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Ghost Bites (Italtile | Mondi | MultiChoice | RCL Foods | Sun International | Vukile)

The Finance Ghost
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Ghost Bites (Italtile | Mondi | MultiChoice | RCL Foods | Sun International | Vukile)

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

Italtile can’t catch a break (JSE: ITE)

No signs of improvement in this sector yet

The building materials industry has been having a torrid time in this higher interest rate environment. Probably the only house improvements that I’ve seen anyone do for the past two years have been related to solar installations. After investing in homes during the pandemic, even well-off consumers have prioritised spending on travel and experiences after the world went back to normal.

None of this is good news for Italtile, which has seen HEPS for the six months to December 2023 fall by between 13.1% and 17.0%. This puts it on 65.8 to 68.8 cents.

The share price has lost over a third of its value in the past three years.

Mondi buys a small mill in Canada (JSE: MNP)

The deal is worth just $5 million, so it only gets a passing mention by the company

With a market cap of R143.5 billion, a transaction worth under R100 million really isn’t going to move the dial at Mondi. This is why the acquisition of the Hinton Pulp Mill in Canada only gets a voluntary announcement. Kudos to Mondi for even giving this level of disclosure.

The mill has the capacity to produce around 250,000 tonnes of pulp per annum. The seller is West Fraser Timber Co. and there’s a long-term partnership in place with the company. Mondi intends to invest in the mill, including for the expansion of the facility with a new kraft paper machine.

Will MultiChoice shareholders have multiple choices? (JSE: MCG)

The board is playing hard-to-get with Canal+

After the market celebrated the news of a non-binding offer from Canal+ for MultiChoice at R105 per share, the company stunned everyone with an announcement that the board feels that this offer underprices the company. This is perhaps a good time to point out that MultiChoice last traded above this level in May 2023, with a 52-week low of R62.31 and a 52-week high of R155.20. The volatility has been exceptional.

MultiChoice claims to have recently gone through a valuation exercise that puts the value “significantly above R105 a share” – but they don’t say by how much, nor do they give details of why. The company also points to public comments by Canal+ that there are many synergies in the deal, which MultiChoice believes need to be factored into a fair offer by Canal+.

The synergies point is highly debatable. There is zero obligation whatsoever for Canal+ to pay a cent towards synergies that it will bring to the table. It is an established principle in dealmaking that you don’t pay for the value that you are bringing. If they really want the deal, then they might share some of the synergies.

When you’re buying a broken car and you have the skill to fix it, do you make an offer based on what the fixed car is worth, or what it is currently worth? Exactly.

MultiChoice is so bold in its approach that they have lifted the cautionary announcement and said that they won’t even engage further with Canal+. This throws the door wide open to any other potential bidders, which is either the masterstroke of the year or a very silly move. If it works, perhaps shareholders will get a better outcome than R105 a share. If it fails, I suspect that the share price will move sharply lower (after the mandatory offer period below) and Canal+ will just keep building the stake by picking up shares at a cheaper price.

Another interesting twist to this tale is that Canal+ has breached the 35% ownership threshold in MultiChoice, which means that it may need to make a mandatory offer to shareholders based on the price recently paid for shares in the market. The TRP needs to rule on whether there should be an offer. Initially I couldn’t see a reason for there not to be, but then I remembered that this rule might be interpreted based on voting rights rather than economic interest. Due to the restriction on foreign voting rights in a local broadcaster, they may not be deemed to have breached the mandatory offer threshold!

There are many potential outcomes here, ranging from a hostile bid made directly to shareholders or another bidder emerging with a better price, right through to the whole deal falling over and MultiChoice directors being left with some egg on their faces.

Corporate M&A is many things, but it isn’t boring!

A brighter rainbow at RCL Foods (JSE: RCL)

Improved conditions in poultry have led to better earnings

Although RCL Foods has put in a substantial effort to diversify operations and be more than just a chicken business, the numbers at Rainbow still make a sizable difference. For the six months to December 2023, HEPS will be at least 30% higher than the comparable period, with the improvement attributed to Rainbow and the sugar business unit.

Despite having to deal with Avian Influenza in this period, Rainbow achieved better numbers as the turnaround plan was executed. In the sugar business, higher market prices helped them out.

In Groceries and Baking, performance was in line with the comparative period as volumes struggled.

Sun International releases the Peermont circular (JSE: SUI)

There are 11 properties in Peermont, with Emperors Palace as the clear flagship

For a transaction of this size, the release of the circular is a major milestone. In all its 158-page glory, you can see how corporate finance really works in practice.

The jewel in the Peermont crown is Emperors Palace, which has achieved an average EBITDA margin of around 40% in the past few years (excluding 2020). Sun International notes that this is in line with its largest casino operations, which shows that Emperors will slot right in beautifully.

There are 10 other properties in Peermont:

Peermont generated consolidated historical EBITDA of R1.056 billion in FY22 and R1.165 billion in FY23. The purchase price is based on an enterprise value of R7.3 billion. Based on the last twelve months to December 2023, this is EV/EBITDA multiple of 5.76x. That just shows you how ridiculously overvalued some assets are in South Africa, as you can pick up this group of casino assets on what feels to me like a rather modest EBITDA multiple.

The risk is on the balance sheet, with Sun International taking on R4.0 billion worth of debt in Peermont and borrowing the purchase price as well, so group debt will balloon from R5.9 billion to R13.2 billion. Sun International will pay reduce the dividend payout ratio to 50% for as long as the net debt to EBITDA ratio is above 2x and will pay 75% when it is below 2x.

So, it’s a risky gamble with strong potential upside. What else would you expect from a gaming group?

And in case you need a reminder of why people work extremely hard to break into the M&A advisory industry and then still put in incredibly long hours once they are in, here are the fees:

A bullish update from Vukile Property Fund (JSE: VKE)

The full-year performance should be ahead of even the upgraded guidance

The year ending March 2024 is proving to be a goodie for Vukile. This retail-focused REIT has unique exposure of 40% South Africa, 60% Spain. Total assets in the portfolio are worth R40 billion.

In South Africa, key metrics for November and December were positive and in line with expectations. Festive trading was particularly strong, with trading density up 7.6% in December. Township centres led the way with 13.2% growth, while rural centres grew 7.2% and urban centres only managed 4.5%. If we combine both November and December, we see township centres up 9.7%, rural up 3.3% and urban properties only 1.3% higher.

Fast foods were only up 5.4% in December, which is a modest performance that we’ve seen in other property updates as well. We know from the apparel retailer updates that clothing did well over this period, echoed by Vukile’s update that shows women’s wear sales up 14.5% in December and men’s wear up 8.1%. Notably, grocery sales were only up by 2.4% in December.

Moving on to Spain, Castellana (the name of the overall portfolio) achieved record footfall for the 12 months to December 2023, up 6.4%. Sales numbers grew 7.9% despite 2022 being a strong base. Unlike in South Africa, Black Friday was a relative winner with sales growth of 7.0% in November and 6.1% in December.

At category level, the winner in Spain was media and technology (up 19.5%), with health and beauty (14.2%) and food and beverage (12.3%) also putting in solid growth numbers. The leisure category finally moved ahead of 2019 levels, marking a full recovery from the pandemic (without adjusting for inflation, at least).

With nine months of the year now behind them, Vukile gave the happy news that full-year performance should be ahead of even the upgraded guidance for FFO per share (and cash measure) and dividend per share. It’s been an excellent year for the company.

Little Bites:

  • Director dealings:
    • The managing director of the Feed division at Astral Foods (JSE: ARL) has sold shares worth R1.2 million.
    • A non-executive director of KAL Group (JSE: KAL) has bought shares in the company worth R224k.
  • Renergen (JSE: REN) announced that the investment by Mahlako Gas Energy for a 5.5% stake directly in Tetra4 (the Virginia Gas Project) has met all conditions precedent. The R550 million should now flow. The market is waiting for helium to flow as well, so hopefully that isn’t too far away.
  • Zeder (JSE: ZED) announced that the disposal of Capespan Group (excluding the pome fruit primary production operations and the Novo fruit packhouse) to Agrarius has been completed. Zeder has received R511.39 million from the disposal. Agrarius is a JSE-listed special purpose investment vehicle that is Shariah compliant and focsed on the agriculture sector value chain. It operates a R10 billion Shariah-compliant sustainability-focused asset-backed note program and raised this funding through the Sukuk issuances.

Satrix launches Satrix JSE Global Equity ETF

Satrix
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Satrix launches Satrix JSE Global Equity ETF

This gives investors exposure to SA companies with offshore listings.

Satrix, South Africa’s leading provider of index-tracking products, will list a new exchange traded fund (ETF) during the first quarter of 2024, upon approval from the JSE. The Satrix JSE Global Equity ETF (STXJGE) will give investors an equity building block that upweights local companies that have their primary listings offshore. It will track the FTSE/JSE Global Investor Index.

