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Ghost Wrap #54 (NEPI Rockcastle | MultiChoice | Santam | Shoprite vs. Woolworths | Richemont)

The Finance Ghost
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Ghost Wrap #54 (NEPI Rockcastle | MultiChoice | Santam | Shoprite vs. Woolworths | Richemont)

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:

  • NEPI Rockcastle is seen as one of the better REITs on the local market and a recent update shows why.
  • MultiChoice is in for a long journey with Showmax, at a time when the rest of the business is facing substantial other challenges.
  • Santam is focused on repricing risk, which means upward pressure on short-term insurance premiums across the industry.
  • Shoprite is doing an exceptional job of growing volumes, with further market share gains that look especially impressive when compared to a competitor like Woolworths.
  • Richemont saw sales drop in the Americas region and margins are under pressure across the board, so is the online side of the business proving to be a distraction?

Global megatrends shaping the ETFs of the future

The Finance Ghost
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Global megatrends shaping the ETFs of the future

The first exchange-traded fund (ETF) was launched 30 years ago in the US, the beginning of an industry that has grown exponentially to now holding nearly US$10 billion in assets under management.

In honour of this milestone, Satrix’s Chief Investment Officer (CIO), Kingsley Williams has done some future-gazing to see what might be next for this innovation in investing that has fundamentally impacted the landscape.

By 2030, what will the ETF landscape look like?

BlackRock forecasts the global exchange-traded fund (ETF) industry will grow to $25 trillion by then. Kingsley Williams, CIO at Satrix*, says ETF’s growth potential in South Africa is immense. Currently, index funds and ETFs account for over 50% of equity assets under management (AUM) in the US, almost 25% of assets in Europe, and 15% within equity and listed property categories in South Africa. That leaves ample growth opportunity, as other regions around the world catch up to the US.

Williams added that ETFs are an efficient way to harness investment themes, which are being shaped by five megatrends that are dominating economies and financial markets globally. These trends will continue into 2030 and beyond, shaping the investment landscape and providing opportunities for investors to harness these structural shifts.

Five global megatrends shaping the investment world of tomorrow:

  • Shifting economic power:

The International Monetary Fund forecasts that China and India will generate about half of all global economic growth in 2023. Power is moving from West to East, and ETF products are evolving to offer exposure to the East, including the Satrix MSCI China ETF and Satrix MSCI India ETF. Further evidence of this economic shift is how the BRICS nations (Brazil, Russia, India, China and South Africa), which represent the largest developing economies, have surpassed the G7 as the largest industrialised nations (US, UK, Germany, France, Japan, Italy and Canada) in terms of share of global GDP based on Purchasing Power Parity.

  • Shifting demographics and ageing populations:

In 1963, the fertility rate was 5.3 births per woman. By 2050, the UN forecasts this will fall to 2.1. Conversely, the global life expectancy in 1950 was 46.5 years; by 2050, this should be 77.3. Increased longevity and declining birth rates mean many countries have ageing populations, prompting seismic shifts to cater to older individuals. As populations age and technology enables further medical advances, this creates a virtuous circle as increased spending goes towards healthcare. Satrix launched the Satrix Healthcare Innovation ETF as a thematic strategy to enable investors to gain exposure to this megatrend within their portfolios.

  • Technological innovation and breakthrough:

A 2021 McKinsey paper suggests there will be more tech innovation in this decade than there was in the previous 100 years. Tech underpins multiple megatrends, and the Satrix Nasdaq 100 ETF is a great expression of capturing blue-chip game-changing companies in this space.

  • Rapid urbanisation:

The UN is expecting Africa’s population to double by 2050. People will migrate en masse to urban areas, creating mega cities worldwide. Satrix has Smart City Infrastructure and Global Infrastructure ETFs to address the titanic task of creating these cities, sustainably.

  • Climate change and resource scarcity:

By 2030, humans will need to have halved our greenhouse gas emissions to stop the most devastating effects of global warming from transpiring. We are running out of time, according to the Intergovernmental Panel on Climate Change. To help tackle this longstanding megatrend, Satrix has two ETFs which focus on climate transition while maximising exposure to highly rated ESG companies across the globe.

Trends shaping the South African ETF landscape of 2030

PwC predicts global ETF AUM will experience a 17% compound annual growth rate across the next five years. It pins this on recent record inflows, and a plethora of innovative new players and products. Williams expects robust growth locally, prompted primarily by institutional adoption and offshore interest.

He adds, “ETFs have been accessed primarily by the direct market locally. Now, we’re seeing adoption in intermediated spaces. In 2030, this trend is likely to continue, alongside offshore growth. As ETFs are traded more via Linked Investment Service Providers (LISPs) and other intermediated platforms, we’ll see increased activity that will naturally deepen the capital market process, lowering spreads and creating an ecosystem that attracts even more institutional players.

“Over the next decade, we’ll continue to see consolidation, with more refinement. Relative to income earned it’s costly to set up a low-margin business, so ETFs are likely to stay limited to the big players.”

Here, Williams gives further predictions for the local ETF landscape in 2030:

  • Institutional adoption:

There’s an upsurge in other African countries of institutional investors using ETFs to gain exposure in their portfolios. We’ll see this continue in South Africa as well. Swift uptake of interest-bearing asset classes: There’s a rapid roll-out of new asset classes that historically haven’t been available in ETF form, such as bonds, commodities and even crypto. Now, globally, there’s a surge of flows going to interest-bearing asset classes. This means more market transparency when it comes to pricing, and further democratisation as these asset classes become increasingly accessible.

