Tuesday, January 7, 2025
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Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

The Finance Ghost
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Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

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

No dividend at AfroCentric (JSE: ACT)

HEPS has fallen sharply

In the year ended June, AfroCentric could only grew revenue by 2%. That’s not going to cut it, with HEPS down by 34%. The dividend of 34 cents a share last year is just a distant memory as no dividend will be declared for the year ended June 2023.

Although once-off restructuring costs were part of the story here, the lack of revenue growth is the real concern. The pharmaceutical cluster normalised after heightened trading during 2022, which explains the year-on-year move. The medical scheme administration business isn’t exactly a rocketship either, but put in a steady performance with a 2.6% increase in revenue.

The strategic focus will be on bedding down the Sanlam relationship after the group took a 60% controlling stake in AfroCentric in May 2023.

AngloGold sells its stake in Gramalote (JSE: AGL)

Bidders were non-existent, so the joint venture partner is buying it

AngloGold is selling its 50% stake in the Gramalote Project for a total consideration of up to $60 million. The buyer is B2 Gold Corp, which already owns the other half. Both parties wanted to sell Gramalote and couldn’t find any buyers willing to make an acceptable offer, so B2 Gold was basically the only buyer in town for this stake.

AngloGold will receive a payment of $20 million at closing date, with the balance dependent on various project and production milestones at the project. The deal unlocks some cash for AngloGold and allows the group to focus on its core assets.

Fairvest delivers a pre-close update (JSE: FTA | JSE: FTB)

Investors have been brought up to speed on the year ending September 2023

Fairvest has a portfolio with a gross lettable area split of 49.2% retail, 25.8% industrial and 25.0% office. That split would’ve looked good before the pandemic. As we all know though, office property hasn’t been a happy story in the aftermath of Covid. The vacancy rate in that portfolio is 11.5% vs. 4.4% in the retail portfolio and just 1.2% in industrial.

It’s not surprising that recent property disposals have been focused on office properties, although a couple of retail and industrial sales have also been in the mix.

The group level result is vacancies of 5.3%, positive rental reversions of 2.3% and a loan-to-value below 34%. The guided distribution per B share is between 40.5 cents and 42.0 cents. The B shares closed the day at R3.28, so that’s a yield of roughly 12.6% based on guidance.

If you would like to read the full presentation, you’ll find it here>>>

Gemfields completes its third best year for emeralds (JSE: GML)

It’s just a pity that the final auction of higher quality emeralds won’t work out

At the latest auction of commercial quality emeralds, Gemfields’ offering contained a higher than usual mix of lower value grades. Recent emerald production at Kagem has been of lower quality and quantity than usual, which is why the company has withdrawn from the higher quality emeralds auction scheduled for November.

This means that emerald auctions are now finished for Kagem for 2023, with total auction revenues of $90 million. That’s the third best auction year ever for Kagem, slightly below $92.3 million in 2021 and way below the bonanza in 2022 of $149 million.

That tough base in 2022 has put the share price under pressure recently, with investors realising how quickly the price/earnings multiple is going to unwind this year.

Mondi finds a way out of Russia (JSE: MNP)

The Syktyvkar asset has found a buyer

Mondi’s share price closed 2.6% higher after the market received the happy news that the overhang related to the Russian operation may soon be a thing of the past. It’s been a struggle to sell the Syktyvkar asset, but there’s now a deal with Sezar Invest LLC to dispose of the business for RUB 80 billion. That works out to roughly R16 billion.

The very good news is that regulatory conditions have been met, so this deal is ready to close provided the buyer can make the various payments. There are six monthly instalments to be paid, with the first due at the end of September 2023. The asset will transfer after four payments and the final two will be secured by a letter of credit.

Mondi plans to distribute the proceeds to shareholders once all instalments have been made.

The Russian buyers are absolute winners here, picking up the asset for a profit before tax multiple of 1.7x. Who says that (war) crimes don’t pay?

Oceana gives the market a peek at its performance (JSE: OCE)

Management hasn’t given any overall commentary though

Usually, a voluntary trading update gives the market a useful summary from the management team about the group level performance. This isn’t the case at Oceana, where it dives straight into the segmental performance.

In canned fish and fishmeal (Africa), Lucky Star grew volumes by 8% in the 11 months ended 27 August 2023. In the last five months though, volumes fell 5% because of base effects. Concerningly, margins are under pressure as pricing increases weren’t enough to offset inflationary increases in energy, tin can and other costs. The good news is that local canning production volumes increased by 15%, so there’s a lot of inventory to support demand going forward. Now the company just needs to see more demand!

South African fishmeal and fish oil saw a 32% increase in average rand selling prices over the period. Sales volumes were 8% lower and production volumes fell 24%.

Overall, the local operations incurred costs attributable to load shedding of R28 million.

Moving on to the US, they have electricity there but they also had fewer fish. Based on the 21-week season, landings were 5% lower than the prior period. Not only are there fewer fish, but the fish also had lower fat content, so fish oil yields have dropped. Strong operating inventory levels helped mitigate this impact, with sales volumes up 49% for fishmeal and 28% for fish oil. With major supply problems in Peru, a demand-supply imbalance caused fishmeal prices to rise 9% in dollars and fish oil prices to jump by 38%. With the rand being weaker and the Hurricane Ida insurance proceeds having been received, there’s a good outcome here for Oceana.

In the wild caught seafood division, horse mackerel sales volumes were slightly lower for the 11-month period and hake sales volumes fell by 38% due to a reduction in catch rates and days at sea. The impact of high fuel prices won’t help here either. As a mitigating factor, the weak rand supported export pricing.

Looking at the balance sheet, Oceana took the proceeds of R370 million after tax from the sale of the cold storage business and put them towards settling term debt in South Africa of R550 million. Term debt in the US was successfully refinanced.

Capital expenditure jumped from R154 million to R380 million, with investment in vessels and production facilities after fishing rights were renewed for 15 years. R50 million of a committed R115 million has been spent on the canned meat facility in the St Helena Bay region.

Detailed results are due on 27 November.

A new chapter begins for Prosus and Naspers (JSE: PRX | JSE: NPN)

Bob the Empire Builder is on his way out

With the capitalisation issue to undo the ridiculous cross-holding now complete, Prosus no longer holds any Naspers N ordinary shares. With that deal completed, the share buyback programme has now resumed.

That’s not the biggest news that the company released on Monday. No, that honour definitely goes to the “mutual agreement” that will see CEO Bob van Dijk step down as CEO. He will remain as consultant to the group until September 2024, although it’s hard to imagine why based on his track record.

Having been CEO of Naspers since 2014 and of Prosus since it listed in 2019, Bob earned an absolutely eyewatering amount of money while presiding over perhaps the most convoluted corporate structure in South African history.

His successor on an interim basis is Ervin Tu, the Chief Investment Officer at Naspers. Tu is an ex-Goldman Sachs and Softbank dealmaker and is based in San Francisco, so you can be sure that he loves a good revenue multiple when buying businesses.

Will it simply be more of the same for the company? Time will tell.

Volumes under pressure at RFG Holdings (JSE: RFG)

This is example number 593 of consumers cutting back

For the 11 months to the end of August, RFG grew revenue by 10%. Price inflation was 13.5%, so volumes were down. There were also forex movements and mix changes (as well as the acquisition of Today), so the group helps us out by confirming that volumes actually fell by a substantial 7.7%. The good news is that the first half of the year was a decline of 8%, so the second half has improved to a decrease in volumes of 6%.