Kingsley Williams, Chief Investment Officer at Satrix*, says “This new fund represents a shift in investment strategy, catering to the market’s evolving needs. It will provide an alternative option for investors who want to diversify their local equity portfolios and incorporate higher exposure towards rand hedge stocks, particularly in light of the upcoming harmonisation of the FTSE/JSE benchmark indices (ALSI and SWIX) in March 2024.

He said over the past few years local equity indices using the All Share Index (ALSI) construction methodology have significantly reduced exposure to inward-listed global companies such as BHP Group (BHG), Compagnie Financiere Richemont (CFR), Glencore (GLN), Prosus (PRX), and Anheuser-Busch InBev (ANH), due to a combination of corporate actions, restructuring and index rules resulting in substantially reduced floats.

“This has exposed these equity indices more to local macroeconomic idiosyncrasies (often referred to as SA Inc. factors), which clients may wish to diversify away from within their local equity exposure.”

“Investors can blend the Satrix JSE Global Equity ETF with existing ETFs to gain increased exposure to dual-listed companies on the JSE, as historically offered by the ALSI indices.”

Rand Hedge and Offshore Revenue Exposure
“The new ETF has a significantly higher rand hedge profile than other broad local equity market indices, providing a potential cushion should the local currency weaken. It also offers a diversified source of revenue from its constituents, with higher earnings emanating from offshore markets across a variety of sectors. That makes it ideal for investors with a longer-term investment horizon who can withstand equity-like volatility,” adds Williams.

Blending Local Equity Exposure With Global Investment Appeal
Satrix says the Satrix JSE Global Equity ETF tracks the recently launched FTSE/JSE Global Investor Index, focusing on the 50 largest companies listed on the JSE. This approach diverges from broad local equity benchmark indices by using global free-float metrics for weight determination. Local equity benchmark indices typically reduce the weight of dual-listed companies, by only considering the proportion of shares held locally.

Key Features of this ETF include:

  • Diverse portfolio: Targets the 50 largest JSE-listed companies.
  • Global free-float weighting: Uses global free-float metrics, offering higher exposure to dual-listed companies.
  • Quarterly rebalancing: Ensures the ETF stays current with market changes.
  • Competitive TER: An attractive Total Expense Ratio (TER) of 0.15% makes it an affordable option for a diverse range of investors.
  • Easy access: The ETF will be available for trading on the JSE, making it accessible for a variety of investment applications.

Visit www.satrix.co.za for more information on the Satrix JSE Global Equity ETF.

*Satrix is a division of Sanlam Investment Management.

Ghost Bites (British American Tobacco | MC Mining | Pan African Resources | Sanlam | Vodacom)

The Finance Ghost
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Ghost Bites (British American Tobacco | MC Mining | Pan African Resources | Sanlam | Vodacom)

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

British American Tobacco settles with Philip Morris (JSE: BTI)

No money is changing hands under this agreement

British American Tobacco and Philip Morris have been battling it out over intellectual property disputes relating to the cigarette alternative products. These are key growth areas for the businesses – and the source of halfway decent ESG ratings.

The companies have now agreed to a settlement that puts literally everything to bed, including future claims against current products. Each party is allowed to innovate and introduce new product interations.

The amount changing hands? Zero. Nada. Niks. The fight was so damaging for both sides that there is no clear winner here.

In the official announcement relating to the settlement, British American Tobacco reminded the market that Vuse and glo are each £1 billion brands. There’s a valuable pie to fight over here, especially as these products become more profitable in years to come (provided all goes to plan). The parties have clearly decided to just move on now and focus on their respective businesses.

MC Mining has received the bidder’s statement (JSE: MCZ)

The recommendation at this stage is still to take no action

MC Mining has been waiting for the consortium of joint bidders (including Senosi Group and Dendocept – with all parties holding a combined 64.3% of shares in issue) to lodge a bidder’s statement in line with Australian takeover laws.

This has finally happened, so the independent board must now move ahead and consider the terms of the statement. The next step is that the board responds with a target statement that will include an independent expert report and the independent board’s recommendation regarding the bid.

Until then, shareholders have been told to take no action in relation to the bid.

The price is A$0.16 per share, which works out to around R1.97 at current exchange rates. The share price closed 20% higher at R1.80.

A shiny jump in earnings at Pan African Resources (JSE: PAN)

HEPS has jumped sharply – and that’s in US dollars

Pan African Resources has been on the receiving end of a gold price that increased 13.7% in dollars in the six months to December 2023 vs. the comparable period. Volumes of gold sold increased by 8.9%. Even before you take advantage of the weak rand, this combination is going to tell a good story for US dollar results.

Indeed, HEPS will increase for the period by between 41% and 51% in US dollars – the company’s reporting currency. The average exchange rate was 7.8% weaker for the period, so rand results would’ve been even better.

This is why the share price is up around 24% in the past 12 months.

A busy day of M&A news for Sanlam (JSE: SLM)

Assupol is the big news, with a deal in Morocco as well

I’ll start with the most important news, which is that Sanlam (acting through Sanlam Life) is making an offer for Assupol. If you go back to April 2023, two major shareholders of Assupol (Budvest with 46.11% and the International Finance Corporation with 19.36%) noted an intention to commence a sale process. Sanlam is now providing that exit and wants the rest of the company as well, hence this is being structured as a scheme of arrangement (a desire to get a 100% stake) with a standby offer as well.

This is an unusual structure, as it means that Sanlam is happy to get a piece of the pie at this price even if it can’t get the whole thing. For the standby offer to become applicable though, holders of at least 65% of shares in issue would need to accept it. At the moment, irrevocable undertakings are in place for holders of 69.81% of the shares, so it looks like the scheme is likely to go ahead anyway as they are very close to the required approval rate for a scheme. If the scheme somehow fails, the standby offer is on track unless an irrevocable undertaking is pulled.

Assupol is currently listed on the Cape Town Stock Exchange with a market cap just below R5 billion before this offer was made. The embedded value (an important metric for life insurers) is R7.07 billion. Sanlam sees Assupol as a strategic fit in the Retail Mass segment, particularly given Assupol’s strong customer base in Gauteng.

The price for the deal is quite a complex calculation, thanks to the existence of the B shares among other issues. Based on the assumed implementation date, it works out to R15.23 per share. This is a 32.17% premium to the closing price of the shares on the day before the offer was made. The offer works out to R6.5 billion in total, so that’s a lot closer to the embedded value in the business. An independent expert has opined that the scheme price is fair and reasonable to shareholders.

There must be some long faces at the Cape Town Stock Exchange. They don’t exactly have many listings and now one of the most important ones is set to disappear.

In much smaller (but still interesting) news, the formation of the SanlamAllianz Africa joint venture triggered a mandatory offer in Morocco for Sanlam Maroc. It seems as though shareholders were very happy with that outcome, as holders of a sizable 23.86% of shares in issue said yes to the offer.

The total price was R2.43 billion, funded by Sanlam Emerging Markets and Allianz Europe in line with their respective 60% and 40% shareholdings in SanlamAllianz. This increases the stake held by SanlamAllianz in the Moroccan business from 61.73% to 85.59%.

Vodacom now has 200 million group customers (JSE: VOD)

The deal for Vodafone Egypt has made the group substantially larger

When companies want to grow, they can either do it the slow way (organic growth) or the fast way (acquisitions). Now, getting bigger overall doesn’t mean that shareholders are any better off. If you acquire businesses in exchange for shares, then the number of shares in issue keeps going up. When wearing an investor hat, you always have to keep this in mind when looking at companies that have grown significantly through deals.

Vodacom now services 200 million customers across the group and is obviously making a big deal of this fact, with 75 million of those customers using a financial service. Revenue from “new services” – which includes financial and digital services – is targeted to reach 25% to 30% of revenue over the medium term. The contribution exceeded 20% this quarter for the first time. Mobile money is the cornerstone of this part of the business.

For the quarter ended December 2023, Vodacom’s group revenue grew 26.8% year-on-year. If you dig deeper, you’ll find that South Africa grew by 4.0% and International (which excludes Egypt) was good for 12.6%. This means that the bulk of the exciting growth came from the acquisition of Egypt.

The group reports a group normalised number for service revenue specifically. Without the normalisation, it increased by 29.7%. With the adjustment for the Egypt deal, it grew by 8.8% with Egypt and 3.2% without Egypt. So even when adjusting for the change in shareholding, the growth really is coming from Egypt. That business grew service revenue by 29.1% in local currency and there were 55.5% more financial services customers, so those are impressive numbers.

