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Ghost Bites (Cognition | Delta Property Fund | Transaction Capital)

The Finance Ghost
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Ghost Bites (Cognition | Delta Property Fund | Transaction Capital)

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

At Cognition, the balance sheet is what counts (JSE: CGN)

The gap between HEPS and NAV per share confirms it

After the sale of Private Property for a tremendous price, Cognition is now a group that is highly pregnant with cash. The group generated HEPS of just 2.48 cents for the six months to December 2023, yet the tangible NAV per share is 103.85 cents. That’s a huge difference, explained by R207 million worth of cash on the balance sheet vs. liabilities of just R28.2 million.

Cognition is currently in discussions with controlling shareholder Caxton & CTP Publishers and Printers (JSE: CAT), which may lead to an offer to delist Cognition.

The share price is currently trading at R1.05, which is already in line with the tangible NAV per share. It’s not obvious to me why Caxton would pay a significant premium to this price.

More insult and injury for Delta Property Fund (JSE: DLT)

It’s very debatable whether a fine a few years down the line actually punishes the right people

Delta Property Fund is another great local example of a company that turned into a financial disaster. The problems started with an announcement in 2020 dealing with problems in the financials. This would turn out to impact the 2018 and 2019 numbers as well.

The company initiated forensic investigations in 2020 that found a host of problems. To Delta’s credit, the JSE acknowledges that the company was transparent in dealing with the issues.

Still, there has to be some kind of punishment for not complying with IFRS, although share prices tend to dish out their own punishment when it comes to these things. The JSE has publicly censured Delta and imposed the maximum fine of R7.5 million, of which R5 million is suspended for a period of five years provided no other listings requirements are breached as they pertain to financial performance.

Far more importantly, the investigation into the individuals involved (rather than the company) is ongoing. It feels like that’s a much better way to punish the right people, rather than putting even more pressure on the company’s balance sheet and causing more damage to minority shareholders.

Transaction Capital releases the WeBuyCars unbundling circular (JSE: TCP)

Perhaps more importantly, there’s also a WeBuyCars management presentation to work through

In around April 2024 (and how I wish the Transaction Capital share price was just an April Fool’s Day joke), WeBuyCars will be separately listed on the JSE if all the conditions along the way are met. This is exciting stuff, particularly as our local universe of stocks tends to shrink a lot faster than it expands. WeBuyCars is that rare beast on the market: a pure-play view on a business model. They focus on doing one thing and doing it well.

It’s quite incredible to consider the history of WeBuyCars. It was started in 2001 and took another nine years until the first car supermarket was built in Pretoria with capacity for 100 vehicles. Fast forward to 2024 and they sold 14k vehicles just in January.

The company consistently reminds investors that Motus and CMH are not directly comparable, as WeBuyCars only sells used cars. There’s no noise from a rental business, or new car sales, or after-market parts. In fact, the strategy to expand the existing product offering is at this stage focused only on finance and insurance penetration, which means a higher value per customer. They are looking to make the value-added margin in addition to the gross margin on a sale. That’s a solid organic growth strategy, rather than a foray into something new or unrelated.

The group is looking to add at least 2,000 bays in FY25 to FY26, reaching regions of South Africa that aren’t currently serviced by sales outlets. They will need to be careful here that they don’t build supermarkets in areas that can’t support them.

Fascinatingly, they expect market share to grow from the existing 10% – 12% up to 23% by FY28. That’s a very bold chart to put in an investor deck! In theory, there’s no reason why they can’t achieve this.

FY23 was a wobbly in terms of the profit growth story. If you understand what happened to used vehicle prices over this period, then you’ll also understand why this chart (1) accelerated in FY21 and FY22 and (2) fell off in FY23:

For me, where the economic reality does bite WeBuyCars is on the inventory days calculation. This is simply how many days worth of sales they have in inventory at any point in time. This has increased from 24 days to 30 days in the past two years, which is a material negative impact on working capital:

On the whole, in case it isn’t obvious, I’m bullish on WeBuyCars. This is exactly why I took exposure on Transaction Capital when they did the deal. Sadly, as you will no doubt be aware, the problems at SA Taxi blew up the Transaction Capital share price and I took that knock. At least the end result is direct exposure to WeBuyCars and some hope of an outcome for the “rump” of Transaction Capital, even if that might be a take-private of SA Taxi and Nutun. That is 100% speculation from my side, so please treat it as such. It just seems to make sense, as that rump will very much be the ugly duckling after the unbundling of this swan.

As a reminder, the structure of the unbundling and related capital raising activities will see Transaction Capital unlock between R900 million and R1.25 billion in cash. This will do wonders for the balance sheet. When you look through all the complex steps in the process, the equity value of WeBuyCars has been set at R7.5 billion.

The one hangover of this structure that I’m not a fan of is that Gomo (a finance and insurance business) will still be in Transaction Capital even though it services WeBuyCars in addition to SA Taxi. I’m sure everything is arms’ length and goodness knows a service provider doesn’t always need to be in the same group as the company it services, but it does mean there is still a legacy link to what is being left behind in Transaction Capital.

The WeBuyCars pre-listing statement is due for release on 12th March. That’s the day after my birthday and I’ll assume this is my gift from Transaction Capital.

Little Bites:

  • Director dealings:
    • The CFO of Nampak (JSE: NPK) has acquired shares worth R4 million.
    • In one of the strangest director dealings I’ve seen, a director of Afine Investments (JSE: ANI) bought shares worth R655k and then sold R606k worth of shares on the very same day at the same price per share. Then, a day later, he bought shares worth R1.85 million.
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth nearly R33k.
  • For those of you who like to keep track of the cost of debt for corporates, British American Tobacco (JSE: BTI) has priced notes due in 2031 at 5.834% and notes due in 2034 at 6.000%. The total issuance is a meaty $1.7 billion.
  • As indicated by the company earlier in the week, André van der Veen has officially replaced Peter Surgey as chairman of Nampak (JSE: NPK).
  • In a rather funny update that calls into question whether an investment strategy can also include a preference for similarity of names, an international investment house called Hosking Partners LLP has increased its interest in Hosken Consolidated Investments (JSE: HCI) to 5.05%.
  • Anglo American Platinum (JSE: AMS) announced that the Mototolo and Amandelbult mines are the first PGM mines to South Africa to complete an IRMA audit, achieving the IRMA 75 and IRMA 50 levels respectively. Whilst this doesn’t exactly do anything about the PGM prices, it does help with fussier buyers who track their supply chain and it helps keep Amplats on the right side of investors with an ESG slant to their mandates.