Canned fruit and vegetables are under particular pressure based on consumer demand. The pie category is doing well thanks to the Today business. Overall, regional revenue is up 11% for the period with huge inflation of 16.4% and volumes down 6%.

In the international segment, revenue grew 6.7% but volumes fell 12.9% as the world normalised after the Greek peach crop failure in 2021. Operational pressures at the Cape Town port are a serious concern, with shipping lines bypassing the port in some cases due to waiting times.

And of course, against this backdrop of lower volumes, there is still load shedding to contend with.

Results for the year ending September will be released on 22 November.

Zeder sells most of Capspan to Agrarius (JSE: ZED)

The pome farming unit isn’t part of the deal

Zeder has been talking about a value unlock for as long as I can remember. The disposal of the 92.98% stake in Capespan is part of that strategy, even though Zeder is hanging onto the pome farming unit and will put in place a deal with Capespan for marketing and distribution of the related crops.

The minority shareholders in Capespan are also selling, so the buyer is getting 100% of Capespan. Speaking of the buyer, you’ve likely never heard of Agrarius Sustainability Engineered, a JSE-listed special purpose investment vehicle with a R10 billion Shariah-compliant note program. Managed by 27four Investment Managers, this is a good example of how the JSE offers various different listing structures.

Zeder’s interest in Capespan was valued at R1.046 billion as at February 2023. The disposal value is only R511 million but Zeder is quick to point out that this is in line with the previously reported value excluding the pome unit that is being retained. Zeder plans to distribute the proceeds to shareholders once the cash is received, with an effective date for the disposal expected to be in January 2024.

Little Bites:

  • Director dealings:
    • Three directors of property fund MAS (JSE: MSP) collectively bought shares worth R3.66 million.
    • The CEO of African Rainbow Minerals (JSE: ARM) bought shares worth R3.1 million.
    • The spouse of a co-founder of Mr Price Group (JSE: MRP) bought shares in the company worth R924k.
    • Brimstone (JSE: BRT) co-founder Fred Robertson bought N ordinary shares in the company worth around R112k.
  • Quilter (JSE: QLT) is making an odd-lot offer. It’s an unusual one, as the threshold for the offer is a holding of 200 shares rather than 100 shares. The company is offering a 5% premium to the market price to be calculated based on the 5-day VWAP until 20 October, but don’t get too excited. There’s another unusual twist in the tale, with the offer only being eligible to shareholders who held fewer than 200 shares on 28 April 2023 and who will still hold those shares on 10 November 2023. Based on how I read this offer, opportunistic plays to buy up 199 shares and lock in some beer money won’t work.
  • The mandatory offer by African Phoenix and concert parties to shareholders in enX Group (JSE: ENX) at a price of R6.41 per share was unlikely to be a showstopper when the current share price is R8.10. Indeed, only holders of 0.27% of the issued shares were happy to accept that price, taking the offerors to a collective holding of 49.07% in the company. It’s a very thinly traded stock, which must be why some people were happy to take the liquidity opportunity and move on.

The Slow Simunye: Are the Benchmarks Finally Becoming One?

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The Slow Simunye: Are the Benchmarks Finally Becoming One?

By Nico Katzke, Head of Portfolio Solutions at Satrix*

This short article describes the coming index harmonisation for the FTSE/JSE SWIX (Shareholder Weighted Index) and ALSI (All Share Index) methodologies in March 2024. We will discuss the what, the why and the when – while stressing that having a harmonised benchmark index matters for the integrity of our asset management industry.

The What …

Harmonising the SWIX and ALSI methodologies to have a single representative benchmark index is not a new topic. In fact, over the past few years there’s been much talk about the need for it, with the JSE initiating multiple public discourses on how to make this a reality. In the past, the differences between the SWIX and ALSI methodologies have been significant, making harmonisation a potentially disruptive exercise.

Following the natural alignment between the indices in the past few years, the time is now right for harmonisation to occur, given that there are only a few, somewhat arbitrary, remaining differences between the SWIX and ALSI indices.

Note that for the remainder, we will refer only to the SWIX and not the Capped SWIX as these are virtually equivalent currently following Naspers’ reduced index weight.

The Why …

While both the SWIX and ALSI index methodologies consider exactly the same constituents, the free floats for some companies differ. Notably, SA companies that moved their primary listings offshore before October 2011 (called grandfathered companies) are included at their full global float for the ALSI weight calculation1. The SWIX was introduced in 2004 to offer an alternative benchmark that considers only the locally available float on STRATE, thereby down-weighting the grandfathered companies. But corporate actions in recent quarters have meant that most of the float differences, notably for CFR (Richemont), BHG (BHP Group), ANH (AB InBev), OML (Old Mutual), HAR (Harmony Gold) and GFI (Gold Fields) to name a few, have converged.

The process of index harmonisation is thus less disruptive today than it would have been in the past. Consider, for example, the companies that had different SWIX and ALSI floats from just a year ago compared to the most recent rebalance in June 2023 (shaded floats in the June 2023 chart mean they are currently aligned):

Source: Satrix. Data: FTSE/JSE – 30 June 2022
Source: Satrix. Data: FTSE/JSE – 30 June 2023

1 Index weights are determined by multiplying shares in issue (SSI) with price and the ALSI or SWIX float factor.

From this, the only meaningful differences currently remaining between the two methodologies are for AGL (Anglo American), INP (Investec Plc) and MNP (Mondi), (with the underweights funding the few remaining grandfathered over-weights):

Source: Satrix. Data: FTSE/JSE – 31 August 2023

The When …

At the March 2024 rebalance, the JSE intends doing away with the ALSI methodology to align the benchmark indices to the SWIX methodology (using companies’ available local float as reflected on STRATE). The new indices will be called All-Share indices, which means all the current SWIX alternatives fall away and the ALSI effectively becomes the SWIX.

Importance

Having a single domestic equity market index is important for several reasons.

  • First, having multiple benchmark indices creates confusion for investors looking to compare the performance of their managers to an investable alternative. Having a single index will make broad performance comparisons simpler, with more transparency in terms of the value added by active differentiation. Ideally, a benchmark choice should not be a strategic decision.
  • Second, various managers have begun to benchmark their funds to peer averages. Given that the past two decades have seen the majority of active funds underperform both the ALSI and SWIX index alternatives, a comparison to active manager peers overstates aggregate performance relative to an investable index alternative. By the end of 2022 more than 20% of assets managed actively were done using the industry median as a stated benchmark (Morningstar). Having a single benchmark index should make peer-relative comparisons harder to motivate, as well as making it easier to know what a relevant and investable market performance would have been.

Conclusion

The performance differences between the SWIX and the ALSI indices have been significant in recent years. We’ve shown in the past that the choice between which index to track is a key strategic decision, with the realised tracking error of the SWIX being as high as the median active manager’s, relative to the ALSI.

Up to the end of June 2023, the one-year return difference between the ALSI and the SWIX was more than 7%, with the difference almost entirely explained by the ALSI’s comparative overweight to one company, Richemont. This meant that active managers with the SWIX as a benchmark would have performed significantly better on a relative basis simply because of one company’s return – an unfortunate function of our index methodology differences.