Little Bites

  • Director dealings:
    • An executive director of Argent Industrial (JSE: ART) has sold shares worth R1.5 million.
    • Sean Riskowitz has bought another R232k worth of shares in Finbond (JSE: FGL), acting through Protea Asset Management.
  • Life Healthcare (JSE: LHC) has completed the sale of Alliance Medical Group, receiving £845.9 million in the process. Net proceeds of R10.5 billion have been repatriated to South Africa after the settlement of international debt. The majority of these proceeds will be returned to shareholders – but we don’t know how much just yet.
  • BDO has opined that the Dis-Chem (JSE: DCP) related party transaction regarding the acquisition of the Midrand head office and distribution centre is fair to shareholders. Such an opinion is a requirement for a related party transaction.
  • Willem Britz has stepped down as a non-executive director at AfroCentric (JSE: ACT), having been on the board since 2015. He was one of the founders of Pharmacy Direct, a business that AfroCentric acquired.
  • AYO Technology (JSE: AYO) has renewed the cautionary announcement related to finalising the terms of the settlement agreement with the GEPF and PIC. There has been extensive engagement with the JSE to ensure compliance with listings requirements. The parties previously agreed to extend the long stop date for this to 30 June 2024.
  • Creating perhaps more questions than answers in the process, Grindrod (JSE: GND) alerted the market to announcements by Martius Limited and Redink Rentals Limited regarding an event of default. These companies are funders of Mokoro Holding Company, in which Grindrod has a 35.07% equity interest in the non-core private equity portfolio. Grindrod is not a guarantor on the funding arrangements but is considering the impact on the fair value of the investment. I suspect that this is very small in the grand scheme of things at Grindrod.

Ghost Bites (Glencore | Hudaco | MiX Telematics | MultiChoice)

The Finance Ghost
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Ghost Bites (Glencore | Hudaco | MiX Telematics | MultiChoice)

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

2023 saw a drop in production and commodity prices at Glencore (JSE: GLN)

Production guidance doesn’t look terribly inspiring either

Production at Glencore was in line with earlier revised guidance for 2023. Of course, being in line with guidance certainly doesn’t mean that it tells a happy story year-on-year. The second half was better than the first half, but it was still a year in which only gold and coal saw an increase in production from own sources. Metals like copper (-5%), cobalt (-6%) and zinc (-2%) were all lower.

Looking at production guidance, there is very little or no growth predicted across copper, cobalt, zinc, ferrochrome and coal. Nickel is expected to decrease due to a planned reduction in operations.

On top of all this, pricing achieved for copper, zinc and nickel was lower year-on-year in US dollars. Nickel faced particularly negative pressure, with pricing down 13%.

Glencore’s share price is down by around 13% in the past 12 months, with these numbers showing why the market cooled off on the stock. Of course, like all mining giants, Glencore is cyclical and the return to shareholders will vary dramatically based on the time period chosen.

Hudaco shows double-digit growth in the dividend (JSE: HDC)

The payout ratio has increased

Hudaco operates a variety of consumer-related products and engineering consumables businesses. Diversity is the name of the game, ranging from aftermarket automotive products through to fire detection.

The clever thing about the portfolio is that when the economy isn’t fantastic and the consumer-focused businesses are taking strain, the engineering consumables businesses can generally come to the party with pricing power and steady demand.

Turnover grew 9.1% vs. 2022 and operating profit was up 5.1%. This means that operating profit margin went the wrong way, contracting by 50 basis points to 12.0%. As mentioned, it was engineering consumables that saved the day, with revenue up 14.9% and operating profit up 23.7% vs. consumer products that could only achieve revenue growth of 3.7% and a profit decline of 10.4%.

HEPS increased by 7%, but the company points out that the base period included COVID-related insurance claims. Without the insurance, it increased by 10%. The final dividend was up 12%, so the full year dividend was 10.8% higher than the previous year. This means that the payout ratio moved higher even on an adjusted basis.

Return on equity came in at 19.9%, which is impressive. The share price is R159 and the net asset value per share is R115.71, with the premium to book value justified by the strong return on equity.

MiX Telematics grew revenue and profits (JSE: MIX)

The company is busy with a potential merger with PowerFleet

As the PowerFleet prospectus demonstrated, profits aren’t always easy to come by in tech businesses. MiX Telematics just released third quarter numbers and they reflect a profit at least, which might be interesting when shareholders consider this vs. a merged entity.

The net subscriber base at MiX is now 1,142,000 subscribers. Total revenue increased by 6% year-on-year in constant currency and adjusted EBITDA was up 13%. Sadly, the company reports in dollars, so earning most of its revenue in rands isn’t very helpful to a US investor audience. This is why they are trying to merge into something that US investors are likely to get more excited about.

Canal+ drops a bombshell on MultiChoice shareholders (JSE: MCG)

Despite laws that will make this difficult in terms of voting rights, there’s a take-out on the table

Groupe Canal+ SA has been building its stake in MultiChoice for a while now. Although anyone with experience in the markets knows that this is often a precursor to a larger deal, the nuance here is a South African law which limits voting control of a local broadcaster by a foreign entity. I find it unlikely that Canal+ is happy to pay for 100% of a company without having control over it, so they must have found a way to make it work.

Either way, anyone with a short position on MultiChoice was absolutely obliterated by this. The share price closed 26.60% higher at R94.95 on the news that Canal+ would be making an offer of R105 per MultiChoice share. The fact that the closing price is 10.6% below the offer price shows you that the market is expecting a fairly long process to conclude the deal.

The company released a separate announcement dealing with the funding of the new Showmax partnership with Comcast subsidiary NBCUniversal Media and Sky. As a reminder of the terms, MultiChoice contributed Showmax for a 70% equity stake in Showmax Africa and provides ongoing business support (including its portfolio of content). Comcast (through its subsidiary) has taken a 30% stake and is supporting the business through licensing the Peacock streaming platform and content from NBCUniversal, Universal Pictures, Peacock and Sky.

Funding is being provided by MultiChoice Group Holdings and Comcast in proportion to their shareholdings. $20 million has been invested thus far and another $30 million will be provided in February – in both cases in proportion to shareholdings. Another $127 million is expected to be needed for the remainder of the year ending 31 March 2024.

Long story short: building a streaming business is very expensive!

Little Bites:

  • Director dealings:
    • Sean Riskowitz (acting through Protea Asset Management) has bought more shares in Finbond (JSE: FGL), this time worth R32.5k.
  • Southern Palladium (JSE: SDL) announced that the scoping study for the Bengwenyama project (which is 70% held by the company) has shown attractive economics. The pre-feasibility study is thus underway. The company is estimating a life of mine EBITDA margin of 43% and post-tax internal rate of return of 21%. The total estimated EBITDA over the life of mine is $5.2 billion. I must point out that the level of accuracy at this early stage is +-30%. The company still has a long way to go. The completion of the pre-feasibility study and associated resource drilling is scheduled for the second half of calendar 2024 and is fully funded.
  • Labat Africa (JSE: LAB) gave more information on why the cautionary announcement was recently withdrawn. It had originally related to potential adjustments to prior year numbers by the auditors. The company is comfortable that no adjustments will be needed.
  • Nikkel Trading is the controlling shareholder of Brikor (JSE: BIK) and has now made two appointments to the company’s board.
  • Rex Trueform (JSE: RTO) announced that the related party acquisition of two properties (announced back in September 2023) has lapsed as a shareholder meeting has not yet been held.

Ghost Wrap #61 (The Foschini Group | Mr Price | Truworths | Pepkor)

The Finance Ghost
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Ghost Wrap #61 (The Foschini Group | Mr Price | Truworths | Pepkor)

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:

  • The Foschini Group got the market excited about the sector, with strong growth in the local business and encouraging commentary on margins – but the offshore businesses have suffered.
  • Mr Price also put in promising revenue growth and has a positive gross margin story to tell, with the base effect making a big difference here.
  • Truworths has struggled in the local business (admittedly vs. a high base), with the UK-based business shooting the lights out – especially when translated to rands.
  • Pepkor is a perfect example of why credit sales are important for local retailers, with cash sales growth being hard to come by. 

Ghost Bites (Anglo American | Astral | Ellies | EOH | Hyprop | Impala Platinum)

The Finance Ghost
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Ghost Bites (Anglo American | Astral | Ellies | EOH | Hyprop | Impala Platinum)

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

Anglo American flags better diamond conditions at De Beers (JSE: AGL)

Things got shiny in the US over the holiday season

2023 was the year in which lab-grown diamonds really became a talking point. This impacted the De Beers business (part of Anglo American), with a significant drop in rough diamond prices and worries around demand.

The first sales cycle of 2024 seems to be back on track, with sales of $370 million. Although that’s down on $454 million in the first cycle of 2023, it’s a significant improvement from sales of $137 million in the final cycle of 2023.

The company attributes this to consumer demand in the US over the holiday season, as well as the restart of rough diamond imports into India. The company still believes that it will take some time for rough diamond demand to fully recover.

Astral Foods swoops back into decent profitability (JSE: ARL)

The “big bird era” is behind us – no, really!

Astral Foods had a truly horrible time in the year ended September 2023. Basically everything that possibly could go wrong, did in fact go wrong. The previous period had everything from load shedding agony through to the horrors of bird flu. The company uses words like “devastating” and “decimating” and the colourful language is entirely warranted.

