Emira wants to buy the rest of Transcend (JSE: EMI | JSE: TPF)
And they aren’t prepared to pay a premium for it
With a bid-offer spread as wide as the moon and practically zero liquidity, shareholders in Transcend only have one realistic way to exit their positions: sell to Emira. This is because Emira holds 68.15% of the shares in issue, so it can easily block an offer from anyone else.
This leaves major shareholders in Transcend stuck in an illiquid rut and unable to realise the value of their stake. It’s therefore not surprising that holders of 18.61% in the company have already given irrevocable undertakings to accept Emira’s offer of R6.30 per share, even though this implies no premium to the current traded price. This represents 58.41% of the voting class (as Emira can’t vote), so this proposed scheme of arrangement is already a long way down the road towards 75% approval.
With Transcend’s net asset value (NAV) per share as at March 2023 of R8.23, the offer price is a 23% discount to NAV. This is unfortunately what happens when there is only one obvious buyer for the stake and no liquidity to offer people an alternative way to exit. When buying stocks in a takeout basket and hoping for a premium, this is important to take into account.
As a final comment on this price, this discount to NAV isn’t terribly different to other takeout prices we’ve seen on the JSE. Where there has been a premium offered to shareholders, it’s because the traded discount to NAV was much higher.
Libstar suffers a substantial drop in earnings (JSE: LBR)
Here’s another casualty of this operating environment
With a drop in the share price this year of over 30%, the market has been pricing in terrible numbers at Libstar. With the release of a trading statement for the six months to June, we now know just how tough it has been. The numbers seem to be in line with what the market expected, as the share price hardly moved in response.
Revenue growth was just 4% and selling price inflation and mix contributed 10.7% to growth. This immediately tells you that volumes were down, in this case by 6.7%.
Part of the drop in volumes is because Libstar discontinued certain unprofitable lines in the retail business, so that’s technically a good thing. The destruction of the Shongweni mushroom production facility in the second half of 2022 certainly wasn’t a good thing, obviously leading to a sharp drop in fresh mushroom production. Excluding the impact of these issues, retail volumes would’ve been up by 1%.
The industrial and export channels didn’t do well for various reasons.
With lower volumes in a manufacturing company, you would expect to see a drop in gross profit margin. This has played out here, with gross profit down by 5.6% despite revenues up 4%. Gross margin was consistent with the second half of 2022 at least.
The same can’t be said for diesel costs. The company spent R8m in H1’22, R31m in H2’22 and a whopping R45m in this period. Pricing increases could only partly mitigate this impact.
Against this backdrop, normalised EBITDA (a good proxy for operating profit) fell by between 17.3% and 19.3%. This is before we consider net finance costs, which jumped by 71% because of higher interest rates.
HEPS has dropped by between 54.9% and 59.8%, so this is a period that Libstar will want to forget. Normalised HEPS from continuing operations fell by between 42.4% and 47.5%.
Detailed results are due on 12 September. The company has noted that initiatives around the strategic direction will be shared at the same time.
Sibanye’s HEPS has approximately halved (JSE: SSW)
All the PGM players are in the same boat, as one would expect
Sibanye-Stillwater is shielded to a small extent from the decline in PGM prices by its gold exposure. It’s nowhere near enough to stop the pain though, with HEPS for the six months to June down by between 48% and 53%. With a 22% drop in the average rand basket price for PGMs, they never stood a chance, even with the base period including the horrors of the industrial action in the gold business.
On top of the negative move in the cycle, Sibanye has had to content with other issues like a shaft incident at Stillwater.
Sibanye cannot control market prices for commodities but can control production. Local PGM production was flat (a solid outcome), Stillwater’s PGM production was down 11% because of the operational issues and local gold increased by 233% because the base period was a catastrophe.
The share price is down 34% this year, though it remains a ridiculous 285% higher over five years. Mining cycles are wild things.
Transpaco: low on stock liquidity, high on earnings growth (JSE: TPC)
This small cap is heading in the right direction
With a market cap of under R900 million and a wide bid-offer spread, Transpaco has a share price chart that is typical of a stock with low liquidity. Whenever you see long horizontal lines, it’s because the stock is thinly traded:
This doesn’t mean that the company isn’t growing. In a trading statement for the year ended June 2023, Transpaco announced that HEPS will increase by between 16% and 22%. This means a range of 554 cents to 582 cents.
The share price is around R29, so that’s a Price/Earnings multiple of roughly 5x.
Little Bites:
Director dealings:
With results now released and Standard Bank (JSE: SBK) no longer in a closed period, a couple of prescribed officers and an associate of a director collectively sold shares worth around R12.8m.
The same is true atInvestec (JSE: INP), where a director and a prescribed officer collectively sold R2.8m worth of shares.
Des de Beer has bought another R6m worth of shares in Lighthouse (JSE: LTE).
A director of Santova (JSE: SNV) sold shares worth R426k.
AngloGold (JSE: ANG) shareholders have said yes to the proposed reorganisation of the company, which effectively internationalises the holding structure of the group.
In this fireside chat, Wichard Cilliers and Andre Botha of TreasuryONE made themselves available to answer any questions that attendees wanted to ask in the session.
Starting with China and ending with the Big Mac Index, we discussed everything from the rand and the South African trade deficit through to the Fed and consumer confidence.
This is a wonderful learning opportunity, brought to you by TreasuryONE
Along with the release of its interim results, MTN announced it had signed a memorandum of understanding with Mastercard. Following a bespoke process to identify and potentially introduce strategic minority investors into the US$5,2 billion (enterprise value) MTN Group Fintech business, the company will, following the completion of the due diligence exercise, close a deal with Mastercard.