Ghost Bites (Aveng | Barloworld | BHP | Blue Label Telecoms | 4Sight | KAP | MC Mining | Nampak | Renergen | South32)

The Finance Ghost
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Ghost Bites (Aveng | Barloworld | BHP | Blue Label Telecoms | 4Sight | KAP | MC Mining | Nampak | Renergen | South32)

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

A big jump in earnings at Aveng (JSE: AEG)

And a change in reporting currency

Aveng now earns 91% of its revenue from outside South Africa. To this end, the company is changing its reporting currency to the Australian dollar, reflecting the true economic situation of the group.

For the six months to 31 December 2023, Aveng’s revenue is expected to be 45% higher and earnings are up at both McConnell Dowell and Moolmans. Due to the disposal of Trident Steel in this period, HEPS from continuing operations is the right metric to focus on. It came in between 65.4% and 75.0% higher.

Local mining conditions hurt Barloworld (JSE: BAW)

The slowdown in South African mining is worrying

In the four months to 31 January 2024, Barloworld saw a 5% reduction in group revenue. The company has attributed this to lower demand in mining and consumer industries, with continued geopolitical conflicts not doing any favours.

With commodity prices having come under pressure and South African infrastructure doing a very poor job of supporting local mines, there was a slowdown in mining activity that saw Equipment southern Africa’s revenue decrease by 2%. After-sales activity was up, but at lower gross margins, leading to a dip in margin due to the mix effect. If there’s a silver lining here, it’s the decrease in levels of inventory. Also, the Bartrac joint venture in the DRC is showing an increase in attributable profits.

Equipment Eurasia has been supported by 20% revenue growth in Barloworld Mongolia, attributed to strong mining activity. The Russian business saw revenue drop by 26%, so that offset the overall story. At least both businesses achieved good operating margins.

In Consumer Industries, Ingrain’s revenue fell 5% due to lower demand in the alcoholic beverages, papermaking and converting sectors. Export sales fell due to competitive global pricing of starch. The impact of lower sales is that operating margins have fallen as well, as there are fixed costs. A restructure is underway to reduce fixed expenses.

More bad news in the nickel mining industry (JSE: BHP)

BHP is impairing Western Australia Nickel

BHP has announced two “exceptional items” for the financials for the six months to December 2023. This doesn’t mean exceptionally good, before you get excited.

The first is an impairment of the Western Australia Nickel operations of $3.5 billion pre-tax. Conditions in the nickel industry are really difficult at the moment (remember Glencore is also shutting an operation in this space) and BHP is reducing costs at the mine. The problem is the supply of nickel from Indonesia, which has significantly increased. This has lowered the nickel price at a time when mining costs are still under inflationary pressure.

There’s another impairment as well, but it has nothing to do with nickel. BHP is taking another pre-tax charge of $3.1 billion in relation to the Samarco dam failure, taking the total provision to $6.5 billion. This is based on an updated view of the costs after recent legal developments. Importantly, there is still significant uncertainty over what the final cost of this might be.

As usual, nothing is simple at Blue Label Telecoms (JSE: BLU)

You have to read the trading statement very carefully

Blue Label Telecoms has released a trading statement for the six months ended November 2023 and you have to be very sure of what you are looking at. For example, if you don’t take into account the huge negative move in the comparative period from the recapitalisation of Cell C, you would think that core HEPS is over 10x higher year-on-year. If you take out the current and prior period impacts of that recapitalisation, then HEPS is actually down 23%.

Then, it’s worth highlighting that the trouble in adjusted HEPS was from Comm Equipment Company (CEC), which saw headline earnings drop by R119 million. The rest of the group grew headline earnings by R19 million (10% growth). The problems at CEC are a drop in gross profit and substantial increases in expected credit losses, driven by a larger subscriber base and a deteriorating macroeconomic backdrop in South Africa.

There was a buzz around Blue Label Telecoms on Twitter/X in the latter part of 2023. The share price has rolled over since then, with the only real money being made on the rally from September to December. Over almost every time period, Blue Label investors have lost money.

The reward for foresight into 4Sight (JSE: 4SI)

The share price has approximately doubled just in 2024!

4Sight has a market cap of under R600 million. This is firmly small cap territory. It’s bigger than it was though, with an increase of a ridiculous 360% in the past 12 months! This year alone, the share price has roughly doubled. Welcome to Camp Small Cap and the rollercoaster ride.

To give support to this move, a trading statement for the year ended December 2023 reveals HEPS growth of 120.4% to 135.2%.

KAP’s earnings take a klap – again (JSE: KAP)

The good news (I guess) is the base period is better than everyone thought

Further to the trading statement in December that gave the bare minimum disclosure (a decrease in earnings of at least 20%), KAP has now issued a further trading statement that shows a drop in HEPS of between 25% and 36% vs. the comparable period as published.

This distinction is important, as the base period earnings are being restated to allow for Safripol recovering R183 million from a supplier that had overcharged the company. The good news is that the R183 million was recovered, thereby increasing HEPS for the base period by 2.8 cents. The bad news is that this makes the year-on-year decrease even worse: a range of -31% to -41%.

At least debt is lower than a year ago and a revolving credit facility of R3 billion has been raised to refinance upcoming debt maturities. With a HEPS range of 19.8 cents to 23.3 cents, the group is still profitable despite all the strain at Safripol.

MC Mining’s independent board does not approve of the takeover bid (JSE: MCZ)

Or, as per Aussie takeover law, a resounding DO NOT ACCEPT all in capital letters

Things always get very interesting when independent boards play hardball with a potential acquirer. It is their role to make a recommendation to shareholders regarding whether an offer is fair. MC Mining’s board isn’t impressed with the bid by Goldway Capital for A$0.16 per share, calling it opportunistic and lacking an appropriate premium for control of the company. Simply, they believe the offer should be higher.

