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Ghost Wrap #47 (Capital Appreciation vs. PBT Group | Mustek | Bidvest | Hyprop vs. Growthpoint | Astral Foods and Quantum Foods | Trellidor | Southern Sun vs. City Lodge)

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

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

  • Capital Appreciation’s share price has done anything but appreciate this year, with sector peer PBT Group also under pressure.
  • Mustek is proof of how low expectations can help in this environment.
  • Bidvest is executing a bolt-on acquisition in Australia, a traditionally tough market for SA corporates.
  • Hyprop’s outlook for distributable income is as bearish as Growthpoint’s outlook, yet the share price performances are completely different because of relative valuation.
  • Astral Foods is in a perfect storm for the poultry industry, just like sector peer Quantum Foods.
  • Trellidor gave earnings guidance that really disappointed the market.
  • Southern Sun shows that swimming with the tide is much easier than swimming against it, with City Lodge finding things are a lot harder in its traditionally business-focused hotel footprint.

Ghost Bites (Astral Foods | Choppies | Discovery | Investec | MC Mining | Remgro | Trellidor)

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


Motherclucker, it’s bad out there for poultry (JSE: ARL)

The Astral Foods update reads like the script of a horror movie

To be quite honest, I’m surprised that the Astral Foods share price only fell by around 11% for the day. There isn’t a single positive thread in the announcement, with problems everywhere you look. Take a swig of your coffee and prepare yourself.

When results were released for the six months to March 2023, it was already made clear to the market that load shedding and these macroeconomic conditions represent serious problems. Things have only gotten worse since then, with load shedding being a R1.9 billion burden for the full financial year ending September 2023 (vs. R741 million in the interim period). This includes R200 million in capital costs to try and address the issue. The rest of the costs include R45 million per month in diesel and other issues like production cutbacks and overtime shifts.

This brings us neatly to the next problem: enormous pressure on chicken prices to consumers. The announcement almost makes it sound like Astral may not be generating much gross profit, let alone net profit. We will need to wait for detailed results to confirm or deny this. Margins on chickens are notoriously thin, so it’s genuinely not impossible for load shedding plus consumer pressures to have smashed gross margin.

And finally, as we reach the end of this horror movie where the frightening character with the chainsaw is waiting behind the door, we find bird flu. In fact, we find the worst bird flu that South Africa has ever witnessed. The total cost of the outbreak is estimated to be R220 million.

It therefore shouldn’t surprise you that headline earnings per share collapsed into a loss of between R18.08 and R18.02. Interestingly, that’s pretty similar to the amount by which the share price dropped on the day of the announcement.

The balance sheet is geared to around 25% and there are no debt covenants. I bet the lenders are starting to wish that they had negotiated a few safety nets for themselves. Things desperately need to change for the poultry industry.


Margins at Choppies have been chopped (JSE: CHP)

It’s very tough out there for retailers

Even beyond South Africa’s borders, things are tough for retailers. It’s incredible to compare the results from Choppies to a company like CA&S Holdings (JSE: CAA), as it shows you how important it is to pick your position in the value chain. CA&S is killing it at the moment in terms of volumes growth, whereas Choppies experienced a drop in volumes on a comparable store basis.

For the year ended June, Choppies grew revenue by 6.4% but saw gross margin decline from 21.6% to 21.1%. Operating margin declined by 36 basis points to 4.26%, with expense growth outpacing revenue growth. Of course, net finance costs also increased.

With all said and done, HEPS fell 7.5% and no dividend was declared in this uncertain environment.


Dividends are back at Discovery (JSE: DSY)

As usual, there are also plenty of accounting adjustments

Discovery is a big fan of releasing “normalised” numbers that tend to look much better than HEPS reported in the good ol’ fashioned way. Before diving into the details, I’ll let you decide based on the share price performance whether the market is terribly interested in management’s view on normalised numbers. Here’s the key statistic: Discovery is currently trading at similar prices to 2015.

For long-term holders, the only benefit to being involved in Discovery has been free smoothies at Kauai.

