare challenges, or the desperate need to manage your mental health through lifestyle upgrades and experiences, or your cat ripping up your brand-new rug.

You’re in a fight over a finite set of resources on the planet, with an increasing number of humans who need them.

40 years, you say? To make enough money for the next 20 or more? That’s a big ask, especially when it seems like humanity is hell-bent on using Artificial Intelligence to drive even more people into unemployment.

It’s all in the maths

To make this equation work, the retirement industry and many personal finance influencers focus on getting you to drink less coffee, thereby saving more of your income (before fees of course) in your early years and ensuring that you have a bang average 85 years on this world. This is because you’ll have very little spare money in the best years of your life, all so that you can afford Wimpy every Wednesday when you’re too old to remember what proper food tastes like anyway.

If we all knew precisely when we would die, it would be a lot easier to just work out exactly how much money we need and spend all the rest before our kids do. This is unfortunately not possible, even for the most dedicated Diamond members on Vitality.

I believe there’s another way, but you’ll have to buckle up and get ready for a wild ride to get it right.

Retirement is for salaried employees, not entrepreneurs

The biggest problem with the concept of retirement is that it assumes that at the age of 60 or perhaps 65, you suddenly become a useless amoeba who can’t add value to anything or anyone beyond falling asleep at the appropriate time after family lunches. This simply isn’t true.

If you can extend your ability to earn an income, then the maths starts to look very different indeed. Instead of hoping to live off passive income, you’re supplementing it with an active income. If you really get it right, then you’ll be living off the active income entirely for quite some time past the age of 60.

How do you do this? Well, a corporate is going to force you to retire at some point, so you then have to hope that you have a skillset that lends itself to some kind of consulting role. That’s really not easy to get right. I have some bad news for you on how useful many corporate skills are in the world outside of air-conditioned offices with full solar power backup.

When I made the decision to leap from corporate life into the very uncertain world of entrepreneurship, one of the things I imagined is how great it would be one day to perhaps have a business that can earn an income without me being involved all the time. That’s a semi-retirement that literally delivers the best of all worlds, with ongoing income and perhaps most importantly, a sense of purpose and something to keep my brain alive into hopefully much older years.

The lesson here? Learn continuously, keep your skillset relevant and be alert to opportunities to build income away from your salary. Perhaps most importantly, make sure your career is built around something you genuinely enjoy and can see yourself doing for many years. I can tell you for sure that these things are a lot more fun than cutting your coffee intake.

If all else fails, perhaps I’ll just run for president somewhere. Isn’t that what all the octogenarians are doing these days to stay active?

Rucking up the returns: investor insights inspired by rugby coaches

Satrix
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Rucking up the returns: investor insights inspired by rugby coaches

The excitement is building for the 2023 Rugby World Cup (RWC). Kickoff is 8 September in France and, as reigning champions, our nation’s hopes rest on the shoulders of the Springbok squad of 33 for another win. With strategies, tactics and game plans in the news, now is a good time to take a lead from rugby coaching staff in your investment journey.

Siyabulela Nomoyi, Satrix’s* quantitative portfolio manager, says, “We know that winning a rugby world cup relies on a number of factors coming together – the right coaches, right plan, right team, right mindset etc. And growing wealth actually has quite a few similarities.”

He said that investing through exchange-traded funds (ETFs) is an excellent way to start an investment journey. They are low cost, very accessible and easy to manage.

Satrix is the country’s leading provider of ETFs.

Nomoyi says some of the winning aspects of a good RWC campaign could be applied in the world of investing. Here are some rugby roles that you can take on in your own winning strategy:

  1. The Head Coach: Strategy Is Everything
    Remember how the Springboks executed “The Move” in the 2019 Rugby World Cup final? That strategy took them to victory. Just as rugby teams dissect their opponents and forge plans to increase chances of a win, your investments need a clear game plan. To successfully build wealth through investing, you should look at crafting a roadmap that aligns with your long-term goals and risk appetite, much like the Springboks’ tactical masterpiece. This can be done in conjunction with a financial adviser or by doing careful research and using the wealth of online information to help you build the right plan.
  2. The Selector: Diversity Is Key
    Look at the Springbok squad for the 2023 World Cup – a medley of players who all bring something special to the squad. The fast, the strong, the accurate, the leader. Similarly, diversification in investing is a key play. By spreading your investments across various sectors and asset classes, such as local and global equities, bonds and cash, you create a cushion against market fluctuations. This approach reduces the impact of a single loss and could amp up your overall portfolio performance.
  3. The Tactician: The Right Tools Should Be In Place
    The Springboks have constantly come up with new configurations for their bench to keep the on-field momentum going. Last World Cup they ditched the traditional five-three split between forwards and backs for six-two. Now they have been experimenting with seven-one. Just like these tactics keep the Springboks forward momentum consistent, low-cost index funds do the same for your investments. They trim down fees that could otherwise eat into your returns over time, keeping your investment’s efficacy intact.
  4. The Whole 15: Balancing Risk and Safety
    Ever notice how the Springboks choose the right moments to take risks on the rugby field? Your investment journey will thrive on the same balance. Like a rugby team balancing defensive plays and daring attacks, a well-rounded investment portfolio combines both high- and low-risk investments. Index funds, like dependable teammates, replicate established market trends, offering you a sturdy strategy.
  5. The Captain: Weathering Market Storms
    The Springboks’ resilience after their tough loss in their first game of the 2019 tournament – a tough lesson but they bounced back and won. Similarly, when investment markets are turbulent, maintaining your strategy matters. Resisting the urge to make impulsive changes during market downturns will make sure you don’t lock in any losses and you will still be in the market when it starts to perform better again. Staying the course can lead to long-term gains, just like the Springboks’ triumphant comeback.
  6. The Analyst: Learning From Wins and Losses
    In rugby, every game, whether it ends in cheers or tears, holds a nugget of wisdom. It’s the same with investments. Each outcome, good or bad, can teach you valuable lessons. So, as you tune into the Rugby World Cup, consider how the strategies employed by different teams could guide your investment journey.