As the indices have begun to converge following corporate actions in recent years, index harmonisation is now finally achievable with limited disruption. From March 2024, we will finally have a single representative benchmark index for our local equity market. The benefits of this transparency and simplicity cannot be overstated.

*Satrix, a division of Sanlam Investment Management

Satrix - own the Market Logo

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

Ghost Bites (Gold Fields | OUTsurance | Putprop | York Timber)

The Finance Ghost
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Ghost Bites (Gold Fields | OUTsurance | Putprop | York Timber)

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

Gold Fields gives an update on Salares Nortes (JSE: GFI)

There’s a delay in commencement of production and a decrease in near-term guidance

Gold Fields has announced that the Salares Nortes project commenced construction back in February 2021 and is now 97% complete. I’ve looked at enough classic car projects in my life to know that “97% complete” can mean that the last 3% really isn’t easy. That hopefully won’t be the case here, although there’s a two-month delay in commissioning the mills and filter presses. The original equipment manufacturer (OEM) needs to commission the plant for the warranties to be valid and that’s where the delay has come in.

Steady state production is only expected by 2025, so 2023 and 2024 production will vary based on the ramp-up. The previous guidance was 15,000 – 20,000 gold equivalent ounces for 2023 and and 500,000 gold equivalent ounces for 2024. It looks like 2023 will be 1,000 ounces at best and 2024 will be between 350,000 and 400,000 ounces.

The all-in cost is expected to average $700/oz for the first six years of the mine’s life (2024 – 2029) and $780/oz over the total life of mine, which is out to 2033.

The total project capital estimate has increased by $20 million to $1,040 million due to capitalisation of costs based on the later commencement date for first gold.

Long story short: building mines isn’t straightforward and delays aren’t uncommon.

OUTsurance is a rare SA success story in Australia (JSE: OUT)

When we build from scratch, we seem to have a chance

OUTsurance Group is making sure that shareholders get something out. The ordinary dividend has skyrocketed from 65.5 cents to 134.8 cents. The share price is up 22% this year, providing once more that it’s possible to do well on the local market if you pick the right stocks.

OUTsurance Group owns 89.9% in OUTsurance, 100% in RMI Investment Managers and a portfolio of venture capital investments. Including cash, the group has guided that the non-OUTsurance portfolio is worth between R2.7 billion and R3.1 billion.

Normalised earnings from continuing operations (excluding Hastings which was disposed of in the prior period), increased by a lovely 62.2%. A drop in head office costs from R134 million to R80 million was a major driver here. To get closer to the core operational performance, we can look at the 39.3% growth in the share of earnings from OUTsurance.

Youi in Australia is a major part of this, contributing R1.385 billion of R2.924 billion to OUTsurance’s earnings in this period, way up from a contribution of R413 million last year. Rand depreciation of 8% against the Aussie dollar is only part of the story here, with juicy growth in gross written premium income and an improved claims experience. The cost-to-income ratio dropped and investment income increased. If there was a bingo card for the drivers of insurance earnings, this result would be marking every box.

In OUTsurance’s South African short-term business, gross written premium growth was 8.8%. The claims performance wasn’t positive, with all the usual South African problems ranging from load shedding to crime and of course inflation in repair costs. The cost-to-income ratio increased from 25.3% to 26.1%. That’s still more efficient than the Australian business at 31.6%.

OUTsurance Life achieved gross written premium growth of 17.8% and the Funeral business achieved growth of 49.6% in the same metric. Face-to-face sales were discontinued in June 2023.

The growth story is far from over here. Aside from organic growth in existing markets based on product innovations and partnerships, the company is planning to enter the Republic of Ireland. Let’s hope our pending destruction of the Irish rugby team (fingers crossed) won’t scupper that plan.

Jokes aside, the other major move is the exercise of the option to acquire the remaining 50% of the Youi shares owned by a non-executive director of the group for A$42.5 million. Deloitte & Touche Financial Advisory has opined that the terms of the deal are fair to OUTsurance shareholders, as this is a small related party transaction.

Putprop still trades at a massive discount to NAV (JSE: PPR)

The market wants dividends and the yield is sorely lacking

Putprop has a market cap of less than R150 million. This is absolutely tiny and especially by property standards, with property funds needing to be much larger to justify being listed. With a net asset value of R16.12 and a share price of R3.48, one wonders for how much longer this company will be listed despite going to the effort of a rather pretty annual report with a Monopoly theme.

You’ll be taking a Chance if you build a position here, as getting out of it will be very difficult because of limited liquidity. Most property investors want dividend income and Putprop is light on that, with a total distribution of 11.25 cents per share for the year ended June 2023. The dividend yield of 3.2% makes it difficult to attract investors.

The loan-to-value (LTV) ratio has also spiked from 37.0% to 41.6%, so that’s another cause for concern for investors.

Either the market is wrong or the net asset value is wrong. You decide.

York Timber: higher wood prices didn’t help (JSE: YRK)

You read that correctly

I’ll genuinely never understand the appeal of York Timber. I’ve looked at it a few times before and the argument is always that the biological assets are valuable. Unfortunately, the company hasn’t done a great job historically of turning those trees into cash flows.

The latest update is a trading statement flagging a huge drop in HEPS of at least 90%.

Aside from inflationary pressures on costs that couldn’t be recovered in selling prices, the major issue was reduced harvesting from York’s own plantations that drove an increase in external log purchases. The prices for those logs increased despite a drop in lumber selling prices, so York seems to be getting squeezed in the middle.

The strategy to increase the clear-fell age of the plantations seems to be happening at the wrong time. The bigger question is whether there is ever a right time for York Timber, as there always seems to be something hurting the story. The share is trading at a new 52-week low:

Little Bites:

  • Director dealings:
    • Acting through a trust, Terry Moolman has bought R515k worth of shares in Caxton & CTP Publishers and Printers (JSE: CAT).
    • Directors of Libstar (JSE: LBR) are buying the dip, with three directors buying shares worth a total of nearly R170k.
  • In what is surely a surprise to absolutely nobody, Labat Africa (JSE: LAB) is late with the release of its financial statements. The JSE has fired a warning shot, with a deadline of 30 September.

Ghost Bites (African Rainbow Capital | AfroCentric | FirstRand | Gemfields | Metair | Sibanye-Stillwater)

The Finance Ghost
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Ghost Bites (African Rainbow Capital | AfroCentric | FirstRand | Gemfields | Metair | Sibanye-Stillwater)

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

Is African Rainbow Capital finally making it rain? (JSE: AIL)

Intrinsic net asset value per share has shown decent growth

African Rainbow Capital Investments (commonly referred to as ARC) has been a disappointment for investors, with a history of large management fees at the expense of shareholders. A recent change to the management fee structure has started to address that issue, although there’s no way to claw back the original payments. The management fee for the year ended June 2023 was R98 million vs. R225 million in the prior year.

I still don’t think a 10% performance hurdle is appropriate though. These days, you can get that by just locking the money up in a fixed deposit for a few years! Performance fees are still too high.

A positive step is that the portfolio is more focused than before, with three major disposals and a particular focus on reducing exposure to listed shares. The best way to start closing a discount to intrinsic net asset value (INAV) per share is to own assets that investors can’t get elsewhere. If the assets are simply shares in other listed companies, then what is the point of the intermediary group even existing in the first place?