I will therefore just focus on headline earnings, which increased by 5%. If you are happy to accept normalisation adjustments like removing the effect of interest rates, then normalised HEPS increased 32%.

A dividend of 110 cents has been declared. On the current share price of R147, that’s a yield of just 0.75%.

Another relevant metric is embedded value per share, which is R149.11. Return on embedded value was 13.2%, which I believe is why the share price is quite similar to embedded value. Still, there are other financial institutions I would own long before Discovery.


The Investec – Rathbones deal has completed (JSE: INP)

The bank now has a significant stake in a much larger UK operation

Investec tried bravely to build from scratch in the UK, but eventually the right way to achieve true scale was to combine the business with another decent-sized player. The merger of Investec Wealth & Investment in the UK with Rathbones Group makes all the sense in the world strategically.

The deal has now become effective, which means that Investec holds a 29.9% stake in voting shares and a whole bunch of convertible non-voting shares as well. The economic interest in the enlarged entity is thus 41.25%, so Investec has relinquished control but has gained exposure to a far more established and powerful business overall.

Investec has appointed two non-executive directors of Rathbones has part of the deal.


Losses narrow at MC Mining (JSE: MCZ)

The headline loss per share has improved by 55%

MC Mining has reported a loss for the year ended June 2023 of $4.4 million. Non-cash charges within that number are $3.7 million, so the cash loss is much smaller.

Although revenue increased by 91%, cost of sales grew by 96%. Margins are very thin, with gross profit of $3.6 million off revenue of $44.8 million. To add further pressure to the income statement, the company has been staffing up for the Makhado project. This has a five-year implementation plan and an estimated post-tax IRR of 37%.

The existing operations clearly can’t afford to fund the development of Makhado, which is why the company raised net proceeds of $21.4 million in a rights issue in November 2022.

The share price has been hammered this year, down 40%.


Remgro isn’t mincing its words about this environment (JSE: REM)

This is “probably one of the most difficult business environments” since Remgro’s inception

Johann Rupert isn’t called “Rupert the Bear” for nothing. There’s always a pragmatic and realistic undertone to company announcements in his stable, with the Remgro announcement being no different. Despite the intrinsic net asset value increasing 16.6%, the introductory paragraph doesn’t exactly inspire hope in the economy.

This was a year of dealmaking for the group, including transactions related to Mediclinic and Distell / Heineken. There were also changes to OUTsurance Group, Grindrod Shipping and Grindrod. In case you need a reminder of how ridiculously expensive these transactions tend to be, the detailed results disclose “abnormal merger integration and deal compensation costs” of a whopping R619 million at Distell just on the Heineken deal.

Remgro has reflected results from Heineken Beverages for two months of this financial year and things aren’t off to a great start. Even excluding amortisation and depreciation related to the acquired assets, Heineken Beverages contributed a loss of R19 million based on the consumer environment, load shedding and supply chain challenges. Ouch.

Touching on some of the private companies in the portfolio, Siqalo Foods saw a 14.2% decrease in headline earnings based on a drop in volumes in this environment and a 17.6% increase in input costs. My bearishness on consumer-facing stocks continues.

Lending money remains a decent activity in this environment, with Business Partners contributing R72 million to headline earnings vs. R70 million in the comparable period. The modest increase is thanks to higher interest rates, offset to an extent by credit impairments.

The fibre assets are the subject of a potential transaction with Vodacom, one which the competition authorities are not very keen on. CIVH saw a major jump in headline earnings from R47 million to R206 million, thanks to improved performance in the business. It’s not hard to see why Vodacom is hot for this deal.

I also have to highlight TotalEnergies, where headline earnings dropped from R1.076 billion to R54 million. Negative stock revaluations were part of the problem. Even without that, earnings fell 29.5% due to higher input costs and supply chain challenges. Oil isn’t always lucrative!

Long story short, intrinsic net asset value (NAV) per share increased by 16.6% to R248.47. The current share price of R157 is a discount of 36.8% to intrinsic NAV. The ordinary dividend is up by 60% to 240 cents.