Thankfully, things have improved substantially. Load shedding has decreased, which means lower diesel expenses than anticipated. Due to a normalisation of broiler age and live weight, the feed conversion rate is better. The company literally describes this as being a better environment after the “big bird era” – when the slaughtering programme was so negatively impacted by load shedding etc. that birds were bigger than they should be and thus more expensive to feed.

The company avoided chicken shortages by importing broiler hatching eggs during bird flu. The International Trade Administration Commission recommended an import tariff rebate based on shortages, despite Astral noting that there weren’t any shortages!

Excitingly, the poultry division has posted a marginal level of profitability in the first quarter of 2024. Group HEPS is expected to be between 647 cents and 654 cents for the interim period, a wonderful improvement from HEPS of 163 cents in the comparable period. The balance sheet is also in good shape, with debt trending lower.

The dream is over at Ellies (JSE: ELI)

The company couldn’t get the funding for the Bundu Power deal

I’ve written a few times before that the proposed acquisition of solar business Bundu Power was at a lofty multiple. With Ellies needing to raise debt for the deal (and with the rest of the Ellies business on fire), it was always going to be a long shot. Sadly, the company’s dream hasn’t worked out and the outcome is particularly painful, with Ellies now entering voluntary business rescue.

The share price closed 60% lower at R0.02 per share. This is a perfect example of what happens when a company takes too long to move with the times. A sad day for a household name.

EOH: sideways and disappointing for investors (JSE: EOH)

I really struggle to see a reason to be bullish here

EOH’s rollercoaster ride has been well documented. At some point, the company became a little bit boring. It did a rights issue at R1.30 and then had to knuckle down and find ways to grow. A year later, the share price is at R1.32. You don’t need to get the calculator out to figure out that your money was better off elsewhere.

There’s absolutely nothing in the “operating context” section of the pre-close update that will inspire bullishness in shareholders. The whole thing is just a reminder of how much the local economy sucks. The knock-on effect is pressure on IT budgets, particularly in the public sector where EOH is still playing. Large corporate IT investments are being spread out or delayed entirely.

The first quarter of this financial year saw the worrying trend in revenue continue. Things got better in the second quarter, although we have no idea by how much. There are also some vague comments around the company hoping for “some” revenue growth relative to the second half of the previous year. This implies that they might be lower year-on-year i.e. vs. the first half of the previous year.

At least gross margin is stable, even if revenue is struggling. Things could be worse. They are also working hard to save on overheads. Naturally, the interest charge comes down substantially thanks to the R600 million equity capital raise and the decrease in debt.

There are still a couple of legacy issues that the company is dealing with, including a PAYE dispute with SARS in one of the subsidiaries.

EOH hopes to make a living from public sector and large corporate head office IT work. In a country with almost no economic growth, I’m afraid that there is nothing to get excited about in that business model.

Hyprop had a merry Christmas across most metrics (JSE: HYP)

But as we’ve seen elsewhere, Black Friday was less inspiring in 2023

Hyprop (owner of various important malls in South Africa and elsewhere) released an operational trading update dealing with the festive season. The company says that retailers and shoppers have become “savvier” about Black Friday deals, which is a nice way of saying that Black Friday sucked in 2023. Thankfully, people spent that money in December instead.

In the South African portfolio, tenant turnover was up only 3.2% year-on-year in November, whereas the December growth rate was 8.1%. Trading density grew 3.0% and 7.5% for the two months respectively. Foot count was surprisingly consistent, coming in at 4.0% and 4.1%. Going to the mall and whipping out the credit card clearly isn’t the same thing.

In Eastern Europe, the properties are on the right side of an economic growth story. Turnover grew 16.8% and 15.2% in November and December respectively – measured in euros! This is despite foot count being up 2.7% and down 2.6% for those months respectively.

Moving on to Ghana where Hyprop has three centres, much of the focus has been on replacing Game as a tenant. Turnover measured in US dollars increased by 7.7% in October and 4.7% in November. Your eyes aren’t deceiving you – no December numbers have been given as they aren’t ready yet. Financial reporting clearly moves a bit slower in Ghana!

Overall, that’s a decent set of numbers for the property fund.

Impala Platinum somehow grew production on a like-for-like basis (JSE: IMP)

This is despite the absolute tragedy in November that claimed 13 lives

Sadly, fatal accidents in the mining sector are still a reality. Usually, it’s a case of one or two incidents every few months, leading to the tragic loss of life of someone who simply arrived for work that day. That’s already unacceptable. What happened at Impala Platinum in November was so much worse, with 13 employees losing their lives and another 73 employees injured in a single accident.

Of course, a number of formal processes are underway in relation to that incident, including internal processes and investigations by the Department of Mineral Resources and Energy (DMRE). This is going to carry on for a while.

Repair work to the shaft at Impala Rustenburg has been making progress and the DMRE gave permission to use the rock winder on Tuesday 9 January. This allows a ramp-up in mined volumes to around 60% of production capacity in the coming weeks.

Despite all of this, the production loss associated with this catastrophe was only 30,000 ounces, with the loss of a further 30,000 ounces expected for the second half of the financial year. For the first half, Impala group managed to grow production by 18% to 1.9 million ounces. On a like-for-like basis, production increased by 2%. The difference between the two numbers is of course the acquisition of Royal Bafokeng, now called Impala Bafokeng.

Sales volumes were up 12% overall. They were down by 2% on a like-for-like basis. This isn’t helpful when PGM prices came off significantly for the period under review, with the group achieving revenue of R25,795 per 6E ounce sold. Irritatingly, they didn’t give the amount for the comparable period in the announcement, so I had to go dig it out. They achieved revenue per 6E ounce sold of R38,117 in the comparable period. I guess that’s why it was left out.

Group unit costs per 6E ounce are up 5% to R20,350. This doesn’t bode well for profitability, which is why HEPS is expected to be “at least” 20% lower than the comparable period. I suspect that it will be a lot lower than that. “At least 20%” is the minimum guidance required under JSE rules.

Little Bites:

  • Director dealings:
    • The Saltzman family has pulled off one of the biggest off-market trades you’ll ever see in this country, selling over R1.51 billion worth of shares in Dis-Chem (JSE: DCP) to Coronation. This takes Coronation’s stake to 29.83%, which is similar in size to what the Saltzmans still hold.
    • A prescribed officer of Acsion Limited (JSE: ACS) has bought shares in the company worth R26.5k.
    • The COO of Kibo Energy (JSE: KBO) has sold more shares, this time to the value of R486k.
    • The independent non-executive chairperson of RFG Holdings (JSE: RFG) has acquired shares worth R31.4k.
  • I have bad news for you if you are a Basil Read (JSE: BSR) shareholder. The company has been in business rescue since June 2018 and has been focused on completing construction contracts and pursuing contract claims. The business rescue practitioners believe that the business will not be compliant with JSE Listings requirements once the plan is fully implemented, so the company is engaging with the JSE regarding a potential termination of the listing. It hardly matters for shareholders, as there isn’t any residual value envisaged after creditors are settled.
  • As a reminder of just how far the PPC balance sheet has come (JSE: PPC), the company has repurchased shares to the value of R143 million between 6 September 2023 and 29 January 2024.
  • Resilient REIT (JSE: RES) and Lighthouse Properties (JSE: LTE) announced that the acquisition by affiliate Salera Properties of Salera Centro Comercial in Spain has now been completed. In good news, this is a month ahead of expectations.
  • Harmony Gold (JSE: HAR) has achieved strong shareholder support for the proposed B-BBEE transactions involving employee and community trusts.
  • MC Mining (JSE: MCZ) released an activities report for the quarter ended 31 December 2023. Run-of-mine production at Uitkomst was 31% higher year-on-year and sales were much higher. No lower grade coal was sold. Thermal coal prices have come down severely year-on-year, but premium steelmaking hard coking coal is trading well above the levels a year ago. The company is still waiting for Senosi and Dendocept to lodge their bidder’s statement for the A$0.16 per share offer.
  • Orion Minerals (JSE: ORN) has released a quarterly activities report for the three months to December 2023. As you might expect from a junior mining house, many of the points are highly technical in nature and relate to operational steps needed to make progress on the development of the three base metal hubs in South Africa. Having raised funding in 2023, the company is busy with trial mining at the Prieska Copper Zinc Mine. The feasibility study is being completed at the Okiep Copper Project. The Jacomynspan Nickel-Copper-Cobalt-PGE Project (a name that doesn’t exactly roll off the tongue) has been the subject of laboratory scale test work.
  • In case you follow African Equity Empowerment Investments (JSE: AEE) in detail, you may want to know that the audited financials have some differences to the reviewed results previously released. Among other issues, the changes include certain balances with AYO Technology (JSE: AYO). AYO also released a SENS announcement related to a few of these changes. Most of all, you’ll want to check out the circular dealing with an offer by African Equity Empowerment Investments to its shareholders (excluding Sekunjalo and certain directors) at a price of R1.15 per share. This includes a proposed delisting of the company.
  • There might be a sting in the tail for Tongaat (JSE: TON), with a company trading as Powertrans having launched an urgent application in the High Court in Durban to interdict the business rescue practitioners and the Vision consortium from going ahead with the implementation of the business plan that creditors approved. Powertrans has also applied for the business rescue plan to be set aside. Unsurprisingly, Tongaat, the business rescue practitioners and the Vision consortium will oppose the application.
  • Efora Energy (JSE: EEL) seems to be getting closer to rectifying its current status as a company that is suspended from trading on the JSE. They are currently working on 2023 interim results, having achieved a significant catch up. Operationally, the Alrode Depot is fully operational and they are selling diesel and other fuel products to bulk customers in various industries. The company has exercised its right under the lease agreement for that property to purchase the depot for R3.8 million.