The top 13 investments now comprise 88% of the portfolio and the unlisted portion of the portfolio is 89%. The largest asset is Rain, contributing 27.6% of the fund’s value. The valuation increased in response to improved EBITDA and the acquisition of spectrum. TymeBank is 12.3% of the fund’s value has now has 7.4 million customers. Tyme Global is reported separately and is 4.8% of fund value.

There have been some substantial investments in portfolio companies, with debt in the ARC Fund increasing by 51% as a result. R664 million was invested in TymeBank and Tyme Global to fund the acquisition of Retail Capital and R883 million was advanced to Kropz Plc (which contributes 11.7% of fund value).

After a performance hurdle was met in the previous year and more shares were issued, NAV per share on an IFRS basis only increased by 13.5% despite the effective share of invested assets increasing by 19.8%.

The INAV per share is R11.41 and the share price is R6.00. That’s a discount of 47.4%.

AfroCentric flags a significant drop in earnings (JSE: ACT)

Once-offs are only partially to blame here

In a trading statement dealing with the year ended June 2023, AfroCentric guided a drop in HEPS of between 30% and 40%. This is based on Private Health Administrators being reflected as a discontinued operation in this period and the restated comparable period.

The company notes various once-off impacts in these earnings, like corporate and restructuring activities. The procurement of hospital surgery consumables has also been closed down, leading to write-downs of inventory and debtors. A normalisation of trading in the pharmaceutical cluster has also impacted profitability.

The good news is that the medical scheme administration cluster has been stable, with growth in private and public schemes during the year.

FirstRand’s cautious approach drives 12% growth in HEPS (JSE: FSR)

Normalised ROE increased to 21.2%

FirstRand is very proud of its credit loss ratio, which is below the through-the-cycle range. Being below the range isn’t necessarily a good thing though, as it suggests that the bank may not be taking enough risk! Being too cautious is almost as bad as being too risky, as a conservative approach can lose out on growth.

Growth in HEPS of 12% is nothing to sneeze at and normalised ROE of 21.2% wipes the floor with other banks. FirstRand has enjoyed structurally higher ROE for as long as I can remember.

Despite the cautious approach, the jump in impairments of 55% is much higher than growth in net interest income of 16%. Non-interest revenue grew 11%. Operating expenses were 12% higher, with a 14% increase in staff costs and a 5% increase in headcount. The cost-to-income ratio improved from 52.5% to 51.8%.

The top performing division (ignoring all the complicated stuff accounted for at the centre) was Wesbank, up 16%.

In terms of outlook, FirstRand expects the credit loss ratio to be marginally above the mid-point of the through-the-cycle range. ROE is expected to remain at the upper end of the 18% – 22% target range.

Where did the sparkly earnings at Gemfields go? (JSE: GML)

If it comes out the ground, it’s volatile

For the six months ended June, Gemfields has reported an ugly drop in adjusted headline earnings per share from 62.6 ZAR cents to 35.1 cents. The “adjusted” point is a reference to fair value losses in Sedibelo Resources, with a substantial write-down of $13.3 million because valuations have dropped for platinum group metals companies. HEPS as reported includes this fair value drop, whereas traditional impairments are usually excluded. That’s why I’m OK with using the adjusted number here.

If we look at the key operating assets, then Kagem’s revenue (emeralds) fell from $85.2 million to $64.6 million and MRM’s revenue (rubies) fell from $95.6 million to $80.4 million. Fabergé, a perennial disappointment, saw revenue drop from $9.5 million to $8.4 million, citing a softer luxury market.

Although not the reason for such a large drop in adjusted HEPS, having 3% more shares in issue on a weighted average basis doesn’t help matters.

This announcement was a trading statement rather than a release of detailed results, which are expected on 22 September.

Metair? Met debt, that’s for sure (JSE: MTA)

EBITDA and HEPS are telling completely different stories

Metair really has had to deal with a number of horrible things, ranging from hyperinflation and earthquakes in Turkey through to floods in KZN. The company just can’t catch a break, yet it is still standing and is profitable.

Unfortunately, they are working very hard so that their bankers can have a better life. EBITDA (earnings before interest and some other things) grew by 63% in the six months to June. HEPS (which is net of interest) fell by 9%. A quick look at the income statement shows you the culprit:

The problem isn’t just the quantum and cost of debt,, although it certainly doesn’t help when group net debt increased from R2.6 billion to R3.2 billion over the past six months. Because certain projects are still ramping up, return on invested capital (ROIC) was only 5.3% in this period vs. 11.7% in the comparable period.

Other than the known issues, it’s concerning that the Ford Ranger project seems to have been plagued with production challenges and higher than expected costs. They hope to recover at least some of these from Ford.

As a final example of the bad luck this company has been dealing with, Russia was an important export customer for the Mutlu battery business in Turkey. Due to sanctions and to preserve its reputation, the company ceased sales to Russia and export volumes fell 32% as a result, with a direct negative impact on hard currency earnings.

Overall, things really need to improve for Metair as the company is already on thin ice with its lenders, as covenants have been breached and needed to be waived. Lenders don’t have infinite patience with these things.

The share price chart for the past 12 months isn’t pretty:

SA Corporate Real Estate’s dividend falls 12.2% (JSE: SAC)

The company tries hard to get you to look at the cadence instead

Financial reporting is generally based on year-on-year movements. Most people actually don’t run their businesses like this, as it tends to make more sense to look at the recent monthly trend than the year-on-year numbers, except in seasonal businesses.

Property group SA Corporate Real Estate doesn’t have a great year-on-year story to tell, with the dividend down 12.2% for the six months to June 2023. Compared to the six months to December 2022, the dividend is up 1.8%. Similarly, net property income is down year-on-year but better than in the six months to December.

Including derivatives, the loan-to-value ratio is 36.3%. That’s an improvement from 37.8% at the end of December 2022.

The net asset value (NAV) per share is R4.17 and the share price is only R1.82, so it is trading at a 56% discount to NAV. The total distribution over the last twelve months is 22.57 cents, putting the group on a trailing yield of 12.4%. If the share price traded at NAV, the yield would be just 5.4%, which is precisely why the market isn’t interested in the NAV.

Sibanye-Stillwater enters a s189 process in the gold business (JSE: SSW)

This specifically relates to the Kloof 4 shaft

Sibanye has a problem in its local gold business. The Kloof 4 shaft has major operational constraints, including “seismicity” (how’s that for a word?) and cooling issues. There have been ongoing losses, even at the better recent gold prices. With a recent incident that caused damage to the shaft infrastructure, the situation has now reached breaking point.

A s189 process is a labour restructuring process i.e. retrenchments. This could affect 2,389 employees and 581 contractor employees. After significant labour issues in the gold business recently, this isn’t going to be easy to manage and isn’t fun for anyone involved.

Little Bites:

  • Director dealings:
    • The big dogs at Blue Label Telecoms (JSE: BLU) might have bought shares recently but other directors and directors of major subsidiaries have been net sellers, so read into that what you will. The latest trades are sales worth nearly R960k by three directors (including a group director).
  • Astoria (JSE: ARA) has renewed the cautionary announcement that has been in place since July 2023, with negotiations for a potential acquisition still ongoing.
  • If you are a shareholder in Tongaat Hulett (JSE: TON), you may want to attend the engagement session with the business rescue practitioners on 26 September. Refer to the SENS announcement for the Teams link.
  • Astral Foods (JSE: ARL) is hosting a pre-close briefing session on 21 September. If you want to attend, refer to the SENS for registration details.