As Nomoyi points out, “Much like a well-executed rugby game plan, investing strategically can lead to substantial victories in the financial arena.” So, embrace these rugby-infused tactics and watch as your investment game transforms into a winning streak.

*Satrix, a division of Sanlam Investment Management

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, their 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 (Bell Equipment | Brikor | British American Tobacco | Delta Property | Merafe – Glencore | Sanlam | Transaction Capital | Trellidor)

The Finance Ghost
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Ghost Bites (Bell Equipment | Brikor | British American Tobacco | Delta Property | Merafe – Glencore | Sanlam | Transaction Capital | Trellidor)

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

Bell Equipment rings even louder (JSE: BEL)

An updated trading statement confirms an even bigger jump in earnings

Trading statements are funny things. They can be very conservative at times, especially when the language is an increase of “at least” and then a round number, like 20% of 30%. A much tighter trading statement would give a range, removing the chance of a major upside surprise after that.

In the initial trading statement for the six months to June, Bell indicated an increase in HEPS of at least 30%. The updated trading statement is far more exciting than that, with HEPS up by between 61% and 67%.

This implies a range of between 338 cents and 348 cents a share. As I keep saying, this year has been all about industrial companies rather than the retailers, an important lesson about inflationary conditions and the kinds of companies that do well during such a period.

A mandatory offer for Brikor is imminent (JSE: BIK)

Nikkel Trading is on the verge of breaching the 35% ownership threshold

Nikkel Trading currently has a 34.23% stake in Brikor. Nikkel has advised Brikor that it is in the process of acquiring more shares in the company, which will take it above the 35% ownership threshold. This triggers a mandatory offer to remaining shareholders.

The price for the acquisition is expected to be 17 cents a share, so this suggests that the mandatory offer would also be at this level. The share price jumped to 16 cents a share in response.

In a separate announcement, the company noted that the circular regarding the contract mining and coal purchase agreement should be sent out by 30 September.

British American Tobacco exits Russia and Belarus (JSE: BTI)

The price hasn’t been disclosed

Back in March 2022 when all hell literally broke loose in Ukraine, British American Tobacco announced that its ownership of assets in Russia and Belarus wasn’t sustainable. That’s right kids, a tobacco company with a conscience. Perhaps more importantly, international laws were to blame for this decision.

The buyer of the Russian and Belarusian businesses is a consortium led by the management team in Russia. The businesses will thereafter be known as the ITMS Group. Employees in the business will apparently enjoy their current employment terms for at least two years after completion of the deal.

British American Tobacco hasn’t disclosed the selling price for the businesses. This isn’t exactly an immaterial region, accounting for 2.7% of group revenue and 2.5% of group operating profit in the last financial year. The only other financial information we have is that the company remains confident of delivering the full year guidance that was given during the interim reporting cycle back in July.

Delta Property continues to fight for survival (JSE: DLT)

When debt was on a month-to-month basis, you know it was bad

Right at the top of the list of highlights for Delta Property Fund for the six months ended August, we find the news that month-to-month debt facilities with Nedbank and Investec were refinanced for 12 months and 24 months respectively. That surely takes a bit of the edge off at Delta, with the company working hard to steady the ship. The facilities come to R3.1 billion in total.

Other good news includes the conclusion of a revolving credit facility of R37.5 million with Nedbank and a 50 basis points reduction in the cost of debt with that bank.

The improved debt outlook wasn’t just driven by good rental collections. Delta has signed agreements to sell 5 assets in the next six months for a total of R123.8 million, with agreements in place to sell another R1.5 billion worth of properties within the next year.

There are two major problems that Delta is trying to navigate. The first goes to the very core of the business, which is that the portfolio is primarily B-grade office space with government as the tenant. Negotiating with our government really isn’t fun and they historically aren’t great payers, although that seems to have improved greatly in this interim period. The other problem is the environment of high interest rates, which puts the balance sheet on a knife-edge even after these improvements.