  • Active management:

Globally, in the fixed interest space, there’s a proliferation of actively managed ETFs. For several consecutive quarters now, we’ve seen funds flow into this space worldwide. South Africa traditionally lags a little, but as uptake snowballs globally, we’re likely to see local adoption of actively managed ETFs as well.

  • ESG:

ETFs allow people to express their investment views and choose what they want to be exposed to. This includes ESG and sustainability-focused funds, like the Satrix MSCI World ESG and Satrix MSCI Emerging Markets ESG ETFs. Going into 2030, sustainable investment will remain a focus worldwide.

Traditionally, ETFs were synonymous with indexing and equity. Now, they’re being seen as a tool that benefits all players, across the asset class spectrum. There’s an increasing array of assets and investment strategies wrapped into the ETF vehicle, which makes them building blocks that give investors an almost infinite array of choices. This – plus their flexibility, low fees and dependability – is catapulting them into a new chapter of hyper-growth that’s likely to continue for the next decade and beyond.

For more information, visit https://satrix.co.za/products

*Satrix is a division of Sanlam Investment Management, an authorised financial services provider.

Satrix Logo

CIS disclosure

Satrix Investments (Pty) Ltd is an approved financial service provider in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (“FAIS”). The information above does not constitute financial advice in terms of FAIS. Consult your financial adviser before making an investment decision. While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP, 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 disclaim 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.

Satrix Managers (RF) (Pty) Ltd (Satrix) is a registered and approved Manager in Collective Investment Schemes in Securities. Collective investment schemes are generally medium- to long-term investments. With Unit Trusts and ETFs the investor essentially owns a “proportionate share” (in proportion to the participatory interest held in the fund) of the underlying investments held by the fund. With Unit Trusts, the investor holds participatory units issued by the fund while in the case of an ETF, the participatory interest, while issued by the fund, comprises a listed security traded on the stock exchange. ETFs are index tracking funds, registered as a Collective Investment and can be traded by any stockbroker on the stock exchange or via Investment Plans and online trading platforms. ETFs may incur additional costs due to being listed on the JSE. Past performance is not necessarily a guide to future performance and the value of investments / units may go up or down. A schedule of fees and charges, and maximum commissions are available on the Minimum Disclosure Document or upon request from the Manager. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. Should the respective portfolio engage in scrip lending, the utility percentage and related counterparties can be viewed on the ETF Minimum Disclosure Document.

Ghost Bites (AH-Vest | Burstone | Emira | Investec | Life Healthcare | NEPI Rockcastle | Safari | Southern Sun | Trellidor)

The Finance Ghost
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Ghost Bites (AH-Vest | Burstone | Emira | Investec | Life Healthcare | NEPI Rockcastle | Safari | Southern Sun | Trellidor)

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

AH-Vest gets the squeeze (JSE: AHL)

It’s anything but All Joy at this small food manufacturer

With a market cap of just R16 million, it’s hard to imagine why AH-Vest is even listed. The best market bid is 1 cent a share, with the offer at 35 cents. It’s a total waste of time and is surely a take-out target for one of the major food groups, especially as All-Joy is a decent brand.

Load shedding really hurt the results for the year ended June 2023, with significant lost sales due to lost production volumes. Retailers don’t like it when suppliers can’t meet demand, so that might be a problem going forward as well. A further issue is increased input costs and supply chain pressures.

The combined impact is that HEPS is down by 33.2% from 2.02 cents per share to 1.35 cents per share.

Burstone releases its first set of results under that name (JSE: BTN)

The fund was previously called the Investec Property Fund

Burstone Group has released results for the six months to September 2023, with this year having been all about the internalisation of the management company and the rebranding of the group. Sadly, none of those things do anything about the cost of debt, with distributable income per share down by 5% as this REIT struggles along with most of the others in this environment.

The South African portfolio achieved 2.0% growth in like-for-like net property income. The European portfolio was good for 7.9% growth. The underlying portfolios are moving in the right direction, but the bankers are getting the incremental benefit.

For the full year, previous guidance has been maintained. This means distributable income per share growth of between 0% and 2%. That would be a strong second half that requires growth of 5% to 9%. This won’t be easy when the loan-to-value ratio is 43%.

It’s also worth noting that Sam Leon, the ex-CEO (back when it was called Investec Property Fund), has retired as a non-executive director of the company.

Emira’s results aren’t fully comparable year-on-year (JSE: EMI)

A change of year-end means there’s a seasonal skew in the numbers

In order to align with the year-end of its controlling shareholder Castleview Property Fund (JSE: CVW), Emira has changed its year-end from June to March. This means that the interim period to September 2023 has to be compared to the six months ended December 2022. In other words, the festive season is in the base period but not this one. Clearly, that limits comparability.

There are other elements that hurt comparability, like the substantial disposal of Enyuka.

I’ll therefore just focus on the latest numbers in isolation. The loan-to-value ratio is 41.2%, so that’s under control but definitely a happier place for bankers than shareholders. The net asset value is R17.03 and the current share price is R8.65, so that’s a bigger discount than you’ll usually see. The interim dividend is 61.74 cents, which is a yield of 7.1% just for the first six months!