RMB Corvest (FirstRand) in partnership with Umoya Capital Partners, has acquired a significant minority stake in SANTS Private Higher Education Institution. Programmes offered by SANTS focus on quality at an appropriate cost, with an emphasis on ease of access and customer service for potential educators. Since its establishment in 1997, SANTS has presented various programmes and qualifications to more than 40,000 educators in South Africa.
The R8 billion BEE deal announced by Sanlam in October 2018 with SU BEE Investment SPV for a 5% stake (111,349,000 new shares) in the company is being unwound. The shares were issued at the time at R70 per share representing a 9.88% discount – the share has traded for the most part below this level thanks to the pandemic and economic fragility of the country. The deal funded via a combination of preference shares and external funding is unlikely to provide the beneficiaries with any benefit and as such Sanlam has taken the decision to unwind the deal. The company will acquire the preference shares held by Standard Bank (the external funder) and secured by 85 million Sanlam shares for R2,4 billion, funded from existing cash resources.
Unlisted Companies
Sylvania Platinum, a low-cost PGMs producer listed on the London Stock Exchange’s Alternative Investment Market, has announced a joint venture (JV) in SA between its local unit and Limberg Mining, a subsidiary of ChromTech Mining. The JV will process PGM and chrome ores from historical tailings dumps and current arisings from the Limberg Chrome mine in the Western Limb of the Bushveld Complex. The JV will trade and operate under the name Thaba Joint Venture. Sylvania will initially fund the R600 million start-up costs and will provide c.US$5 million in the form of a loan for working capital.
Vitruvian Medical Diagnostics, a medical technology startup developing low-cost diagnostic assistance tools for medical laboratories, has raised US$1,25 million in a recent Seed Extension II funding round. The round was led by 27four Investment Managers’ social impact fund, the Nebula Fund. The investment will be used to scale growth by increasing the team and driving growth in new technologies.
Air Products South Africa, via its subsidiary Weldamax, has added to its gas and welding portfolio with the acquisition of a controlling interest in EWN&S. The acquisition will add a further four sales outlets to the existing 13 countrywide outlets. Financial details were undisclosed.
These earnings got hammered with a vengeance (JSE: AEG)
Aveng’s updated trading statement shows how bad things are
The Aveng share price has been weird for the past week. It started moving higher out of nowhere, then gave up all those gains after the updated trading statement was released. If punters were speculating on the release of favourable information from the company, they got it wrong.
With operating losses at both McConnell Dowell in Australia and Moolmans locally, this period is a useful reminder of how risky construction really is. For the year ended June, the headline loss per share is between 761 cents and 749 cents. The share price is only R8.16, so another year like this and there really wouldn’t be much left to this group. As you would expect, the share price has halved over the past year as these losses were priced in.
Detailed results will be out on 22 August.
Alphamin released its quarterly financials (JSE: APH)
This is a great candidate for my chart of the day
Mining is a great way to learn about operating leverage, or the impact of fixed costs on margins. Simply, when times are good, they are really good when you have a lot of fixed costs. When they are bad, well, you know the rest.
Here’s a chart of what that looks like, thanks to tin miner Alphamin releasing its quarterly financials:
DRDGOLD’s revenue grows slightly ahead of costs (JSE: DRD)
This means that HEPS is moving in the right direction
For the year ended June, DRDGOLD managed to grow its revenue by 7%.
Although gold sales at Ergo Mining fell by 5% despite a 21% increase in yield (with throughput as the problem), this was more than offset by a 16% increase in the rand gold price. At Far West Gold Recoveries, that gold price increase was the saving grace as yield fell by 8% and sales fell by 15%.
Cash operating costs increased by 6%, below revenue growth and thus giving margins a move in the right direction. Ergo was the winner here once more, with costs up by 6% vs. Far West Gold Recoveries where they increased by 11%. Although Ergo is far larger than Far West and that’s why the average has come out where it did, there’s obviously some rounding off here in the commentary as well.
Free cash flow in this period was R468.9 million, way down from R871.6 million in the comparable period. The difference lies in much higher investing activities in this period. Importantly, there’s still no debt on the balance sheet.
Exxaro gives us full details on its earnings (JSE: EXX)
When the cycle turns, it can turn quickly
You know the drill by now: commodity prices down, inflationary pressure on costs and infrastructure in South Africa that has more blind spots than Ferrari’s F1 pit strategies. Like so many other mining houses on the local market, Exxaro is having to deal with all these issues.
Exxaro generates 96% of revenue and 90% of EBITDA from its coal business. With coal revenue down 16.4% year-on-year, this was never going to be a pretty result. Very few people realise that Exxaro also has renewable energy investments in the form of wind assets, which recorded a very good six months thanks to a windier period. It’s just too small in the group context to really make a difference.
Where we desperately need the winds of change to blow is at Transnet. You know it’s bad when the results make a comment that Transnet’s performance “did not deteriorate further” – so just being bad, rather than worse, is an achievement.
HEPS fell by 29% for the six months to June and the interim dividend is 1,143 cents per share, down 28%.
Gold Fields: not too bad, actually (JSE: GFI)
In this environment, a small drop in mining is a big win
To give context to the Gold Fields numbers, I am mentioning right upfront that the company has operations in several countries. This gives it some protection from the joy of load shedding (and load curtailment for that matter).
For the six months to June 2023, HEPS came in at $0.51 (because the company is listed in the US and reports in dollars). This is a 12% drop vs. the comparable period. Despite this, the rand dividend has increased by 8% year-on-year to R3.25 per share, which tells you everything you need to know about the exchange rate over the past year.