Trellidor is a disaster (JSE: TRL)

Earnings have come in way lower than I expected

When Trellidor released a trading statement at the beginning of September that flagged an increase of at least 20%, it was clear that this was not the actual percentage growth that would be coming. FY22 was a shocking year, so earnings needed to be multiple times higher than in that year, not just 20% higher.

The good news is that earnings are indeed multiple times higher, with HEPS of between 4.16 cents and 4.24 cents vs. 0.40 cents in the base period. The very bad news is that this is nowhere near enough, as 2021 saw HEPS of 40.8 cents and 2020 was 13.8 cents. In other words, earnings are less than a third of what they were in 2020!

The share price plummeted 24.6%, which is what happens when there are desperate sellers in an illiquid stock. But even at R1.87, the earnings multiple is clearly ridiculous and the company cannot justify anything close to that level.

If you read the reasons for the earnings drop, there’s very little happy news here. Household budgets are under pressure and consumers are focusing on basics like electricity and water solutions, nevermind security. In the UK, customers focused on in-store shop fittings based on regulatory changes, not security. When you combine these revenue pressures with increased input cost pressures and the adverse Labour Court Judgement that saw the reinstatement of 42 employees with full backpay and benefits, Trellidor really is facing huge problems. As final insult to injury, increases in debt and prevailing interest rates drove a substantial increase in net finance costs.

One thing is for sure: the doors are a much safer investment than the company itself.


Little Bites:

  • Director dealings:
    • Normal programming appears to have resumed, with Des de Beer buying R1.9 million worth of shares in Lighthouse (JSE: LTE).
    • I generally avoid commenting on director sales related to vesting of share options, as that isn’t usually useful information for investors. The approach taken by a director of major subsidiaries at Novus (JSE: NVS) is worth highlighting though. He received R691k worth of shares and only sold R74k worth of shares. That’s a solid retention of shares.
    • Fred Robertson and various associated entities bought N shares in Brimstone (JSE: BRT | JSE: BRN) worth roughly R390k.
  • Collins Property Group (JSE: CPP) is in the process of taking its stake in Collins Property Projects to 100% by flicking U Reit Collins (a subsidiary of Castleview Property Fund JSE: CVW) to the top. In other words, Collins will issue shares to pay for the acquisition, taking the subsidiary of Castleview to a 21.78% holding in Collins group. To execute this transaction, some amendments to authorised share capital will be required and a circular has been sent to shareholders.
  • If you are interested in Omnia (JSE: OMN), then the presentation at the RMB Morgan Stanley Off Piste conference is a useful way to learn more about the company. You can find the deck at this link.
  • Microcap Telemasters Holdings (JSE: TLM) released a trading statement dealing with the year ended June. HEPS has swung from a loss of 3.73 cents to earnings of 0.81 cents. The share price is only 95 cents!
  • Rex Trueform (JSE: RTO) has been investing in property recently, with another deal now notched on its belt. There are various properties involved with a total value of R51.5 million, of which R44.5 million is being funded by debt. The acquisition yield is 9.5%. The rationale here is that Rex Trueform’s subsidiary is already occupying part of the properties for operational purposes, so they are securing that occupancy and earning a rental yield on the rest.
  • Shareholders of Kore Potash (JSE: KP2) approved the resolutions required for the issue of shares under the current capital raising efforts.

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

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Exchange-Listed Companies

In a bid to double its facilities management operations in Australia, Bidvest has acquired Consolidated Property Services (CPS) for an undisclosed sum from private shareholders. CPS provides integrated property services to more than 145 sites across Victoria, New South Wales and South Australia. With current management having signed services agreements the company says the deal will be earnings and return accretive to Bidvest.

Zeder Investments subsidiary Zeder Financial Services, which holds a 92.98% stake in the Capespan Group, is to dispose of Capespan excluding its pome fruit primary production operations and the Novo fruit packhouse. The acquirer, 3 Sisters, is a special purpose acquisition vehicle owned and funded by Agrarius Agri Value Chain, which is administered and driven by 27four Investment Managers. Zeder will receive R511,39 million for its stake while minority shareholders will receive R38,6 million for a 7.02% interest. As part of the disposal, Zeder will conclude a strategic relationship with Capespan in respect of the marketing and distribution of Pomme Farming Unit’s crops.