For reference, that’s a pretty similar yield to what my residential landlord earns from me in 12 months. Again, if you really want to own property, there are “buy-to-let” opportunities right there on the JSE. They are called high yielding REITs.

Gold Fields gives an operational update (JSE: GFI)

Incoming CEO Mike Fraser will be in his comfortable chair on 1 January 2024

The quarter ended September has seen a 9% decrease in year-on-year group attributable gold-equivalent production at Gold Fields. That’s a mouthful. It’s also a mouthful that went the wrong way, particularly in Ghana.

With lower gold sales and inflationary increases in costs, group all-in cost increased by 27% year-on-year. All-in sustaining cost is 30% higher. It’s not hard to see why an increasing gold price is so important to these mines.

Net debt to EBITDA came in at 0.48x, a bit higher than 0.42x at the end of June.

The Salares Nortes project is 97% complete vs. 94% at the end of June. The group invested $111 million in this quarter alone. First gold is expected in December 2023, so that’s a nice Christmas present that sure beats coal under the tree!

In other corporate activity, the group is working with the government in Ghana to obtain approval for the proposed joint venture in that country with AngloGold Ashanti.

Investec looks back on a period filled with corporate activity (JSE: INP | JSE: INL)

Nobody can accuse the management team of sitting on their hands

Investec has released results for the six months to September and they reflect some major strategic actions.

The merger of Investec Wealth & Investment UK with the Rathbones Group is a smart transaction that delivers scale in that market, with that shareholding being equity accounted going forward. Investec sold its property management companies to Burstone Group for a rather eyewatering sum, so that was helpful to shareholders.

In the prior year (which is relevant for comparability), Investec distributed a 15% shareholding in Ninety One to shareholders and restructured The Bud Group to facilitate an orderly exit.

To help investors understand what the group now looks like, adjusted numbers have been presented that show what the six months would’ve looked like had the Rathbones and Burstone transactions taken place at the beginning of the period. On that basis, adjusted operating profit would be up 11.2% in GBP and HEPS would be up 15.3%.

Looking deeper, there was growth in both net interest income (up by double digits) and non-interest revenue. The cost to income ratio improved, as operating costs were up 12.3% in constant currency. The credit loss ratio of 32 basis points is well up on 16 basis points in the base period and towards the upper end of the through-the-cycle range of 25 to 35 basis points. The bank notes that rather than an overall deterioration in the credit book, there have been specific client stresses.

Return on equity improved from 12.9% to 14.6%. Please remember that this is as reported in GBP, so that’s a hard currency return.

The dividend is up 14.8% and around R6.8 billion has been invested in share repurchases since that programme was announced, so significant value is finding its way to shareholders. This is good stuff overall!

I don’t really see the appeal of investing in hospitals (JSE: LHC)

Life Healthcare isn’t the only reason why, but it’s one of them

It’s very easy to think about a hospital and go “yes, that place is frighteningly expensive and highly necessary and must be a great investment” – except, it isn’t. Over five years, Life Healthcare is down 30% and I would remind you that there was a pandemic in the middle of that period!

If you followed the hospital groups during the pandemic, you’ll know that COVID actually wasn’t helpful to them. The only cases running around were COVID, so the high margin voluntary stuff just wasn’t happening. Still, I can’t see the excitement even if we ignore the impact of the pandemic.

For the year ended September, Life grew revenue from continuing operations by 10.3% and normalised EBITDA by 4.4%. The dividend is 10% higher. At least things are moving in the right direction, but in a high interest rate environment I don’t see these as returns that warrant single stock exposure to the group. Remember, any company needs to look good relative to the broad market index, otherwise you should just diversify and own the index. It’s not just about whether they go up.

Normalised EBITDA margin fell from 17.4% to 16.9%, with the company attributing this to a variety of factors ranging from mix effect in revenue through to cost pressures. Margins are expected to remain flat in the 2024 financial year.

Group HEPS is down 16.9% because of the vast costs associated with the disposal of Alliance Medical Group. Adjusting for those in normalised EPS gives you growth of 11.4%. This means that dividend growth of 10% reflects a lower payout ratio.

The Alliance Medical Group transaction is expected to close in the second quarter of the 2024 financial year. The circular was recently released to shareholders, with the vote scheduled for 8 December. With all said and done, there should be £360 million on the table for a special distribution to shareholders.

Rocking out with proper growth at NEPI Rockcastle (JSE: NRP)

This is generally seen as one of the best REITs on the local market

NEPI Rockcastle has given an update for the nine months to September. At first blush, they show growth in net operating income of a very high 23%. There are three acquisitions skewing that higher though, with the like-for-like growth coming in at 14%. Of course, this is still really good!

It’s interesting to note that higher footfall (+6%) and a rise in average spend per visit (also +6%) were equal contributors to like-for-like growth in tenant sales. Against that backdrop, it’s not surprising that there is strong demand for space in these malls, with the vacancy rate down to 2.2%.

Importantly, there is absolute no debt maturing in 2023. The balance sheet was also boosted by a 74% take-up rate on the scrip dividend, bringing the loan-to-value ratio to 32.9%. That’s below the company’s strategic threshold of 35%.

Earnings guidance for the full year has been affirmed at 12% expected growth in distributable earnings per share.

Safari’s distributable earnings have dropped (JSE: SAR)

The main reason is a once-off insurance event in the comparable period

For the six months to September, Safari Investments (a REIT, in case you weren’t sure) reported growth in operating profit of 8.15%, helped by strong occupancy levels. Net asset value (NAV) per share increased by 6.42% to R9.45 per share, with the share price currently at R5.50 and reflecting a substantial discount to NAV.