In terms of other important metrics, gold production fell by 4% and the all-in cost per ounce increased by 3%. The balancing figure that saved the result from a sharper drop is of course the gold price, which was $1,927 in this period vs. $1,851 in the comparable period.
Due to acquisitions and dividends, net debt increased during the period and the net debt : EBITDA ratio is now at 0.42x vs. 0.33x a year ago.
The full year guidance has been maintained for both production and costs. Of course, nobody knows what the gold price will do.
CFO Paul Schmidt has indicated a desire for early retirement (I think the gold price will do that to anyone to be honest), so the company will look for a successor.
Master Drilling is still growing, but for how long? (JSE: MDI)
I suspect there’s a lag effect of the commodity cycle on Master Drilling’s earnings
Master Drilling has released a trading statement because the expected growth in HEPS for the six months to June is between 20% and 30% higher in rands. The company also gives a dollar range for HEPS growth, which is only between 0.7% and 10.7% because of rand weakness.
This is obviously a very strong growth rate, with interim HEPS expected to be between 162.70 and 176.30 cents. The share price is just over R12, so the annualised multiple is around 3.5x. When multiples are low in mining and related companies, warning bells should be going off for you.
Is it correct to annualise the interim earnings? I’m not familiar enough with Master Drilling’s business model to know for sure (and I would welcome any insights here), but logically a drop in commodity prices can’t be good news here. When prices are high, mining exploration is easier to justify. When prices drop, mining houses get tighter on capital expenditure and drilling would suffer.
The share price shows you how cyclical this stock is:
Oceana releases a trading statement (JSE: OCE)
Make sure you have read it carefully
A trading statement is usually big news, but not always. It is triggered by earnings moving by more than 20% vs. the comparable period, whether up or down. That’s a big move, which is exactly why the JSE Listings Requirements make companies give an early warning of a move this size.
Oceana’s trading statement is based on a move in earnings per share (EPS), not headline earnings per share (HEPS). This is a very good time to learn one of the big differences between the two concepts: profits and losses on disposals of assets. HEPS excludes these distortions.
Oceana sold Commercial Cold Storage Group with effect from April 2023, banking a juicy profit of R370 million after tax. This works out to 304 cents per share, which is huge vs. earnings for the year ended September 2022 of 603 cents. It’s therefore not rocket science to figure out that the move will be more than 20% in earnings.
At this stage, no guidance has been given for HEPS. Although this doesn’t necessarily mean that HEPS won’t have a significant move, it does mean that you shouldn’t be interpreting this trading statement as meaning a big jump in the core business.
Sabvest’s interim results are always worth a read (JSE: SBP)
This is one of the most respected investment holding companies on our market
Unlike some of the other investment companies on the JSE that hold mostly a basket of listed assets, Sabvest gives exposure to assets that you can’t otherwise get. There are thirteen unlisted and three listed investments. The Seabrooke Family Trust has voting control of Sabvest through a special share class and holds a 40.5% economic interest. This has been a lucrative investment vehicle, boasting a 15-year share price CAGR of 17% (excluding dividends).
The net asset value (NAV) per share is up by 10.4% over the past year, which is a decent outcome that has been driven by resilient performance in most of the unlisted investments. The dividend per share is consistent at 30 cents, which is a tiny yield (even when annualised) on a share price of R70. You aren’t buying this thing for the dividend.
The discount to NAV is substantial, with a share price of R70 vs. a NAV per share of R114.65. That’s a discount of 39%, which isn’t materially different to other major funds like Remgro.
If you’ve been following the sad and sorry tale of Transaction Capital, you’ll be wondering what the impact is on Sabvest. Obviously now a much smaller percentage of the portfolio than it once was, the value of the stake is R35m and the total portfolio is worth nearly R5.3bn. If you’re bullish on Transaction Capital, it’s probably too small within Sabvest for this to be the right way to play that view.
If you would like to see the full portfolio, here it is:
Standard Bank grows its earnings and dividend by 35% (JSE: SBK)
Return on equity has also jumped sharply
Standard Bank is a large beast. There’s far more to the group than just South Africa, with the African regions contributing 44% to headline earnings. Africa grew headline earnings by 65% and achieved return on equity of 28.4%, blowing away the South African result of 17% growth and return on equity of 15.2%. By the way, that South African result is still more than decent!
Income has experienced wonderful growth in a period of higher interest rates and larger balance sheets under inflationary conditions, up 29%. The expense base certainly doesn’t grow by this much, which is why the cost-to-income ratio has improved from 55.5% to 50.5%. That’s not the best in the sector, but it’s not bad. Remember, lower is better on that ratio.
The story of banking this year has been one of impairment provisions, which are measured by the credit loss ratio. This has increased to 97 basis points, which is right at the top of the through-the-cycle range of 70 to 100 basis points. Despite this, the banking business achieved return on equity of 19.0%, much higher than 15.3% in the interim period last year and a genuinely high number.
Net asset value per share is an important driver of the share price, so you always want to see this moving in the right direction. On this metric, Standard Bank achieved growth of 10%.
In good news for those who are barely keeping their heads above water every month, Standard Bank has echoed Nedbank’s view that local interest rates will be flat for the rest of the year.
Speaking of the outlook for the second half of the year, Standard Bank expects ongoing strong revenue growth and positive jaws (income growth ahead of expense growth i.e. further improvement in operating margins). The credit loss ratio is expected to remain in the upper half of the target range, so that suggests it won’t get any worse from the current level.
Shareholders will enjoy an interim dividend of 690 cents per share, a payout ratio of 54%.