The board also notes that the bidders would need to hold at least 82.19% of shares in issue based on acceptances in order for the bid to become unconditional. This is because holders of at least 50.1% of the shares not held by the joint bidders must accept the offer based on the conditions imposed by the bidder.

Lots of narrative at Nampak – but no numbers (JSE: NPK)

It seems like things are moving in the right direction

Nampak is a turnaround story that I really struggle to get excited about. The company faces an incredible array of headwinds, making it very difficult to achieve meaningful returns for investors.

An update for the three months to December 2023 gave the market some important nuggets of information, like the news that operating profit has improved and net debt levels are down. Importantly, the divestiture plan is proceeding in line with previous guidance.

The South African business is on the wrong end of consumer pressures, although this does vary depending where in the group you look. For example, a good crop in the fruit season helped with the canned fruit business. The plastic and paper businesses have a less encouraging story to tell.

As is usually the case, currency issues in Nigeria and Angola continue to cause problems. At least demand is higher in Angola for cans, which is more than Nigeria can say.

The labour costs across the group are still a problem. Discussions with unions are in progress to limit increases. Although the company doesn’t say so in this announcement, one can reliably assume that unsuccessful negotiations could lead to job losses.

Concerningly, it seems as though working capital seasonality had a negative impact on cash generated from operations. This is expected to normalise by the end of March and it’s important that it does. The group must reduce debt by R243 million by the end of March and is on track to do so, with R180 million already done from the proceeds on disposal of the Nampak Nigeria Metals property and the UK apartment.

Yes, an apartment in the UK. You read that correctly.

With the existing chairman stepping down at the AGM, the board resolved to appoint Andre van der Veen to the chairman role.

Another hiccup at Renergen (JSE: REN)

Compressors have let the company down

The good news at Renergen is that LNG deliveries have recommenced after the maintenance outage.

The bad news is that there are yet more issues in the helium side of the business (which is what people care about). This time, the blame is being put on primary mixed refrigerant compressors, supplied by a Swiss group and assembled in China. The new part is expected to be delivered after Chinese New Year celebrations. Although Renergen may have a claim from insurance or against the supplier for the problem, it does once more raise questions around when the helium production will start.

The market continues to wait, with the share price having halved in the past 12 months.

Is mining cyclical? Just ask South32 (JSE: S32)

The dividend has all but disappeared

My dad ensured that I received a healthy dose of Led Zeppelin in my teenage years. I’m glad that happened, because I love the band today. They have a song called Good Times Bad Times and it’s a good thing to keep in mind when investing in mining.

For the six months to December 2023, South32’s revenue fell by 15% and the ordinary dividend has collapsed by 92%. Do not, ever, buy mining houses based on trailing dividend yield. You will frequently get hurt. The forward dividend yield is the right metric.

The reason for the drop in dividend is that diluted HEPS has also been smashed, down from 12.6 US cents to 1.2 US cents.

The reason for the drop? Well, despite record aluminium production, commodity prices went in the wrong direction and metallurgical coal volumes were lower. The show must go on of course, so the company has announced a $2.16 billion investment in the Taylor zinc-lead-silver deposit in Arizona (no relation to Swift) despite the drop in earnings. Production is only expected in H2 of FY27, which is a good reminder of the length of the planning cycle in mining.

Return on Invested Capital (ROIC) has plummeted from 12% to 1.3% and South32 will certainly be hoping for some improvement in commodity prices. The company expects a 7% production uplift in the second half of the year and will be driving cost efficiencies in the business, but mining houses can only do so much if commodity prices remain depressed.

Little Bites:

  • Director dealings:
    • Sean Riskowitz, acting as usual through Protea Asset Management, has bought yet more shares in Finbond (JSE: FGL), this time worth R755k.
    • The CEO of British American Tobacco (JSE: BTI) has reinvested dividend income worth £6k.
  • Philip Kotze, who is a representative of Clover Alloys, has agreed to step down from the Orion Minerals (JSE: ORN) board to avoid potential conflicts of interest that would arise from discussions around funding and other opportunities with multiple parties (including Clover).

ANSARADA DealMakers Annual Awards – Results 2023

Marylou Greig
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ANSARADA DealMakers Annual Awards – Results 2023

Over the past two decades, South Africa’s merger and acquisition (M&A) activity has all but halved, influenced by various factors, including regulatory changes, concerns over political stability, and local and global economic conditions, all of which have dampened investor confidence and slowed dealmaking momentum. This, is, of course, bar the blip in 2021, following the release of the bottleneck caused by the 2020 pandemic.

In 2023, total deal activity by SA-listed companies declined to 315 deals, valued at c.R576bn and that compares with 383 deals valued at R735bn in 2022. Of this 2023 total value, 64% of the deals were announced by foreign companies with secondary listings on the JSE.

Delving deeper into the numbers, the value of the 284 deals announced by SA domiciled companies in 2023 declined 44% against that of 2022 and this, despite the effect on the numbers of a weaker exchange rate. On a positive note, the number of failed deals dropped to six, against a norm of roughly 24.

Of the top 10 largest 2023 deals (by value) by a primary listed SA company, Life Healthcare’s disposal of Alliance Medical Group to entities advised by iCON Infrastructure tops the list at R19,7bn. The largest B-BBEE deal by value was Absa’s eKhaya transaction at R11,2bn. Both deals won their respective categories at the ANSARADA DealMakers Awards.

The standout theme of the general corporate finance tables, the rubric representing corporate restructurings, listings, share issues, unbundlings among others, was the return of value to shareholders by way of share buy-back programmes, special cash distributions and the secondary listing of companies on A2X providing investors with the cost-effective trading of listed shares.

The winners of the platinum medal subjective awards are as follows:

Ince Individual DealMaker of the Year – Ferdi Vorster

(L-R) Arie Maree (Ansarada), Ferdi Vorster and Laban Nyachikanda (Ince).

Brunswick Deal of the Year – Life Healthcare’s disposal of Alliance Medical Group

Life HealthCare’s disposal of Alliance Medical Group took home the Brunswick Deal of the Year award. Advising on the deal were Goldman Sachs, Barclays Bank, Rand Merchant Bank, Standard Bank, Werksmans, Webber Wentzel, Deloitte and BDO.