There are various other initiatives underway to try and unlock capital to repay debt. When results for this interim period are released, investors and punters alike will be fully focused on what the debt ratios look like.

Merafe deepens the JV relationship with Glencore (JSE: MRF | JSE: GLN)

Another PGM production plant will be included in the joint venture

Back in 2022, Merafe and Glencore agreed that a new PGM production plant at the Kroondal Mine would be contributed to the joint venture between the parties. This has proven to be a profitable decision and the parties are now looking to replicate that success with another production plant.

This time, it will be located at the Thorncliffe Mine, based on the eastern chrome mine operations. This project comes with a capital expenditure bill attributable to Merafe of R117 million.

This deal is so small in Glencore’s world that the company didn’t bother to announce it.

Sanlam: focus on the cash earnings, not HEPS (JSE: SLM)

IFRS complexities are doing what they do best: making financials harder to understand

IFRS 17 Insurance Contracts has become effective. It seems to be as useful to investors as the new leases standard was when that became effective. The latter caused havoc for retailers in particular, with the former obviously impacting insurers like Sanlam.

With headlines everywhere crowing about HEPS growth of 118% for Sanlam in the six months to June 2023, I’m just not sure that this is the metric to be focusing on. By Sanlam’s own admission in its results, the focus is actually on Return on Group Equity Value (RoGEV) and dividend growth.

This is incredibly complicated stuff and I certainly don’t claim to be an insurance expert (far from it). What I do know is that HEPS growth of 118% suggests an absolute blowout result, yet adjusted RoGEV (Sanlam’s favourite measure from what I can see) is 7.9% vs. the hurdle rate of 7.5%. That’s a good result for sure, but perhaps not extraordinary. Here’s what the calculation looks like:

As another useful metric, cash net results from financial services increased by 30%. Yes, it’s more complicated than that, but there’s a helluva big gap between the cash earnings growth of 30% and HEPS growth of 118%.

Transaction Capital buys itself some time on the WeBuyCars deal (JSE: TCP)

The put-call structure has been extended

Before the Transaction Capital share price blew up in a puff of oil smoke out of the back of a poorly maintained taxi, the deal with WeBuyCars had been executed in textbook fashion. Transaction Capital had built a strong relationship with the founders and they did a staggered transaction that allowed the founders to share knowledge while sticking around for the ride.

The huge problems at SA Taxi take nothing away from the quality of the WeBuyCars deal. There are always those in the market who are skeptical, but as a devout petrolhead I can tell you that WeBuyCars changed the game in this industry and put a real liquidity floor in place for consumers. Suddenly, a car could always be sold. That wasn’t the case previously, allowing dealers to make ridiculous lowball offers to desperate sellers.

The SA Taxi and share price issues have impacted Transaction Capital’s deal strategy, with various put-call options in place and the potential to settle 30% of the purchase price through the issuance of Transaction Capital shares. That was a whole lot more appealing to the company when the share price wasn’t in the toilet.

Under a revised structure, the good news is that Transaction Capital retains the ability to settle the remaining options based on 70% cash, 30% equity, or 100% cash if that is more appropriate at the time. The period of time for the structure has been extended, with various tranches between November 2023 and March 2029. The end result is that Transaction Capital can still end up owning just about 100% of WeBuyCars if all the options are exercised. There is no change to the price/earnings multiple range of 9.5x to 10.5x. used in the calculations for the put and call options.

There is one other significant change, which is that the metrics in the options will be calculated based on two-year averages. This includes volume-weighted average share price and the underlying earnings for the calculation.

Most of all, this outcome shows that Transaction Capital still has a good relationship with the WeBuyCars founders. Doing good deals can help you when you need it most.

Trellidor: just how much higher will earnings be? (JSE: TRL)

Here’s the classic “at least 20%” trading statement in action

Trellidor is finalising its earnings for the year ended June 2023. The comparative period (i.e. the 2022 financial year) was a revolting time for the company, with HEPS of just 0.4 cents. For context, 2021 saw HEPS of 40.8 cents and 2020 was 13.8 cents.

This context is so important, as it means that the latest trading statement with bland guidance that earnings will be “at least 20% higher” is just a tick-box exercise for the JSE Listings Requirements. The earnings should be multiple times higher than in 2022, nevermind just 20%.

The stock isn’t very liquid and is currently at R2.20, which also tells you that 2022 was just a freak year that must never be repeated. The question is just how significant the recovery in 2023 can be.

Little Bites:

  • Director dealings:
    • Des de Beer is at it again, buying another R1.86 million worth of shares in Lighthouse Properties (JSE: LTE).
    • An associate of a director of Nedbank (JSE: NED) has bought shares worth R380k.
    • The CEO of Sirius Real Estate (JSE: SRE) bought shares worth around R170k.
  • For a laugh, Moody’s has upgraded the credit outlook for Eskom from stable to positive. Now, before you get ready to hit your screen against the wall, this is purely a credit analysis and most importantly, the outlook is based on the current rating, which is so deep in junk that you can barely see it at the bottom of the dustbin. Basically, Eskom is right near the bottom of the dustbin and isn’t expected to fall between the cracks anymore, thanks to taxpayers (you and me) footing the bill via government.
  • And in other news from the public sector cess pool, the CFO of Sanral (Inge Mulder) is now on a temporary leave of absence pending internal processes. I suspect that this story is only just warming up.