Standard Bank must be reading Ghost Mail, because they’ve already done the work for me on a potential chart of the day going back to 1H18! With so many accounting restatements and changes in rules, I won’t try replicate this or add in the second half for each year. This tells a good enough story:
Little Bites:
Director dealings:
We are firmly back into a Des de Beer buying cycle at Lighthouse Properties (JSE: LTE), with the latest acquisition being R6.1m worth of shares.
Senior executives of Karooooo (JSE: KRO) acquired shares worth R1.6m. I was surprised to see that this is a “voluntary disclosure” of this trade. The company’s primary listing is on the Nasdaq and so those rules take precedence, but I didn’t realise that the JSE doesn’t force this disclosure on secondary listed companies.
A director at Acsion (JSE: ACS) bought shares worth R13.3k.
A director of Afine Investments (JSE: ANI) fished some coins out from between the couch cushions and bought shares worth R4.6k.
With the future of the company now secured, the CEO of Royal Bafokeng Platinum (JSE: RBP) will now retire as his fixed term contract expires at the end of August. The current manager of the Styldrift mine will now take over the top job at what will be a subsidiary of Impala Platinum (JSE: IMP). In a cute story, he was a bursary student at Impala Platinum many years ago and was with the company for 13 years! Talk about coming full circle.
Advanced Health intends declaring a Clean-Out dividend to shareholders of 20 cents per share. The payout is conditional on the Scheme (the offer to acquire the issued shares of the company by Eenhede Konsultante Eiendoms Beperk at 80 cents per share) being declared wholly unconditional.
Resilient REIT has disposed of 162,431,649 shares in Hammerson plc for an aggregate consideration of R982,2 million. Although Hammerson’s results were well received by the market, the Resilient Board says its priority remains focused on Resilient’s energy initiatives and funding its capital commitments while retaining conservative leverage.
Finbond will ask shareholders to vote on the repurchase from related parties of 38.55% of the total issued Finbond shares. The company will repurchase 220,523,358 shares from Net1Finance and 120 million shares from Massachusetts Institute of Technology at a price of 29.11 cents per share. The shares, if repurchased, will be delisted.
Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 10,010,000 shares for a total consideration of £43,6 million.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 7 – 11 August 2023, a further 2,185,222 Prosus shares were repurchased for an aggregate €145,97 million and a further 272,116 Naspers shares for a total consideration of R930,3 million.
Six companies issued profit warnings this week: Exxaro Resources, Italtile, Northam Platinum, Impala Platinum (update), KAP and Aveng.
Four companies issued or withdrew a cautionary notice: Finbond, Ayo Technology Solutions, Conduit Capital and Trustco.
Africa Finance Corporation has announced a US$95,25 million investment in oil and gas downstream company Mahathi Infra Uganda. The funding will finance, amongst other things, the construction of two self-propelled barges for operation on Lake Victoria. The new barges are expected to have a significant impact with a single barge trip replacing 200 truck journeys on East Africa’s busiest transport route between Kisumu in Kenya to Kampala in Uganda.
Starcore International Mines has acquired EU Gold Mining in a share swap transaction. The deal will give Starcore a stake in the Kimoukro Gold Project in Côte d’Ivoire through a Mineral Property Option Agreement that EU Gold has with K Mining SARL.
Carlyle has announced the sale of Assala Energy in Gabon to Etablissements Maurel & Prom SA, the oil and gas exploration and production company listed on Euronext. Financial terms were not disclosed. Carlyle first invested in Assala back in 2017.
d.light has secured an additional US$125 million in funding through a securitisation facility to scale up its services in Tanzania. The Eastern and Southern African Trade and Development Bank has provided a US$30 million securitisation facility with the capability for d.light to purchase up to $125 million of receivable assets.
Ghanaian agritech company, Oyster Agribusiness, has secured US$310,000 in funding. Root Capital has provided $300,000 in debt and the firm has received grants totalling $10,000 to expand its existing operations.
Ed Partners Africa, the Kenyan non-banking financial institute that provides loans to educational institutions, has raised US$1,5 million in debt funding from Oikocredit.
Firering Strategic Minerals has signed an option deed to acquire up to 28.33% in Limeco Resources – owner of the limestone project 22km west of Lusaka in Zambia. The option is exercisable in two tranches at a total cost of US$5,1 million.
The macro landscape in South Africa is challenged by muted growth, constrained energy availability, rising interest rates and disrupted rail logistics, just to name a few.
While all local companies are affected in one way or another, the industrial sector is particularly exposed, as evidenced by the fact that the JSE FTSE All Share Index has, in aggregate, increased around 33% over the last five years, while a market-weighted average of 44 JSE-listed industrial stocks decreased by approximately 10% over the same period.
This backdrop has translated into significantly lower M&A activity in South Africa. According to DealMakers, there have only been 32 M&A transactions concluded in the first quarter of 2023, compared to 82 transactions in Q1 2022. At this rate, it is almost certain that 2023 will fall short of the 731 deals concluded in 2022, although the RMB Corporate Finance house view is that deal activity is likely to pick up later in this calendar year.
Industrial counters are bearing the brunt of the current economic climate and, looking at valuation levels in the sector, it suggests a buyers’ market. We believe that there are good acquisition opportunities in the sector for those who are willing (and brave enough) to search for them through a ‘value-orientated lens’. Looking at a basket of 44 industrial stocks listed on the JSE, the average PE multiple over the last year is approximately 9x compared to the 10-year average (excluding COVID-19) of approximately 13.5x.
We looked at the work of well-known global value investors to identify some of the key principles that they use in their investment approaches and how they could be applicable in a South African acquisition context.
Understand the importance of market cycles “The pendulum of investment psychology is constantly fluctuating between optimism and pessimism, between greed and fear, between credulousness and skepticism, between risk tolerance and risk aversion.” – Howard Marks, co-founder and co-chairman of Oaktree Capital Management.