Exxaro BEE Deal of the Year – ABSA’s eKhaya transaction

(L-R) Arrie Maree (Ansarada) Molefi Nthoba and Jan-Hendrik du Plessis (Absa), Ling-Ling Mothapo (Exxaro), Mark Antoncich and Jason Janse van Vuuren (Absa)


Catalyst Private Equity Deal of the Year – Carlyle’s exit of Tessara

L-R Jaco Smit (Tessara), Michael Avery (Catalyst), Bruce Steen (Carlyle) and DJ Schreuder (Tessara)

Business Rescue Transaction of the Year – Cast Products South Africa

L-R: Arie Maree (Ansarada), Johan du Toit (Engaged Business Turnaround), Refilwe Ndlovu (Chrisyd Advisory Services) and Marylou Greig (DealMakers).

Special Recognition Award – African Parks

Accepting the award on behalf African Parks from Marylou Greig (DealMakers) is Yushanta Rungasammy and Sihle Bulose (CMS South Africa).

2023 M&A award winners (listed companies)

The category of Investment Adviser (by deal value) was won by Rand Merchant Bank. (L-R) Arie Marie (Ansarada), Krishna Nagar and Irshaad Paruk (RMB) and Marylou Greig (DealMakers).

The category of Investment Adviser (by deal flow) was won by Java Capital. (L-R) Arie Marie (Ansarada), Wilson Baloyi and Kevin Joselowitz (Java Capital) and Marylou Greig (DealMakers).


The category of Sponsors (by deal value) was won by Absa CIB. (L-R) Kevin Brady (A2X) and Bonnie Brink.

The category of Sponsor (by deal flow) was won by Nedbank CIB. (L-R) Michelle Benade (Nedbank CIB), Kevin Brady (A2X), Sujal Roy and Ryan Morrison (Nedbank CIB).

The category of Legal Adviser (by deal value) was won by Bowmans. (L-R) Simla Ramdayal (WTW) and Tholinhlanhla Gcabashe.

The category of Legal Adviser (by deal value) was won by Cliffe Dekker Hofmeyr. (L-R) Simla Ramdayal (WTW) and Roxanna Valayathum.

The award for Transactional Support Services Adviser (by deal value) was presented to Deloitte. Thembeka Buthelezi received the award from Marylou Greig (DealMakers).

Mdu Luthuli received, on behalf of Deloitte, the award for the Top Transactional Support Services Adviser (by deal flow) from Marylou Greig (DealMakers).


Winners of other awards presented on the night were:

In the category of General Corporate Finance:

Investment Adviser (by deal value): Rand Merchant Bank
Investment Adviser (by deal flow) tie: PSG Capital and Investec Bank

Sponsor (by deal value): Investec Bank
Sponsor (by deal flow): PSG Capital

Legal Adviser (by deal value): Webber Wentzel
Legal Adviser (by deal flow): Webber Wentzel

Transactional Support Services (by deal value): EY
Transactional Support Services (by deal flow): PwC

Top BEE advisers were:
Legal Adviser (by deal value): ENS
Legal Adviser (by deal flow): ENS

Top advisers (unlisted deals) were:
Legal Adviser (by deal value): Webber Wentzel
Legal Adviser (by deal flow): Webber Wentzel

2023 M&A League Tables: SA advisory firms (in relation to exchange-listed companies)


2023 General Corporate Finance League Tables: SA advisory firms (in relation to exchange-listed companies)

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


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

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

Exchange-Listed Companies

Yet another quiet week on SENS – but this, I am told by those advising on deals, is not a true reflection of the current level of M&A activity. Well, that is good news especially as the country’s elections loom larger.

Transaction Capital has released further details of its proposed unbundling and listing of WeBuyCars (WBC). Prior to the listing, Transaction Capital plans to raise between R900 million and R1,25 billion by issuing shares in the second-hand car dealer. Shares will be issued to Coronation giving the asset manager an 11.3% stake at a cost of R760 million. New investors will be able to subscribe via a capital raising exercise of c.R750 million. This will reduce Transaction Capital’s stake from 74.9% to a range of between 57% and 67%. WBC’s founders’ shareholding will reduce from 25.1% to 10%. Proceeds from the various capital raising initiatives will be utilised by Transaction Capital for the settlement of debt at holding company level. The implementation date of the unbundling and listing is anticipated to occur during early April 2024.

Sirius Real Estate has acquired a further two business parks in Germany. The parks, one in Köln and the other in Göppingen, have been acquired for a total cost of €40 million using proceeds from the €165 million capital raise.

The Competition Commission has approved a deal which will see Sanlam’s private equity arm acquire Bacher, a distributor and wholesaler of high-quality brands such as Hugo Boss and Tommy Hilfinger.

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

As part of its strategic review of its investment portfolio, Brimstone Investment has disposed of 8,836,487 ordinary shares in Equites Property Fund for a total consideration of R123,9 million. The proceeds from the disposal will be applied to meet funding obligations in the near to medium term. The disposal is classified as a Category 2 transaction and accordingly does not require shareholder approval.

The logistics and fleet management company, Karooooo, will embark on a share repurchase programme to buy back up to 10% of its shares. This will be done through market purchases on the JSE and the Nasdaq.

Following the launch of the share buy-back programme announced in October 2023, AB InBev has repurchased a further 512,809 shares at an average price of €58.46 per share for an aggregate €29,98 million. The shares were repurchased over the period 5 – 9 February 2024.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 5 – 9 February 2024, a further 4,080,757 Prosus shares were repurchased for an aggregate €118,88 million and a further 493,133 Naspers shares for a total consideration of R1,48 billion.

MC Mining’s Independent Board, has again, recommended to shareholders not to accept the off-market takeover offer from Goldway warning that it is opportunistic, and does not provide an appropriate premium for control.

The JSE has warned shareholders that Ellies has failed to submit its interim report within the three-month period as stipulated in the Listing Requirements. If the company still fails to submit its interim report by 29 February, then its listing may be suspended.