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

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

Exchange-Listed Companies

British American Tobacco plc has announced the disposal of its Russian and Belarusian businesses to a consortium led by members of the Russian management team for an undisclosed sum. The company announced in March 2022 that the ownership of these businesses was no longer sustainable in the current environment. Post completion, the businesses will be known as the ITMS Group.

The sale of assets held by Rebosis, currently under business rescue, continues with the announced sale of a portfolio of 10 properties to Hemipac Investments for R650 million.

Oando plc has reached an agreement with Eni to acquire 100% of the shares in Nigerian Agip Oil Company. The transaction increases Oando’s current participating interests in OMLs 60 to 63 from 20% to 40%.

In March this year Brikor advised shareholders that Nikkel Trading 392 intended to acquire from major shareholders a 67.7% stake in Brikor in two tranches at 17 cents per share. The first tranche, representing a 34.1% stake, was acquired at the time of the announcement. The second tranche (33.6% stake) was conditional on several suspensive conditions, including regulatory approval from the Competition Authorities, the JSE and the TRP. Brikor has now advised that it will acquire the second tranche which will trigger a mandatory offer to minorities.

Unlisted Companies

Cipla Medpro South Africa is to acquire Actor Pharma in a deal valued at R900 million, according to a filing by its Indian holding company. The deal is a strategic move by the South African subsidiary to strengthen its position in the over-the-counter segment of the market, unlock future growth opportunities and leverage cost synergies in the SA market.

Real estate private equity platform Kasada, has acquired the former Radisson Blu Hotel & Residence situated in the Cape Town city center for an undisclosed sum. Kasada has a presence in eight African countries with a portfolio of 19 hotels.

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

Lighthouse Properties plc has issued 51,913,215 new Lighthouse shares in terms of its scrip dividend election at R5.39 per share, resulting in a capitalisation of the distributable retained profits in the company of R118 million.

Santam has advised that it is in a position to distribute R2 billion of the gross proceeds received from the sale in 2022 of its 10% interest in the SAN JV to Allianz Europe BV. Shareholders will receive a special dividend from income reserves of R17.80 per share.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 28 August and 1 September 2023, a further 1,012,749 Prosus shares were repurchased for an aggregate €64,99 million and a further 250,654 Naspers shares for a total consideration of R796,4 million.

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 10,550,000 shares for a total consideration of £45,28 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 832,004 shares were acquired at an aggregate cost of A$2,88 million.

Two companies issued profit warnings this week: Pan African Resources and The Foschini Group.

Five companies issued or withdrew a cautionary notice: Trematon Capital Investments, Ellies, Afristrat Investment, enX and Brikor.

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

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

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

DealMakers AFRICA

Beltone Venture Capital has acquired a 20% stake in Egypt’s digital home and décor brand, ariika. The Series A investment will accelerate the brand’s expansion to Saudi Arabia.

BIO and EDFI AgriFI are co-investing €6 million in gebana Faso to enhance integrated and sustainable food supply chains in the region. gebana Faso is a subsidiary of the gebana Group and specialises in processing and exporting Fair Trade and Organic cashew nuts and dried mangoes from Burkina Faso.

PZ Cussons Nigeria has announced that PZ Cussons Holdings wants to buy out the other existing shareholders at ₦21 per share via a Scheme of Arrangement. The deal is subject to board, shareholder and regulatory approval. PZ Cussons has been present in Nigeria since 1899 and the move is aimed at strengthening and simplifying the Nigerian operations.

Btrust has acquired Nigeria’s Qala, which has been rebranded as Btrust Builders Programme.

Galileo Resources has entered into a joint venture agreement with Cooperlemon Consultancy in respect of the exploration for copper at large scale exploration license 28001-HQ-LEL situated in Northwest Zambia. A series of earn-in and exploration expenditure will see Galileo take a 65% stake in the joint venture.

Global Investments Holding Ltd has acquired a 30% stake in Eastern Company, a tobacco producer in Egypt. The sale will reduce the Holding Company for Chemical Industries’ stake from 50.9% to 20.9% and is part of the Egyptian government’s ongoing programme of privatising state-owned assets. The deal was valued at US$625 million.

Uganda’s Asaak has entered the Latin American market through the acquisition of FlexClub Mexico. The fintech did not disclose the value of the deal.

Nigeria’s Itana has raised US$2 million to push forward its plans to establish a digital free zone. The funding was provided by LocalGlobe, Amplo, Pronomos Capital and Future Africa.