Ghost Bites (Argent Industrial | MiX Telematics | Pepkor | Shoprite | Transaction Capital)

The Finance Ghost
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Ghost Bites (Argent Industrial | MiX Telematics | Pepkor | Shoprite | Transaction Capital)

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

A sale and leaseback at Argent Industrial (JSE: ART)

This is a handy way to unlock funding

There’s always a lot of debate around whether operating companies should own the properties they operate from. It usually comes down to how strategic the property is, as it is certainly easier to move an office full of people than it is to move specialised industrial equipment.

Like most industrial groups, Argent Industrial has a property portfolio. This is a source of potential funding, particularly through sale and leaseback transactions. In these deals, investors are found who want to buy properties and lease them back to the company.

Argent Industrial will execute such a transaction on the Phoenix Steel properties in Gauteng, unlocking R45.4 million in the process. The proceeds will be used to settle debt on the properties and the rest will be used for share buybacks. That sounds like a good application of the money to me!

MiX Telematics and PowerFleet release their circular and prospectus (JSE: MIX)

This is a great opportunity to learn more about corporate finance

As we’ve known for a while now, MiX Telematics and US-based PowerFleet are looking to implement a merger. The structure is that PowerFleet would acquire all the shares in MiX Telematics in exchange for shares in PowerFleet. The merged entity would then be listed on the JSE under the PowerFleet name.

This means that MiX Telematics needed to release a circular to shareholders to approve the deal. Separately, PowerFleet needed to release a prospectus giving full details of the merged entity. Go check out the two documents to learn more about corporate finance transactions like these.

The rationale for the deal is that both businesses are sub-scale, so combining their efforts will build a larger telematics and Internet-of-Things business. The companies are obviously hopeful that they might get more attention on the Nasdaq as well.

The deal certainly isn’t cheap to implement, with the prospectus noting astronomical fees of $16.6 million!

Annoyingly, due to the timing of the publication vs. financial disclosure, the last available numbers in the prospectus are for the year ended December 2022. That now feels very old. Perhaps it doesn’t matter, as PowerFleet is consistently loss-making:

Those advisory fees look even more gigantic once you’ve seen this income statement, don’t they? This is typical tech start-up kind of stuff, which works a lot better on the Nasdaq than on the JSE.

Pepkor’s core business put in a solid performance (JSE: PPH)

It’s also really good to see strong growth in Avenida

Before we delve into this, it’s time to draw a 12-month chart for this sector:

The reality is that Truworths is the only one you really wanted to own over the past year. The rest have ranged from bleh to bliksem.

Pepkor has reported decent numbers for the end of 2023. If nothing else, at least Ackermans seemed to turn the quarter with a gain in market share in December. It’s been on quite the downward trajectory, so it’s good to see the inventory strategy coming right there and a recovery underway.

Speaking of inventory, the group highlights port disruptions as a problem for stock inflows. This is a risk facing all local retailers to some extent.

Pepkor didn’t let that get them down though, with growth of 7.2% in revenue from continuing operations for the three months ended 31 December 2023. Like-for-like sales were up 4.1% for the quarter, with PEP Africa (17.9%) and Avenida (10.8%) doing particularly well – noting that those growth rates are on a constant currency basis. Core operation Pep only managed 3.3% like-for-like growth. The Building Company suffered a 0.7% decline, in line with the pressures we’ve seen across that sector.

The pressure on volumes (inflation was 6.5% in PEP, Ackermans and Speciality and like-for-like sales came in below that) means that store growth really helped to pull the result higher, taking group merchandise sales growth to 5.5%.

Things have improved in January with the back-to-school season. Like-for-like sales are up 7.8% in PEP and 8.7% in Ackermans.

And in case you needed any more evidence that local consumers are under huge pressure, group cash sales increased by 2.4% and credit sales were up 35.2%. Group credit sales as a percentage of total sales increased from 9% to 12%. The credit strategy comes through strongly in the Fintech segment in businesses like Tenacity and Capfin. This segment also houses the Flash business that serves the informal market, which achieved revenue growth of 16.8%. Flash contributes 66% to the Fintech segment. Total Fintech segment revenue was up 20.7%

There’s no stopping Shoprite (JSE: SHP)

This marks 58 consecutive months of market share gains!

Over five years, the Shoprite share price is up 65%. Pick n Pay is down 66% and SPAR lost 43% of its value. This has to be one of the very best examples of where stock picking within a specific sector can be profitable.

Supporting that share price move is 58 consecutive months of market share gains in Shoprite’s core local supermarkets business. This is an extraordinary achievement. If you can believe it, sales growth accelerated in the three months to December (the second quarter of the financial year) vs. the immediately preceding quarter. Q2 sales growth from continuing operations was 14.6% vs. 13.2% in Q1. Supermarkets RSA is driving the performance, up 15.8% in Q2 to take the six-month performance to growth of 14.6%. This dwarfs Supermarkets Non-RSA (up 6.2%) and Furniture (up 1.7%). Other operating segments jumped by 23.1%.

To get a better sense of performance, it’s useful to adjust for the impact of the stores that were acquired from Massmart. Taking those out of the mix shows Supermarkets RSA sales growth of 11.2% – still very good.

As we’ve become accustomed to, the stores resonate at all income levels. Checkers and Checkers Hyper grew 13.7% (with a shout-out of appreciation to Checkers Sixty60’s growth of 63.1%). Shoprite and Usave grew 13.1%. LiquorShop increased sales by 25.2%. Even OK Franchise within the Other segment is doing well, with group sales to franchisees up by 25%.

The big question is going to be around profitability. The group has given some clues here that the sales story is going to be the highlight and that the market should temper its enthusiasm around profits. The comparable period included non-recurring income of R244 million as a loss of profit insurance claim. They suffered R500 million in diesel costs in this half because of load shedding. They have also incurred a “notable” increase in finance charges due to higher interest rates.

Interim results are due on 5th March, at which point we will see how the sales growth is translating into growth in profits.

Transaction Capital to unbundle WeBuyCars (JSE: TCP)

Here’s the first major step in trying to rescue some value from this broken growth story

As a look at my brokerage account will quickly confirm, the fall from grace of Transaction Capital was rather hideous. What went up certainly came down. The company is now trying to engineer the best possible outcome, which is a bit like trying to sculpt a turd into something beautiful.

Deep within the excrement, we find WeBuyCars. I like this business and the way it put a liquidity floor into a used car market that was crying out for exactly that, with other dealers enjoying easy money for far too long. The market is cyclical of course, but the underlying business is solid in my opinion.

At this stage, the board of Transaction Capital has in principle resolved to unbundle the entire stake in WeBuyCars, which means a 74.9% shareholding. This is good news for market participants in general, as it means there’s a pure-play look at WeBuyCars.

Although WeBuyCars has been legally isolated from the impact of SA Taxi’s restructuring, the reality is that perceived group contagion is an issue that needs to be addressed. Unbundling the company and letting it build a profile away from Transaction Capital is the way to do it. Including the potential future financial obligation to SANTACO of R285 million, Transaction Capital’s net debt was R1.4 billion at 30 September 2023 and subsequently reduced to around R1.2 billion as per the integrated annual report. There’s a long road ahead and it would be better for WeBuyCars not to be caught up in that.

Importantly, the annual report notes that Transaction Capital has no intention of pursuing a rights issue. I suspect that the share price will show some love to the news of the WeBuyCars unbundling.