Despite this, the distribution per share fell by 9.09% to 30 cents per share. This is because the base period included a substantial non-recurring insurance payout that was received by the company. It also doesn’t help that finance costs went up, as this reflects below operating profit.

The group maintains a 100% payout ratio, so the interim dividend is also 30 cents per share.

Southern Sun’s numbers need a careful read (JSE: SSU)

And the good news is that earnings guidance has been increased further

Southern Sun released a further trading statement for the six months to September, which means numbers previously provided to the market have been updated.

The base period included a large separation payment of R313 million post-tax. This number is included in HEPS, but excluded from adjusted HEPS as it is clearly once-off in nature. I would therefore focus on adjusted HEPS, otherwise it looks like the business is going backwards and that isn’t the case.

The base period still had a pretty serious COVID hangover in it, so the year-on-year growth rate looks ridiculous. I would simply focus on the earnings range for adjusted HEPS, which has moved higher. The original trading statement reflected expected adjusted HEPS of 14.5 to 17.4 cents. The updated range is 17.0 to 19.0 cents.

Trellidor: strong enough to keep even the bankers out (JSE: TRL)

For now, at least – but there is much to be done

Trellidor has had some really bad luck, with a labour ruling against the business that absolutely hammered it financially. When you combine this with the prevailing economic climate and all the supply chain issues during and after the pandemic, it’s a recipe for disaster.

When a company breaches lending covenants, it is now at the mercy of the bankers. The funny thing is that the bankers are somewhat at the mercy of management, as they lose their debt investments if the business goes under. In practice, a breach of covenants is basically an opportunity for the banks to fire a warning shot and put pressure on the company. They don’t just pull the rug at the first sign of a covenant breach.

This positive approach seems the be what has happened at Trellidor, with the banks having assessed the FY23 numbers and condoned the breaches, with no additional covenants or conditions imposed. This suggests that the banks are very comfortable with the turnaround plan.

One of the interesting points in the plan is that a significant contract related to roller shutters in the UK is being fulfilled, with an obvious benefit to revenue.

The group is actively looking at ways to improve the balance sheet. The dreaded words “rights offer” haven’t been used at this stage. Instead, the group is looking at a sale and leaseback transaction to free up some capital.

Based on this encouraging development, the debt will be reclassified back to non-current in nature, as it isn’t due within the next 12 months.

I must remind you that the banks are interested in protecting their debt investment and earning the yield. They might be happy, but that doesn’t mean that shareholders will have a good time.

Little Bites:

  • Director dealings:
    • The CEO of Shoprite (JSE: SHP) has sold shares as part of an “annual rebalancing of his investment portfolio” – and that rebalancing was a cool R30 million in value.
    • A director of a major subsidiary of Super Group (JSE: SPG) received a share award worth nearly R3 million and sold every one of those shares on the market.
    • The recently appointed CEO of AECI (JSE: AFE) has bought shares worth nearly R220k.
    • The CFO of Spear REIT (JSE: SEA) has bought shares worth R70.6k.
    • Hilariously, a director of Sable Exploration and Mining (JSE: SXM) bought 5 shares at 13 cents each. Yes, that really is a total trade of 65 cents. If you don’t laugh, you’ll cry.
  • Afine Investments (JSE: ANI) released a trading statement dealing with the six months ended August. Although HEPS will be within 20 of the prior period, earnings per share will be 24.55% down vs. the comparable period.
  • Quilter (JSE: QLT) has finalised the odd-lot offer, managing to repurchase nearly 15.8 million of its own shares in the process. That’s a meaty repurchase worth around R315 million. For reference, the market cap is nearly R29 billion. This is a big company.
  • If you are a shareholder in Premier Group (JSE: PMR), you may want to take a cursory look at the circular released by the company in relation to a new long-term incentive plan.
  • Globe Trade Centre (JSE: GTC) literally has no liquidity on the JSE whatsoever. In the very unlikely event that you are a shareholder, then you should know that the company is no longer pursuing the acquisition of Ultima Capital. I guess you should also know that the results for the nine months to September have been released, showing rentals up by 7% but a loss after tax of EUR 6 million.

South African M&A Analysis Q1-Q3 2023

Marylou Greig
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South African M&A Analysis Q1-Q3 2023

The recent World Cup win by the boys in green and gold brought much needed relief, albeit for a fraction of time, from the daily bombardment of negative news that has become a way of life for South Africans. But like all good things, this hype has faded, and our attention is once again focused on making the best of, let’s face it, a very difficult setting.

M&A activity is, by its very nature, resilient in tough times – rather, it is the type of deals completed that changes. Nevertheless, the industry has come under pressure. For the period from January to end-September 2023, deal activity declined 26% year-on-year, and almost 40% when compared with deal activity in 2021. Private Equity, an important driver in the dealmaking space, also declined – down 36% on the previous year.

Share issues and repurchases continue to characterise the general corporate finance activity in 2023, with R222 billion raised from the issue of shares and R260 billion the value of shares repurchased. The repurchase programmes of Prosus, Naspers and Glencore account for most of this value, while the aggregate value of Richemont’s issue of A shares (conversion of depositary receipts) reported in Q1 was R196,56 billion.