AfricInvest has invested US$40 million in The British University in Egypt. This is one of the largest foreign direct investments in the education sector in the North African country. The funds will go towards the university’s expansion and transformation plans.

Renew Capital Angels has invested an undisclosed amount in Kenyan fintech FlexPay.

Kenyan crypto payments startup, Kotani Pay has closed a US$2 million pre-seed round led by P1 Ventures. Other investors include DCG/Luno and Flori Ventures.

Lagos-based fintech, Anchor, has secured US$2,4 million in a seed round led by Goat Capital. Other investors include FoundersX, Rebel Fund, Pioneer Fund, Y Combinator, Byld Ventures and Future Africa. Since launching in August 2022, the embedded finance fintech has processed more than $550 million in annualised total transaction volumes and achieved a 30% month-on-month growth in revenue.

Sehatech, an Egyptian health insurtech, has raised US$850,000 from A15 and Beltone Venture Capital. The funds will be used to grow the staff contingent and to invest in product development.

Moroccan edtech Smartprof has raised an undisclosed amount of funding from Digital Africa’s Fuze. Part of the funding will be used to help the company accelerate its expansion into West Africa.

To strengthen its ESG agenda, Safaricom, has announced a new multi-billion Sustainability Linked Loan with four banks – Standard Chartered Bank, Stanbic Bank, ABSA Bank and KCB. This is the largest ESG linked loan facility in East Africa and the first Kenya Shilling denominated sustainability linked loan in the market. The loan is valued at KES15 billion, which can be increased to KES20 billion by accordion.

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

Using sustainability-linked financing for impact to achieve ESG goals

Khurshid Fazel
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Using sustainability-linked financing for impact to achieve ESG goals

The adoption of sustainability-linked financing (SLF) instruments by borrowers is primarily driven by their growing realisation that these instruments are a valuable tool to achieve their ESG objectives, which outweighs the associated costs.

This was the topic of a recent podcast hosted by Khurshid Fazel, in a discussion with borrowers and a lender.

The banks’ financing decisions shape the economy, so the way that they structure SLF can be used to bring about positive impacts. SLF presents borrowers with an opportunity to embed sustainability into their operations and activities in a manner that promotes accountability.
In this way, SLF creates a symbiotic relationship between lenders and borrowers.

Practical examples

Two examples of how SLF was used to achieve impact outcomes are demonstrated by a property group and a diversified industrial group.

The property group secured SLF to install solar PV on the rooftops of its warehouses, for its tenants. The lending bank discussed appropriate key performance indicators (KPIs) and milestones that had to be achieved in order to obtain preferential terms, and the achievement of these targets had to be independently verified. This data helps to give confidence to investors, lenders, and the property organisation that it is following the right path.

The advantages for tenants in this example were not only that the solar PV reduced their energy cost and provided reliable power, but also that some of them have international customers that impose certain sustainability requirements on the companies with which they do business. Taking steps to be a sustainable business can help a business get more contracts. Also, with reliable and relatively cheaper power, tenants can produce more efficiently and price more competitively. The driver of SLF in this case was accountability and commitment. For the borrower, what gets measured, gets done.

In a second case, a diversified industrial group with operations in Africa and Asia has put considerable effort into programmes that epitomise sustainability. This group, which publishes its sustainability KPIs on its website, has taken on four financing instruments that are ‘green’ or sustainability-linked, including a gender bond which is listed on the JSE.

The listing of the gender bond introduced new global investors, enabling the business to tap new sources of funding. Impact investors are looking to invest in companies that contribute to the common good while delivering a return. The gender bond has two goals: transforming the gender ratio of employees and seeking more female-owned businesses to participate in the supply chain. After the launch of the gender bond, female-owned businesses have come forward, instead of having to be searched for. In this example, SLF was used to raise awareness on an important issue for the borrower, and to inspire action on the issue amongst its stakeholders.

Accountability, awareness and action are drivers of SLF

Setting out sustainability KPIs on a public platform means that the world can see them. If a business does not fulfil its commitments, not only will there be a pricing adjustment on the SLF, but the public will be aware that the business fell short, which carries reputational risks. Companies that claim a commitment to sustainability but whose actions do not reinforce the message are likely to be accused of greenwashing.

There are often significant costs for the borrower associated with putting the necessary systems in place to fulfil its commitments, pursuant to the SLF. Firstly, the commitments require buy-in from the whole organisation and key stakeholders, because sustainability touches on many different aspects. Secondly, the sustainability programme must have oversight from the board of directors. A company that thinks carefully about what is important to its stakeholders and community, and tailors its funding and strategy around those objectives, may be better able to achieve its KPIs than one which is merely pursuing sustainability because everyone else is.

Thirdly, a company may already have certain sustainability objectives, but taking on SLF and making its KPIs public is likely to make fulfilment faster and more effective than if the goals are internal, with moveable deadlines. But this comes with reputational risk if targets are missed.