The mandatory offer of R6.41 per enX share by African Phoenix Investments to minority shareholders closed on 15 September 2023 with acceptances in respect of 0.27% (495,846) of the company’s issued share capital. African Phoenix now holds a 49.07% stake in enX.

Mondi plc has entered into an agreement to sell its last remaining facility in Russia to Moscow-based real estate development company Sezar Group. In August 2022 the company announced the sale of Mondi Syktyvkar to UK’s Augmented Investments for a purchase consideration of €1,5 billion. However, the deal failed in June this year due to “lack of progress” in gaining the necessary approvals to complete the transaction. Sezar will pay a total cash consideration RUB80 billion (c. €775 million/R15,7 billion). Mondi intends to distribute the net proceeds from the disposal to shareholders.

OUTsurance has exercised an option to acquire, for A$42,5 million (R518,5 million), the remaining 2.65% stake in Youi held W Roos, a member of the team which started Youi in 2008. The company acquired the first 2.65% stake in March this year for A$36 million.

Telemedia, a subsidiary of Rex Trueform, has entered into two agreements to acquire properties. The Telelet portfolio, consisting of eight properties, will be acquired for R50 million and the acquisition of 27 Landau Terrace in Melville, a related party acquisition from the Bretherick Family Trust, for R1,5 million.

AngloGold Ashanti has agreed to sell its 50% indirect interest in the Gramalote Project in Columbia to Canadian miner B2Gold for a total consideration of up to $60 million (R1,1 billion). AngloGold Ashanti will receive a cash payment of $20 million at the transaction close with the balance dependent on project construction and production milestones. The Gramalote project is a joint venture between the two companies.

Unlisted Companies

Saint-Gobain Construction Products South Africa, the subsidiary of the French headquartered leader in light and sustainable construction, is proposing to acquire local specialist epoxy, polyurethane flooring and construction solutions company Technical Finishes SA. Financial details were undisclosed – the deal is pending regulatory approval.

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

Weekly corporate finance activity by SA exchange-listed companies

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Quilter plc is to launch an odd-lot offer to shareholders holding fewer than 200 ordinary shares in the company on 28 April 2023 and who will still hold those shares on 10 November this year. This applies to approximately 134,000 (67%) of the company’s shareholders, representing 1.21% of the total number of shares in issue. If all shares eligible to participate are tendered, Quilter will pay out £16,1 million for 17 million shares based on a price of 90.1 pence per share which represents a 5% premium to the market price.

OUTsurance will pay shareholders a special dividend of 8.5 cents per share payable on 9 October 2023.

A further 31,096,000 shares have been issued by Kore Potash following the approval by shareholders of the issue in respect of the conversion of convertible loan notes into equity by its chairman David Hathorn.

Argent Industrial has repurchased a further 325,487 ordinary shares representing 0.58% of the issued share capital of the company for an aggregate R5,11 million. The company is entitled to repurchase a further 10,82 million shares in terms of the general authority granted at the last annual general meeting.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 9,650,000 shares for a total consideration of £44,13 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 5,605,784 shares were acquired at an aggregate cost of A$18,68 million.

The JSE has warned Labat Africa that it may face suspension and possible removal of its listing from the bourse if it fails to release its Annual Financial Statements before 30 September 2023.

Three companies issued profit warnings this week: York Timber, Southern Sun and Astral Foods.

Two companies issued or withdrew a cautionary notice: PSV and African Equity Empowerment Investments.

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

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

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DealMakers AFRICA

Turaco has acquired MicroEnsure Ghana (to be rebranded as Turaco Ghana) from MIC Global. Financial terms were not disclosed. The deal sees the tech-enabled insurance company expand its footprint in Africa and will now operate in four countries – Kenya, Uganda, Nigeria and Ghana.