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

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

Another week packed with company results and only a handful of acquisition announcements.

Exchange-Listed Companies

As per Brikor’s announcement last week Nikkel Trading 392 (NT392) acquired from major shareholders an aggregate 64.11% stake in Brikor in two tranches at 17 cents per share, triggering a mandatory offer to minorities. NT392 has offered to acquire the remaining 193,6 million shares (excluding Brikor’s CEO’s c.13% stake) for an aggregate R32,9 million.

Momentum Metropolitan announced in its financial results for 2023 that it had concluded a sale agreement with OUTsurance in terms of which the company will acquire OUTsurance’s stake in RMI Investment Managers. The acquisition will enable Momentum to increase its asset management market participation significantly.

Unlisted Companies

Ascension Private Equity Fund I has acquired a 45% stake in Paul’s Muesli for an undisclosed sum. In addition to being a manufacturer of muesli, granola and cereal bars, Paul’s Muesli sources, imports and supplies a wide range of oats and dried fruit, seeds and nuts to the retail and wholesale breakfast cereal market.

German chemical and ingredients distributor Brenntag is to acquire the operating business of Chemgrit Group, headquarter in Johannesburg. Chemgrit is an independent specialty chemical distributor with a focus on personal care, food and material science. The enlarged Brenntag Specialties business in South Africa will be scaled to other African markets, adding to Brenntag’s current African presence with local entities in Maghreb, Ghana, Nigeria, East Africa, Mauritius and SA. Financial details were undisclosed.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Following the results of the scrip dividend election, Capital & Regional plc will issue 5,082,996 ordinary shares in the company in lieu of an interim dividend, resulting in a capitalisation of the distributable retained profits in the company of R64,6 million. The shares represent c. 2.3% of the current issue share capital of the company.

Transpaco has concluded an agreement with Manufacturers Investment Company to repurchase 1,100,000 shares for a cash consideration of R30,61 million. The shares represent 3.67% of the issued shares of the company. The shares will be repurchased at R27.83 per Transpaco share, representing a 10.10% discount to the 30-day weighted average traded price as at 1 September 2023.

Argent Industrial has repurchased 310,376 ordinary shares representing 0.55% of the issued share capita of the company for an aggregate R4,93 million. The company is entitled to repurchase a further 10,83 million shares in terms of the general authority granted at the last annual general meeting.

Tsogo Sun has repurchased 138,044 shares in terms of its of its Odd-lot Offer to shareholders. The shares were repurchased at a repurchase price of R13.01 for a total consideration of R1,795,952.

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 10,370,000 shares for a total consideration of £44,64 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 1,930,472 shares were acquired at an aggregate cost of A$6,34 million.

Investec Property Fund will trade under its new name Burstone Group from commencement of trade on 20 September 2023.

Following the restructuring of AngloGold Ashanti and the move of its primary listing to the New York Stock Exchange, the company’s secondary inward listings on the JSE and A2X will be effective from the commencement of business on 20 September 2023.

Following the acquisition by Impala Platinum of remaining shares in Royal Bafokeng Platinum (RBPlat) from minority shareholders, RBPlat’s listing on the JSE will terminate on 18 September 2023.

Four companies issued profit warnings this week: Old Mutual, Putprop, Gemfields and AfroCentric.

Five companies issued or withdrew a cautionary notice: Clientèle, Chrometco, Brikor, Tongaat Hulett, Astoria Investments.

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

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

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

DealMakers AFRICA

Adiwale Fund I has acquired a minority stake in Senegalese consumer goods distribution company, Global Action. Financial terms were not disclosed.

The Minerals Income Investment Fund of Ghana (MIIF) acquired a 6% stake in the Ewoyaa Lithium Project for US$27,9 million plus 6% of the ongoing exploration and development costs. The agreement also saw MIIF take an c.3% stake in Atlantic Lithium for $5 million. Piedmont Lithium and Atlantic Lithium are partners in the project.

Tana Africa Capital has exited its investment in International Education Group (IEG) to Globeducate. No financial terms were disclosed. IEG was established in 2015 and is now a network of four schools – three in Morocco and one in the Netherlands.

Egypt’s National Service Projects Organization (NSPO) has acquired up to 24% in three Bashay Steel subsidiaries for EGP10 billion. The stakes in Egyptian Sponge Iron and Steel Company, Egyptian American Steel Rolling Company and International Steel Rolling Mills were acquired on the over-the-counter market of the Egyptian Stock Exchange.

Oryx Energies S.A. has strengthened its footprint in Senegal, where it has been present since 1989, by acquiring a majority stake in Puma Energy Senegal S.A. for an undisclosed sum. Puma Energy Senegal will be renamed Oryx Gaz Sénégal S.A.

WhoGoHost, a Nigerian web hosting company, has acquired cloud communications startup, SendChamp. The value of the deal was undisclosed but was settled by way of cash and equity.

Uganda’s agri-loan startup, Emata, has secured a US$2,4 million seed round made up of US$800,000 in equity and $1,6 million in on-lending capital. Investors in the round include Norrsken, Zephyr Acorn, African Renaissance Partners and Draper Richards Kaplan Foundation.

Kenyan fintech Lipa Later has closed a KES500 million private debt placement with undisclosed lenders. The company announced that it was looking to raise an additional KES2 billion in equity and debt to help with its growth plans.

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

SARS’s Authorised Economic Operators Programme: a must for businesses to expand beyond borders

Dyondzo Kwinika and Virusha Subban
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SARS’s Authorised Economic Operators Programme: a must for businesses to expand beyond borders

The global economy demands that businesses expand beyond borders, but they face hurdles from customs and regulatory barriers in other countries and regions which make this expansion challenging. In 2005, the World Customs Organisation (WCO) introduced the Authorised Economic Operator (AEO) programme as part of the SAFE Framework. The aim of the WCO was to establish a global system for identifying private companies that provide significant security assurances regarding their involvement in the supply chain.

The AEO programme serves several important purposes, including preventing international terrorism, improving revenue collection, and facilitating trade. Moreover, the AEO programme aims to establish and enhance Customs-to-Customs network arrangements, which streamline the movement of goods through secure international trade supply chains. The second pillar of the SAFE Framework focuses on Customs to Business arrangements.

In 2015, the WCO released its Customs-Business Partnership Guidance to assist Customs administrations in building favourable and collaborative relationships with businesses. The Customs-Business Partnership Guidance contains precise and inclusive instructions to apply to various situations and conditions. It also presents flexible models that can benefit Customs administrations, regardless of their current dealings with businesses. This comprehensive guide has been thoughtfully structured into four parts, each of which dives deep into the subject matter. The first part explains the processes involved in working with Customs. The second part outlines a step-by-step approach to partnership formation. The third part shares valuable insights and tips from other members. Finally, the fourth part includes advanced ideas and strategies to improve understanding.

Considering the above, the SARS AEO programme adheres to the minimum standards set by WCO under the SAFE Framework and Customs-Business Partnership Guidance.

In May this year, Botswana, Eswatini, Lesotho, Namibia and South Africa, the Member States of the Southern African Customs Union (SACU), signed the Mutual Recognition Arrangement to recognise SACU importers and exporters that have been granted AEO status. The SACU Revenue Administration is also committed to facilitating cross-regional trade and being alert to all its risks, to reduce poverty, inequality and unemployment.