Five companies issued profit warnings this week: Sasol, Insimbi Industrial, Gold Fields, Cashbuild and Kap.

Cognition was the only company to issue a cautionary notice this week.

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

Ghost Bites (DRDGOLD | Pan African Resources | Universal Partners)

The Finance Ghost
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Ghost Bites (DRDGOLD | Pan African Resources | Universal Partners)

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

DRDGOLD can be very thankful for the gold price (JSE: DRD)

Without the increase, this period would’ve been a catastrophe

2023 wasn’t an easy year for DRDGOLD. The company had fallen behind on bringing new reclamation sites on stream to replace depleted sites. This was due to various external factors, ranging from delays on water usage licenses through to community interference. This forced the company to turn to legacy and clean-up sites to make 2023 a workable year – a situation made all the more frustrating by better gold prices that needed to be taken advantage of.

So, for the six months to December 2023, throughput fell 13% and production was down 7%, with better grades from the clean-up sites helping to mitigate some of the throughput pain.

Here’s an excellent summary of what life is like at mining dumps around Joburg:

Despite all this, DRDGOLD managed a 12% increase in revenue thanks to a 22% increase in the average rand gold price. Operating profit was up 15%, with operating margin expanding from 29.9% to 30.6%. A dividend of 20 cents per share has been declared.

The remainder of 2024 looks far more encouraging as all of the new sites are now up and running. There are also good reasons why costs should be better, including the completion of the solar power plant at Ergo that is scheduled for completion in March 2024.

Inflationary pressures cannot be ignored though, with cash operating cost guidance increased from R770,000/kg to R800,000/kg. This is a very tough way to make money, sadly, made all the more difficult by issues in Joburg.

The important numbers look good at Pan African Resources (JSE: PAN)

The group took advantage of the stronger gold price

The gold price doesn’t always do what we would like it to. In fact, it rarely behaves itself, seeming to move based on everything from inflation through to the gravitational pull of the moon. This means that when the price moves higher, gold mines absolutely must take advantage of this.

Pan African Resources did exactly that in the six months to December, with gold production up by 6.7% and an encouraging narrative around potentially upgrading guidance for the full year. Thanks to strong production and despite inflationary pressures, all-in sustaining costs (AISC) per ounce dipped slightly from $1,291/oz to $1,287/oz and full-year guidance has also been improved in this regard.

HEPS for the period was up 46.1%, which is obviously a strong result. Due to significant capex at the Mogale Tailings Retreatment project, net debt increased from $53.7 million to $64.3 million year-on-year. Steady state production is expected at the project by December 2024.

Universal Partners recognises a significant fair value loss (JSE: UPL)

The net asset value is down year-on-year as a result

Universal Partners holds a genuinely unique portfolio of assets, at least from a JSE perspective. They have everything from a dental roll-up business through to special toilets. No kidding.

Portman Dentex is actually a great example of a growing trend in the UK to combine fragmented services offerings into larger groups. This is now one of Europe’s largest dental care providers, fighting tooth decay across several countries. Following the merger of Portman and Dentex, Universal became a minority shareholder in the enlarged group. The business is performing ahead of budget, but higher borrowing costs have meant a shift in focus to operational efficiencies rather than lots of new acquisitions. Still, the business acquired three new practices during the quarter and how has over 400 practices in the group.

Another roll-up style play is Workwell, which doesn’t always work well. This is an accountancy and payroll business focused on contractors and freelancers as clients. That sounds like a lot of hard work to me – the exact opposite of lucrative B2B strategies. The business has struggled during a challenging labour market in the UK but is now in line with budget for the first quarter.

SC Lowy is a credit investing and lending group. The funds delivered a decent performance for the year, which is to be expected when yields are higher. The business in Italy, Solution Bank, achieved a record year.

Global recruitment business Xcede achieved the revised profit forecast for 2024. To help with working capital needs, Universal Partners subscribed for £1.5 worth of loan notes issued by Xcede.

We then arrive at Propelair, a toilet that uses just 1.5 litres of water per flush vs. 9 litres like a traditional toilet. Sounds good, but toilets turned out to be a rather kak business sadly. The company is way behind the original business plan and the investment is valued at a nominal amount.

The net asset value per share is £1.297, which equates to just over R31. The share price is R24. It is down from £1.429 a year ago, with fair value losses as a contributor to that.

Little Bites:

  • Director dealings:
    • Hot on the heels of Brimstone deciding to sell shares in Equites (JSE: EQU), the COO has also sold shares in the company. The sale is worth R6.9 million. The director has a loan agreement with Investec that is secured by shares and value of the loan has now been reduced.
    • Naughty, naughty: an independent non-executive director of Reunert (JSE: RLO) bought shares in the company worth R151k without obtaining prior clearance.
    • At Capital Appreciation Limited (JSE: CTA), the chairman, CEO and CFO only sold enough of their vested share options to pay the tax, whereas the divisional directors cashed in on share options in full. This isn’t an unusual situation given the variance in earnings at group executive vs. divisional executive levels.
  • Fortress Real Estate (JSE: FFA | JSE: FFB) announced that Moody’s has affirmed Fortress’ ratings and has upgraded the rating outlook from negative to stable.
  • Deutsche Konsum (JSE: DKR) shares literally never trade on the JSE, so I include this note just to give a data point on how German property is performing. For the quarter, net rental income (i.e. after operating expenses) fell 2.0% and FFO declined by 21.1% because of funding costs. The net loan-to-value at the fund decreased slightly from 61.6% at the end of September to 60.7% at the end of December.
  • In an announcement that you won’t see every day, an employee of the designated advisor of Visual International (JSE: VIS) bought shares worth R900. The designated advisor is the JSE listings requirements advisor for companies listed on the AltX.

Ghost Bites (Cashbuild | Gold Fields | Santam | Textainer | Transaction Capital)

The Finance Ghost
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Ghost Bites (Cashbuild | Gold Fields | Santam | Textainer | Transaction Capital)

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

No sign of improvement at Cashbuild (JSE: CSB)

This sector continues to take strain

As we’ve seen at Italtile and within certain other groups, the so-called DIY sector continues to struggle. Building and construction materials only enjoy strong demand when consumers are feeling so confident about an economy that they want to invest in fixed assets. You know, the kind that are attached to the ground.