Little Bites:

  • Director dealings:
    • Aside from various management transactions related to share option schemes, there was also a disposal of shares by an executive of Richemont (JSE: CFR) to the value of R18.2 million.
    • Heriot REIT (JSE: HET), acting through a subsidiary, bought R22.8 million worth of shares in Safari Investments (JSE: SAR). Heriot Properties is an associate of a non-executive director of Safari. Heriot and its concert parties hold 58.8% of Safari shares after this trade.
    • The company secretary of Datatec (JSE: DTC) has sold shares worth R454k.
    • The Praesidium partnership, an associate of a director of Huge Group (JSE: HUG) that regularly buys shares in the company, has bought another R2k worth of shares.
  • Cash shell Trencor Limited (JSE: TRE) released a trading statement for the year ended December 2023. As a cash shell, it’s really about forex and other movements. HEPS will be between 71.4 and 71.7 cents.
  • Conduit Capital (JSE: CND) has renewed its cautionary announcement related to the provisional liquidation of CICL, the company’s main subsidiary.

Ghost Bites (ArcelorMittal | Gemfields | MAS | Truworths | York Timber)

The Finance Ghost
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Ghost Bites (ArcelorMittal | Gemfields | MAS | Truworths | York Timber)

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

ArcelorMittal’s profitability has been smashed (JSE: ACL)

This really isn’t the business model you want to be operating in South Africa

Before diving into the latest trading statement from ArcelorMittal, it’s worth looking at the share price chart:

Quite the rollercoaster, isn’t it?

It’s not getting any better, either. HEPS for the year ended December 2023 has fallen from R2.34 in 2022 to a headline loss per share of between -R1.55 and -R1.85. Ouch!

Headline earnings excludes the substantial impairment that has been recognised on the company’s Longs steel business. In November 2023, the company announced that this business would potentially be wound down. Extensive engagement followed, including with government stakeholders. Sadly, there are structural reasons why this business is failing, ranging from an environment of low demand through to governmental own-goals like logistics infrastructure. Another issue is the advantage that scrap has over iron ore.

Although the discussions have been positive, there are no quick solutions. It seems like a bit of a coin toss at the moment whether the company will keep the Longs business alive. It will take a significant effort from all stakeholders involved. In the meantime, the company has recognised an impairment charge of R2.1 billion against the assets of the business. This doesn’t include closure or retrenchment costs.

What hasn’t helped at all is that the second half of 2023 was poor for steel demand. Slow growth in China is a major factor here. Local demand is weak, with low to no growth. You can once again thank government (and specifically Eskom) for that. To make it even worse, Chinese manufacturers are dumping their steel in the South African and African markets as they don’t have sufficient domestic demand. It’s just a mess.

Despite everything, the company describes its debt as being at “tolerable levels” – for now, at least.

Gemfields sings a bullish tune (JSE: GML)

Emeralds and rubies continue to shine

At a time when diamonds are struggling, the more colourful stones are doing just fine thanks. Gemfields has released an update for the six months to December 2023 and it tells a good story, with auction revenues and pricing continuing to be positive.

2023 was the second highest year of auction revenues in Gemfields’ history, despite the withdrawal of November 2023’s auction of higher quality emeralds. The next auctions planned include a commercial quality emerald auction in Q1 2024 and a higher quality emerald auction and mixed quality ruby auction in Q2 2024.

Net cash at 31 December 2023 was $11.1 million, excluding auction receivables of $38.9 million.

MAS with a display of capital maturity (JSE: MAS)

The property fund is being extremely pro-active in managing the balance sheet

I was pleased to see the release of an investor presentation by MAS, the Eastern European real estate fund that gave the market a bit of a shock when it suspended its dividend. The suspension wasn’t due to an immediate problem. Instead, the company is looking ahead to 2026 and planning accordingly.

This perhaps came as a shock to South African investors, who are far more accustomed to management teams who collect bonuses right up until a company falls off the end of a cliff, at which point they blame “market conditions” for a highly dilutive rights issue before re-pricing share options and promising a lucrative “turnaround” strategy. Of course, they earn bonuses during the turnaround as well.

If that sounded like it was dripping with sarcasm and annoyance, then you got the right idea.

Full credit must therefore go to the MAS management team for showing the maturity to take the pain now in pursuit of a sustainable balance sheet. After the share price had an initial heart attack, things have improved:

In this presentation from the investor day, the company notes that the pressure comes down to one thing: bonds maturing in 2026 and the likely capital raising environment for MAS at that point in time. The overall fund does not have an investment grade credit rating, so conditions need to be highly favourable towards emerging markets and “risky assets” for a raise to be successful at decent rates. To get ahead of this problem, MAS is retaining its earnings from operations and is raising secured debt on unencumbered properties.

This point is worth explaining in more detail. You see, a property fund can either raise money at property level (like getting a mortgage on your house) or at portfolio level (like getting debt from the bank to go and buy various properties). The former is secured by a specific property. The latter is either unsecured, or is secured by the overall number of properties in the group. The problem for lenders at portfolio level is that they are second in the queue behind lenders who hold specific properties as security.

The lower the risk, the lower the cost of debt. This is why raising debt against specific properties is a cost effective way of raising capital to replace the bonds at portfolio level.

If you want to see what a mature approach to capital structure looks like, I highly recommend reading the presentation. This table should be stuck on the wall of every listed company executive in South Africa, especially in the property sector:

Truworths: now we know where the market share was lost (JSE: TRU)

Look no further than Truworths to see where Mr Price and The Foschini Group won back sales

Truworths shareholders may never have believed this day would come, but they can thank their lucky stars for the UK business. Without it, this would’ve been an ugly trading update.

For the 26 weeks to 31 December 2023, Truworths Africa experienced a 0.3% decrease in sales. Office (the UK business) was up 15.6% in GBP, so the group result was growth of 8.2% in rands. Guidance for HEPS growth is 0% to 4%, so the growth in sales doesn’t seem to have translated into an exciting increase in profits.

The Truworths Africa performance was impacted by a high base effect, the exact opposite of what we saw at Mr Price (which probably isn’t a coincidence). It’s not like there are suddenly loads of extra shoppers running around, so one store’s gain is a relative loss for another. Where Mr Price and The Foschini Group reported excellent sales in this period, Woolworths was disappointing and now we know that Truworths also lost out. Like-for-like store sales at Truworths fell by 3.3%. Trading space increased by 0.9% and is expected to be 1% higher for 2024, so they are still investing. Product inflation was 8.4% in this period, which is a lot more palatable than 13.3% in the comparable period.

After growing 13.4% in the comparable period, the two-year growth stack isn’t too bad for Truworths at all. Still, there are worrying signs here, as credit sales were flat year-on-year because credit scorecards deteriorated and thus credit extension declined. Overdue balances as a percentage of gross trade receivables deteriorated from 11% to 12%.

This means that Truworths had to rely on growth in cash sales, which wasn’t forthcoming. Cash sales fell by 0.9%. I must also point out that only 30% of Truworths Africa’s sales are cash sales.

The problem got worse towards the end of the period, with retail sales down 1.6% for the last 9 weeks of the period.

The silver lining in the local business is online sales, which increased by 41% to contribute 4.2% of Truworths Africa’s retail sales. That’s quite similar to what we’ve seen at competitors.

Looking at the UK, sales were up 15.6% in GBP and 33.1% in our beloved rands. That’s big growth in local currency (i.e. GBP – whenever people talk about local currency, they mean where the business is based rather than the head office) that is made even better by the trajectory of our currency.

Online sales in the UK grew even faster, with the contribution increasing from 44% of sales to 47% of sales. It’s a good reminder of how early the South African online story is in its journey.

Growth did slow down towards the end of the year, coming in at 11.6% in GBP in the last 9 weeks.

Interestingly, trading space in Office decreased by 2.8% for this period but is expected to increase by 12% for 2024, with the business looking to invest in new stores and renovations.

York acquires land (and trees) from Sappi (JSE: YRK | JSE: SAP)

And this deal isn’t just about the timber

York Timber (JSE: YRK) has acquired the Pine-valley Farms (yes, they use the hyphen) from Sappi for R65.4 million. The value is exactly in line with an independent valuation performed on the farms in March 2023.

The deal includes the commercial timber currently on the land, which York will harvest over time. This reduces York’s dependency on third-party lumber purchases.

Interestingly, the opportunity also brings 300 hectares of arable land for the expansion of York’s avocado and soft citrus farming operations. It’s debatable whether the market will love the risk of fruit farming on top of the existing lumber operations, but time will tell. To add to the risks, the deal is being funded through debt.

This is a Category 2 transaction, so shareholders won’t be asked to vote on it anyway.

