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Ghost Bites (Accelerate Property Fund | Anglo American | Ascendis | Jubilee Metals | MC Mining | Richemont | Sabvest | Sun International | Trustco)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | Anglo American | Ascendis | Jubilee Metals | MC Mining | Richemont | Sabvest | Sun International | Trustco)

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

Accelerate Property Fund is starting to take serious strain (JSE: APF)

Did they bite off way more than they can chew with Fourways Mall?

The only good news in the Accelerate Property Fund results for the six months to September 2023 can be found on the revenue line, which moved 5% higher. From then onwards, it’s ugly. So ugly, in fact, that SA REIT Funds from Operations (the key metric) plummeted from R110.7 million to just R26.9 million.

Simply, they have too much debt. The loan-to-value ratio has spiked from 42.1% to 47.7%. The interest cover ratio is down from 1.9x to 1.7x and they’ve had to ask lenders nicely to temporarily relax this covenant while they complete the disposals of certain properties to try and reduce debt.

The Fourways Mall development seems to have been too ambitious, with a vacancy rate of 17% that has been flat in the past six months. To try and fix this, they’ve appointed Flanagan and Gerard to asset manage Fourways Mall and they will be making several other changes. I enjoyed the mention of “dwell time” as an important metric for success: literally, having tenants in place that lead to shoppers increasing their time spent in the mall! A separate circular to shareholders will be issued for the proposed Flanagan and Gerard appointment.

In addition to those challenges, the fund owns a portfolio of B- and C-grade office space, which is where the biggest vacancy problems lie.

These are stressful times for the fund, with a weighted average debt term of just 1.1 years. It will help them tremendously if rates start dropping next year, but hope is never a strategy.

The directors must be taking some heat from major shareholders, as the related party settlement disclosed in the March 2023 results has been amended to have no cash outflow for Accelerate. Full details will be released in due course and I’ll reserve judgement until then.

Unsurprisingly, no dividend has been declared for this period as the fund desperately needs to preserve cash.

A court victory for Anglo American in Zambia (JSE: AGL)

The Kabwe class action has been dismissed

Lead pollution in the town of Kabwe, Zambia, is a very severe problem. Two law firms have been trying to pin it on Anglo American, by leading a class action suit on behalf of Zambian claimants.

This hasn’t worked, as the High Court of South Africa has dismissed the claimants’ application for certification of a class action. According to Anglo American, the court recognised the multiple legal and factual claws in the claim. They even dismissed it with costs, noting that the law firms had taken out insurance for those legal costs (i.e. this won’t hit the pockets of the claimants).

Ascendis Health has released the delisting circular (JSE: ASC)

A significant portion of shareholders will be moving into the delisted space rather than selling

Thanks to a consortium led by Carl Neethling (who also happens to be the CEO of Ascendis these days), there’s an offer on the table for shareholders of 80 cents a share. This has been deliberately structured as an offer rather than a scheme of arrangement, as any shareholder can opt to refuse the offer and hold shares in an unlisted environment instead.

This tells you that management is more interested in operating in an unlisted environment than in taking out all the other shareholders at this price. Acting as Independent Expert, BDO Corporate Finance has opined that the offer is both fair and reasonable to shareholders.

Holders of 54.39% of eligible shares in issue (including Calibre Investment Holdings with 20.78%) have noted that they will vote in favour of the delisting resolution. Those shareholders (along with the consortium members) have also indicated that they will not accept the exit offer.

A holder of a further 11.21% of shares in issue has given written confirmation of an intention to vote in favour of the delisting. This takes total support to around 65.60% for the delisting resolution, which gives it a very good chance of succeeding at the shareholder meeting. They need 75% of those present at the meeting and companies never manage a 100% turnout of shareholders.

If you would like to refer to the circular, you’ll find it here.

Jubilee Metals received strong support for a capital raise (JSE: JBL)

This is exactly how public markets are meant to work

In an accelerated bookbuild structure, a company announces a capital raise and the bookrunners jump on the phone to fill the raise. Jubilee clearly had investors waiting in the wings (they even called this a “very targeted raise”), as the raise was filled almost immediately after it was announced.

You may recall news of an exciting project in Zambia, with International Resources Holding RSC Limited (based in Abu Dhabi) coming in as the major funder. Jubilee Metals is the technical partner on that transaction and has other copper investments in Zambia as well.

To fund the various projects in Zambia, the company wanted to raise £10 million at a price equal to the 30-day VWAP. Due to the volatility in the price, this is a 19% discount to the price on 14 December before the raise was announced.

The sad thing for South Africans is that the bookrunners are based in London. It looks like Jubilee didn’t waste its time by trying to raise on the JSE. That strategy worked out well, as investor demand was such that the raise was increased from £10 million to £13 million.

This is a good reminder that (1) junior mining groups constantly need to raise capital and (2) the market likes what Jubilee is doing in Zambia.

A revised deal on the table for MC Mining (JSE: MCZ)

A consortium led by Senosi Group has filed a revised offer

I must say, the MC Mining SENS announcement doesn’t make it easy for us to find out what is going on here. Perhaps it’s an Aussie thing (as the regulations in that market are very strict around takeovers), but it simply recommends that shareholders “take no action” in relation to the offer. There’s no useful summary of the terms.

This means that I had to go digging in this document to find those terms.

Long story short, there’s a consortium of shareholders that currently hold 64.30% of the shares in issue. Senosi is the big fish in that pond, holding 23.38%. The parties have put forward a number of very good reasons why the company being listed doesn’t make sense, ranging from expected dilution through to cash burn and total lack of liquidity in the stock.

The offer price of A$0.16 per share is a 23.1% premium to the closing price before the first takeover bid by the consortium was announced on 3 November. It’s a 14.3% premium to the closing price on 15 December.

Importantly, if the consortium reaches 75% ownership, they will look to delist the company.

A luxury-grade pain for Richemont (JSE: CFR)

The FARFETCH deal is dead

FARFETCH is set to be acquired by South Korea’s Coupang, which throws the deal with Richemont under the bus completely. Painfully, this means that the $300 million in convertible senior notes issued by FARFETCH to Richemont in November 2020 will probably not be repaid. The carrying value as at 30 November 2023 is EUR218 million (note the currency).

Richemont has no other financial exposure to FARFETCH and none of the underlying Maisons have launched e-concessions on the FARFETCH marketplace. Importantly, YNAP (Richemont’s online business) has not adopted FARFETCH Platform Solutions either.

Perhaps Richemont’s first loss is its best loss here. I remain highly skeptical of the entire concept of online luxury.

Sabvest has announced some portfolio changes (JSE: SBP)

The group holds a wide range of investments

The first change is that the stake in Masimong Group Holdings has reduced from 10% to 9%. The company restructured its capital and got rid of some preference shares as well. The net impact on Sabvest is a receipt of R51 million.

The second change is that Sabvest’s interest in Sunspray Food Ingredients will decrease significantly from 27.67% to 11.1% assuming all conditions precedent are met. This is expected to result in the receipt of R80.9 million in February 2024, with top-up provisions over three years as well.

Finally, Sabcap has acquired an indirect holding in Versofy, one of the largest home and SME solar installation and power solutions groups in South Africa. This is a small effective stake, as Sabvest has a 12.5% interest in a consortium that has bought 30% in Versofy. Sabvest has provided initial guarantees of R15 million and funding of R16.5 million, which may vary as the deal develops.

Sun International acquires Peermont Group (JSE: SUI)

The jewel in the crown is of course Emperors Palace

When a company operates casinos, you surely can’t be surprised when it rolls the dice on a gamble, now can you?

Sun International will fund the acquisition of Peermont entirely through debt, based on an enterprise value of R7.3 billion and an EV/EBITDA multiple of 5.76x. In simple terms, this means they’ve bought all the shares and claims in Peermont for a total value of R7.3 billion on an EBITDA yield of 17.4% (the multiple expressed as a yield instead). That’s an earnings yield above the cost of debt, hence the idea is to use the bank’s money for the deal and repay it as quickly as possible. This is a typical private equity structure, even though Sun International isn’t a private equity fund.

I must caution that EBITDA is before depreciation, which is usually a decent proxy for maintenance capex. These are expensive facilities to keep in decent shape to attract consumers, so using an EBIT yield and testing that against the cost of debt is a better approach. We unfortunately don’t have that information just yet.

Another important point is that R7.3 billion isn’t the amount that will actually change hands here. Included in that amount is Sun International taking on the debt of Peermont. It looks like approximately R3.2 billion will need to be paid to Peermont shareholders for their equity, with that amount being funded by new debt.