South Africa isn’t exactly filling people with confidence right now and that’s before the latest round of load shedding.

To add to the absolute lack of faith in the country’s economic future, we have high interest rates that make capital projects expensive.

The net result? A drop in HEPS at Cashbuild for the 26 weeks ended 24 December 2023 of between 15% and 25%.

Although earnings per share (EPS) is rarely an area of focus on the local market, impairments to goodwill are so large for P&L Hardware and other business units that earnings could be as low as break-even! That’s a big ouch.

Gold Fields couldn’t fully capitalise on a higher gold price (JSE: GFI)

Although within guidance, key production and cost metrics deteriorated year-on-year

Gold Fields released a trading update dealing with the year ended 31 December 2023. Full year attributable gold production is down 4% year-on-year and all-in costs are $1,512/oz, which is 15% higher year-on-year. When less gold is sold, expenses per ounce go up – especially when there are also inflationary pressures.

All-in sustaining costs (AISC) for the year were $1,295/oz, which is 17% higher year-on-year.

HEPS for the year is expected to be 18% to 24% lower, driven mainly by the once-off net proceeds for the Yamana deal break fee having been received in 2022. If you strip those out and if you use normalised earnings per share instead, it comes in between 1% and 7% higher year-on-year.

Santam’s HEPS is higher, but perhaps not for optimal reasons (JSE: SNT)

Sometimes you just have to take the wins wherever you can get them

The good news at Santam is that the year ended December 2023 saw the company achieve HEPS growth of 17% to 37%. Nobody is going to complain about that.

The “bad” news is that the jump is thanks to better investment returns on the insurance float (which gets invested in money market and fixed interest portfolios), rather than a strong result from the insurance operations themselves. The net underwriting margin is expected to be below the long-term target range of 5% to 10%. Various risk events (including exposure to earthquakes in Turkey) have impacted this margin, with the final release of Covid-related business interruption claims provisions helping to mitigate some of the issues.

Although the investment of the float is an important part of the economics of any insurance business, it would also be good to see the underwriting margin heading in the right direction, especially if we start to move into a cycle of decreasing interest rates.

Textainer releases earnings ahead of the all-important shareholder meeting (JSE: TXT)

The drop in full year HEPS reflects the cyclical nature of this industry

Textainer is literally just a few days away from the shareholder meeting to vote on the transaction that would see Stonepeak acquire all the shares in the company for $50 per share. This is why the company didn’t even host an earnings call to accompany these results.

Still, the results are important and shareholders will consider them as part of the vote. For the full year, HEPS fell from $6.14 to $4.59 as shipping cooled off vs. the post-pandemic period.

It’s interesting to note that in the nine months leading up to the Stonepeak announcement, Textainer repurchased shares at an average price of $36.31. That’s way below the Stonepeak offer, so that’s solid capital allocation from a shareholder perspective.

Stonepeak deal aside, Textainer has declared a dividend of $0.30 per share payable on 15 March 2024.

Transaction Capital lifts the lid on the WeBuyCars unbundling (JSE: TCP)

And a capital raise by the company for good measure

Transaction Capital has given the market details on the proposed structure of the WeBuyCars unbundling, which includes a few twists and turns that the market wasn’t expecting. In a separate announcement, the group also gave an update on the trading performance of WeBuyCars for the four months to 31 January.

The good news is that the positive momentum in the second half of the last financial year has continued into the new year, with revenue up 16% for the four months and core earnings up by 20%. Cash generated from operations has jumped beautifully by 57%, as the inventory value is only up by 2% despite the jump in revenue. Importantly, net interest bearing liabilities (R734 million in property finance on the vehicle supermarkets and R300 million for inventory) fell by 26%.

The blemish on this result is the finance and insurance (F&I) penetration, which was 19.4% in this period – down from 21.6% in the comparable period. Although shareholders would like to see this moving higher, it’s not enough to distract from the excellent financial results for this period.

This performance has come at the right time, as Transaction Capital needs to realise the value of a portion of its stake to help the company navigate its nightmare in SA Taxi. To achieve this, Transaction Capital will reduce its stake in WeBuyCars from 74.9% to between 57.5% and 67.5% prior to unbundling. The founders of WeBuyCars will also dilute from 25.1% to not less than 10% prior to unbundling.

On the whole, Transaction Capital plans to unlock between R900 million and R1.25 billion in cash prior to the unbundling. This will be used to settle debt and other obligations. Of great importance is that the call and put option structure with the founders of WeBuyCars will be cancelled, as they will now realise their value through the capital raising initiatives.

Note: the following section has been updated after a discussion with the management team to further understand the nuances of the deal:

The deal structure is complicated and involves various cash flows. With all said and done, the correct interpretation of the value of WeBuyCars seems to be R7.5 billion. In case you’re wondering if this view can be backed up by third party deals, the answer is that you’ve got Coronation, Stockdale Street Investment Partnership (the Oppenheimer family) and Ellvest (the Ellerine family) coming on board at this value. I initially thought the value might be more like R4 billion – R5 billion but that was without the benefit of the strong recent trading performance. As a Transaction Capital shareholder, I’m not complaining.

The market appreciated this news, sending the Transaction Capital share price 10% higher to R8.26. The announcement references a sum-of-the-parts valuation by the independent expert that values Transaction Capital at R11.86 per share, which is a great indication of just how much value was destroyed by SA Taxi in recent times. In case you’ve forgotten, Transaction Capital traded above R50 a share in early 2022.

Little Bites:

  • Director dealings:
    • Acting through Protea Asset Management, Sean Riskowitz has bought another R4.37 million worth of shares in Finbond (JSE: FGL).
    • Although I’m not 100% sure how the British American Tobacco (JSE: BTI) share compensation plan works, it’s notable that the interim finance director sold £250k worth of shares from the company’s share plan account.
    • The CEO of Datatec (JSE: DTC) bought another R4.05 million worth of shares in the company, taking his stake to 15.6% in the company. Conversely, the company secretary sold shares worth R346k.
    • A director of a major Dis-Chem (JSE: DCP) subsidiary sold shares worth R1.56 million.
    • The CEO of Sirius Real Estate (JSE: SRE) has bought shares worth £19.8k in a self-invested pension.
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth R28.6k.