Some borrowers may consider the marginal adjustment on the SLF that is gained by meeting the KPIs agreed with the bank as insufficient to offset the cost of putting measurement systems in place and bringing in verification agencies. But the margin adjustment on the loan does not appear to be the ultimate driver or advantage of SLF. The starting point should be a careful consideration of the levers of sustainability that the business should put in place to drive revenues, keep costs down, and build a brand in the market. Purpose is important, but so is profit.

Setting stretch targets

A borrower has to travel a journey with its lender before reaching the stage of drawing up a term sheet. Some borrowers have established sustainability strategies, but if their targets are not particularly ambitious, the bank is likely to raise the possibility of doing more. In evaluating whether the current targets are ambitious or not, it will look at how the organisation has performed in the last two to five years or against its peer group, and how material its commitments are to its size and power. For some borrowers who do not yet have the building blocks in place, the bank can give advice.

One of the ancillary benefits of setting sustainability targets, taking on an SLF instrument and monitoring progress against KPIs is that it helps to strengthen governance in an organisation. As SLF matures in SA, it will become more regulated – the JSE has already put out sustainability disclosure guidelines – and choosing legal and financial partners who understand the underlying values of SLF will smooth the journey.

Khurshid Fazel is a Partner | Webber Wentzel.

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

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

Investment in Africa: Exploring the continent’s growth potential

Mish-al Magiet
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Investment in Africa: Exploring the continent’s growth potential

Africa, the world’s second-largest and second-most populous continent1, has long been seen as a land of untapped potential. However, in recent years, a wave of economic growth and development has been sweeping across the continent, making it an increasingly attractive destination for global investors, poised to benefit from its vast natural resources, youthful population, improving infrastructure and burgeoning middle class. This article will delve into the reasons why Africa continues to hold immense promise, and explore the growth potential that awaits those who are willing to venture into this exciting market.

RAPID ECONOMIC GROWTH

Africa’s economic landscape has been transforming rapidly in the past decade. According to the African Development Bank’s (AfDB) African Economic Outlook 2023 report, several African countries have consistently recorded impressive GDP growth rates, outpacing global averages. While growth on the African continent was impaired by the residual effects of the COVID-19 pandemic, “the continent performed better than most world regions in 2022, with the continent’s resilience projected to put five of the six pre-pandemic top performing economies — Benin, Côte d’Ivoire, Ethiopia, Rwanda and Tanzania — back in the league of the world’s 10 fastest-growing economies in 2023–24”.2 Growth on the continent has been driven by a combination of factors, such as increased political stability, economic reforms, and a growing consumer base. Furthermore, the continent’s middle class has tripled to 313 million people over the last 30 years, according to the AfDB, which will significantly drive consumption and demand for goods and services.

ABUNDANT NATURAL RESOURCES

Africa is rich in natural resources, including oil, gas, minerals and arable land. The continent boasts significant reserves of minerals such as gold, diamonds, copper, cobalt and platinum, among others. With the global demand for these resources on the rise, Africa presents a tremendous opportunity for investors in extractive industries. Additionally, the continent’s vast agricultural potential remains largely untapped, making it an attractive destination for investments in agribusiness and food production. The potential for agri-investment on the continent can be seen by the fact that world cereal yields have increased nearly three times since 1960, but Africa has only increased yields by 90%. As Africa’s population growth outpaced cereal productivity over this period, this has resulted in significant demand locally, with continued potential to secure global off-takers.3

YOUTHFUL AND DYNAMIC WORKFORCE

Africa is the continent with the youngest population in the world.4 This demographic advantage presents both a challenge and an opportunity. By harnessing the potential of its youth through education, skills development, and job creation, Africa can unlock its productive capacity and drive economic growth. Investors can tap into this growing pool of talent and leverage it for innovation, entrepreneurship and productivity gains in various sectors, including technology, manufacturing and services.

INCREASING URBANISATION AND CONSUMER DEMAND

Africa is experiencing rapid urbanisation, with the number of cities on the continent having more than doubled in the last 30 years from 3600 to 7600, with their cumulative population increasing by 500 million people.5 This urban growth is accompanied by a rise in consumer demand, as a growing middle class seeks access to better housing, healthcare, education and consumer goods. The continent’s rising urban population presents significant investment opportunities in infrastructure development, affordable housing, retail, e-commerce and financial services.

INFRASTRUCTURE DEVELOPMENT

Historically, Africa has faced infrastructure challenges, which hindered its economic growth. However, significant progress has been made in recent years to address these gaps. Governments and international partners are investing heavily in building transport networks, energy systems and digital infrastructure across the continent. These investments not only create opportunities for infrastructure-focused investors, but also unlock new markets and facilitate regional integration.