For South African businesses involved in trade within the regional market of the SACU and internationally, there is an opportunity to achieve AEO status. AEO status is available to businesses such as manufacturers, importers, exporters, brokers, carriers, consolidators, intermediaries, ports, airports, terminal operators, integrated operators, warehouses, distributors and freight forwarders. In addition, Small, Medium and Micro Enterprises (SMMEs) within the same trade zone are eligible for the AEO programme. However, SARS Customs approval is necessary before AEO status can be achieved. The AEO programme is divided into different accreditation levels, as explained below.

Level 1 Accreditation AEO: Compliance

In 2017, SARS launched AEO Compliance by granting accreditation status to 28 traders, including importers and exporters. In July 2021, section 64E of the Customs Act 91 of 1964 (Customs Act), was amended to widen the scope of participation in the SARS AEO programme, allowing more role-players in the supply chain to participate. In addition, these amendments align with the standards of Pillar 2 of the WCO Framework of Standards, which introduces a safety and security element that adheres to international best practices. As a result, entities or traders in international trade can participate in the voluntary Level 1 Accreditation programme with SARS Customs. This will enable them to maintain standards in their internal processes and computer systems. As of 31 January 2022, there were 144 accredited traders.

Certain requirements must be met for the above entities or traders to acquire accreditation. These include demonstrating a compliance record spanning three years before application. They also include maintaining a computer system that aligns with the user agreement and knowing customs and excise laws and procedures. Audited financial statements for the last three years must be provided as alternative evidence of financial viability. Additionally, outstanding taxes, interest, penalties or other amounts due and payable to SARS must be paid. All tax returns and documents must be submitted for tax purposes.

This level offers several benefits, including lower security amounts, fewer inspections, and the ability to use the unique SARS AEO logo to brand the business.

Level 2 Accreditation AEO: Safety and Security

Level 2 Accreditation, or the AEO Safety and Security programme (AEO-S) is a voluntary programme designed to enhance supply chain security. It utilises a documented process to identify and mitigate risks throughout the international supply chain. In July 2021, the AEO-S programme started with one trader.

To be eligible for consideration, applicants must ensure that their premises, buildings and facilities have adequate and appropriate security measures. This is to prevent unauthorised access by individuals or vehicles. Personnel and other individuals accessing the premises must also be protected. Additionally, applicants must identify any business partners involved in the supply chain and ensure that they meet security requirements. Under the applicant’s supervision, cargo and conveyances must be kept secure and their integrity maintained. Applicants must have procedures to mitigate the risk of losing or destroying their records and information. Staff must be trained in recognising potential threats and taking appropriate action. Adequate information technology security measures must be employed to protect the applicant’s information technology systems.

Communication with SARS is necessary in customs matters. Applicants must comply with the latest revision of the King Report on Corporate Governance guidelines, to the extent applicable.

Investing in the AEO-S programme may yield several advantages beyond Level 1 Accreditation for businesses. Benefits may include exemptions from specific customs supervision. They may also include targeted training sessions, and reduced documentary and physical inspections for regulatory compliance and supply chain security risk. In addition, they may include exemptions from security payments.

These are the summarised benefits of becoming an AEO:

Boost international trade: The AEO Programme can help businesses streamline customs procedures, leading to faster and more efficient trade. This can result in increased competitiveness and profitability.

Importance of trust: Trust is crucial to becoming an AEO. By achieving AEO status, businesses demonstrate their commitment to compliance and security standards. This can help to build trust with trading partners and increase collaboration and growth opportunities.

Role of technology: Technology plays a vital role for AEOs; for example, electronic systems enable businesses to manage customs procedures more efficiently, reducing the risk of errors and delays. This can help businesses save time and money while improving their overall performance.

Crucial for small businesses: SMMEs play a vital role in the South African economy, contributing significantly to GDP and job creation. SARS is exploring the benefits of the AEO programme to support and ensure compliance among SMMEs. By becoming an AEO, small businesses can compete on a level playing field with larger companies. They can improve their reputation and access new markets by eliminating barriers to entry, facilitating business growth and enhancing trade. Additionally, AEO status can provide benefits such as expedited inspections and refund claims. It can also provide education on customs and excise, cost savings on security and embargo fees, and leverage on current government offerings.

Foster collaboration across borders: The AEO can facilitate business collaboration across borders. AEOs enjoy mutual recognition of other AEOs in different countries, simplifying procedures and reducing costs. This can help businesses forge new partnerships and expand their operations.

The AEO status accreditation takes effect on the date specified in the accreditation letter or certificate and remains valid for five years. However, if a holder’s registration or license is suspended or cancelled according to section 60(2) of the Customs Act, or if they voluntarily give up their accredited client status and notify the Commissioner, their status will expire before the end of the five-year term. To renew their status, holders must apply no later than 30 days before their expiration date and comply with the Rules under Section 64E of the Customs Act. If the renewal application is not processed before expiration, the SARS Commissioner can extend the validity period.

The AEO programme greatly benefits businesses seeking to grow regionally and internationally, and to improve performance. By becoming an AEO, a business can reap various advantages, such as faster and more efficient trade, improved reputation and trust, and increased opportunities for collaboration. Businesses trading within the regional market of the Southern African Custom Union and internationally are encouraged to take advantage of SARS’ efforts to strengthen global supply chain security and facilitate the movement of legitimate goods through the AEO programme.

Dyondzo Kwinika is a Candidate Attorney and Virusha Subban a Partner and Head of Tax | Baker McKenzie Johannesburg.

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

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

The conundrum of conversion under convertible loan agreements

Njeri Wagacha and Rizichi Kashero-Ondego
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The conundrum of conversion under convertible loan agreements

The financing of start-ups, enterprises in the seed stage, and medium-sized businesses has changed significantly over time, giving investors several investment structuring alternatives based on the financial health and organisational structure of the target business. For various reasons, including the value of the target business and cost-effectiveness, businesses and investors prefer to raise capital using convertible loan notes (CLN) rather than standard equity and debt investment structures during early-stage rounds. CLNs are distinct from other loan note structures in that they can be converted to equity on the occurrence of a conversion event. Parties have numerous conversion event structures at their disposal, depending on the objectives that the investor and the target business hope to achieve. In this article, we explore the CLN model and the various factors that one should keep in mind when drafting a CLN.

Why the CLN?

First, it is important to understand the purpose of the CLN before deciding how, if and when the loan will be converted. There are times when a target firm is cash-strapped and decides to request a loan in the form of a CLN from a third-party investor or an existing shareholder (the Lender), to temporarily resolve its cash flow requirements. Using a CLN may be a quick method for the Lender to guarantee its return without having to go through a due diligence exercise which, in any case, could be lengthy, and which could result in protracted negotiations over transaction documentation. Entering into a CLN ensures that once the loan has been disbursed, if converting to equity is unappealing, the Lender is able to choose repayment over conversion.

As an alternative, Lenders may choose a CLN because it simply gives them more security. After all, if the target business cannot repay the loan, the Lender has the option of becoming a shareholder and transforming the business rather than having to liquidate assets (which the target business may not have) to recoup its investment.

A Lender may also decide to enter into a CLN when unsure of the company’s future performance and, therefore, may choose to stagger its investment into the target business.