Little Bites:

  • Director dealings:
    • The CEO of Marshall Monteagle (JSE: MMP) bought shares in the company worth R11.7 million in an off-market trade.
    • An associate of the CEO of Acsion Limited (JSE: ACS) has bought shares worth R9.5 million in an off-market trade.
    • An associate of directors of Argent Industrial (JSE: ART) has sold shares worth R1.1 million. We’ve seen sales by this associate before, with the rationale being that there’s an ex-director involved in that entity that is looking to cash out. I do see this as being different to existing directors looking to take money off the table, which is exactly why the company provides this explanation.
    • An executive director of Afrimat (JSE: AFT) has sold shares worth R645k.
    • At Finbond (JSE: FGL), Sean Riskowitz (acting through Protea Asset Management) has acquired shares worth R25k and an independent non-executive director has bought shares worth nearly R30k.
  • Adcorp (JSE: ADR) has announced an odd-lot offer to clean up the shareholder register and reduce costs. Amazingly, 79.24% of total shareholders fall into the category of holding fewer than 100 shares. At the current share price, that means holdings worth R380 and less! These shares cumulatively represent 0.07% of total shares in issue. You can immediately see the administrative burden and why Adcorp is happy to clean this up at a 5% premium to the 30-day volume weighted average price.
  • Southern Palladium (JSE: SDL) released a quarterly activities report for the three months ended December 2023. This quarter will be remembered for an increase in the Indicated Mineral Resource and the receipt of formal notification from the Department of Mineral and Resources and Energy that the Mining Right application was accepted. Southern Palladium held $8.34 million in cash at the end of December, down from $9.98 million at the end of September. This excludes cash held by 70% subsidiary Miracle Upon Miracle Investments, surely one of the most aptly named mining businesses on the JSE. It takes a whole lot of miracles for junior mining to make it in this country’s conditions!
  • Mondi’s (JSE: MNP) share consolidation to offset the impact on its share price of a special dividend has become effective.
  • Labat Africa (JSE: LAB) has withdrawn the cautionary announcement that was first issued in October. This officially means that caution is no longer needed when trading in this shares. Considering that the shares are suspended from trading and Labat is frequently a subject of unusual announcements, I would unofficially suggest that caution is shown whether suspended or otherwise!

Why are we losing our minds over Stanley cups?

Dominique Olivier
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Why are we losing our minds over Stanley cups?

You’ve heard of an emotional support animal, sure. But why are people all around North America suddenly talking about an “emotional support water bottle”? Is the Stanley cup really the last word in personal hydration – or is this just a sippy cup for adults?

TikTokkers. Momfluencers. Gym bunnies. Corporate girlies. They all have one thing in common: their absolute devotion to the Stanley cup. Even if you’ve never seen a Stanley in person, you’ve no doubt seen at least one video about it online – whether it was an influencer raving over the new colour range that dropped at her local store, or a video of some dad making fun of his wife’s obsession with her oversized water bottle.

@hellokittyloverr26

New pink stanleys are out at @target 🩷🥰🫶🏼 #stanley #stanleycup #stanleytumbler #pinkstanley #pinkstanleytarget #pinkstanleytumbler #pink #pinklover #pinktok #pinkaesthetic #pinkgirl #girlythings #girlytok #girlygirl #girly #viral #viralvideo #viraltiktok #fypシ゚viral #fypシ #fyp #fy #foryoupage #foryou #foru

♬ original sound – valeravixen

I don’t use the word “obsession” here lightly either. Some members of the church of Stanley are so dedicated to these products that they are erecting “Stanley displays” in their kitchens to show off their collections. Right at the start of the year, a 23-year-old woman in the US was arrested for allegedly stealing 65 Stanley cups worth a total of about $2300. Following her arrest, the police issued a plea to the public: “While Stanley Quenchers are all the rage, we strongly advise against turning to crime to fulfil your hydration habits.”

So, why are we so thirsty for Stanley cups all of a sudden?

@lukecharleshammer

the Stanley cup craze is something else 😂 although i do love them 🤷🏼 we stan @stanleybrand in our house #marriedlife #stanleycup 🎥 inspo: @www.janky.com

♬ Blue Blood – Heinz Kiessling

A short trip down memory lane

It’s hard to keep a good brand down, and the clever folks at Stanley know this. Having celebrated its 110th anniversary in 2023, this old dog learned a new trick just in time to meet an upsurge in demand for health-focused products post-pandemic.

The brand’s founder, welder William Stanley Jr., was somewhat of a pioneer amongst blue collar workers when he invented his “Unbreakable Stanley Bottle” in 1913. Back then, most insulated bottles and flasks had a glass lining, meaning that one accidental knock on a factory floor, workroom or construction site would render a bottle obsolete. Stanley’s bottles featured a stainless steel lining, which not only made them tougher, but paved the way to more hygienic drink consumption.

Stanley remained popular with factory and construction workers, and eventually managed a seamless transition into the camping trend, which unlocked the leisure side of the market. But it’s the way that they captured the attention of social media influencers that will probably go down in history as a business masterclass.

Back with a bang

The sudden surge in the popularity of the Stanley cup can be attributed to the efforts of Ashlee LeSueur, Taylor Cannon, and Linley Hutchinson. This trio of close friends serve as the masterminds behind The Buy Guide, an e-commerce blog offering product recommendations for various aspects of the modern woman’s life.

The Stanley cup was among the initial recommendations on their site and gained traction within their modest following. However, in 2019, Stanley announced that they would discontinue the Quencher cup – the same product that The Buy Guide had been promoting. Since Stanley was inactive on social media at that stage, they were completely unaware of the renewed interest in the Quencher until the girls from The Buy Guide reached out to them, begging them to keep the product alive.

The turning point came when a new mom and influencer, who had previously purchased the cup through The Buy Guide, shared a photo on her Instagram story. She praised the cup for its utility in staying hydrated during childbirth and while caring for her baby.

This endorsement breathed new life into the Stanley Quencher and proved beneficial for the Stanley company at large. Recognising the untapped potential in Instagram marketing, Stanley collaborated with The Buy Guide in 2020. The strategic alliance aimed to leverage the product’s appeal among women in particular. As The Buy Guide team stated, “We knew if women could sell this cup to women, it would be a winner.”

Their intuition proved correct. Stanley redesigned their Quencher cup in a series of candy colours and successfully reached the female market, even dedicating a section on the front page of their website to the Stanley Quencher.

Now everybody wants a sip

Just like the latest skincare crazes that have every pre-teen buzzing, the Stanley cup has become the “must-have” item for everybody from moms to college students to young girls. TikTok is flooded with videos of 11-year-olds shedding happy tears on Christmas morning as they unwrap this prized possession. Having a Stanley instantly upgrades your cool factor – an unexpected outcome for what is basically a fancy water bottle.

All of this is great for Stanley, of course, and they’ve certainly leaned into their success. Their Quencher comes in 11 standard colours, with an array of occasional limited-edition releases that help to drive hype. Priced between $20 and $45 each (size dependent), they aren’t exactly cheap – but that hasn’t stopped fans from stocking up on multiple colours and sizes and even buying keychain-like accessories to glam up their bottles.

Of course the proof is in the profit, where the effect of Stanleymania is clear to see. Next time you wonder if influencer marketing is effective, remind yourself that Stanley’s annual sales reportedly jumped from $75 million to $750 million in 2023 alone.

How long can it stay hot?

One of the selling points of the Stanley Quencher is that it can keep beverages hot for 7 hours. How long will they be able to do the same for demand?

At present, about 110 000 people are signed up to Stanley’s restock notification list for out-of-stock products. As anybody with experience in the markets will tell you: it’s simply impossible for that demand to last. At some point, the bubble will burst, and the same stores that are seeing moshpits erupt around their new Stanley stock drops will be selling surplus stock out of bargain bins.

@iamrayysyymone

#greenscreenvideo #target #stanleycup #valentines #fyp

♬ original sound – Rayy Syymone

Perhaps it is a mark of the human condition, our herd mentality and our fear of missing out that drives us to hype products like the Stanley cup into these dizzying heights. Stanley isn’t a listed company (imagine what that chart would look like if it was!) but if it was, I reckon this would be the time when investment analysts would start looking at it with a sceptical eye. Will the comedown be a gradual taper as people lose interest and influencers move on to fresher pastures, or will it be a sudden drop on the heels of some scandal? Only time will tell.

About the author:

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

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

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

Ghost Bites (Alphamin | BHP | Grindrod Shipping | Lewis | Novus | Sea Harvest – Brimstone)

The Finance Ghost
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Ghost Bites (Alphamin | BHP | Grindrod Shipping | Lewis | Novus | Sea Harvest – Brimstone)

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

Alphamin was negatively impacted by heavy rainfall (JSE: APH)

Sales volumes were far below production volumes, but it’s a temporary problem

Alphamin produces tin in the Democratic Republic of Congo. With the release of fourth quarter results, we now know that 2023 was a record year of tin production. Sadly, heavy rainfall towards the end of the caused a lot of problems for road haulage, so sales volumes fell far below production volumes in the final quarter (2,046 tonnes and 3,126 tonnes respectively).

The good news is that this is a temporary issue as the rainfall has subsided. Alphamin expects to catch up the sales shortfall in the first quarter of the new financial year.

The full year result was a 1% increase in contained tin produced and an 11% drop in contained tin sold. Average tin prices fell by 15%. Combined with the drop in sales, it’s therefore not surprising to see EBITDA falling by 39%. The company did as much as it could to mitigate the impact of falling prices and sales volumes, with all-in sustaining cost flat year-on-year.