This will take Sun International’s gearing level to 2.6x, with a plan to reduce this below 2.0x within 24 to 36 months.

What does this deal bring Sun International? The flagship Emperors Palace resort is obviously a major win (EBITDA margin of 40% which is in line with some of Sun International’s largest resorts), with various other small casinos in the group as well. There will also be some scale benefits in the online sports betting operations, as Peermont also has a business in that space.

If Sun International shareholders shoot the deal down, then a break fee of R75 million will be payable. Sun International has already received support from Value Capital Partners (which holds 26.04% of the shares) and holders of a further 36.50% of shares in issue. This takes total support at this stage to 62.54%, with only 50% needed for the deal to go ahead.

If all goes to plan, Sun International effectively bulks up its local operations and essentially pays for the deal with the profits of the company that it is acquiring. Of course, things can go wrong along the way, which is why deleveraging the balance sheet as quickly as possible will be a priority. Importantly, Sun International is retaining the current dividend policy, so they really are trying to give investors the best of both worlds here.

Note: an earlier version of this piece erroneously noted that 75% approval was needed for this transaction. My apologies for this error.

Trustco releases full details of the drop in NAV (JSE: TTO)

The real estate portfolio dragged NAV lower, as did other factors

Although the opening paragraph of the Trustco announcement talks about the company showcasing its resilience and adaptability, there isn’t much resilience in the net asset value per share dropping sharply from 186 cents to 117 cents.

Part of this is because Trustco is an investment holding company and discount rates moved a lot higher in the past year, leading to a decrease in equity valuations. Another major factor is a 42% drop in property values since the Bank of Namibia imposed loan-to-value restrictions. After a High Court challenge by Trustco, the mandatory deposit amount has been reduced from 50% to 10%.

The highlight is the mining exposure (Meya Mining) which achieved commercial production of diamonds. Trustco holds 19.5% in that asset, way down from the 65% initially acquired in 2016. This discount rate used for the valuation of this business is 28.20%, which gives you a good idea of what sort of returns investors are looking for in frontier markets like Sierra Leone.

Little Bites:

  • Director dealings:
    • The family trust of a director of PSG Financial Services (JSE: KST) sold shares in the company worth over R15 million. That’s a substantial sale!
    • A director of a major subsidiary of African Rainbow Minerals (JSE: ARI) has sold shares worth R1.7 million.
    • The CEO of Invicta (JSE: IVT) and Dr Christo Wiese are still at it in terms of buying the same number of shares on the open market. They’ve each acquired shares worth around R86k in the company.
    • A director of Clicks (JSE: CLS) has bought shares worth R31k on the market.
    • Among various Sygnia (JSE: SYG) directors who exercised options to acquire shares, there were a few who haven’t sold any of those shares. That’s unusual and worth a mention.
  • Although this isn’t a director dealing in the purest form, there’s a good reminder on the market of how much money the two founding partners of African Rainbow Capital have made. Shares in African Rainbow Capital Investments (JSE: AIL) worth R125 million have been transferred from African Rainbow Capital (Pty) Ltd to private companies related to each of Dr. Johan van Zyl and Johan van der Merwe. Yes, that’s a total of R250 million.
  • Harmony (JSE: HAR) has released the circular related to the proposed top-up to the B-BBEE transactions. You’ll find it here if you want to read it.
  • Sebata Holdings (JSE: SEB) has released results for the six months to September. The operating business recorded a 2% decrease in revenue. The headline loss per share has deteriorated from 5.27 cents per share to 9.91 cents per share. The value in this group is derived from a receivable related to the disposal of Sebata Municipal Solutions to Inzalo Capital, with total financial assets coming in at over R300 million. Sebata’s market cap is R230 million. The recoverability of that amount is in doubt and if performance conditions aren’t met, then the business sold to Inzalo will be returned to the group. Of course, Sebata and its shareholders would far rather receive the cash than the shares.
  • City Lodge (JSE: CLH) announced the results of its odd-lot offer. The company repurchased 314,698 shares (0.05% of the total issued ordinary share capital) for R1.48 million.
  • Texton’s (JSE: TEX) rights offer has become unconditional, which means it will go ahead. Regular readers of Ghost Bites will know that I’ve been very critical of this transaction and the impact it has on minority shareholders. The circular will be released on Thursday, 21 December.
  • A further three non-executive directors of Shaftesbury Capital (JSE: SHC) have stepped down from the board as part of right-sizing the board after the merger of Capital & Counties and Shaftesbury.
  • Kibo Energy (JSE: KBO) announced that a non-executive director and significant shareholder of Mast Energy Developments (MED) – the subsidiary that is still waiting for its money from its joint venture partner – has given a director loan of £81k to MED. He sold 14,000,000 MED shares for this out of a total holding of 17,708,538 MED shares. The loan bears interest at 7% per annum and (if I understand the somewhat cryptic announcement correctly) is repayable through the issuance of 14,000,000 MED shares, regardless of their value.
  • Andrew Mthembu, who has held a number of executive roles in industries like telecoms, has been appointed to the board of KAP (JSE: KAP).

Ghost Bites (Grindrod | Huge Group | KAP | SA Corporate | Spear | Tharisa)

The Finance Ghost
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Ghost Bites (Grindrod | Huge Group | KAP | SA Corporate | Spear | Tharisa)

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

Grindrod looks to extend its stay in Mozambique (JSE: GND)

This port is incredibly important, especially as South African infrastructure deteriorates

Grindrod holds an indirect 24.7% stake in the Maputo port. The current concession expires in 2033, so there’s only 10 years left of the current deal.

The good news is that the company operating the port has been in discussions with the Mozambique government to extend the current concession out to 2058. The even better news is that the government has issued an in-principle approval for the extension.

This facilitates increased investment to expand the capacity at the port, which is particularly important given the state of play at Transnet and the opportunities this creates for Grindrod and Mozambique.

Huge Group raises R300 million in pref share funding (JSE: HUG)

This settles existing debt facilities with RMB and leaves plenty leftover for investments

Huge has raised preference share funding from RMB. Instead of a loan, the bank subscribes for preference shares in a funding SPV (special purpose vehicle) and then the SPV can pass that funding on to group companies as required.

Under this structure, RMB will subscribe for R150 million in A preference shares and R150 million in B preference shares. The A shares are redeemable over five years, starting in year three. The B shares are redeemable in a bullet structure (a single redemption) at the end of year five.

The existing term debt facilities with RMB of R162.5 million will be settled with these proceeds. That leaves a solid amount over and above this settlement for further investments by Huge. Let’s hope they do a better job than in some of the previous deals and investments.

KAP’s earnings drop by at least 20% (JSE: KAP)

This is the lump of coal under the tree for KAP shareholders

KAP released a trading statement dealing with the five months to November 2023. The biggest issue is weakness in global polymer margins, with a direct impact on key business Safripol. This problem has dwarfed any of the usual suspects, like load shedding and Transnet port congestion. Safripol’s operating margin is “well below” the through-the-cycle guidance range of 7% to 9%.

PG Bison did fairly well in this period and the R1.9 billion MDF expansion project has been completed. Export sales have been strong but these are at a lower margin than domestic sales, so the mix effect means a slightly lower margin overall.

Unitrans saw performance go backwards due to the broader operating environment. The division has been restructured and those benefits will come through in the second half of the financial year.

Feltex (which plays in the new vehicle assembly value chain) had a decent period, with a steady order book supported by a recovery in assembly volumes.

There’s also good news at Restonic, which achieved volume and revenue growth in this period despite subdued demand in the furniture retail market.

Finally, Optix saw a dip in profits despite satisfactory growth in revenue. This is due to the costs of scaling the business in line with objectives.

KAP has a number of businesses (as you can see), but Safripol is the key. With poor performance in that operation, HEPS is expected to be at least 20% lower than the comparable period. They don’t give a tighter range than that, which suggests that the drop could be significantly worse than 20%.

The group is within debt covenants and raised a R3 billion revolving credit facility, so the balance sheet is managing for now at least.

SA Corporate gives a pre-close update (JSE: SAC)

This deals with the key metrics for the year ending December 2023

SA Corporate Real Estate has a varied portfolio that even includes residential units. Across the portfolio, it looks like the fund will achieve 4% like-for-like growth in net property income for the year ending December 2023.

The retail portfolio has seen a dip in 12-month rolling trading density growth, from 5.1% to 4.8%. Although reversions were slightly negative in the period ending June, they are expected to swing to between 2.5% and 3.0% for the full year thanks to favourable renewal activity.