A worrying trend is the exit of companies from Africa’s largest stock exchange, the JSE. Over the past six years (excluding 2023), an average of 25 companies have delisted each year. For the year to end-September, 19 companies have delisted, with a further five set to do so within the coming months. New listings have all but dried up. Private equity has been identified as one reason for the loss of listings, providing financing in softly regulated private markets. In 2017, the JSE welcomed 21 new listings; in the year to September 2023, this figure had dropped to three. Secondary listings on A2X continue to increase, with 18 recorded for the period under review.

It is becoming increasingly clear that South Africa’s approach to foreign affairs will play an important role in determining investment and growth outcomes for the country. While investor interest is present, with a good supply of deals in the pipeline, the challenge is getting them across the line. Investor sentiment – weighted down by the macroeconomic environment, geo-political influences, and the impending local elections – is adopting a wait and see attitude.

DealMakers Q1-Q3 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).

DealMakers Q1-Q3 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).

The latest magazine can be accessed as a free-to-read publication at www.dealmakersdigital.co.za

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

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?

Exchange-Listed Companies

Having failed to persuade Teck Resources’ minority shareholders earlier this year, to merge the Teck operations with that of Glencore’s, Glencore has reached an agreement with Teck to acquire a 77% stake in its steelmaking coal business Elk Valley Resources (EVR) for US$5,93 billion in cash, on a cash free debt free basis. Nippon Steel Corporation will hold a 20% stake in EVR and POSCO the remaining 3% – both of whom have existing relationships with Glencore. The company remains committed to the demerge of the combined businesses, believing that a standalone company containing its combined coal and carbon steel materials business, including its stake in EVR, would attract strong investor demand given its yield potential.

Absa’s Mauritius subsidiary has reached an agreement to acquire the domestic Wealth and Personal and Business Banking business of The Hongkong and Shanghai Banking Corporation (HSBC) in Mauritius. Financial details were undisclosed.

Deneb Investments is to dispose of the property situated at 34 Kinghall Avenue, Epping in Cape Town to Gerber Advisory Specialists for R64,35 million. The property is not considered core to Deneb’s strategy.

Unlisted Companies

Pineapple, the local digital insurance provider, has announced the conclusion of a R400 million funding round. The round was led by new investors, Futuregrowth, Talent10 and Mineworkers Investment Company while the business received additional investment support from existing investors including Old Mutal ESD, Lireas Holdings, ASISA ESD Fund and E4E Africa. Pineapple’s technology allows it to service customers at 20% of the cost of traditional insurance providers.

Local proptech startup Neighbourgood has acquired Cape-based traveltech startup Local Knowledge in a move expected to transform the travel and hospitality experience. The deal will combine Neighbourgood’s 1000-plus living and working spaces with the Local Knowledge’s ability to provide the next-gen with unforgettable travel experiences via its technology.

Convergence Partners has increased its stake in African broadband infrastructure company CSquared through the acquisition of the stake held by Google. In addition, the pan-African impact investment management firm took part in CSquared’s US$25 million equity capital raise.

ASX-listed Vanadium Resources (VR8) has increased its interest in Steelpoortdrift by 4.59% to 86.49% through the completion of a transaction with Math-Pin, its BEE party. The acquisition is payable via a combination of R2,930 in cash and 8,092,810 share options to acquire VR8 shares, which will on exercise, represent 1.48% of the issued share capital of VR8.

Private Equity fund managers 1K Africa and Ascension Capital, have announced an investment in South Africa’s payment profile hosting credit bureau, Consumer Profile Bureau (CPB). The undisclosed investment will be used to help CPB scale its market position and services including its unique technology for tracing, credit verification and debtor profiling.

UK global sports media business LiveScore Group has increased its stake in Wonderlabz, a Cape-based software development and talent hub, from 25% to 100%.

UK headquartered online trading services provider ATFX, has acquired Khwezi Financial Services, a South Africa over-the-counter derivative provider. Financial details were undisclosed.

Liquid Intelligent Technology has received R900 million in funding from the IFC and Rand Merchant Bank to be used to scale affordable broadband access in the Eastern Cape Fibre Project.

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

This week was all about share repurchases and profit warnings.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 6 – 10 November 2023, a further 4,351,713 Prosus shares were repurchased for an aggregate €124,7 million and a further 326,470 Naspers shares for a total consideration of R1,04 billion.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of US$1,2 billion by February 2024. This week the company repurchased a further 10,010,000 shares for a total consideration of £43,88 million.

Super Group has concluded an intra-group repurchase of 5,309,812 shares at a price of R34.51 per Super Group share for an aggregate R183,24 million. The shares will be delisted.

Quilter plc has repurchased 15,798,423 shares in terms of its odd-lot offer. A total of 15,798,423 shares were acquired – 291,711 shares at 88.10 pence and 15,506,712 shares at R20,08 per share.

Five companies issued profit warnings this week: Quantum Foods, Dipula Income Fund, Trematon Capital Investments, Capital Appreciation, Afine Investments and AH-Vest.

Cognition was the only company this week to issue a cautionary notice. The company is in discussions with its holding company, Caxton and CTP Publishers and Printers which, it says may result in an offer by Caxton to acquire those shares in Cognition not already held. Will this be another delisting from the JSE?