INNOVATION AND TECHNOLOGY

Africa has witnessed a remarkable surge in technology adoption and digital innovation. With limited legacy infrastructure, the continent has leapfrogged into the digital age, embracing mobile payments, e-commerce and digital services. Tech hubs are emerging in various cities, such as, Lagos, Cairo, Nairobi, Cape Town and Kigali, fostering a vibrant startup ecosystem.6 Investment in African tech startups has been steadily increasing, with annual investment between 2015 (US$185 million) and 2023 (US$3,3 billion) having grown by 1,694%.7 Sectors like fintech, agritech, cleantech, edtech and healthtech offer attractive prospects for investors, while it is clear that platform and software businesses are becoming increasingly important to investors.8

FAVOURABLE BUSINESS ENVIRONMENT

Many African countries are implementing reforms to improve their business environments and attract foreign direct investment. Simplified regulations, streamlined bureaucratic procedures and enhanced legal frameworks are being put in place to make it easier for investors to do business. Furthermore, improved political stability and governance across many African nations have created a conducive environment for investment. Governments are increasingly implementing pro-business policies, streamlining regulations, and enhancing transparency. Additionally, regional economic communities, such as the African Continental Free Trade Area (AfCFTA), being the largest free trade area in the world by country participation, are promoting intra-African trade and integration, further bolstering the investment climate and encouraging cross-border trade and investment, with the goal of creating a single market of over 1.3 billion people and a combined GDP of approximately US$3,4 trillion.

UNTAPPED POTENTIAL

Despite the growing interest, Africa remains largely untapped, with vast opportunities for investors. Numerous sectors are ripe for development, including manufacturing, tourism, renewable energy, infrastructure, financial services, healthcare and agriculture. Markets like Egypt, Morocco, South Africa, Nigeria, Kenya and Rwanda, among others, are attracting significant attention from investors looking to capitalise on their potential.

CONCLUSION

Africa’s potential as an investment destination must not be underestimated. The continent’s growing population, expanding consumer market, rich natural resources, improving infrastructure, technological advancements and improving governance provide a solid foundation for investment opportunities. While challenges for investors exist, such as regulatory complexities, infrastructure gaps and political risks, these can be mitigated by partnering with local businesses, conducting thorough due diligence, and adopting a long-term perspective.

Investors who recognise Africa’s potential and are willing to embrace its unique opportunities stand to reap the benefits of being early movers in the next big frontier. Africa’s rise is not a question of ’if’, but rather ’when’. The time to invest in Africa is now, as the continent continues its transformative journey toward sustainable development, economic growth and prosperity.

1.Population in Africa 2020, by country, published by Lars Kamer, June 22, 2023. https://www.statista.com/statistics/1121246/population-in-africa-by-country/
2.African Development Bank’s African Economic Outlook 2023 report. https://www.afdb.org/en/knowledge/publications/african-economic-outlook
3.David Ndii, December 2022, https://carnegieendowment.org/files/202212-Ndii_-_Africa_Agriculture.pdf
4.According to the United Nations. http://surl.li/jelsr.
5.OECD/UN ECA/AfDB (2022), Africa’s Urbanisation Dynamics 2022: The Economic Power of Africa’s Cities, West African Studies OECD Publishing, Paris, https://doi.org/10.1787/3834ed5b-en
6.According to the World Economic Forum, Nigeria, Egypt, Kenya and South Africa receive 92% of Africa’s investment in technology, which accounts for a third of the continent’s start-up incubators and accelerators. The significant investment in these African countries has led to emerging tech hub cities in each of these countries.
7.The African Tech Startups Funding Report 2022, https://disrupt-africa.com/wp-content/uploads/2023/02/The-African-Tech-Startups-Funding-Report-2022.pdf
8.Lay and Tafese (2023) based on Crunchbase data. (https://iap.unido.org/articles/how-new-wave-tech-startups-driving-development-africa)

Mish-al Magiet is a Director | PSG Capital

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

Ghost Wrap #44 (Bowler Metcalf | City Lodge | Shoprite | The Foschini Group | Bidvest | AVI)

The Finance Ghost
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Ghost Wrap #44 (Bowler Metcalf | City Lodge | Shoprite | The Foschini Group | Bidvest | AVI)

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.

  • Bowler Metcalf is evidence of how share buybacks can turn financial water into wine.
  • City Lodge was permanently damaged by the pandemic, but at least the company is profitable again.
  • Shoprite’s astonishing performance was blunted by Eskom, which means share price performance is also well off where it should be.
  • The Foschini Group’s trading update reflects the impact of pressure on like-for-like sales, a drop in gross margin and debt on the recent acquisition.
  • Bidvest’s second half of the financial year was all about generating cash, which was helpful for the dividend payout ratio.
  • AVI’s results look good provided you exclude I&J, which tells us something about the different segments in the group.

Ghost Bites (Aspen | Calgro M3 | Capital & Regional | Grindrod Shipping)

The Finance Ghost
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Ghost Bites (Aspen | Calgro M3 | Capital & Regional | Grindrod Shipping)

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

I discussed Shoprite on Kaya Biz with Gugulethu Mfuphi on Tuesday night:

Aspen takes a step towards filling its capacity (JSE: APN)

The company is focused on landing pharmaceutical manufacturing contracts

Build it and they will come. This is some of the worst business advice ever given to startups, with Aspen experimenting with this strategy at scale. The recently expanded sterile manufacturing capacity is ready to go and needs contracts for it to generate revenue and a return on the investment, especially after the COVID vaccines fizzled out.