Conversion

A CLN essentially gives the Lender and the target business flexibility to meet their needs. The following are some considerations for both parties:

a) Maturity date: the parties will agree on a date by which the loan will mature, known as the maturity date. On this date, depending on the negotiating power of each, the parties can decide if the loan automatically converts, whether the Lender has the option to convert or whether the right of repayment accrues. If acting for the company, the effect of increasing the shareholding, seeking shareholder approval, and potential dilution of the shareholders versus the interest payable on the loan will be key considerations.

b) Equity financing round: if the valuation of the target business is of concern, an equity financing round should be considered as a conversion event by the Lender. An equity financing round is essentially the process of raising capital through the sale or issuance of shares. Depending on the industry of the target business, different parameters can be set by the Lender and the company to the equity financing round. The parameters can be pegged on the number of Lenders participating in the equity financing round or the amount that is raised in the equity financing round. Given how the target firm is valued, the Lender should provide itself with a solution that offers it more security in its investment.

c) Change of control event: the exercise of control over the target business is an element that can be considered as a conversion event. The Lender can opt to convert the loan to equity on the occurrence of a merger, amalgamation, restructuring, sale of assets or execution of an agreement that gives a person or an entity significant control. This option provides the Lender with the flexibility to discern whether they should convert depending on how the company evolves.

d) Event of default: these include events that would ideally result in the termination of the CLN, such as misrepresentation, insolvency, material adverse change, and breach of representations and warranties. On the occurrence of the event, the Lender can opt to terminate the CLN and demand immediate repayment or convert the loan to equity. When negotiating the events of default, the factors to be taken into consideration by both the Lender and company is the nature of the business and the operating values of the Lender; for example, anti-money laundering considerations and the undertakings provided by both parties within the CLN. Essentially, the parties should consider the elements that are non-negotiable.

The value of the loan upon disbursement and the value upon repayment or conversion are additional factors to take into account when deciding whether to convert or demand repayment, specifically:
a) what is the interest chargeable? Is it per annum? Is it cumulative? Does it accrue until full repayment has been made or conversion has occurred?; and
b) the number and value of shares to be issued. Is it a set number of shares? Will a valuation need to be conducted? If so, what are the parameters? Will the target business and Lender benefit from a valuation cap or a discount?

These provisions need to be carefully thought out and should be well articulated and clearly drafted in the CLN.

Food for thought

Despite the benefits of a CLN, which include having the security of acquiring equity, debt ranking higher than equity in the event that a company becomes insolvent and allowing the target business to maintain its shareholding while obtaining financing, the primary risk emanates from ambiguity arising from a poorly drafted CLN.

Given the nature of companies seeking loans in the form of CLNs, the underlying risk is exponential. As most companies are generally in their formative stages, the uncertainty of success should be a concern to negate in the CLN. To counter the risks, the Lender and the company need to consider the purpose of the CLN vis a vis their goals, and accurately structure it to protect themselves against foreseeable risk.

Notably, the CLN has grown in popularity as a result of its adaptability and lack of regulatory requirements for structuring. Although we anticipate that the CLN will provide target businesses with loans at lower interest rates, poor drafting and structuring could result in a deadlock between the Lender and the target business. In this respect, we advise that careful thought be given to the structure of the CLN based on the needs and goals of the target business and the Lender.

Njeri Wagacha is a Partner and Rizichi Kashero-Ondego a Senior Associate | CDH Kenya

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

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

Ghost Bites (Attacq | Gemfields | Growthpoint | Lesaka | Old Mutual | Momentum Metropolitan | Pan African Resources | Putprop | Universal Partners)

The Finance Ghost
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Ghost Bites (Attacq | Gemfields | Growthpoint | Lesaka | Old Mutual | Momentum Metropolitan | Pan African Resources | Putprop | Universal Partners)

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

Attacq matches its interim distribution (JSE: ATT)

Growth in cash distributions is what investors want to see

In a trading statement dealing with the year ended June 2023, Attacq flagged an expectation of a final distribution per share of 29 cents. This is the same as the interim distribution, so the full year distribution of 58 cents is 16% higher than the distribution per share in the prior year.

This has been supported by an increase in distributable income per share of between 12.5% and 15.5%.

Detailed results will be out on 28 September.

This announcement came out after the market closed. On a closing price of R8.25, Attacq is on a dividend yield of 7%.

A wobbly at Gemfields? (JSE: GML)

After seemingly endless good news from the company, here’s something to chew on

The good news is that Gemfields believes that the market is “very healthy” based on demand at the commercial and low quality ruby auction over the past couple of days. A commercial quality emeralds auction is also underway and results will be released soon.

The unfortunate news is that the recent emerald production at Kagem hasn’t been to the standard that Gemfields was hoping for. These are naturally occurring gemstones and nature is unpredictable. The company has decided to pull out of a high quality emeralds auction in November 2023, as they would rather not participate than offer a sub-optimal product.

After what feels like a very long string of positive updates, this is a reminder that mining is never easy.

This announcement came out after the market closed, so keep an eye on the share price on Thursday morning.

These conditions aren’t good for Growthpoint (JSE: GRT)

And the outlook for FY24 is particularly worrying

Growthpoint has released results for the year ended June 2023. The distributable income per share and dividend per share are both up by 1.3%, so the payout ratio is consistent. Net asset value per share limped higher by just 0.3%.

A lot of progress has been made in reducing the size of the South African exposure, with 29 properties worth a total of R1.5 billion disposed of in this period. Since 2016, they’ve sold off R11.2 billion of local exposure. Only one property worth R18 million is held for sale as at the end of the period.

The capital-light business Growthpoint Investment Partners has a happier story to tell, with assets under management up by 14.7% and management fees up from R67.2 million to R98.0 million. They raised R750 million from new investors in the healthcare and student accommodation funds.

Offshore dividend income increased by 7.6% in rand terms. The offshore business is 45.8% of group assets and contributed 29.1% to distributable income per share.

With negative valuation movements in Growthpoint Properties Australia as a major contributor to this move, the loan-to-value (LTV) ratio deteriorated from 37.9% to 40.1%. The South African LTV is more conservative than the group LTV, sitting at 32.9% vs. 32.0% in the comparable period.

It’s also worth noting that 77.7% of the South African borrowings carry a fixed rate. The weighted average maturity for local borrowings has increased from 2.9 years to 3.5 years.

The only really sparkling part of the story is the V&A Waterfront, which reported a 21.5% increase in Growthpoint’s share of distributable income. Crown jewel properties are still great assets.

The problem is that conditions in South Africa remain tough, with negative reversions on leases and a decline in renewal success. For South Africa specifically, funds from operations per share (an important industry metric) fell by 4.4% this year.

The outlook for FY24 isn’t great at all, with an expectation for distributable income per share to drop by between 10% and 15%. The group will try and maintain a payout ratio of 82.5%. To help see the group through difficult times, Norbert Sasse has agreed to stay on as CEO until 31 December 2026.

The dividend per share for the year of 130.1 cents and the closing price of R11.40 means that the company is trading on a yield of 11.4%.

Lesaka beats its revenue guidance (JSE: LSK)

Constant currency growth is especially strong

Lesaka is listed on the Nasdaq as well as the JSE and reports in dollars, despite revenue being earned in South Africa. This obviously puts the growth rate under eternal pressure because of rand weakness, perfectly demonstrated by group revenue growth of 9% in dollars vs. 32% in constant currency.

The Connect Group has been included in the result for the full quarter and is outperforming according to Lesaka. The consumer division is also in the midst of a turnaround.