Even the office portfolio is showing some signs of improvement, with vacancies down from 16.6% at the end of June to around 15% by the end of the year. Reversions have also moved positive, which is big news.

The industrial portfolio has one minor vacancy and will see reversions move negative for the full year due to the renewal of a motor showroom.

In the residential portfolio, rental escalations are between 3.5% and 4%.

The group is also busy with a restructure of its residential business, with full details available in the presentation at this link.

Spear expects flat distributable income per share (JSE: SEA)

The commercial office portfolio is a headache, but will hopefully be resolved soon

Spear REIT is known as the property fund that is focused solely on the Western Cape. Having recently done a roadtrip in northern parts of the country and having also done a lot of driving around the Western Cape where I have lived for the past few years, I can confirm that this is a solid strategy in South Africa.

But even the Western Cape infrastructure can’t make up for weakness in the commercial office portfolio, where the vacancy rate has gone the wrong way. This is because a large tenant vacated space in Parow and the area is being relet to more than one party. Negotiations with one party have dragged on, leading to an inflated vacancy rate as at 30 November 2023 (the end of the third quarter of the financial year). The fund believes that this vacancy will be addressed soon. They even channeled their inner Jerome Powell by referring to it as “transitory”!

The industrial portfolio is in much healthier shape than commercial, reflecting a vacancy rate of just 1.41%. Rental reversions are +5.4% and in-force escalations are the highest across the Spear portfolio, coming in at 7.66%.

Convenience retail is also doing pretty well, with a vacancy rate of 2.95% and positive rental reversion rate of 4.65%. In-force escalations of 7.24% aren’t far behind the industrial portfolio. 41% of the portfolio is occupied by national tenants on long-dated leases with solid payment records.

In other good news, at least Spear is managing to recover 96% of the cost of diesel supplied across the portfolio. There aren’t many funds that can say that! Importantly, once commissioned, Spear’s total PV solar production capacity will cover 25% of its demand.

The balance sheet reflects an improvement to cost of debt by 4 basis points since the interim period, but a significant year-on-year increase from 8.66% to 9.55%. The fixed debt ratio is just under 40%, which is still well below the target range of 65% to 75% of debt to be fixed for 24 to 36 months. The loan-to-value has moved higher, from 36.30% at FY23 to 40.70%. The target range is 38% to 43%. The disposal of the Liberty Life Building in Century City will reduce the loan-to-value ratio by 500 basis points by the end of FY24.

Although the second half of the year is reflecting an improvement on the situation in the interim period, management’s expectation is for distributable income per share to only be 0% to 1.5% higher year-on-year. It’s tough going in property at the moment.

In morning trade, it looked like somebody had finger trouble with a trade that went through way too high:

Tharisa: a tale of two commodities (JSE: THA)

PGMs have had an awful year, but chrome has been much stronger thankfully

Tharisa produces both PGMs and chrome, with the latter saving the story right now. The results for the year ended September 2023 reflect really tough times in PGMs (as we already know this year), while chrome prices have been on the up.

Let’s start with reef mined, which is the first step in producing these commodities. The volume of reef mined fell by 24.1%, with various issues related to the open pit mining process (including adverse weather). The company purchased ROM ore to maintain plant throughput.

Production of PGMs fell by 19.3% and sales of PGMs fell by 14.4%. The average PGM basket price tanked by 26.2% in dollars. Rand weakness mitigated this disaster somewhat, with prices in local currency down by 15.7%. The PGM market is so tough at the moment that the Karo Platinum Project timeline for commissioning has been pushed out by 12 months to June 2025. They can accelerate that timeline if markets improve.

Chrome production fell 0.2% and sales were up 0.3%, in both cases excluding third party volumes. Production may be flat, but the average chrome price was up 25.8% in dollars. In rand, it was up 44.7%!

Putting it all together, we find a 5.3% drop in revenue. That doesn’t sound too bad, but when combined with inflationary pressure in costs, the net impact is a 42.4% decrease in EBITDA. Profit before tax fell by 48.1%. The free cash flow situation is very different to the move in profitability, with that metric up by 15% and net cash on the balance sheet up by 60.9%.

In case you’re wondering about the commodity split, PGMs contributed just 29% of gross profit in this period, down from over 62% in the comparable period.

Looking ahead, production guidance for FY24 is between 145koz and 155koz PGMs (vs. 144.7koz in this period and 179.2 koz in 2022) and between 1.7 Mt and 1.8 Mt of chrome concentrates (vs. 1.58 Mt in both 2022 and 2023). At current commodity prices, the near-term growth is clearly going to come from chrome.

Little Bites:

  • Director dealings:
    • Carl Neethling has been leading a consortium that is looking to do a take-private of Ascendis (JSE: ASC). Together with his associates (under JSE rules – so don’t mistake this as meaning they are part of the consortium), there have been acquisitions of further shares worth R5.5 million. This takes the combined holding of Neethling and these specific associates to 11% of Ascendis.
    • Now, here’s a substantial example of a show of faith in a company. The CFO of MAS (JSE: MSP) – the real estate fund that has suspended its dividend based on concerns about the debt refinancing environment in a few years from now – has bought shares worth R2.06 million.
    • An associate of the Wapnick family – the people running Octodec (JSE: OCT) – has bought shares in that company worth R591k.
    • A director of Remgro (JSE: REM) exercised share appreciation rights and sold the entire lot, not just the amount required to cover the tax.
    • The CFO of RH Bophelo (JSE: RHB) bought shares worth R49k.
    • The non-executive chairman of Primary Health Properties (JSE: PHP) and his associate have collectively acquired shares under the dividend re-investment plan worth just over £3k.
  • The business rescue practitioners at Tongaat Hulett (JSE: TON) certainly aren’t going to be taking a break this December. The court has ruled that the meeting to approve the business rescue plan must be adjourned from 14 December to no later than 11 January 2024. The bigger news is that the plans need to be amended, presumably to take into account the payment of sugar levies based on a separate recent court blow to Tongaat Hulett. This business rescue is on a knife’s edge.
  • Conduit Capital (JSE: CND) hopes to publish its financials for the year ended June 2022 (not a typo) by January 2024. The problem is that CCL (94.4% of revenue) is in liquidation, hence many things have needed to be finalised to make this audit work possible.
  • The board of Afristrat (JSE: ATI) has reached the conclusion that the company is no longer a going concern. In fact, things are so bad that they won’t even use business rescue provisions, as there needs to be a reasonable prospect of the business being saved before this route can be followed. They do not believe that such a prospect exists. Ironically, the board is waiting for the outcome of a liquidation application ruling in court (the hearing was more than three months ago) before it can act on this conclusion. The reality is that the show is over at Afristrat. The company (and its shareholders) is a casualty of fraud in the Getbucks business that is part of the group.
  • Khalid Abdulla, former director of AYO Technology (JSE: ACT), has been fighting the JSE’s recent censure and associated financial penalty at the Financial Services Tribunal (FST). Initially, a fine of R2 million was handed down by the JSE for transgressions. The reconsideration application was heard on 15 September and a decision has now been given, with the application being partially upheld. Aside from a wording change to the breach of JSE rules that led to the fine, the more relevant change is that the FST has reduced the fine from R2 million to R1.2 million. The rest of the application was dismissed, so the public censure is still in place and the fine is due immediately.
  • Sanlam (JSE: SLM) has consolidated its stake in AfroCentric (JSE: ACT) under Sanlam Life. The total stake is 60% in AfroCentric. There is no actual change in holding here, but it’s a sign of the strategic thinking.
  • Marshall Monteagle (JSE: MMP) announced the resignation of David Marshall as CEO. He has been in the role since 2009. Warwick Marshall is taking over the top job, having established the trading division of the group in 1993.

Ghost Wrap #58 (Tharisa | enX – Nedbank | Thungela | Italtile | Grindrod)

The Finance Ghost
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Ghost Wrap #58 (Tharisa | enX – Nedbank | Thungela | Italtile | Grindrod)

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

In this episode of Ghost Wrap, I covered these important stories on the local market:

  • Tharisa has PGM and chrome operations, which means the company has two levers to pull in response to commodity prices.
  • enX is selling Eqstra to Nedbank, which has interesting financial and strategic considerations for investors in both those groups.
  • Thungela can’t do much about local infrastructure at Transnet and the negative effect it has, but some clever dealmaking in the Aussie acquisition has paid off.
  • Italtile is still suffering in an environment where consumers are buying holidays and experiences, not new bathrooms.
  • Grindrod has a partially mitigating factor when it comes to local infrastructure, holding an indirect stake in the company operating the Maputo port – and that concession is being extended by the Mozambican government. 