Just about everything in the financial world is cyclical – from market liquidity to interest rates to the financial performance in the SA industrial sector. The most basic reason for this is human nature. Undoubtedly, there are also objective drivers that play a part in cycles, such as the COVID-19 pandemic (which, in financial market terms, led to a massive dip and almost as big a jump in very short order), but it is the application of psychology to these drivers that determines the amplitude of cyclical fluctuations.
It feels as though we are in a period where the weak SA economy, together with several objectively negative events, is leading to an abundance of (often exacerbated) bearish news flow. This is driving risk aversion, which in turn creates behaviour from investors and capital allocators that is driving valuations down. Eventually, a point will come where these valuations become attractive enough for the underlying prospects being valued that the contrarians will start knocking at the door and, in time, other capital allocators will follow suit. This behaviour is the catalyst that ultimately leads to an upturn in the cycle, and value-focused capital allocators worth their stripes can identify a cycle and leverage off it.
Behave in a counter-cyclical and contrarian manner “To buy when others are despondently selling, and to sell when others are euphorically buying takes the greatest courage, but provides the greatest profit.” – Sir John Templeton, founder of the Templeton Growth Fund.
Many investors tend to be trend followers, which is what creates market cycles. Highly successful capital allocators are the opposite. As the cycle corrects itself, a big part of effective capital allocation lies in buying companies when everyone is against them and their prospects, and selling companies when everyone loves them. Of course, this is a difficult and scary thing to do, but it can be very rewarding when done right.
We had a conversation with the CEO of a well-known manufacturing company, who told us how one of their main global competitors went from half its size to almost double its size in less than seven years, and how a substantial part of the growth resulted from two large acquisitions when the market was close to its lowest level.
If you consider the recent acquisitions in the South African cement industry (Afrimat acquiring Lafarge South Africa and Huaxin Cement acquiring Natal Portland Cement), one could argue that these were contrarian moves, where the rest of the market was seeing limited growth in the short term.
Buy at an acceptable margin of safety “Confronted with the challenge to distil the secret of sound investment into three words, we venture the motto – ‘Margin of safety.’” – Benjamin Graham, renowned value investor, lecturer, financial securities researcher, and mentor to Warren Buffet.
Margin of safety is effectively value investing’s credo – buying something for less than it’s worth. One can achieve a margin of safety when a company or stock is bought at a price sufficiently below its intrinsic value, allowing for human error, bad luck, or extreme volatility in a complex, unpredictable and rapidly changing world. This largely describes the South African industrial sector at present, characterised by potentially undervalued businesses, presenting an opportunity to buy at an acceptable margin of safety.
Looking at Afrimat’s acquisition of Lafarge South Africa at an enterprise value of approximately R800m, Chronux Research calculates that Afrimat is effectively acquiring Lafarge South Africa’s materials businesses at a 3x EV/EBITDA multiple and getting the cement business for free. Afrimat is known for acquiring good assets that need a little bit of work at a low price, having done something similar with Diro Iron Ore (now Demaneng Resources) a couple of years ago, and it shows with its market cap having increased around approximately 215% since July 2016 to R9,1bn.
Search for quality and avoid too much leverage “Using leverage is like playing Russian roulette – it means that you are inevitably going to get a bullet in the head.” – Ray Dalio, founder of Bridgewater Associates.
An important part of being able to take advantage of contrarian opportunities, even if acquired at a low multiple, is to ensure that the company has the runway to withstand stress. Even though one may be acquiring a business, believing in the long-term industry and company prospects, change often takes a long time. One needs to ensure that the business can keep the lights on, especially if things get worse. From an acquisition perspective, this entails two key points: i) buying high-quality businesses that are in strong fundamental positions and ii) not over-leveraging them.
Reunert is a very good example of this. The company’s market capitalisation has been mostly stable over the last five years, but came under pressure in mid-2022, dropping to R5,8bn. Notwith-standing this, Reunert continued to operate its solid portfolio of assets efficiently, and continued making strategic acquisitions in line with its long-term strategy. Most recently, it has acquired defence component manufacturer, Etion Create, and technology-focused consulting agency, IQbusiness, without materially leveraging its balance sheet. Its market capitalisation has since strengthened to R9,3bn.
Think long-term expected value “The single greatest edge an investor can have is a long-term orientation.” – Seth Klarman, founder and CEO of the Baupost Group.
Often, when allocating capital, companies are too focused on the next year’s earnings. Acquisitions should be made that will maximise expected value, even if that means the lowering of near-term earnings. We frequently see too much emphasis being placed on the near-term EPS accretion or dilution when companies are considering acquisitions. This then deters companies from taking a long-term perspective and making contrarian plays when times are challenging.
These principles may seem simple, but it is often said that (value) investing is simple, not easy – implying that human nature often intervenes to the detriment of investing (or in the case of M&A, acquisition) success.
When it comes to industrial companies, while we have a firm belief in the longer-term prospects of the sector, we expect deal flow in the short term to remain muted, given concerns around ‘forecast error’ because of all the macro challenges. The implementation of transactions is also taking longer to conclude; in many instances, due to longer and more difficult negotiations on risk and reward, including valuations and warranties, allied with longer regulatory approval processes.