Ghost Wrap #62 (Sasol | ArcelorMittal | Sappi | Curro | British American Tobacco)

The Finance Ghost
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Ghost Wrap #62 (Sasol | ArcelorMittal | Sappi | Curro | British American Tobacco)

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:

  • Sasol has seen its share price halve over the past year, with the wonderful opportunity for investors in 2020 becoming a very distant memory as infrastructure and other issues take their toll.
  • ArcelorMittal is perhaps the most severe rollercoaster ride of them all on the JSE, with the steel industry only for those with an exceptionally strong stomach.
  • Sappi demonstrates that the paper industry is also a tough place to play, with swing traders doing better than long-term holders of this stock.
  • Curro may be growing its earnings at a solid rate, but the company is still coming to terms with growth that is well below original expectations.
  • British American Tobacco is now profitable in the non-combustibles business and is still doing what it does best in the traditional smoking business: putting through pricing increases that fund dividends. 

Ghost Bites (Anglo American | Calgro M3 | Glencore | Sirius Real Estate)

The Finance Ghost
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Ghost Bites (Anglo American | Calgro M3 | Glencore | Sirius Real Estate)

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

Anglo American looks to Finland for more opportunities (JSE: AGL)

If this sounds familiar, it’s because Sibanye-Stillwater has been doing the same thing

Anglo American and Finnish Minerals Group have signed a memorandum of understanding to explore opportunities around Finland’s battery metals strategy. This reminds me of when the local property funds all ran off to Eastern Europe in search of deals. Our mining houses seem to be taking a similar route in Finland!

To be fair, Anglo American already has an investment in Finland in the form of the Sakatti project, so it becomes an interesting debate around who has been copying whose homework around here.

There are various metals that form part of the “green metals” or “transition metals” groupings that are frequently written about. These metals are just as exposed to cycles as other commodities, evidenced by the Glencore news further down in Ghost Bites.

At this stage, Anglo American hasn’t released any concrete details around this memorandum of understanding.

Calgro M3 released an encouraging trading statement (JSE: CGR)

Share buybacks do wonders for earnings growth

Calgro M3 has been a comeback kid of note on the local market, with a focused strategy and capital allocation discipline that is working out very nicely. The latest trading statement is further evidence of this, with the company expecting HEPS for the year ended 29 February 2024 to be at least 20% higher.

If you’re familiar with trading statements, you’ll know that this is the minimum required disclosure under JSE rules. In other words, the increase could be significantly higher. When you consider that the number of shares in issue has decreased by 21% over the past year, even a sideways move in headline earnings would look strong at HEPS level.

Given the recent positive trajectory in operating performance, it seems fairly likely that the earnings improvement is significantly more than 20%. We will know for sure as we move closer to results being released in early May, with an updated trading statement likely to be released between now and then.

The nickel market has claimed another scalp (JSE: GLN)

Glencore isn’t prepared to carry any further losses at Koniambo Nickel

The Koniambo Nickel joint venture between Société Minière du Sud Pacifique SA and Glencore can be found in New Caledonia, a French territory in the South Pacific. Glencore has been involved since the Xstrata transaction back in 2013 and has funded more than $4 billion over the past decade without realising a profit at any stage.

This is obviously a terrible outcome for shareholders and enough is enough at some point. The mine is very important to the local economy but is simply untenable in the current market conditions for nickel. This is despite the best efforts of the French government to try and support the ongoing operation of the mine.

The operation will be moved into a state of care and maintenance, with the furnaces to remain hot for six months. All local employees will be retained for that period. Glencore will try to find a new industrial partner for the mine in an effort to avoid the economic fallout for the region.

Sirius buys two business parks in Germany (JSE: SRE)

The acquisitions have been funded from the November capital raise

Sirius Real Estate is listed on the JSE, but you won’t find any of the fund’s money flowing into local opportunities. This is a perfect example of how you can invest on the JSE and give your money a passport in the process. The fund is focused firmly on business and industrial parks in Germany and the UK.

The latest deal is to acquire two business parks in Germany for €40 million. The deals have been funded by the proceeds of the €147 million capital raise that was concluded back in November. It’s been a busy time for Sirius, as the fund acquired three UK properties in North London for €33.5 million towards the end of 2023.

The two German properties are of very similar values. The first is in Köln and was acquired for €20.0 million, with an EPRA net initial yield of 7.3%. The occupancy rate is just over 89% and the weighted average lease expiry is 2.4 years. The second property is in Göppingen and was acquired for €19.8 million. It has been acquired on an EPRA net initial yield of 6.9%. Occupancy is at 86% and the weighted average lease expiry is 2.8 years.

In both cases, Sirius will look for value-add opportunities to improve the economics of the properties. Sirius already owns other properties in the areas and so there is familiarity with both regions.

From the capital raised in November, €78 million has been committed to legally binding acquisitions and Sirius is in discussions for opportunities related to the remaining €70 million or so.

Little Bites:

  • Director dealings:
    • The CEO of Invicta (JSE: IVT), Steven Joffe, as well as Dr. Christo Wiese have been at it again with buying up shares in the company. The latest purchase is to the value of R985k for each of them.
    • The CEO of RH Bophelo (JSE: RHB) has bought shares in the company worth R401k.
    • Associates of directors of Nictus (JSE: NCS) have bought shares worth just under R24k.
  • This isn’t a director dealing in the usual sense as it relates to share options rather than an outright sale or purchase, but I simply had to mention a director of Naspers (JSE: NPN) selling shares worth a spectacular R79.8 million. Best of all, this only represents around 58% of the shares received under the share options that were exercised. It’s tough at the top, hey.
  • Cognition Holdings (JSE: CGN) released a rather amusing trading statement, noting that HEPS for the six months to December 2023 will be up by between 260% and 280%. This is thanks to returns on cash balances held over the period after the disposal of the Private Property platform. The company also renewed the cautionary announcement related to ongoing discussions with Caxton and CTP Publishers and Printers (JSE: CAT), Cognition’s holding company.
  • The chair of Sasfin (JSE: SFN), Deon de Kock, has unfortunately had to step down for medical reasons. Current lead independent director Richard Buchholz has been nominated as his replacement, subject to approval by the Prudential Authority.
  • Southern Palladium (JSE: SDL) released an addendum to the Bengwenyama project study. Perhaps I’m misreading it (and very happy to be corrected), but it suggests a project IRR of roughly 20% (see table below). That doesn’t sound like anywhere near enough to make junior mining appealing, especially in PGMs!