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

Nigerian B2B marketplace for auto dealers, Shekel Mobility, has raised over US$7 million in a debt and equity seed round. Ventures Platform, MaC Venture Capital, Y Combinator, Rebel Fund, Unpopular Ventures, Maiora Capital, PageOne Lab, Phoenix Investment Club, Heirloom VC, Pioneer Ventures and other angel investors provided the US$3,2 million equity funding with the remaining US$4 million in debt financed by Zedvance, VFD Microfinance Bank, Zenith Bank, Fluna and others. This is the second time the mobility fintech has raised funds this year – in January the team announced a US$1,95 million oversubscribed pre-seed round led by Ventures Platform. Other investors included Y Combinator, Voltron Capital, Zedcrest and some angel investors.

RMB has provided N$500 million in new debt funding and has refinanced a N$100 million loan for Oryx Properties to help fund the acquisition of Dunes Mall in Walvis Bay, Namibia. The property fund announced the acquisition in May and undertook a ‘rights offer’ to part fund the N$620 million purchase price among other things. The rights offer was 82.4% taken-up, raising N$312,9 million.

The Namibia Infrastructure Development and Investment Fund (NIDIF), managed by Eos Capital, has acquired a minority stake in the Namibian business of Lightstruck, a fibre infrastructure company specialising in open access last-mile fibre networks. Financial details were undisclosed.

Lapaire, an African eyecare business headquartered in Abidjan, Côte d’Ivoire and operating 54 optical shops across seven African countries, has raised an undisclosed sum from Beyond Capital Ventures. The investment forms part of Lapaire’s Series B investment round. The Series B funding will aid the company’s plans to launch in five new markets including the DRC, Ghana, Guinea, Nigeria and Tanzania.

Pan-African tech company, CSquared Link Holdings (Mauritius), announced an equity capital raise from both new and existing investors. The US$25 million in funding came from Convergence Partners Digital Infrastructure Fund (CPDIF), the International Finance Corporation (IFC) and the International Development Association’s (IDA) Private Sector Window Blended Finance Facility. It was also announced that CPDIF had acquired Google LLC’s stake in CSquared.

PZ Cussons Nigeria has notified shareholders that the offer by majority shareholder PZ Cussons (Holdings) to acquire the remaining 26.73% held by minorities for ₦21 per share announced in September, has been increased to ₦23 per share.

Union Bank of Nigeria plc disclosed that the offer price to minorities had been increased from ₦7 per unit to ₦7.70 per unit. Titan Trust Bank acquired a majority stake in December 2021 and offered to buy out the remaining 6.59% stake from minorities through a mandatory offer in October 2022. The Bank is currently finalising the process of obtaining approval to delist from the NGX.

African Export and Import Bank (AFREXIM) has signed a debt funding package with Oando plc comprising a US$500 million senior secured reserved based lending facility and a US$300 million receivables backed term loan facility. The deal was signed at the Intra-Africa Trade Fair in Cairo, Egypt.

UAE-based Sky One has acquired a substantial stake in Libyan airliner Fly Oya. Financial terms were not disclosed.

ASX-listed 88 Energy has, through a newly formed subsidiary Eighty Eight Energy (Namibia), signed a three stage farm-in agreement with Monitor Oil and Gas Exploration (Namibia), a wholly-owned subsidiary of Monitor Exploration, to earn up to a 45% non-operated working interest in onshore Petroleum Exploration Licence 93 (PEL 93) located in Namibia’s Owambo Basin. The farm-in agreement schedule consists of three stages. Stage one: [20% working interest] the payment of US$3,7 million in consideration for past costs and the first US$3 million of the 2024 work programme. Stage two: [17.5% working interest] payment of US$7,5 million of the first well gross cost. Stage 3: [7.5% working interest] option to fund the first US$7,5million of the second well gross cost.

Holcim has announced the sale of its businesses in Uganda and Tanzania. In Uganda, Hima Cement has been sold to Sarrai Group for an enterprise value of US$120 million. In Tanzania, the 65% stake in Mbeya Cement Company has been sold to Amsons Group for an undisclosed sum.

Moroccan transport and logistics startup, CloudFret, has raised €2 million (US$2,1 million) from AfriMobility and Azur Innovation Fund. Operational in Morocco since 2021, the company expanded to Marseille and now looks to expand further with the introduction of an innovative solution geared towards optimising empty truck returns, with a focus on the intra-European market.

Akhdar has announced a six-figure investment from Value Maker Studios (VMS). The Egyptian edtech is an Arabic language platform that provides audiobook summaries. The funding will be used to expand its existing presence in Saudi Arabia.

SPE Capital and Proparco have sold Amanys Pharma to Laprophan for an undisclosed amount. The pair acquired the company in 2020 (known at the time as Saham Pharma) and this sale marks the second exit for SPE AIF.

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

South Africa: new JSE rules to encourage listings

Lydia Shadrach-Razzino, Tanya Seitz and Shamila Mpinga
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South Africa: new JSE rules to encourage listings

In Brief

The Johannesburg Stock Exchange (JSE) has seen listings halve in the past two decades, mostly because of reduced foreign investment and challenging macroeconomic conditions. However, the stock exchange’s onerous listing requirements have arguably led to increased compliance costs and an unprecedented number of delistings. In addition, issuers have been less optimistic about the prospects of raising capital on the JSE, with many trading at double-digit discounts. As a result, the JSE has announced numerous changes to its listing requirements to encourage new entrants and prevent delistings, including the most recent announcement to simplify the JSE Listings Requirements.