As a result, we think that there will be fewer, but better, long-term acquisitions made, as buyers seek to identify opportunities that tick boxes along the lines of the five principles covered above. Deal flow is likely to be driven by:
• Consolidation and bolt-on acquisitions: we continue to see consolidation as bigger companies with stronger balance sheets look to integrate the value chain to manage costs and enhance margins and cash flows;
• Delisting transactions: there have been many delistings off the JSE in the past couple of years, and it has been particularly busy in the industrial sector (Imperial, Value Logistics, Onelogix, Afrox and Rolfes Holdings, to name a few). We see this trend continuing, given the ‘value trap’ that we’re seeing in the small and mid-cap industrials sector; and
• International M&A: large multinational industrial companies looking to strategically expand into the African continent often see South Africa as the launch pad for such a regional expansion, and we see a surprising amount of inbound interest as a result. The logistics sector is currently particularly active in this regard, with Taylor Maritime Investments’ acquisition of Grindrod Shipping and AP Moller Capital’s acquisition of Vector Logistics as prime examples. There are also South African operators looking to expand into broader Africa and offshore to diversify regional exposure and look at growth opportunities, like Omnia, which recently established a joint venture between its mining focused subsidiary, BME, and PT Multi Nitrotama Kimia, an Indonesian explosives and blasting services provider. In our view, these cross-border deals are expected to continue.
Alex Volschenk is a Lead Banker in the Automotive, Logistics and Industrials Sector and Cara Pardini a Corporate Finance Transactor | RMB.
This article first appeared in DealMakers, SA’s quarterly M&A publication.
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, we recap a busy couple of days:
It’s hard to find companies doing well in this environment, but Grindrod is one of them – if only the share price would notice!
As expected, there’s a further trading statement from Impala Platinum about just how bad things are.
Merafe is doing very well, bucking the trend in the mining industry and continuing to trade at a dirt cheap multiple.
In property, the trajectory locally and in Western Europe (represented by Resilient) is completely different to Central and Eastern Europe (NEPI Rockcastle)
Base effects are important, as evidenced by looking at Santam and Sun International’s latest numbers and comparing their through-the-cycle returns.
Advanced Health proposes a clean-out dividend (JSE: AVL)
There’s a 20 cents dividend on the table before the 80 cents per share buyout offer
Advanced Health is on its way out from the JSE. The controlling shareholders are taking it private at a price of 80 cents per share. Before that happens, there’s a clean-out dividend being proposed to shareholders. This is basically a final kiss goodbye from the company.
It was clearly bigger than the market expected, as the share price jumped nearly 29% to 98 cents. I’m genuinely not sure why anyone paid 98 cents for a 100 cents return with deal risk. The real winners are those who bought a year ago when the stock was trading below 30 cents!
A significant media mistake re: Kibo Energy (JSE: KBO)
Mistakes happen, but this one is particularly awkward
The approach I take in Ghost Mail is to only ever report on what I read on SENS. I avoid any kind of speculation, hearsay or information that isn’t released through the official JSE system. Goodness knows I’ve made mistakes on this website (and I’m always so grateful for the kind corrections), but Moneyweb made a big one here.
After an article screamed good news about Kibo Energy from the rooftops, the share price saw some pretty big action in the morning. The company was quick to correct the article, as Moneyweb was reporting on a gas discovery near Secunda by a company called Kinetiko Energy that has nothing whatsoever to do with Kibo Energy, despite the headline to the contrary.
This share price has been stuck between 2 and 3 cents forever, so an apology from Moneyweb is cold comfort for those who punted at the stock and paid up to 5 cents in morning trade. Just think about that in percentage terms – a drop from 5 cents to 2 cents means 60% of your money has evaporated!
This is a most unfortunate situation for all involved. It’s also a good reminder to always do your own research, instead of relying on others.
NEPI Rockcastle achieved solid growth (JSE: NRP)
This is a very encouraging trading statement
NEPI Rockcastle isn’t bothering with an earnings range. Instead, the company has given the exact distributable earnings per share for the six months to June 2023 of 28.50 euro cents, which is 24.8% higher than the comparable period. This is thanks to a strong operating performance in Central and Eastern Europe and acquisitions in the second half of 2022.
The dividend will be no less than 25.65 euro cents per share, which is a dividend payout ratio of at least 90%.
Happy news for shareholders all round!
Sun International released an interesting trading statement (JSE: SUI)
Yup – that means it’s time for the chart of the day
Of all the sectors that got hurt by the pandemic, the hospitality industry surely came off worst. With hotels shut across the world, you could drive past them and just about hear them racking up losses.
Sun International reports adjusted HEPS in addition to normal HEPS and whilst I’m generally very skeptical of this approach, this is what they base the dividend payout ratio on. It’s been that way for years. So, I worked back through the numbers and used adjusted HEPS for the chart of the day.
As you can see, the pandemic was awful. In fact, if we start at H1’20 when the pandemic hit, the company has generated just 44 cents in cumulative HEPS!
The chart has already given away the growth in adjusted HEPS as indicated in the trading statement, which is between 7% and 12% year-on-year. If you know your JSE rules, you’ll now be wondering why there is a trading statement when the movement is less than 20%. The secret lies in HEPS as per the usual rules (i.e. not adjusted HEPS), which is up by between 73% and 98%.
The difference between adjusted HEPS and HEPS is mainly attributed to the SunWest put option liability and the devaluation of the Naira.
Looking deeper, SunBet achieved record income and the hotels and resorts segment had a very strong first half. Urban casinos grew income and Sun Slots came under pressure due to load shedding. You can’t play on electronic slot machines if there’s no electricity!
Net debt is consistent with the levels seen at the end of December 2022, with net debt to adjusted EBITDA still at 1.8x despite a decent dividend being paid and interest rates increasing.
Little Bites:
Director dealings:
With the Lighthouse (JSE: LTE) results out in the market, Des de Beer is buying shares again. This time, the value was R969k.
The lead independent director of Nedbank (JSE: NED) has bought shares worth R250k – that’s a trade you won’t see every day.