Ghost Bites (AEEI | RMB Holdings | Sea Harvest | Thungela)

The Finance Ghost
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Ghost Bites (AEEI | RMB Holdings | Sea Harvest | Thungela)

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

AEEI is dragged into the red by AYO Technology (JSE: AEE | JSE: AYO)

The highlight is definitely the Fishing and Brands segment

African Equity Empowerment Investments (AEEI) released results for the year ended August 2023. They are complicated, as they include discontinued operations (AYO Technology) and the reporting of normalised headline earnings, which always needs to be treated with caution.

The AYO results have once again put the group in the red, but that is being unbundled to shareholders (lucky them) and so this is now a discontinued operation from the perspective of AEEI. It should be noted that this isn’t the only blemish in the numbers, as there’s also a large impairment in the biotechnology business.

The business that is worth focusing on is Fishing and Brands, with that segment delivering profit before tax of nearly R78 million in this period. The Technology segment (not AYO, but rather one other business) made profit before tax of R13 million. The Health and Beauty segment made a small loss off a revenue base of R49 million. Events and Tourism managed to lose R15.7 million off revenue of R24.9 million.

You probably know this already, but AEEI is a scrappy group of businesses with the embedded poison pill that is AYO Technology. The unbundling will at least take AYO out of the mix.

RMB Holdings releases interim results (JSE: RMH)

It’s important to adjust for the special dividend when looking at the NAV move

RMB Holdings is busy with a classic value unlock strategy, which means managing existing assets as efficiently as possible and returning capital to shareholders along the way. This is why it’s important to look beyond the year-on-year move in net asset value (NAV) per share of -56%. The group is intentionally becoming smaller.

Instead, the right metric is to look at NAV per share excluding the impact of the special dividend. On that basis, the group has actually grown by 5% to 104 cents per share.

There’s another special dividend coming of 23.5 cents per share, payable in December. This is being funded by the cash received for the settlement of the Atterbury base loan, as well as the cash generated by ongoing operations.

The current share price is 63 cents a share.

Sea Harvest is fishing for an acquisition (JSE: SHG | JSE: BRT)

The company has released a cautionary announcement

Sea Harvest released a cautionary announcement regarding a potential acquisition of certain businesses and assets of Terrasan. Although we don’t know exactly what is up for grabs, a quick look at the Terrasan website shows that the group has business interests in abalone, pilchards and aquafeed.

Discussions are clearly a long way down the road, as the companies are obtaining the various regulatory approvals and are filing a merger applications with the Competition Commission

As Sea Harvest is a 54%-held subsidiary of Brimstone, that company also released a cautionary announcement regarding this potential acquisition.

Transnet issues continue to plague Thungela (JSE: TGA)

Export saleable production by the South African operations have fallen year-on-year

Thungela released a pre-close update dealing with the year ending December 2023. It’s been a tough year for the entire coal industry, with prices way down vs. last year. Whether you look at the Richards Bay Benchmark or Newcastle Benchmark coal prices, they have more than halved year-on-year in dollars. Interestingly, each of the major operations can end up selling coal at a discount or a premium to the benchmark price, depending on the specific underlying contracts.

Sadly, export saleable production in South Africa is down by 7.6% due to a deliberate reduction in response to poor Transnet performance. Export sales in South Africa are flat year-on-year, so production was effectively adjusted downwards to the realistic level that Transnet can support. There’s certainly no shortage of demand. We just have to get the stuff to the ports.

The security issues at Transnet, as well as locomotive breakdowns, seem to be problems that just cannot be solved. Luckily, Thungela has certain operational attributes that allow it to be flexible in terms of getting the coal onto trucks. Even then, production had to be curtailed.

The Ensham acquisition in Australia has a different story to tell, with export production ahead of expectations. It’s nice to have working infrastructure! There were many critics of the Ensham deal when Thungela first announced it, but perhaps it is the right long-term play in the context of Transnet. It also helps that the eventual price paid for Ensham was R3.2 billion, not R4.1 billion as expected. This was due to closing adjustments and the lock-box structure with a date of 1 January 2023, which allowed Thungela to benefit from the performance from that date until completion.

Thungela’s net cash position at the end of 2023 is expected to be R9.6 billion.

Little Bites:

  • Director dealings:
    • Here’s a big one: the CEO of BHP (JSE: BHG) has sold more than half of his stake in the company for a total of nearly AUD 19 million. The announcement specifically notes that this is due to a divorce, so it’s more a reminder of how big divorces can get than a view on the share price itself. It’s also an important reminder to read SENS announcements carefully, especially about director dealings and any reasons given!
    • Sabvest Capital (JSE: SBP) has director representation on the board of Metrofile (JSE: MFL) in the form of Chris Seabrooke. Sabvest is an institutional investor, but it still counts as a director dealing that the company bought R2.7 million worth of shares in Metrofile.
    • A non-executive director of Richemont (JSE: CFR) has bought shares worth R177k.
    • The wife of a director of Afine Investments (JSE: ANI) has bought shares worth R10k.
    • An associate of a director of Huge Group (JSE: HUG) bought shares worth nearly R8k.
  • Sasfin (JSE: SFN) needs to send its shareholders a circular dealing with the disposal of the Capital Equipment Finance and Commercial Property Finance businesses to African Bank. A dispensation has been obtained for the 60-day rule. Sasfin hasn’t committed to a date for the release of the circular.
  • In an awkward update for Marshall Monteagle (JSE: MMP), the company corrected what was said in the results announcement regarding the potential sale of its California property for $26.5 million. The initial disclosure was that contracts have been exchanged. Instead, the company is only at heads of terms stage, which means negotiations on smaller points are still underway.
  • For those interested in environmental reporting and how mining groups are responding to climate change, Glencore (JSE: GLN) announced that it has concluded engagements with shareholders who voted against its climate plan. An update plan will be released in March 2024, incorporating the important acquisition of 77% of Teck’s Elk Valley Resources (EVR) steel making coal assets.
  • Orion Minerals (JSE: ORN) has beefed up its board with the appointment of two experienced mining executives as non-executive directors.
  • The ex-CFO of Astral Foods (JSE: ARL), Daan Ferreira, has been appointed as a non-executive director on the board on Premier Group (JSE: PMR).
  • There’s another resignation from the board of AYO Technology (JSE: AYO), this time in the form of non-executive director Valentine Dzvova. She is the CEO of African Equity Empowerment Investments (JSE: AEE), so this is part of the overall separation of these two companies.

Ghost Bites (enX | Jubilee Metals | Marshall Monteagle | Trustco)

The Finance Ghost
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Ghost Bites (enX | Jubilee Metals | Marshall Monteagle | Trustco)

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

enX is offloading Eqstra to Nedbank (JSE: ENX | JSE: NED)

The banking group is bulking up its vehicle leasing business

Back in June, enX alerted the market to a potential transaction to divest Eqstra. The group feels that it isn’t the right owner for Eqstra because the latter needs capital to scale and enX doesn’t have access to capital at the same rates that banks do. This makes it difficult for Eqstra to compete with the fleet solutions of banking groups.

The solution here is that if you can’t beat them, join them. Eqstra will be acquired by Nedbank, thereby solving the funding problem for the business and giving Nedbank a much bigger footprint in this space. For enX, this takes the pressure of Eqstra off its balance sheet, which also removes the majority of enX’s interest-bearing debt.

This is a very big step for enX, as it represents the disposal of a majority of its assets or undertaking. This puts it into s112 territory from a Companies Act perspective. It’s also a Category 1 transaction under JSE rules.

The structure is that Nedbank will subscribe for a 50.2% stake in Eqstra. The company will then use those subscription proceeds to repurchase all the shares held by enX. Nedbank will also put in money for Eqstra to repay loan accounts to enX. The valuation of the equity is based on NAV plus a modest premium of R16 million, less transaction costs.

The minimum subscription price is R379 million, but it could be a lot higher depending on changes in NAV of Eqstra. Had the deal closed on 31 August for example, the subscription price would’ve been R534 million.

Assuming the minimum of R379 million applies, then the gross proceeds (equity and loan repayments) to enX will be R890 million.

Either way, it looks like a significant special distribution is on the cards here. enX needs to keep R100 million in escrow for a period of three years and also wants to retain some capital for “general corporate purposes” – no estimate for that amount is given. The rest will be a return of capital to enX shareholders.