In Detail

The JSE has seen listings halve in the past two decades, from 616 in 2000 to just below 300 in 2023. This is likely as a result of reduced foreign investments into the country due to the unfavourable global macroeconomic climate. However, some analysts have noted that the JSE’s listing requirements are onerous and have arguably led to increased compliance costs and an unprecedented number of delistings in the past five years. While delistings are an ordinary part of capital markets, the scarcity of new listings is a cause for concern.

One of the primary reasons that companies list on the main board of the JSE is to raise capital. However, issuers have been less optimistic about the prospects of raising capital on the JSE in recent times, as many have been trading at double-digit discounts to their net asset values. This has significantly reduced the attractiveness of the JSE to private companies, hence its current efforts to encourage listings. The JSE has, therefore, announced numerous changes to its listing requirements to encourage new entrants and prevent delistings, with the most recent of these changes becoming effective as of 17 July 2023.

The changes to its listing requirements include (i) the introduction of dual-class share structures; (ii) the reduction of free float for new listings; (iii) changes to free float assessments for institutional investors; (iv) changes to the listing requirements for special purpose acquisition companies (SPACs); and (v) making financial reporting disclosures less onerous. Although the changes have been well received by market participants as a means to encourage new listings, they appear to be more geared towards attracting IPOs, rather than adding significant value for existing issuers.

Finally, in September 2023, the JSE announced its intention to completely overhaul the JSE Listings Requirements (Requirements) in an attempt to simplify the Requirements and cut red tape, which is welcomed.

Dual-class shares
In essence, dual-class share structures exist where a shareholder’s voting control over a company is dispro-portionate to their economic interest in that company. A dual-class share structure typically involves a company having two classes of shares that are identical in every respect but voting rights. One class of shares is a “low vote” share, carrying one vote per share (typically Class A shares), while the other class of shares is a “high vote” share, typically carrying 10 or 20 votes per share (typically Class B shares). Prior to the current amendments, the JSE did not allow companies with dual-class shares to list on the exchange. It also prohibited existing listed companies from issuing dual-class shares. An exemption applies to companies with dual-class shares that were listed before 1999. These exempted companies were allowed to issue additional shares of that class. The amendments relating to dual-class shares are forward-looking and apply to new listings. They do not affect companies that are already listed.

A major concern associated with dual-class share structures is the concen-tration of power in the hands of man-agement, with little to no shareholder oversight. This could lead to dubious corporate governance practices, which makes it important for shareholders to maintain a watchful eye over these companies.

The JSE’s introduction of dual-class shares as “weighted voting shares” has been widely accepted, subject to guardrails to mitigate the abovementioned risks. These include (i) requiring a maximum weighted ratio of 20:1; (ii) requiring that dual class shares be held only by directors of the company; and (iii) capping all shares to one vote regardless of the class for certain matters, such as changes to independent directors and auditors, variation of rights attaching to any class of shares, a reverse takeover, liquidation, or delisting. Dual-class share structures are commonplace on stock exchanges globally, as seen on the New York Stock Exchange, the Nasdaq, and the Toronto Stock Exchange. What remains to be seen is whether there is investment appetite for companies with dual-class share structures on the JSE.

Free float and new listings
Free float refers to a company’s issued share capital that is held by public investors. Prior to the amendment, the JSE required main board issuers to have a free float of 20%. To keep abreast of international developments in Europe, and to encourage new listings, the JSE has reduced the free float requirement to 10%. Making a large portion of the company’s shares freely tradeable can be unsettling, particularly for large companies where there are few shareholders willing to sell their shares. Therefore, this is great news for high-growth companies and those with private equity and venture capital investors, which consider free-float requirements a strong deterrent when considering where to list.

Reducing the free float requirement to 10% will allow new issuers flexibility to structure their IPOs, and open markets to issuers wishing to initially raise smaller amounts of equity. The requirement to float 10% is in line with other local exchanges, such as the Cape Town Stock Exchange, thereby making the JSE competitive in the local market. The fact that the free float requirement has been largely unchanged for over 20 years has been detrimental to Africa’s largest exchange, and has impacted the JSE’s competitiveness as a primary and secondary listing jurisdiction. For in-stance, it is strange that companies that were compliant on premier inter-national exchanges would fall short of qualifying for a secondary listing on the JSE for failing to float 20% of their shares. Therefore, this change is a move in the right direction, as it reduces the burden of shareholder dilution.

Institutional investors and free float assessment
There are limited security holdings that qualify as free float. One type of holding that previously did not qualify was a shareholding of 10% or more. This was not ideal, given that it is common for institutional investors, such as fund managers and portfolio managers, to hold more than 10% of an applicant issuer on listing. As an exception, the JSE allowed institutional investor holdings of more than 10% to qualify as free float. The exemption applied where the interest held was in more than one fund and each fund held less than 10% of the shares in the applicant issuer. This exemption was not the saving grace that it set out to be, as it was rather limited and complex to apply. Therefore, the JSE has resolved to change the rules to recognise institutional investors for free float purposes, provided that they have no relationship whatsoever with the directors and family of the applicant issuer.

The JSE has widened the scope for free-float assessments in two major ways. Firstly, the JSE has removed the 10% exclusion altogether, provided there is a minimum number of shareholders. Requiring a minimum number of shareholders will ensure that the floated shares are not held by only one shareholder and will encourage a competitive share price. The JSE’s second amendment is to exclude shareholders who exercise control (>35%) from the free float assessment. Given that 90% of monthly trades on the JSE are driven by institutional investors, they will benefit significantly from this amendment.