The net loss of $11.6 million this quarter included non-cash charges of $10.6 million, so the group is nearly break-even from a cash profits perspective. Cash generated by operating activities saw a healthy positive swing year-on-year.

The company talks about a “transition from turnaround to growth” and has lots of associated bullish commentary in the announcement. The market clearly liked it, closing 8.7% higher.

Seeing double at Momentum Metropolitan (JSE: MTM)

Financial results and an operating update were released separately

No, I’m not sure why Momentum Metropolitan didn’t release a single announcement that combines the financials for the year ended June and the operating update for the same period. Practically simultaneously on SENS, they released these things separately.

The announcements are extremely detailed and you should work through them if you have a position here. I’ll just touch on the interesting highlights.

Normalised HEPS increased by 19% to historic high levels, driven by operating profit increasing by 31% and the investment return dropping by 35%. Once you read Old Mutual further down in Ghost Bites today, you’ll see that this is at odds with what we have seen at other financial services businesses. This is because Momentum Metropolitan has a sizable venture capital portfolio, which saw valuations come off sharply year-on-year.

One of the businesses that struggled operationally was Momentum Insure, with high claim ratios and premium increases that lagged rising claims inflation. Something interesting that I’ve learnt in the past couple of years is that short-term insurers don’t like an environment of rising inflation, as premiums tend to be adjusted once a year rather than monthly. This even led to an impairment being recognised on Momentum Insure.

Another important point is that although new business margin was unchanged at 0.9%, the value of new business fell by 4% because of lower new business volumes and other factors.

If you’re wondering where the boost to operating profit came from, look no further than Momentum Metropolitan Africa where operating profit jumped from R8 million to R508 million!

Return on equity was 22.3%, down from 22.7% in the prior year.

Finally, the dividend increased by 20% for the year.

Old Mutual releases complicated earnings (JSE: OMU)

The latest victim of IFRS changes is the insurance sector

The introduction of IFRS 17 is causing significant distortions and complexities in the results of insurance groups. Those results are already pretty specialised and difficult to understand on a good day, so investors in this sector are in for some brain gym this year.

It’s a little bit difficult to know where to look in this Old Mutual announcement dealing with the year ended June 2023. The ranges are also pretty wide, like results from operations that could be anything between 7% lower and 13% higher. In other words, they will probably be pretty flat, with good and bad news within that number.

Adjusted headline earnings per share is expected to be between 11% and 31% higher. This is probably the right metric, as it considers restated numbers on an IFRS 17 basis and also adjusts for earnings in Zimbabwe.

If you remember nothing else, at least remember that although operational performance at Old Mutual doesn’t seem to have shot the lights out, the environment of higher interest rates and a recovery in equity markets means that investment returns on shareholder funds have improved. This is what drove the headline earnings per share performance.

The rand got Pan African out of trouble this year (JSE: PAN)

Production was significantly lower year-on-year

Pan African Resources is listed in London and on the JSE, with an ADR programme in the US as well. To add to the United Nations feel, the company also reports in dollars.

It was the rand that really saved the day, with the rand gold price having a much better year thanks primarily to rand weakness. Gold production fell sharply by 14.8%, so a difficult year in the gold price would’ve been an ugly outcome indeed.

It still wasn’t a happy year though, with HEPS down by 19.5% to US 3.15 cents per share. A dividend of US 0.95592 cents per share has been put forward for approval. It looks like the final dividend is R0.18 per share and the dollar amount will fluctuate, rather than the other way around.

From the current production level of 175,209oz, the company hopes to improve to between 178,000oz and 190,000oz next year. That’s still well down on 205,688oz in FY22.

The other area for improvement is in the high-cost operations Sheba and Consort Mines, which account for 81% of annual production. This is why group level all-in sustaining cost (AISC) is $1,327/oz despite the lower-cost operations running at $1,152/oz. Group level guidance for FY24 is $1,350/oz.

The balance sheet looks fine, so they have a decent platform off which to boost production and hope for the best with the rand gold price.

Putprop inches forwards, on HEPS at least (JSE: PPR)

We will need to wait for full results on this one

In a further trading statement dealing with the year ended June 2023, Putprop has noted that HEPS will be up by between 0% and 10%. But interestingly, earnings per share (EPS) is down by between 77% and 87%.

Results are due on 14th September i.e. the day after this trading statement. They will need to be considered carefully to understand the difference between EPS and HEPS.

Universal Partners reports a drop in NAV per share (JSE: UPL)

It’s not as bad as it looks though, as there was a special dividend

Investment holding companies are judged by net asset value (NAV) per share. When a dividend is paid to shareholders, this reduces the NAV and thus the NAV per share. In assessing performance, it’s important to keep this in mind. Just looking at NAV per share ignores dividends and thus the total return.

After disposing of Dentex Healthcare and proving that not all dentistry-related activities are painful, Universal Partners paid a dividend of 10 pence per share. This means that NAV would’ve been £1.396 per share without the dividend vs. £1.438 at the end of June 2022. That’s a drop of 3% year-on-year, adjusting for the dividend.

If we look into the portfolio, the group has retained £35.2 million worth of exposure to Portman Dental Care, which is the group that merged with Dentex. This makes it a minority shareholder in one of the largest dental care platforms in Europe.

The group also has a stake in Workwell, a payroll solutions and accounting company in the UK that is trading behind budget because of the tough conditions in the UK and Europe. Still, because of the conversion price on debt into equity, the value has been written higher in Universal’s books.

Another company in the portfolio that is battling headwinds is Xcede Group, a recruitment specialist in the IT and sustainable energy space. While you would think that this makes it a gold mine, there’s been a significant slowdown in hiring activity. There’s a new CEO and CFO in the business, so we will see what happens here. Universal had to subscribe for further loan notes to support working capital. The equity investment has been impaired.

SC Lowy is a credit investing and lending business and achieved a positive return in its fund, putting performance ahead of the benchmark. Fundraising is a challenge in this environment but profits are up.

I chuckle a little every time I read about Propelair, a company that claims to have reinvented the toilet. It uses just 1.5 litres of water per flush vs. 9 litres from a traditional toilet. As exciting as that sounds, the business plan also seems to be in the toilet as the company is trading well below where it should be. The company is raising more capital and Universal Partners isn’t participating in that raise, leaving the value at a nominal £1. Yes, one pound.

£2.3 million worth of investment management fees to Argo were accrued during the year. Interestingly, the fees aren’t paid unless there is a realised exit in the portfolio. So this is purely an accounting entry.

Little Bites:

  • Director dealings:
    • The market doesn’t really understand IFRS, but it does understand a show of faith by directors. We are finally seeing some purchases of shares by the key executives at Blue Label Telecoms (JSE: BLU), with an associate of Mark Levy acquiring CFDs with a value of R3.8 million.
  • Capital & Regional (JSE: CRP) announced the results of the scrip dividend election, with shares representing 2.3% of current issued share capital to be issued in lieu of cash dividends.
  • For the junior mining enthusiasts, Copper 360 (JSE: CPR) has significantly upgraded its mineral resource and has put out the bullish view that expenditure on the plant currently being built is on schedule for November this year and 8% under budget. Mine development is expected to commence in the final quarter of this year.
  • The date for the release of the amended business rescue plan for Tongaat Hulett (JSE: TON) has been extended to no later than 31 October 2023, with an adjournment of the related meetings to no later than 30 November 2023.
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