There are loads of regulatory (and shareholder) approvals still to come here. There’s also a material adverse change clause. It’s no guarantee that the deal will close, but it’s usually the case that these requirements are met unless a really nasty surprise comes up. Holders of 49.93% of enX shares in issue have already pledged their support for the deal, so there’s quite some way to go to meet the necessary approval threshold.

For context, the enX market cap is around R1.55 billion.

Jubilee takes a big step forward with its copper story (JSE: JBL)

This deal also marks the start of a new strategic relationship with a major global partner

Jubilee Metals regularly makes a song and dance about its technical capabilities. Talk is cheap, but luckily there’s a lot more than talk here. The latest news is that International Resources Holding RSC Limited (based in Abu Dhabi and part of the most valuable listed holding company in the UAE) is acquiring one of the largest copper waste rock assets on the surface in Zambia. Jubilee Metals is being appointed to design, implement and operate the copper processing solution.

The project cost is likely to be around $50 million and Jubilee has the capability to construct and commission all modular copper units within a 12-month period, with a planned commencement in the first quarter of 2024.

This partnership is important to Jubilee and its shareholders because the company can focus on providing technical solutions to partners who have large balance sheets. This is essentially a capex-light approach to growing the copper business.

Marshall Monteagle turns profitable despite lower revenue (JSE: MMP)

This small cap is not widely followed by the market

Marshall Monteagle is a collection of businesses that includes a mix of FMCG and property investments. This immediately makes it tricky for investors to understand, which is why many of them don’t bother. Liquidity is hard to come by for small caps on the JSE. It’s even trickier for companies that aren’t easy to unpack.

In the six months to September 2023, the company reported a drop in revenue from continuing operations of 19%. Operating profit before tax fell by 66%. Although cost-cutting initiatives in the FMCG business helped, the reality is that the South African retail landscape is anything but favourable right now.

Despite this, profit after tax from continuing operations swung from a loss of $2.7 million to profit of $674k. This all happened on the other expenses line, with a significant negative fair value move last year that didn’t repeat in this period.

Cash and cash equivalents are down by 3%, which isn’t much when you consider the drop in operating profit. The interim dividend is consistent at 1.9 US cents per share.

Lots of pretty writing at Trustco and a big drop in NAV (JSE: TTO)

Credit to whoever wrote this SENS announcement: it gets full marks for use of language

Trustco released a trading statement that would make a decent entry for an English writing competition. It talks about things like a “constellation of challenges” and the “burgeoning cost-of-living conundrum” – all very fancy stuff.

After a few flowery paragraphs, they get to the meat of the thing. In an environment of higher discount rates, the value of a portfolio of businesses comes under pressure because the future cash flows are discounted to today at a higher rate. On top of this, there were issues related to loan-to-value limitations placed on the Namibian property market by the Bank of Namibia, although Trustco seems to have successfully challenged those limitations in court. The challenge was only after year-end though, so the impact of a drop in property valuations is being felt in these numbers.

Long story short, the net asset value (NAV) per share for the year ended August 2023 is expected to be between 98 and 136 cents. It was 181 cents a year ago.

The market gave the share price a 45% smack in response, taking it down to 27 cents (still a heavy discount to NAV).

Little Bites:

  • Director dealings:
    • Value Capital Partners – which has director representation on the board of Tiger Brands (JSE: TBS) – has bought shares in that company worth around R95 million. This is an institutional investor so the quantum isn’t a fair comparison to other director dealings, but the direction of travel matters.
    • The chairman of FirstRand (JSE: FSR) exercised a put option and sold shares worth R59 million. The strike price on the option was similar to the current spot price, which is interesting. It was part of a collar hedge transaction related to a loan.
    • An executive director of Santam (JSE: SNT) has bought shares worth R610k.
    • A director of OUTsurance Group (JSE: OGL) has bought shares worth R103k.
    • Protea Asset Management (an associate of Sean Riskowitz) bought shares in Finbond (JSE: FGL) worth R27k.
  • In case you find sustainability-linked financing interesting, Barloworld (JSE: BAW) managed to shave 3 basis points off two of its loans thanks to meeting targets. Simply, these loans get cheaper if borrowers meet agreed conditions.
  • After 12 years at Shaftesbury Capital (JSE: SHC), Chris Ward is stepping down from his current role as COO. He formerly served as CFO of the group. It sounds like they are splitting on very good terms and his role won’t be replaced on the board.
  • The drama at Tongaat Hulett (JSE: TON) continues. One of the potential rescuers, RGS Group Holdings, has made an application to court regarding certain procedural elements of the planned meetings and other applications currently in court. I’m certainly no lawyer, but it looks like RGS is basically demanding that its deal should be voted on before the other one. The business rescue practitioners are opposing this application.
  • Labat Africa (JSE: LAB) is still busy with the audit for the year ended May 2023. This result is obviously very late now and the annual report can’t be released until the audit is complete. No timeline has been given by the company for completion.
  • The court battles around PSV Holdings (JSE: PSV) continue, with DNG Energy promising that it has the funds and that a formal offer for the business is coming.

Snapshot: photography and the art of disruption

Dominique Olivier
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Snapshot: photography and the art of disruption

Before the 1840s, visual artists had a complete monopoly on the business of making pictures. Then the camera was invented, and the world as we knew it was turned on its head. Back then, it was called the death of art. Today, we know it was really a rebirth.

Have you ever gone on a Tinder date with someone who looked nothing like the pictures on their profile? If so, you might have a bit of sympathy for Henry VIII, who is reported to have grumbled “She is nothing so fair as she hath been reported” when he met his fourth wife, Anne of Cleves, for the first time in 1539. 

You see, poor Henry had been led astray by an over-diligent artist’s hand when he became engaged to Anne. Having never met her in person (he was in England at the time and she was in Germany), the only way to know what she looked like was to study a portrait of her that had been painted by Hans Holbein the Younger. The calm, pale visage depicted in the portrait was apparently a far cry from the face that Henry saw for the first time when Anne arrived in England. Legend has it that he was so incensed by the artist’s deception that he tried to stop the marriage, but political ties with Germany took precedence. The wedding took place, but the marriage was annulled just six months later – unconsummated. 

As citizens of the modern age (who carry powerful cameras around in our smartphones as standard), it seems ludicrous to imagine a time in the world where the only way to know what someone looked like was to rely on an artist’s depiction. To this day, we don’t know what it was about Anne’s looks that upset Henry so much. All we have of her are portraits and Henry’s scornful comments. 

The day the art world stood still

In 1839, Louis Daguerre created the first successful photographic process, called the daguerreotype, which allowed him to use light to capture an image on silver-coated copper plates. Just three years later, the first professional photography studios started to appear in Europe, using technology that condensed Daguerre’s thirty-minute-long photographic process into twenty seconds. 

In 1884, George Eastman developed photosensitive film, eliminating the need for photographers to carry around plates and toxic chemicals. Four years later, Eastman’s Kodak camera went on the market, taking photography out of the hands of professionals and making it accessible to the man on the street. By 1901, every person who could afford a Kodak Brownie camera could photograph whatever they wanted. 

Business owners will no doubt read this little summary of the history of photography and shake their heads in sympathy. Regardless of your industry, disruption comes at you fast. In the span of just one lifetime, photography evolved from scene fiction to everyday fact. 

Rage against the machine

As you can rightly imagine, no-one was more upset by the invention of photography than the great painters of the 19th century. 

From the earliest cave drawings to the most magnificent masterpieces of the Renaissance, art had always been used as a tool to copy what the human eye could see. The job of the artist was to create a believable replica of an object, landscape or person, and the more accurate the depiction, the better (just ask Henry VIII). Artists spent centuries developing techniques, materials and colours that would allow them to capture life by the work of their own hands. The most successful artists of each era had throngs of adoring patrons who considered their talents practically godlike and were willing to pay exorbitant prices for their works. 

And then along comes Louis Daguerre with a mechanism that can capture an exact copy of anything in the world in a fraction of the time or effort that it took to create a painting. Democracy was coming to overthrow the monarchy of the art world, and the royals in charge were not impressed. 

Disruption invites invention

When Daguerre demonstrated his new process for the French Academy in August 1840, Paul Delaroche, the celebrated history painter, proclaimed: “From today, painting is dead!”

In some ways, he was right. Art’s function as a way of illustrating the world around us was rendered moot from the moment that the first photograph was taken. But did that mean that it had no functions left at all?