Two prescribed officers of Mpact (JSE: MPT) collectively sold R3.5m worth of shares.
The shareholders of Tsogo Sun (JSE: TSG) approved the odd-lot offer, which will be executed at a 5% premium to the 10-day VWAP. Before you get excited, the share price is only R12.47, so an arbitrage profit on 100 shares isn’t worth anything.
Equites is reducing debt through a UK land disposal (JSE: EQU)
The Equites Newlands subsidiary is also being appointed to develop the land
With its share price down 30% this year, Equites is having a difficult time. The company needs to reduce debt and looks set to put a 300 basis points dent in the loan-to-value ratio thanks to a major sale of land in the UK.
The sale is worth R1.435bn and this will reduce the group’s land holdings by 32%. After costs and taxes, Equites will unlock R1.2bn worth of equity that will help with the development pipeline in South Africa.
There are a number of conditions to the sale (like town planning and environmental), with an incredible longstop date of 9 February 2025. I almost wonder if that’s a misprint. The company hopes that the conditions will be fulfilled before the end of 2023.
The development isn’t without risk, as the purchaser will cover all costs up to R1.889bn. Over and above that, it gets shared on a 50-50 basis. Equites has maximum exposure of £15m based on a guarantee given in respect of Equities Newlands.
The sale and development profits attributable to Equites are expected to be £6.3m. This won’t be included in distributable earnings and won’t be distributed by Equites. The transaction is expected to be marginally accretive to net asset value (NAV) per share. The highlight here really is the reduction in the loan-to-value ratio as the company words towards a target of 35% by the end of February 2024.
Distribution per share guidance of between 130 and 140 cents for FY24 has been maintained.
Grindrod is a major winner in this environment (JSE: GND)
Some industrials companies are having the time of their lives
Grindrod has released a trading statement for the six months to June 2023. The correct measure to look at is headline earnings per share (HEPS) from continuing operations, as Grindrod Bank was disposed of in November 2022. The base period for continuing operations thus excludes the bank, making the numbers more comparable.
On this measure, HEPS jumped by between 47% and 57%. Tasty, isn’t it? This implies a range of 70.5 cents to 75.6 cents. The share price closed slightly higher at R9.51 and detailed results are due on 25 August.
A flat result at Homechoice with retail going backwards (JSE: HIL)
All the growth is in the Fintech side of the business
For the six months to June, Homechoice reported flat revenue of R1.8bn and HEPS of 143.7 cents, marginally below the 144.8 cents achieved in the comparable period. The interim dividend is higher at least, up from 64 cents to 70 cents as the payout ratio increased.
You don’t need to be a finance expert to spot where the money is being made:
Weaver offers personal lending, payment solutions and insurance products in a mobile-first platform. That is working well. Homechoice is an omni-channel retailer focused on homewares. That isn’t working so well, particularly when there is reliance on the South African Postal Service, which is arguably an even sadder state of affairs than Transnet.
The group has transformed into what is essentially a microlender, with a combination of lending and buy-now-pay-later products. There will always be demand for this when consumers are under pressure. The bigger question for investors is around credit quality in this environment, particularly in light of recent banking commentary.
The group recognised a provision for impairment based on 16% of gross receivables in this period, up from 15.2% in the comparable period, so that seems reasonably conservative at least.
As expected, Implats is a lot more than 20% down (JSE: IMP)
Regular readers knew this was coming because we did the maths together
When Impala Platinum first released a trading statement, the company indicated that HEPS would drop by at least 20%. I worked through the maths with you in Ghost Bites and concluded that the drop would be considerably more than 20% based on commodity pricing and the cost of mining the stuff.
In an updated trading statement, the company has confirmed that the drop in HEPS will be between 39% and 45%. This implies HEPS for the year ended June of between R21.17 and R23.52. On the closing share price of R101.75, that’s a Price/Earnings multiple of 4.55x.
Things are tough at KAP (JSE: KAP)
This has been a terrible year for the share price
Industrial companies have generally had a decent year on the local market, in many cases outperforming consumer-focused businesses. KAP hasn’t seen much of that love unfortunately, with a share price that has tanked 40% in 2023.
In May, the company guided that earnings for the year ended June would drop by at least 30%. The wording “at least” was very important here, with an updated trading statement tightening the guidance to a drop of between 37% and 47%. This means HEPS of between 39.2 cents and 46.6 cents, with the same range given for continuing operations and total operations.
On a share price of R2.61 and using the midpoint of that guidance, KAP is trading on a Price/Earnings multiple of 6x. That’s not exactly a bargain, particularly as South Africa’s growth outlook remains uninspiring.
Investors should take particular note of challenges at Unitrans, where trademarks and goodwill have been impaired based on performance. An impairment isn’t a cash cost but it tells you about the outlook, with a major food retail contract having been lost.
There is some good news at least, with working capital brought back in line with historical levels and debt reduced since December 2022. The balance sheet will be the highlight of this result, not the income statement.
Merafe rallies based on earnings (JSE: MRF)
How does an interim dividend of 20 cents on a share price of R1.31 sound?
Ferrochrome producer Merafe is well known for trading on an extremely low Price/Earnings multiple. The latest earnings confirmed just how low, with interim HEPS of 42 cents. Although annualising mining earnings is extremely dangerous, a breakeven result in the second half of the year would put this thing on a multiple of 3.1x! If we annualise, the multiple is under 1.6x.
The truth is somewhere in the middle, particularly with an outlook that notes pressure on chrome ore prices and inflationary increases in costs. To help manage energy costs, the group only produces at one smelter during the winter season when electricity demand is higher. Sales units are drawn down from inventory accordingly.