Incofin’s Rural Impulse Fund has sold its 28% equity stake in Rwanda’s Unguka Bank to LOC Holdings. Financial terms were not disclosed. Incofin first invested in the microbank over a decade ago and has help the company increase its total assets from US$14 million to $29 million.

Kuwait’s Foreign Petroleum Exploration Company (KUFPEC) has acquired a 40% stake in Egypt’s Nile Delta offshore Block 3 from Shell’s BG International. No financial terms were disclosed.

Lupiya, a Zambian neobank, has announced a US$8,25 million Series A funding round. The round was led by Alitheia IDF Fund and included INOKS Capital SA and the German Investment Bank KfW DEG.

Nigerian auto-tech firm Fixit45 has raised US$1,9 million to drive growth in its existing business and expand into Kenya and Uganda. The pre-seed round was led by Launch Africa Ventures with participation from Soumobroto Ganguly, David DeLucia and a number of angel investors.

Ghanian agritech Complete Farmer has raised US$10,4 million in equity and debt in a pre-Series A. The $7 million in equity was raised from The Acumen Resilient Agriculture Fund, Alitheia Capital via its Munthu II Fund, Proparco, Newton Partners and VestedWorld Rising Star Fund. Sahel Capital’s SEFAA Fund, Alpha Mundi Group’s Alpha Jiri Investment Fund and Global Social Impact Investments provided the $3,4 million debt funding.

Automotive technology platform Mecho Autotech has secured a US$2,4 million pre-Series A funding round. The Nigerian company raised the funds from Global Brain Corporation, Ventures Platform and Uncovered Fund.

Côte d’Ivoire SaaS e-commerce platform ANKA has raised a US$5 million pre-Series A extension round of debt and equity led by the IFC with participation from Proparco and the French Public Investment Bank. The $3,4 million equity investment from the IFC marks its first investment into the African creative sector.

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

Business Rescue practitioners beware: publish or prison

Section 34 of the Insolvency Act, 24 of 1936 (Insolvency Act) is an important creditor protection mechanism ensuring that when a trader transfers a business or any goods or property forming part of the business, creditors will either (if the notices were published) be alerted and have their liquidated liabilities become due or, if the notices were not published, have recourse against the purchaser within a period of six months from the date of transfer.

It is trite that, leaving aside the difficulties of print media’s slow demise, notice of the intended transfer must be published in the Government Gazette, two issues of an English newspaper and two issues of an Afrikaans newspaper circulating in the district in which the business is carried on, within not less than thirty days and not more than sixty days before the date of transfer.

In practice, because this section is not peremptory, and for a variety of commercial reasons notices of the sales of businesses are not always published in terms of s34 of the Insolvency Act. It is obvious that sellers would prefer to avoid their liquidated liabilities becoming due, or due to the time periods involved, it may not be practical to publish.

The rise of the modern business rescue proceedings on the back of the Companies Act, 2008 (Companies Act) has resulted in a conflict with the ancient Insolvency Act.

The trigger for a company to enter into business rescue proceedings is when it is considered ‘financially distressed’, where:

i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or

ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

One of the tools available to a business rescue practitioner to realise value for creditors (and shareholders, if there is any residue), is to sell the business of the company in business rescue proceedings. If a business rescue practitioner, pursuant to a business rescue plan that has been adopted by the necessary majority of creditors, sells a business of a company, must that practitioner publish a notice under s34 of the Insolvency Act? At first glance, this seems nonsensical. The very body of creditors who approved the sale pursuant to the business rescue plan do not need to be alerted to the fact that the sale is now taking effect. S129(4) of the Companies Act already provides that a company must publish a copy of the notice appointing a business rescue practitioner to any shareholder or creditor of the company, registered trade union representing employees of the company, and to each employee (if such employee is unrepresented), thereby notifying them that the company is undergoing business rescue. In addition, what is the purpose in publishing, and purportedly accelerating one’s liquidated liabilities, when one’s creditors’ claims are regulated pursuant to the rules governing business rescue?