Aspen has announced the fourth such contract, in this case with an unnamed multinational pharmaceutical group to manufacture medicine for a chronic disease. They really are as vague as that, so this agreement clearly comes with some pretty strong NDAs.

With R6 billion having been invested in the facility in Gqeberha, investors won’t really care what the product does, as long as its legal! Aspen can manufacture a variety of drugs at this facility and has positioned itself as a manufacturing gateway to Africa for global pharmaceutical players.

Calgro M3 has a good news story for shareholders (JSE: CGR)

A trading statement has flagged a 20% jump in HEPS

Trading statements range from being light on details through to giving a detailed operational update. The Calgro M3 announcement is the former, simply flagging a jump in HEPS and confirming that results will be released on approximately 16 October.

The company expects HEPS for the six months ended August to be at least 20% higher than the comparable period. This implies HEPS of at least 68.40 cents for this interim period.

I must remind you that the minimum change that triggers a trading statement is 20%. When a company releases such a bland trading statement with “at least 20%” as the guidance, it can literally mean anything from 20.1% through to any number you can imagine. Some companies release a “further trading statement” and others just hit you with the results.

Time will tell how this one pans out.

Capital & Regional completes the Gyle acquisition (JSE: CRP)

This looked like a solid acquisition to me

In August, Capital & Regional announced the acquisition of The Gyle Shopping Centre in Edinburgh for £40 million. The asset has been acquired at a net initial yield of 13.51%, which seems like an attractive price. The debt is being provided by Morgan Stanley at a fixed cost of 6.5% for 5 years.

To get the deal done, the company raised equity capital on the local market. This has sadly become a rare occurrence in South Africa, with very few companies tapping the local market for growth capital.

With an underwrite from controlling shareholder Growthpoint (JSE: GRT), Capital & Regional raised the capital and the acquisition has now become effective. This is a good example of a grocery-anchored community shopping centre, which fits right into the company’s strategy. The company also highlights the opportunity for active management of this asset, improving income and thus the valuation.

Grindrod Shipping: a lesson in cycles (JSE: GSH)

It’s hard to think of a more volatile sector than shipping

Unless you were living under a rock during the pandemic (OK – scrap that – we all were), you would’ve been reading about supply chain problems and how retailers just couldn’t get stock. As we emerged from that mess, pent-up demand for goods was extraordinary and people literally couldn’t get their hands on stuff quickly enough. That was a golden opportunity for shipping companies to make massive profits.

As is always the case, these supply-demand distortions tend to right themselves. This chart of Grindrod Shipping’s revenue and HEPS should hopefully illustrate the point:

I want to particularly draw your attention to how close ship sale revenue has been to vessel revenue in the past six months. Shipping companies regularly buy and sell vessels to right-size the fleet based on levels of demand. The proceeds are either used to reduce debt, execute share buybacks or pay special dividends, depending on the company’s balance sheet.

In Grindrod Shipping’s case, a capital reduction of $45 million was approved by shareholders in August. Because of this, no further dividends will be declared in 2023.

The focus area for the company is on the combined management of the Grindrod and TMI fleets and realising the associated synergies. The company is also hoping for a “gentle” structural recovery in the Chinese economy in 2024.

Little Bites:

  • Director dealings:
    • An associate of a director of Nampak (JSE: NPK) has bought shares in the company worth nearly R1.9 million.
    • A director of Richemont (JSE: CFR) bought shares in the company worth roughly R540k.
  • In a long announcement that says a lot without actually saying very much at all, AYO Technology (JSE: AYO) reminded the market that Khalid Abdulla’s fine and censure is the subject of a reconsideration application at the Financial Services Tribunal. This isn’t anything that the JSE didn’t already tell us. The company also reiterated its commitment to Abdulla regardless of this situation, which is another good example of why I’m not an investor in this group.
  • For those following the Lighthouse Properties (JSE: LTE) trades, the results of the scrip distribution are now in for directors. Des de Beer will receive R42 million worth of shares under this distribution, adding to his numerous recent purchases of shares in the company. There’s a few million bucks worth of shares in total being received by other directors as well.
  • Anglo American Platinum (JSE: AMS) announced that Sayurie Naidoo has been appointed as acting CFO of the company. This is an internal appointment, as Naidoo has been with the broader Anglo American group for 15 years.
  • Richemont (JSE: CFR) announced a couple of senior changes. Gary Saage is an ex-CFO of Richemont and has been proposed for appointment to the board and as the chairman of the audit committee. Among other changes, I couldn’t help but smile at the appointment of a new CEO of the Laboratoire de Haute Parfumerie et Beauté – an incredibly pompous title to help the six Maisons involved in fragrances to reach critical mass. His name? Boet. There is officially a Boet in charge there, of the non-Fourways variety. He should surely enhance his name to Boët and give it a luxury spin!
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