While there was initial hostility and derision from artists, once emotions cooled down, many viewed photography as a tool that could be used to enhance and elevate their art. Of course there were those hardheaded individuals who derided the invention of the camera and stuck to their painterly guns in the vague hope that photography was a fad and that their patrons would return to them eventually. For the most part, they have been written out of history, left behind when the curve of invention rolled past them. 

More flexible artists saw the photograph as a way to expand upon the shadow boxes that they had been using for hundreds of years prior. Since one of the greatest challenges of painting from life is translating a three-dimensional object onto a two-dimensional surface, the work of the camera in creating a two-dimensional reference image that an artist could work from allowed them to render scenes and figures with a greater degree of accuracy than ever before.

Others questioned why accuracy in painting was needed at all. If the work of the camera was satisfying the need for images that looked exactly like what they depicted, then what else was left for an image to do? An artistic movement called Impressionism answered this question by shifting focus from everything that a camera could capture to everything that it couldn’t. Fleeting moments of light and shadow, movement and emotion became their subject matter. 

One indelible impression 

Impressionist painters such as Claude Monet, Pierre-Auguste Renoir and Edgar Degas moved away from detailed, realistic depictions and instead embraced a more subjective and interpretative approach. Their works often featured loose brushstrokes, vibrant colors, and a focus on the atmosphere and mood rather than precise representation. By deliberately blurring the lines and creating a sense of ambiguity, they aimed to convey the immediacy and evanescence of the scenes they painted.

Impressionism challenged the traditional purpose of art by suggesting that an image’s value lay not in its faithfulness to reality but in its ability to evoke emotion, capture the essence of a moment, and provide a unique perspective that transcended mere replication. 

The movement marked a significant shift in artistic philosophy, encouraging artists to explore the boundaries of perception and redefine the purpose of visual representation. In the wake of Impressionism, less figurative forms of art followed and flourished: Abstraction illustrated how much we could interpret from colour and shape alone, while Surrealism illustrated our wildest and most incoherent dreams. 

If the Impressionists hadn’t led the charge and innovated their way out of disruption, it’s very possible that Paul Delaroche’s exclamation about the death of art would ring true. Fortunately, all artists are essentially self-employed entrepreneurs, which means that they have always had the tools to problem-solve their way out of a tough spot. So instead of the death of art, the camera brought about a stunning rebirth that freed artists from the shackles of representation and allowed them to peer beneath the surface, looking deeper into the things that make us human than ever before. 

How is a business like a work of art?

There are two important lessons for businesses to take out of the history of the photograph. 

Firstly, disruption is inevitable. Regardless of your industry, it will find you and it will try to end you. If you deny the disruption and wait for it to blow over, you run the risk of becoming like those artists who couldn’t adapt to the use of the camera – left behind in the previous century. Expect disruption – in fact, welcome it with open arms when it comes, because disruption is the fertile soil in which innovation takes the strongest root. 

Secondly, never stop adapting. Here I need to mention the original disruptor in this story, Kodak, which found itself at the crest of the wave of innovation in the early 1900s. It’s all well and good to be innovative, but you can’t be innovative once and then call it a day. The wave keeps moving forward, and if you don’t stay at that forefront, there’s a very real chance that it will roll over you. Kodak was too slow to adapt to the disruption caused by digital cameras (ironically their own invention, which they backburnered in favour of film) in the late 1990s, and as a result, they have become almost as irrelevant as the film cameras that they sell. 

As AI-generated art moves from experimental joke to serious contender in the art world, I for one can’t wait to see how this generation’s artists will reshape what art is amid the disruption.

About the author:

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

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

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

Ghost Bites (African Rainbow Capital | Eastern Platinum | Grindrod Shipping | Harmony | Italtile | MAS | RMB Holdings)

The Finance Ghost
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Ghost Bites (African Rainbow Capital | Eastern Platinum | Grindrod Shipping | Harmony | Italtile | MAS | RMB Holdings)

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

ARC completes its rights offer (JSE: AIL)

The underwriter got a big chunk of shares, which isn’t a shock

I’ve written extensively about this rights offer and some of the mechanics that I felt made it painful for minority shareholders. I won’t delve into that again here.

The latest news is that the rights offer by African Rainbow Capital has been completed and holders of roughly 65% of shares in issue followed their rights. This means that the underwriter got around 35% of the shares being issued in this capital raise.

For those who didn’t follow their rights and ended up with those shares going to the underwriter, this was a significant loss of value because of the pricing of the rights issue.

Eastern Platinum announces the whistleblower findings (JSE: EPS)

The good news is that they were unsubstantiated

The special committee of independent directors has worked through the investigation of the whistleblower allegations at Eastern Platinum. The allegations related to undisclosed related party transactions for the sale of chrome concentrate at discounted prices.

The good news is that the committee has found that the allegations are unsubstantiated, so this can be put to bed now.

Shipping rates look flat at Grindrod Shipping (JSE: GSH)

Grindrod Shipping’s holding company has given updated disclosure on shipping rates

You have to be careful in taking the disclosure by Taylor Maritime Investments and applying it directly to Grindrod Shipping. Taylor discloses the shipping rates for the combined fleets, so it gives insight into the direction of shipping rates but isn’t a perfect indication of quantum at Grindrod Shipping.

For the six months to September 2023, the time charter equivalent (TCE) was $11,550 per day. Looking ahead to the period ending 31 March 2024, the booked rate is an average of $11,634 per day. We aren’t seeing much of an uptick in shipping rates at the moment, but they aren’t dropping either.

Harmony looks to up its B-BBEE ownership (JSE: HAR)

The company envisages the issuance of convertible preference shares to two holders

Harmony Gold wants to top up its B-BBEE ownership through the issuance of convertible preference shares to the Harmony Gold Community Trust and the Harmony ESOP Trust.

Upon conversion, the shares would represent 0.4% and 2.0% of issued ordinary shares respectively.

The pro-forma effect of these transactions is a 5% decrease in HEPS.

Italtile’s sales are going backwards (JSE: ITE)

Consumer discretionary spending remains very tight

Italtile released a sales update for the five months to November. As you might expect, it notes all the different sources of consumer pressure and the problem of overstocked retailers. On top of this, competition is strong in the sector and margins are under pressure to try respond to the poor demand.

System-wide retail turnover fell by 2.9% in this period and the integrated import supply chain business was also negatively impacted by weaker retail sales. Group manufacturing sales to both group and third-party customers fell 5.9%.

Manufacturing businesses really struggle when sales go backwards, the operating leverage starts to work against you rather than with you. The company has warned that profitability will be negatively affected, but further details aren’t given.

MAS still might not pay dividends until 2026 (JSE: MSP)

This is an ultra-cautious approach to the balance sheet

MAS has released a pre-close update for the six months ending December 2023. Operationally, things sound good. For the four months to October, like-for-like footfall is up 8% year-on-year and trading density increased 7%. Occupancy cost ratios are good and so are collections.

Why, then, is there still no sign of a dividend? MAS recently suspended its dividend because of an incredibly cautious approach to the balance sheet. The company doesn’t like what is going on in the bond market, so they are working towards reducing bond refinancing risk in 2026. Now, looking that far ahead is admirable, but perhaps it really is too conservative here.

With the completion of a tender offer for those bonds, the exposure to the 2026 refinancing has been reduced. The group has repurchased €80.7million of notes at a 9.3% discount to par.

The best forecast is that €76million in debt will need to be raised by May 2026 to achieve the balance sheet objectives. Although the group is well placed for this, they believe that dividend payments cannot be resumed before June 2026 if existing bond conditions persist.

RMB Holdings gives an update on NAV per share (JSE: RMH)

Comparability is limited here due to a change in year end and a special dividend

If it wasn’t for the change in financial reporting period and the special dividend, RMB Holdings wouldn’t have needed to release a trading statement as earnings would’ve differed by less than 20%. This is why the percentage change is misleading.

Instead, the important update is that the net asset value range is between 95 cents and 115 cents. The share price is 57 cents.