At this stage, unfortunately, delving deeper brings more questions than answers. What is the position if a business rescue practitioner, on behalf of the selling company, does not publish and the sale is completed, but within six months of the sale, the business rescue proceedings are converted into liquidation proceedings? Does the liquidator become entitled to regard such sale as being void pursuant to s34? Would a purchaser find comfort then in the aforesaid “nonsensical” argument?

Another caution is that if the “nonsensical” argument is incorrect, then assuming that the liabilities of the company in business rescue exceeded its assets at the time of the sale, or where the business rescue proceedings were converted to liquidation proceedings within six months of the sale, the business rescue practitioner may have exposed him or herself to the risk of criminal prosecution. This is because s135(3)(b) of the Insolvency Act prescribes that an insolvent person is guilty of an offence and liable to imprisonment for a period not exceeding two years if, prior to the sequestration of his estate:

“at a time when his liabilities exceeded his assets or during the period of six months immediately preceding the sequestration of his estate, he … alienated any business belonging to him, or the goodwill of such business or any goods or property forming part thereof not in the ordinary course of that business, without publishing a notification of his intention so to alienate in the Gazette and in a newspaper, in terms of the provisions of subsection (1) of section thirty-four(our emphasis).

Obviously, one would need to consider whether, by virtue of the adoption of a business rescue plan which contemplates the disposal of a business, it could then be said that the sale of that entire business becomes “in the ordinary course of that business”. That would be the saving grace to avoid this rigmarole, but we are not aware of any judgment on this point as yet.

Our thoughts, in conclusion, are that business rescue practitioners should be mindful of publishing s34 notices when disposing of a business in the context of a business rescue plan, and ought to do so where the company’s liabilities exceed its assets, so as to avoid the possible commission by the business rescue practitioner of an offence in terms of s135(3)(b) of the Insolvency Act.

Brian Jennings is a Director and Sasha Schermers a Candidate Attorney in the Corporate & Commercial practice | Cliffe Dekker Hofmeyr.

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

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

Unlocking opportunities: exploring the evolving landscape of private equity in Southern Africa

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Private equity, previously seen as a specialised investment approach, has experienced remarkable growth in recent years, particularly in emerging economies like Southern Africa. The region has become an attractive destination for global investors, leading to the unlocking of new opportunities and a transformative shift in the private equity landscape. While the private equity space has historically been male dominated, lately, the landscape is changing to include women, and there is a noticeable shift towards greater gender diversity and inclusion within the sector.

Southern African countries have become a highly appealing investment destination for private equity funds. The region’s attractiveness stems from a combination of factors, including its diverse range of sectors and favourable investment climate. Additionally, the region’s energy sector presents opportunities for investment in renewable energy projects, as there is a growing demand for sustainable energy solutions. Abundant natural resources, a growing middle class, and improving political stability have fuelled investor interest, making Southern Africa an attractive proposition for private equity funds. Private equity firms are recognising the untapped potential of the region’s markets beyond South Africa. Neighbouring countries offer significant growth prospects, due to factors such as an expanding consumer base, improving infrastructure, and favourable regulatory frameworks. By identifying and partnering with local companies with strong growth prospects, private equity funds are unlocking value and driving expansion in these untapped markets.

Private equity in Southern Africa is not solely focused on financial returns; it also plays a crucial role in addressing development challenges. By investing in sectors such as healthcare, education and renewable energy, private equity firms contribute to the region’s sustainable development goals. This impact investment approach is gaining traction among investors, who see the potential for both financial returns and positive social impact. The Mahlako Energy Fund, part of Mahlako Financial Services, aims to bring transformation to South Africa’s energy sector by promoting black economic participation and socio-economic development. The Fund’s primary focus is investments in gas, green hydrogen, renewable energy and energy services. By investing in these areas, the Mahlako Energy Fund aims to contribute to the transformation of South Africa’s energy sector, ensuring energy security for the country. These investments will help to diversify the energy mix, reduce reliance on fossil fuels, and promote the use of cleaner and more sustainable energy sources. The projects funded through Mahlako ensure energy security for the country, while creating employment and advancing South Africa’s ‘Just Transition’ plan.