We can debate earnings multiples all day, but cash is a language that everyone understands. The interim dividend has jumped from 12 cents to 20 cents for this interim period. That’s an interim yield of 15%, which shows why this company has a group of die-hard supporters in the local market.
Rebosis needs a bit more time to evaluate offers (JSE: REB)
The public sales process has significant ramifications for the bankers
Rebosis has given its monthly update on its business rescue and public sales process – basically a garage sale of, well, garages (attached to buildings of course). After the expression of interest phase, the joint business rescue practitioners took 22 participants into the due diligence and offer phase. These bidders ranges from private groups through to JSE-listed REITs.
Binding offers were received on 17 July and final offers were submitted on 7 August, with the team now working through sale agreements with successful bidders. Although it was hoped that agreements would be finalised by 14 August, this wasn’t managed in the end.
The Nedbank portfolio properties will be finalised by 21 August. The Investec and Standard Bank portfolio properties will be finalised by 28 August.
Resilient’s interim dividend isn’t very resilient (JSE: RES)
A 30.8% decrease certainly wasn’t helped by Hammerson’s antics
Resilient REIT has released interim results for the six months to June. The dividend per share has come in at 203.22 cents, which is similar to the 2H’22 dividend (i.e. the immediately preceding six months) but is over 30% down year-on-year. The full-year dividend is forecast to be 400 cents per share, so the second half of the year is likely to be similar to the first half.
Hammerson didn’t declare a dividend in respect of the second half of its 2022 financial year and for the first half of 2023, the company went with a payout ratio of only 65%. Industry best practice is 85%. Resilient is rather gatvol here, disposing of Hammerson shares worth R982 million. This represents roughly 80% of Resilient’s stake in Hammerson.
In the South African portfolio, net property income grew by 5.8%. Rentals for renewals and new leases increased by an average of 9.6%. That’s encouraging. The story isn’t great elsewhere, with the investments in France dealing with tenants who never recovered from Covid and the properties in Nigeria suffering a downward revaluation based on challenges in the country.
Resilient is investing heavily in solar, on track to soon generate 27.7% of electricity consumption from solar installations. That’s a proper achievement and it doesn’t come cheap, which is why the company sold down Hammerson and will rather invest in renewable energy.
The net asset value has increased by 5.79%, so there’s some good news to slightly offset the pain of the dividend. Investors will want to take note of a 400 basis points increase in the loan-to-value ratio to 36.1%, though it helps that Hammerson disposals after the end of the reporting period would take this down to 34.9%.
The big news at management level is that Des de Beer is retiring as CEO. He will remain on the board in a non-executive capacity, with Barry Stuhler also joining the board. Johann Kriek has been appointed as CEO elect.
Santam reports a huge jump in earnings (JSE: SNT)
The year-on-year movement is a little crazy
Whenever I see a big increase or decrease in earnings, I immediately want to look back and understand the through-the-cycle picture. This means that Santam’s trading statement was my inspiration for today’s chart:
It’s not perfect, as there are accounting restatements and it gets murkier in terms of comparability the further back you go. The 4-year compound annual growth rate (CAGR) from H1’19 to the midpoint of H1’23 guidance is just over 4%, so that gives you some idea of the growth Santam is managing to grind out.
An increase in investment income and improved underwriting results helped boost earnings in this interim period, although the net underwriting margin is expected to be lower than the long-term target range because of various factors ranging from weather conditions to large fire claims. A release of Covid-related contingent business interruption claims provisions also helped.
Detailed results are due on 31 August.
Trustco’s management agreement is set for renewal (JSE: TTO)
If nothing else, the official statement by the deputy CEO is entertaining
Next Capital is the investment entity of the CEO of Trustco. The CEO’s incentivisation is structured as a management agreement, like you often see in investment holding companies. No provision has been made for fees since April 2021 when the previous agreement expired, so fees of NAD87m will now be provided for. I think that’s rather a lot for a CEO, but then again I would personally rather invest in a dying earthworm than in Trustco, so it makes no difference in my life.
Here’s the official statement, including a wonderful quote:
Here’s a chart of the proven track record of superior historical returns:
I’m sure it must be superior to something. Steinhoff, maybe? Getting stabbed in the eye?
Little Bites:
Director dealings:
Value Capital Partners, which has board representation at Altron (JSE: AEL), has bought shares worth R6.8m.
Encha Properties, an associate of a director of Vukile Property (JSE: VKE), has sold another R6.5m worth of shares. The company has been selling down shares to settle debt owed to Investec.
Sales by directors and their associates of Argent Industrial (JSE: ART) raised a few eyebrows on the market. The CEO sold shares worth R1.35m and an associate of two other directors sold shares worth R448k.
An associate of the CEO of Mahube Infrastructure (JSE: MHB) has sold shares worth R143k.
The company secretary of Oceana (JSE: OCE) has sold shares worth R21.2k.
Zeder (JSE: ZED) has obtained SARB approval for its special dividend of 5 cents per share. The current share price is R1.79.
As has been the standard practice at Lighthouse Properties (JSE: LTE) recently, there is a scrip dividend alternative to the cash dividend that has been declared. I’m almost willing to bet which option Des de Beer is planning to take!
Shaftesbury (JSE: SHC) has confirmed the exchange rate for its dividend, so the interim dividend will be 36.10725 ZAR cents per share. That’s not exactly an exciting yield on a share price of R29.83.
AYO Technology (JSE: AYO) has renewed its cautionary announcement related to ongoing negotiations with the GEPF and PIC regarding the terms of the settlement agreement and the proposed repurchase of shares. AYO is also engaging with the JSE about the application of the listings requirements to this transaction.
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