Little Bites:

  • Director dealings:
    • Tjaart Kruger has bought another R1.2 million worth of shares in Tiger Brands (JSE: TBS).
    • A director of a major subsidiary of Netcare (JSE: NTC) has sold shares worth nearly R1.7 million and a different director sold shares worth R1.2 million.
    • The chairman of Sibanye-Stillwater (JSE: SSW) has bought shares worth R426k. An independent non-executive director also bought shares worth R109k.
    • Although I’m sure that more announcements of this nature will come through, two directors of African Rainbow Capital (JSE: AIL) have subscribed for shares worth just over R200k in the rights issue.
    • An executive director of Libstar (JSE: LBR) has bought shares worth R101k.
  • There’s some good news at Wesizwe Platinum (JSE: WEZ), with the employees who were staging a “sit-in” protest having returned to the surface at the Bakubung Platinum Mine.
  • Sebata Holdings (JSE: SEB) released a trading statement for the six months ended September 2023. The headline loss per share has deteriorated from -5.27 cents to a range of -9.39 cents and -10.44 cents.
  • African Equity Empowerment Investments (JSE: AEE) has classified its investment in AYO Technology as a discontinued operation. But even with that adjustment made, a trading statement for the year ended August 2023 reflects HEPS from continuing operations of between 0.50 and -0.08 cents, so this could be loss-making even with discontinued operations removed. HEPS from continuing operations was 2.93 cents in the comparable period.
  • Kibo Energy (JSE: KBO) is still trying desperately to get the joint venture for Mast Energy Developments (MED) across the line. After multiple delays, the joint venture partner (Proventure Holdings) has committed to pay the remaining amount between 15 and 20 December. An extension has been granted to allow for this. It really will be a disaster if the joint venture fails to go through after all this effort and so many extensions.
  • Spar (JSE: SPP) has announced the appointment of two non-executive directors. One has a lot of experience in FMCG and marketing and the other is a specialist in big data and artificial intelligence. Although it’s good to see a data push here, they definitely need to just get the basics right.
  • The acting CFO of Kore Potash (JSE: KP2) has resigned. Andrey Maruta has come back into the role, which he previously held between 2019 and 2021 before pursuing another opportunity.
  • Europa Metals (JSE: EUZ) has issued performance shares to directors that represent roughly 3.7% of shares in issue. It’s a pity that the website doesn’t seem to be working!

Simple, but Effective, Investing

The Finance Ghost
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Simple, but Effective, Investing

By Nico Katzke, Head of Portfolio Solutions at Satrix*

Diversification is an often-cited concept. The virtues of not tying one’s fortunes to a single event have been known for centuries – as Shakespeare eloquently states in the Merchant of Venice:

“My ventures are not in one bottom trusted, … therefore, my merchandise makes me not sad.”

But there is more to diversification than simply being an effective sleep aid. Below, we highlight five important features of diversification to keep in mind when investing.

1. Diversification is more than just shuffling eggs between baskets…

Most would answer that diversification simply means placing your eggs in different baskets. But if your eggs are in different baskets that are all on the same vehicle, and that vehicle overturns – all your eggs might be broken. This means, the key to diversification is not simply holding many assets, but rather holding different types of assets. An index that holds 1,000 equities might not be diversified at all if equity markets experience a coordinated downturn (as seen in 2008 and 2022). This makes carefully considered portfolio construction a key step in building long-term wealth. It is wise to keep in mind that N-diversification (holding many assets) is not the same as risk-diversification.

2. Investing is not just about holding the best assets

This might seem like a very strange statement, but similar to picking the best players for their positions in sport (and not just the 15 quickest or largest players) – building a well-diversified portfolio may mean holding seemingly inferior assets too. These assets can offer important hedging features to your portfolio, shielding against large periodic losses. Although equities offer significantly more upside over the long term than fixed income instruments, holding alternative assets with lower correlations ensures a smoother long-term investment journey. This feeds into the next point:

3. Avoiding downside is (far) more important than capturing upside.

A smoother return profile through diversification has both health and wealth benefits – specifically by helping to better manage downside risk. The impact of losses is far more severe than similar gains. The graph below shows initial price moves on the X-axis, and the subsequent required moves to get back to parity. Notice how steep the required gains are following losses (left) compared to required losses following gains (right).

Asymmetric return illustration graph

This means that losing 60% requires a gain of 150% to get back to parity, while a gain of 60% is fully offset by a mere loss of 37.5%. The cumulative impact of large losses is therefore felt for long periods – something investors may not fully appreciate. This feeds into the next point:

4. Entry and exit points matter.

Timing entry and exit points can be a precarious exercise. To show this, we plot the peak-to-trough variation for listed local stocks (split between large-, mid- and small caps) per year. The coloured box shows the 20th and 80th percentiles, with the horizontal line in the middle being the average. From this we see that individual share prices on the FTSE/JSE All Share Index commonly deviate between 30% – 40% per year. This means that even if you take a correct long-term view on a company, the timing of entry and exit points matter greatly. This makes the act of stock picking, by both individuals and even professional fund managers, a high-risk strategy. Contrast this to investing in a simple vanilla index, such as the FTSE/JSE Capped SWIX Index, which is made up of a diversified combination of listed stocks. The index typically deviates between 10% – 15% (the orange bar), meaning the timing of entry and exit points matter far less than when trading individual stocks. And as stressed above, the importance of avoiding large swings is very important for long-term wealth creation.

Peak to Trough Dispersion" FTSE/JSE all-Share Equity Constituents

5. Diversification is thankless.

As the benefits of diversification are not directly observed, its value in your wealth creation journey is often underappreciated. This means we have to consciously accept the virtues of a diversified approach to building wealth. But this is easier said than done.

We are often confronted by stories of great investment decisions, such as that one friend at a braai reminding you about her recommendation to buy that stock at the beginning of the year that is now 90% up; or the uncle who told you to buy Sasol at R25 per share; or the relative that suggested buying bitcoin when it dipped. We then instinctively do mental accounting and get frustrated at missing out on said opportunities – painfully aware of the comparatively pedestrian returns that our long-term diversified strategies delivered over that period. Unfortunately, the desire to share poor investment decisions as cautionary tales is not as strong, so we receive a misrepresentation of the reality of taking concentrated bets.

But hindsight is a fiendish mistress – and it is tempting to grow impatient and act in order to chase the next big payoff opportunity. In those times of great temptation, it may be wise to remind yourself of the short poem written by Ambrose Bierce called A Lacking Factor:

‘You acted unwisely,’ I cried, ‘as you can see by the outcome!’
He calmly eyed me:
‘When choosing the course of my action… I had not the outcome to guide me.

The simple insight offered is to never judge decisions based on uncertain outcomes, as it may teach us bad lessons. We should instead focus on that which we can control: avoiding concentrated risks and the large swings (positive and negative) it entails. Fortunately, indexation vehicles can be easily accessed through, e.g., ETF, or exchanged-traded fund, vehicles where diversification is a built-in feature. It should also be sought through holding diverse asset classes and seeking intermediated help in building a portfolio that can withstand periods of instability. Thereafter, it becomes a psychological game of fighting the urge to change course and chase the high returns that look so easy after the fact.

After all, a diversified approach can be thankless and not very exciting, with few highlights. But it sure has gold at the end of the road.

*Satrix, a division of Sanlam Investment Management

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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.

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Ghost Wrap #57 (British American Tobacco | Absa + Nedbank | Transaction Capital | Spur | Murray & Roberts)

The Finance Ghost
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Ghost Wrap #57 (British American Tobacco | Absa + Nedbank | Transaction Capital | Spur | Murray & Roberts)

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

In this episode of Ghost Wrap, I recapped five important stories on the local market:

  • British American Tobacco is seen as a defensive stock, but I have a different view on it.
  • Absa and Nedbank released updates this week and although Absa’s return on equity is likely still ahead of Nedbank, the share price performance this year shows what happens when expectations aren’t met.
  • Transaction Capital is now behaving more like an investment holding company than the integrated, one-team-one-dream business of a few years ago.
  • Spur is ready to go Italian, with the acquisition of 60% of Doppio Zero having closed and some interesting prospects already on the table.
  • Murray & Roberts has made great strides in repairing the balance sheet, with an encouraging update that takes a rights issue off the table (for now at least).

Ghost Bites (Absa | Anglo American | Anglo American Platinum | Kumba Iron Ore | Murray & Roberts)

The Finance Ghost
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Ghost Bites (Absa | Anglo American | Anglo American Platinum | Kumba Iron Ore | Murray & Roberts)

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

Absa’s share price is as red as its branding (JSE: ABG)

A voluntary trading update resulted in a 6% drop in the share price

The market really didn’t like this one. When a company updates its guidance to reflect return on equity “somewhat lower” than last year, that’s not great.

Starting at the top, revenue growth in 2023 at Absa is expected to be high single digits, driven by net interest income as we’ve seen at the other banks as well. The second half of the year has been slower due to base effects, which is also in line with what we’ve seen elsewhere.