Technological advancements and innovation are reshaping the private equity landscape in Southern Africa. The region has witnessed a surge in tech startups and entrepreneurial ventures, particularly in sectors like fintech, e-commerce and agritech. Private equity funds are actively seeking out innovative companies, providing not only capital, but also strategic guidance and operational expertise to fuel their growth. One of the projects under the Fund is the Prieska Power Reserve project, which has the goal of producing competitively priced green hydrogen and ammonia. The project recognises South Africa’s competitive advantage in the renewable energy market, and seeks to leverage it by positioning the country as a significant player in the global green hydrogen and ammonia markets.

Green hydrogen and ammonia are renewable energy carriers that can be used in various industries, such as agriculture, transportation, chemicals, and electrical backup generation. Prieska will also develop black and female industrialists within the green industry, create employment and develop small businesses, with the majority being black-owned. The project is an example of how rich the region is with opportunities for innovation, investment and sustainable development.

The integration of technology and innovation into private equity investments enables companies to scale rapidly and access new markets. Fintech startups are revolutionising financial services, providing innovative solutions for banking, payments and lending. E-commerce platforms are driving digital trade and transforming the retail sector, while agritech companies leverage technology to enhance agricultural productivity and food security. Private equity firms are capitalising on these opportunities, supporting the growth of technology-driven businesses, and positioning themselves at the forefront of industry disruption.

Successful private equity investments in Southern Africa often rely on strong local partnerships and collaborations. Recognising the importance of local knowledge and networks, many private equity firms are teaming up with local players to navigate the complex business environment and identify promising investment opportunities. These partnerships bring together global expertise and local insights, creating a powerful synergy that enhances investment outcomes.

Environmental, Social and Governance (ESG) factors are increasingly influencing private equity investment decisions in Southern Africa. Investors are placing greater emphasis on responsible investing practices, seeking opportunities that align with sustainable development goals and promote good governance, so private equity firms are incorporating ESG considerations into their investment strategies, driving positive change and long-term value creation in the region. At Mahlako, ESG principles are embedded in the investment philosophy of the Fund.

The Fund’s stringent investment decision-making process is followed with an intentional focus on ESG. As a 100% female-owned organisation with 65% of employees at executive level, Mahlako is ahead with transformation and promoting historically disadvantaged individuals through equity and board membership.

The organisation believes that transparency and accountability are essential to building trust with stakeholders, including investors, portfolio companies, and the communities which are impacted by the various investments. The Fund is committed to advancing economic transformation and meaningful economic participation of black people, particularly women and the youth in South Africa. By focusing on creating opportunities and promoting equity, the Fund actively contributes to the empowerment and development of marginalised groups in the country, and demonstrates a comprehensive approach to sustainable and inclusive investment practices.

By investing in companies that prioritise sustainability and social responsibility, private equity firms contribute to a more resilient and equitable future for Southern Africa. This approach not only benefits local communities, but also enhances the long-term performance and reputation of private equity investments.

Makole Mupita is an Executive Director and Fund Principal for Mahlako Financial Services.

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

Unlock the Stock: Harmony Gold

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

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

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

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

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

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

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


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

The facilities management operations in Australia will be doubled in size

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

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

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


Hyprop scales back its payout ratio (JSE: HYP)

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

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

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

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

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

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

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

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


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

The company needs economic growth and investment in infrastructure

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

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

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

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

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

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

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

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

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


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

But you need to look at adjusted HEPS to see it

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

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

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

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

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

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

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

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

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


Little Bites:

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

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

2

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Aspen lands an important manufacturing contract (JSE: APN)

The company is making progress with filling capacity in Gqeberha

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

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

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

Good news indeed!


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

Even the technology industry cannot escape the realities of our economy

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

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

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

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

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


Grand Parade swings into the green (JSE: GPL)

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

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

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


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

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

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

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


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

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

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

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

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

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

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

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


Little Bites:

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