Ghost Bites (Brimstone | enX | Kore Potash | Sasol)

The Finance Ghost
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Ghost Bites (Brimstone | enX | Kore Potash | Sasol)

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

Brimstone reduced its stake in Equites (JSE: BRT)

The recent recovery in the Equites share price perhaps prompted this move

The Brimstone story hasn’t been very exciting, sadly. The share price has halved in value over 5 years and is down over 22% in the past year. The first problem is that the market puts a substantial discount on the intrinsic NAV. The second problem is that the intrinsic NAV hasn’t shown appealing growth. The combination means a disappointing share price performance and a market cap of just R200 million.

When trading at such a discount to NAV, turning some of the assets into cash isn’t a bad strategy (depending on what happens to the cash thereafter). Brimstone has used the recent improvement in the Equites share price to sell R123.9 million worth of shares, cutting its stake to just over a third of what it used to be.

The disposals were achieved at an average price of R13.02 per share. Hindsight is perfect obviously, but the Equites share price was trading at double this level in 2021. They must be kicking themselves about not selling sooner.

The proceeds will be used to meet funding obligations in the near to medium term. In a perfect world of course, the company would be able to use the proceeds for share buybacks, thereby helping to close the discount to intrinsic NAV.

enX has distributed the Eqstra disposal circular (JSE: ENX)

Shareholders can get all the information they want on the proposal deal with Nedbank

A couple of months ago, enX announced a firm intention to dispose of Eqstra Investment Holdings to Nedbank. It’s a clever deal in my view, as the leasing and fleet management business will benefit greatly from a cheaper source of funding (and nothing is cheaper than being owned by a bank). It also gives Nedbank more scale in its fleet management business and a strong route to market. For enX, it gets a capital hungry business off the balance sheet.

Acting as independent expert, Valeo Capital has opined that the transaction is fair and reasonable to shareholders. The independent board of enX has recommended that shareholders vote in favour of the deal. You can find the full circular here.

I just hope that more attention to detail was paid to the deal than the expenses table (something I always look at). It’s not every day you’ll see a typo in the description AND the footnote:

There’s great news at Kore Potash (JSE: KP2)

Finally, there’s a meaningful step forward on the project

Kore Potash shareholders (and everyone else involved) have had to be patient on this one. For months now, we’ve been reading about PowerChina (the owner of SEPCO) and all the work that the company is doing on site to put together an Engineering, Procurement and Construction (EPC) proposal. Construction projects of this scale can easily sink construction groups if they go wrong, so immense effort is put into the contract itself. The risks are even higher when the build is in a difficult jurisdiction, like the Republic of Congo.

The excellent news is that PowerChina has finally delivered an EPC proposal and draft contract offer. Best of all, the pricing aligns with expectations and confirms the capital cost that was detailed in the original study. Full commercial terms now need to be negotiated, with a targeted signing date of April 2024. Thereafter, the Summit Consortium will need to put in a funding proposal within six weeks of the EPC documentation being signed.

The share price jumped 23% on the news. You can be sure that whether things go well or extremely badly in the next few months, each major update will drive a significant move in the share price, either up or down.

Sasol shareholders continue to take a beating (JSE: SOL)

The latest trading update isn’t helping

Sasol’s share price has halved in the past year, having decoupled considerably from the oil price in recent times. The chemicals side of the business has a substantial bearing on the share price performance, as do the operational realities in the energy business in South Africa.

Battered shareholders don’t seem to be getting any relief, with another 3.9% drop on Friday after the company released a trading statement. Results for the six months to December were hit by a bunch of issues, ranging from commodity prices through to infrastructure problems in South Africa and the weaker global growth outlook.

Adjusted EBITDA for the period will be between 8% and 18% lower. By the time you reach core HEPS level, the decrease is 19% and 33%.

Although I tend to focus on HEPS rather than EPS which is impacted by impairments (non-cash write-downs of assets), I must note that the Secunda liquid fuels refinery was written down to zero as at June 2023 and all the capital expenditure on the project in the six months to December 2023 was also fully impaired due to ongoing issues.

I would therefore argue that EPS is worth considering at the moment. That metric is down by between 29% and 43%.

Whichever way you cut it, things are not looking healthy at Sasol.

Little Bites:

  • Director dealings:
    • An associate of a director of Clicks (JSE: CLS) sold shares worth R2.7 million.
    • The CEO of Invicta (JSE: IVT) and Dr. Christo Wiese are both still buying up shares in the company. The latest tranche saw CEO Steven Joffe pick up R720k worth of shares and Wiese took R1.05 million.
    • A director of a major subsidiary of Santova (JSE: SNV) sold shares worth R1.2 million.
    • After buying another R820k worth of shares, Protea Asset Management (related to Sean Riskowitz) now owns just over 20% of Finbond (JSE: FGL).
    • An associate of a director of Afrimat (JSE: AFT) has bought shares worth R122k.
  • Sirius Real Estate (JSE: SRE) only achieved a modest take-up of the dividend reinvestment plan, which suggests that shareholders aren’t seeing great value in the shares at these levels. Only holders of 0.46% of shares on the UK register and 7.24% of shares on the SA register elected to receive shares instead of a cash dividend.
  • Having already given us significant insight into earnings earlier this month, MiX Telematics (JSE: MIX) has now released its detailed 10-Q (quarterly report under US rules) with the SEC. If you want to check out the company in detail, you’ll find it on the website.
  • Insimbi Industrial Holdings (JSE: ISB) released a trading statement noting that HEPS will be at least 20% lower for the year ending 29 February 2024. This is the bare minimum disclosure required by the JSE, so it’s quite possible that the actual decrease will be significantly worse. No further details have been given.
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