To help investors understand the impact of the sales issue in the fourth quarter, Alphamin notes that this had a negative impact of $14 million on EBITDA. To give context to this, 2023 EBITDA was around $136 million.

Looking at the balance sheet, the company highlights a four-year extension to the off-take agreement with the Gerald Group, which includes a tin prepayment arrangement of up to $50 million. The interest rate is floating and works out to 10.3% currently. There is also a reduced marketing commission under this arrangement.

Thanks to Mpama South coming on stream in the first quarter of 2024, tin production guidance for 2024 is between 17,000 and 18,000 tonnes. That’s a big jump from 12,568 tonnes in 2023. The company estimates that the Mpama South capital expenditure cost will be 10% above budget due to weather and other logistical challenges.

Is BHP’s provision for Samarco high enough? (JSE: BHG)

Media speculation in Brazil suggests that it may not be

The Fundão tailings damn failed in November 2015. It was an absolute disaster. BHP holds a 50% stake in Samarco, the operator of the dam. The other 50% is held by Vale.

As you might expect, the period since the failure has been one of legal action and reparations, with the corporates having to play a delicate game of trying to do the right thing and not being on the receiving end of an outsized financial claim.

BHP’s provision for the failure was $3.7 billion as at 30 June 2023. If Brazilian media speculation is to be believed, it may not be enough.

The Brazilian media is reporting that the Federal Court of Brazil has quantified collective moral damages as $9.7 billion. The original claim was for $43 billion in reparation, compensation and collective moral damages. I’m certainly no expert in this stuff but if just the moral damages are $9.7 billion and BHP is on the hook for half of that, then the provision of $3.7 billion is inadequate.

BHP responded to the media speculation by releasing a SENS announcement noting that the company hasn’t been served with a decision by the court. We therefore don’t know if that amount is correct or not. It would also potentially be open to appeal.

Shipping rates increased at the end of 2023 for Grindrod Shipping (JSE: GSH)

We need to wait for more detailed disclosure to get a proper view on things

Grindrod Shipping is 82.23% held by Taylor Maritime. As Taylor is also listed and releases quarterly updates, Grindrod Shipping always alerts investors to any such updates.

One needs to be careful, as Taylor’s disclosure covers both the Taylor and Grindrod Shipping fleets. At best, we can use this disclosure a rough directional guide. According to Taylor, its net time charter equivalent (TCE) rate increased 15% over the three months ended December. We will need to wait for Grindrod Shipping to release its quarterly results so that a proper year-on-year comparison can be made. That’s the real story, as one would reasonably expect rates in the December quarter to be higher than the September quarter due to retail seasonality.

Separately, Grindrod Shipping also released an announcement dealing with ship sales and purchases. Unless you’re following the company in immense detail, the only relevance of this announcement is the insight that these companies are constantly right-sizing their fleets based on demand. They also do all kinds of interesting transactions, like charter deals rather than outright sales or purchases.

Lewis shareholders suffer an unpleasant UFO sighting (JSE: LEW)

Cash sales have been abducted and credit sales are keeping things going

Lewis is generally seen as a dependable group that manages to push forward in a tough environment, while using clever share buybacks to give shareholders a return that otherwise isn’t available in the furniture industry. This strategy won’t work forever, as conditions in this market need to improve at some point.

In a trading update for the nine months to December 2023, Lewis notes revenue growth of 8.7%. The star here was other revenue, which includes things like interest income and insurance revenue. Thanks to strong credit sales growth in the past two years, this source of income was up 15.2% for the nine months.

That’s just as well, because group merchandise sales were only up by 4.2%. The traditional business (Lewis, Beares and Best Home & Electric) grew 6.6% and UFO fell by 14.5%. The key difference is that UFO is a cash sales business, whereas the rest of the group is dependent on credit sales.

Comparable store sales were just 1.5% at group level over the nine months. For the traditional business, comparable stores sales came in at 3.2%.

As you perhaps already knew, furniture at this end of the market is only a profitable model because of the ability to sell on credit. This means that collection rates are critical to the business performance. The collection rate was 80.7% in this period, down from 82.0% in the comparable period. It also costs a lot of money to manage a debtor book, with those costs up by 59.8% for the nine months.

Lewis continues to find ways to compete in this market, with shareholders rewarded by a high dividend yield along with share price growth over time. The pressure on South African consumers only seems to be getting worse though, so watch that collection rate.

Novus declares a special dividend (JSE: NVS)

Remember this when looking at share price charts in future

When a company is in “value unlock” mode, there are often special dividends along the way. This is typically just a way to return cash to shareholders from sources other than profits. A special dividend is often the outcome of a sale of a division, for example, or some other major strategic change.

Novus has declared a special dividend of 50 cents per share. The source of cash is the sale of property and the reduction of working capital in the print division. On a share price of R4.75, that’s a meaty dividend.

The payment date is 19 February.

When you look at share price charts in future, remember that you need to add back the special dividend to see the true return to shareholders. This is also true for ordinary dividends if you want to consider a total return vs. a share price return. The difference with a special dividend is that it has the effect of causing a substantial drop in the share price because the company is deliberately making itself smaller. The impact on share price return vs. total return is thus more pronounced.

Sea Harvest and Brimstone release the circulars for the Terrasan deal (JSE: SHG | JSE: BRT)

And no, this isn’t a combined circular

You may recall that Sea Harvest recently released the most overcomplicated SENS announcement I’ve ever seen. For whatever reason, it detailed every restructuring step taking place at Terrasan as a pre-cursor to the Sea Harvest deal. The net result is that barely anyone in the market actually understood the transaction.

The circulars have now been released for the deal. There are two of them, as Brimstone as the controlling shareholder of Sea Harvest (with a 53.37% stake) needs to release its own circular to shareholders.

The simple version of this story is that Sea Harvest will acquire 100% of certain Terrasan subsidiaries that catch, process and sell pelagic fish, as well as 63.07% of Terrasan’s businesses that farm, process and sell abalone. The combined purchase price is R965 million. R365 million will be settled in cash and the rest through the issuance of Sea Harvest shares at R10 per share. The current Sea Harvest share price is just below R9.

There are also two deferred consideration payments based on financial targets for the year ended December 2023 and ending December 2024. The maximum possible payments are R98.5 million and R157.5 million.

The pelagic business that is the target of the acquisition is known as Saldanha. It operates on the West Coast of South Africa and employs over 600 people. Its 15-year fishing rights were recently renewed. Sea Harvest has just 0.6% of the anchovy quota and 2.7% of the pilchard quote, whereas Saldanha holds 11.51% and 5.05% respectively. This acquisition therefore give Sea Harvest much higher overall fishing rights.

The abalone business is called Aqunion and it has farms in Hermanus and Gansbaai. It employs 430 people. Sea Harvest is acquiring 63.07% of this business and the remaining 36.93% will be held by Agri-Vie.

Overall, these transactions help Sea Harvest improve its scale and diversification. Terrasan has held these investments for a long time and is looking for a liquidity event.

The pro-forma impact on Sea Harvest from this transaction is a 37% increase in diluted HEPS. That shouldn’t come as a surprise when big chunk of the deal is funded in cash – they are literally buying earnings. The net asset value per share is a useful metric here as well, with that due to decrease by 3%. Of course, the bigger focus will be on strategic benefits going forward.

Sea Harvest doesn’t seem to have used much in the way of corporate finance advice here, but the lawyers (in this case Webber Wentzel) did very nicely with a R8.8 million fee just on the legal advice and drafting. Total transaction costs of R15.6 million really aren’t bad for a deal this size.

From a Brimstone perspective, the important thing here is that the group will be losing control of Sea Harvest as part of this transaction. This is because Sea Harvest has to issue many new shares, so Brimstone will only have a 47.5% stake after the deal. The intrinsic net asset value (INAV) per Brimstone share doesn’t change as a result of this transaction. This is because Brimstone values the stake based on the listed share price and hasn’t taken into account a control premium. The counterargument is that even if a premium had been recognised, it would probably still be there as a 47.5% stake is as good as a 53% stake in practice, as shareholder meetings never have a 100% attendance rate.

And yes, in case you are wondering, shareholders of both Sea Harvest and Brimstone need to approve the deal for it to go through.

Little Bites:

  • Director dealings:
    • Executives at Spear REIT (JSE: SEA) are buying shares in the company, with the CEO buying shares worth R28.8k and the CFO buying shares worth R209k.
    • The CEO of Santova (JSE: SNV) now holds more than 5% in the company. I find it odd that the announcement says that this was due to an acquisition of shares, as I couldn’t see a director dealings announcement. I think it’s more likely that the wrong template was used for this announcement and that the 5% threshold has been reached due to share buybacks and there being fewer shares in issue.
  • The SARB approval for Frontier Transport’s (JSE: FTH) special dividend has been obtained. The payment date for the dividend of 137.38 cents per share is 12 February.
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