The credit loss ratio is expected to exceed the through-the-cycle target range of 75 to 100 basis points. It’s better in the second half of the year, but is still above target.

Operating expenses are up by high single digits, which means the cost-to-income ratio has deteriorated from 51.2% last year. This is negative jaws, which isn’t what we’ve seen at the other banks where margin is improving. I’m sure this is one of the major reasons for the drop in the share price.

Pre-provision profit will only increase by mid-single digits.

The group’s B-BBEE deal became effective on 1 September and will reduce 2023 earnings by 1%.

When all of this is combined, return on equity (the key metric for banks) is lower than 16.4% last year but above the cost of equity of 14.5%. As mentioned earlier, the wording “somewhat lower” suggests that it has moved quite a bit towards the cost of equity, which isn’t great.

The overall flavour here is that South African earnings have decreased and the African earnings have increased, despite the tough situation in Ghana. This is why a bank like Standard Bank is doing so well, as it earns nearly half of its earnings in Africa.

Absa expects to maintain a full year dividend payout ratio of at least 52%.

Anglo American’s SENS announcement talks about unlocking value (JSE: AGL)

The market had a different idea, slashing the share price by over 13%

When a company tries to drive the narrative in the heading of a SENS announcement, you know they are expecting a tough response. This isn’t just an “operational update” from Anglo American. No, this is “Anglo American unlocks value through operational, cost and capital discipline” – except the market is smarter than that, even if many media houses are too lazy to read past the headline.

The CEO of Anglo American kicks off the announcement by claiming that the prospects for mined products have rarely looked better. That’s a rather interesting introduction to a story that features cyclical weakness in PGMs and diamonds, forcing Anglo American to cut its business support costs.

The group gives high-level guidance all the way out to 2026, expecting production to fall in 2024 and 2025 before picking up again in 2026. The guidance for capex is also lower than before, which doesn’t exactly tie in with the prospects looking so great.

It’s sad to see them talking about “aligning to logistics” at Kumba. That simply means that they are having to adjust production based on how utterly useless Transnet is. Refer to the specific update on Kumba in Ghost Bites for more details.

They do make the point that PGM prices reflect an “aggressive consensus” on the pace of decline in internal combustion engines. Although not referenced in this report, I know that Ford is slowing down its global investment in EVs based on worries about demand. Comments like that from the automotive manufacturers don’t seem to be reflected in PGM prices, which suggests some upside for the local mining houses.

At De Beers, they are scrambling to reposition mined diamond to fight the onslaught of lab-grown diamonds. I’ve written extensively on this topic and I quite liked these adverts from the Anglo presentation (which you’ll find at this link).

Much of the good news at Anglo American lies in the copper business and crop nutrients, believe it or not. These are both focus areas going forward.

Anglo American Platinum reduces its production and capex outlook (JSE: AMS)

This is how mining cycles work

When commodity prices drop, the producers of those commodities must respond to the drop by pulling back on production. Over time, the lower supply should lead to higher prices, which in turn drives a period of investment to meet demand at better prices. This is why mines are always referred to as being cyclical businesses and why you have to time your entry very carefully to avoid buying at the top of the cycle when it’s all sunshine, rainbows and dividends.

We definitely aren’t in sunshine and rainbow territory in PGMs at the moment. Prices are depressed and so are shareholders. In response to the price pressures, Anglo American Platinum has announced that production over the next few years will be lower than previously guided. Capital expenditure will also be lower, accompanied by a plan to reduce costs. It should be noted that part of the reduction in refined PGM production is because some relationships will transition to toll arrangements.

Refined production in 2024 was previously guided to be 3.6 to 4.0 million ounces. It’s now between 3.3 and 3.7 million ounces. In 2025, guidance has dropped from 3.3 – 3.7 million ounces to between 3.0 and 3.4 million ounces. Production is 2026 is expected to remain flat vs. 2025.

As noted, capex guidance has dipped by roughly R3.5 billion in 2024, but actually moves higher than guidance in 2025.

The cash operating unit cost per PGM ounce is expected to be R17,800 in 2023 and is anticipated to drop to between R16,500 and R17,500 in 2024.

Kumba continues to be hurt by Transnet (JSE: KIO)

It’s all going wrong “beyond the mine gate”

In case you’ve been living under a rock for goodness knows how long now, infrastructure in South Africa is crumbling all around us. Our economy is heavily influenced by commodity exports, so this is a disaster. Most worryingly, it’s a disaster that just doesn’t seem to be going away.

In Kumba Iron Ore’s update, the company talks about stock levels at the mines increasing to unsustainable levels because the transport infrastructure just doesn’t allow for it to be taken away quickly enough. The only possible outcome is a drop in production, with 2023 production down by roughly 1 million tonnes vs. previous guidance. That might only be around a 3.8% decrease at Sishen, but it has a substantial impact on unit costs per tonne at that mine (up from between R540 – R570 per tonne to R570 – R590 per tonne). As a mitigating factor, unit costs at Kolomela have improved from guidance of R510 – R540 per tonne to R480 – R500 per tonne because of improved production metrics and because production guidance at that mine is unchanged.

The bigger problem for South Africa is lower production in years to come. The production outlook is dropping from 37 – 39 million tonnes in 2024 to between 35 and 37 million tonnes. In 2025, they hoped to increase to 39 to 41 million tonnes, but now the plan is to keep production flat.

Thanks to cost reduction plans, the unit cost is forecast to improve over the next three years despite the flat production. If we actually had a working railway network, they might be talking about creating jobs rather than reducing costs. They also probably wouldn’t be talking about a reduction in capex spend, which certainly doesn’t help our GDP.

There has been a 15% decrease since 2019 in the amount of ore that is being railed. If Transnet doesn’t figure this out, then it’s hard not to have a bearish outlook on the South African economy.

Some good news from Murray & Roberts (JSE: MUR)

The board has given a strong update that a rights issue is not being considered at the moment

Murray & Roberts has been firmly in survival mode, with a broken balance sheet and all kinds of troubles. The market has been concerned that an equity raise might be needed to get it on a sustainable footing. In response to the news that “meaningful progress” has been made on the balance sheet, the share price closed 13.6% higher on Friday!

When something is priced for failure, any good news is cause for a share price celebration. Welcome to speculative investing. Or having a good ol’ punt, as I like to call it.

A big help was the sale of the 50% shareholding in the Bombela Concession Company, which halved South African debt to R1 billion. With the sale of a non-strategic investment in Aarden Solar and the agreement of new commercial terms on one of the group’s largest mining projects in South Africa, debt was further reduced to R770 million over the past three months.

Finally, Cementation Canada has renewed its banking facility with a Canadian bank and will thus pay a dividend of roughly R550 million (excluding withholding taxes) to Murray & Roberts over the next six months to June 2024. This is a classic case of shifting debt from the holding company into a subsidiary. This will take the South African debt down to R350 million.

Based on this, the board does not believe that a rights issue is necessary. The intention is to refinance the remaining South African debt by June 2024. A further bit of good news is that operational costs and overheads have been significantly reduced.

Little Bites:

  • Director dealings:
    • The CEO of Datatec (JSE: DTC) loaded up on shares in a big way, buying a whopping R46 million in shares on the open market. This takes his total shareholding to 15.5% of the shares in the company.
    • The CEO of Invicta (JSE: IVT) and Dr Christo Wiese are still playing matchy-matchy, each buying shares to the value of R88k in the company. These are on-market trades, so I’m not sure what’s going on with these identical orders in the market from these two. Perhaps there’s a bet going on?
    • An associate of a director of Huge Group (JSE: HUG) has bought shares worth R36.5k.
  • The Tongaat Hulett (JSE: TON) soap opera continues, with three “affected persons” (including the Industrial Development Corporation) giving notice of their intention to oppose the urgent applications that were launched to try and stop the current business rescue plans.
  • Astoria Investments (JSE: ARA) has renewed the cautionary announcement related to a potential acquisition. The first cautionary announced was released back in July 2023.
  • The joy of being a successful listed company is that you can issue shares to pay for acquisitions. This is exactly what CA&S Holdings (JSE: CAA) has done to acquire a further 5% in Smithshine, one of the existing subsidiaries of the company. The seller is the minority shareholder in that company and that seller was happy to be paid in shares. The issuance is only for around 0.1% of existing shares in issue in CA&S.
  • Tiny listed group Nictus (JSE: NCS) released results for the six months ended September. They reflect a significant improvement in profits from a loss of R0.4 million to profit of R3.7 million. No dividend was declared for this period.
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