Additional Amendments: SPACs and Financial Reporting Disclosures
In its efforts to retain and attract listings, the JSE has amended its requirements relating to financial reporting disclosures and SPACs, respectively. The JSE introduced SPACs in 2013. This type of company is primarily incor-porated to raise capital to acquire viable assets, with the aim of listing on an exchange. Viable assets are those that qualify for a listing on an exchange. SPACs are a viable investment vehicle and become more attractive in a volatile economic environment when traditional listings become riskier. We witnessed a SPAC boom in 2020 and 2021, when the markets became volatile during the COVID-19 pandemic, but global interest in SPACs has since dwindled. Despite the reduced interest, the JSE has amended its requirements to make SPACs more attractive for listings, should the demand for them increase.

To retain listings, the JSE has reduced the compliance burden for issuers, who will no longer have to produce an abridged version of their financial results along with their audited annual financial statements. Furthermore, where the previous set of annual results had to be accompanied by a modified opinion, issuers’ interim results will no longer have to include an auditor’s opinion. The JSE has admitted that the previously mandated financial reporting disclosures added no regulatory value or benefit to investors. As such, these amendments have received overwhelming support.

Simplification Project
The JSE has announced its intention to simplify the Requirements. Essentially, the JSE plans to rewrite the Requirements using plain language for the benefit of all stakeholders. This process will include a substantial reduction in the volume of the Requirements, and cutting red tape to ensure that only rules that are fit for purpose survive the purge. The JSE has created a dedicated portal for this project, which will run in stages over 18 months, including public participation throughout the process. We look forward to reviewing the suggested amendments.

Final thoughts

The JSE certainly has its work cut out for it, particularly given the rise of other exchanges locally and the success of private equity and venture capital financing in South Africa. With less stringent compliance burdens, competitor exchanges and alternative forms of financing have become more attractive methods of raising capital, thus posing a challenge for the JSE.

In its efforts to encourage new listings and curb delistings, the JSE, through its initiatives to cut red tape, must find a balance between reducing compliance burdens and protecting investors. The previous listing requirements had been in place for over 20 years; therefore, the recent changes are testament to the JSE’s commitment to self-assessment and improvement to encourage capital market reform.

Coupled with the recent amendments to the Requirements, their complete overhaul presents an opportunity for the JSE to reform and regulate listings in a manner that accommodates potential issuers, listed companies, sponsors, shareholders and investors. Balancing these interests is no small feat, but by engaging market participants, the JSE can allay such challenges and pave a path for a renewed stock exchange that can withstand the cyclical nature of global economic conditions.

Lydia Shadrach-Razzino is a Partner and Co-Head, Tanya Seitz is a Director Designate, and Shamila Mpinga, a Candidate Attorney, Corporate/M&A Practice | 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

Unlocking private equity exits in the face of increasing SA uncertainty

Thabo Ndimande and Hauke Schotola | RMB
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Unlocking private equity exits in the face of increasing SA uncertainty

Despite the economic and political challenges in South Africa, multinational companies and investors with long-term capital continue to drive investments across various industries, particularly those with strong growth prospects, led by entrepreneurial management teams and attractive competitive positioning.

RMB is assisting a number of private equity clients to exit their investments in various sectors in South Africa, a trend expected to continue into 2024. For instance, in the last 18 months, private equity clients have been helped to achieve some of the largest PE exits in the SA market, with excellent outcomes for the sellers.

This includes the sale of EnviroServ Holdings to a consortium made up of French multinational SUEZ, Royal Bafokeng Holdings and African Infrastructure Investment Managers, and the sale of Amrod by Alterra Capital Partners to Oppenheimer Partners. The acquisition of EnviroServ will enable SUEZ to reinforce its positioning as an international leader in industrial and municipal waste treatment activities, and to strengthen its position on the African continent.

Multinational companies continue to evaluate investment opportunities in sub-Saharan Africa, but have become more selective in exploring acquisition opportunities in this region, especially when compared with targets in other emerging markets. Longer-term investment horizons and an entrepreneurial background are some of the key attractive characteristics that investors with access to capital are looking for. In addition, existing management teams (and founders) that are expected to remain invested (to some degree) and drive the future growth of these businesses are appealing. RMB continues to expect healthy transaction activity in the next twelve months as we head into the uncertainty of the outcome of the 2024 general election.

Another interesting development is the growing interest in industries which, on the surface, aren’t immediately attractive, but where one can find businesses that are thriving despite economic malaise. Resilient financial performance and strong opportunities for further growth make specific companies in these niche sectors attractive investments, which supports the case for more of a bottom-up vs top-down approach to investing.

Volatile market conditions make it particularly important to have the right tools and understanding of a business and its operating context to generate and sustain interest with potential buyers, thereby driving successful exits.

Clients on the sell side have to make critical judgement calls in selling businesses, and need experienced teams to help them navigate through cycles and a challenging market.

Thabo Ndimande and Hauke Schotola are Lead Transactors in Corporate Finance | RMB.

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

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

Ghost Bites (African Media Entertainment | Brait | Caxton | Dipula | Ethos | MultiChoice | Ninety One | Novus | Reinet | Telkom | Woolworths)

The Finance Ghost
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Ghost Bites (African Media Entertainment | Brait | Caxton | Dipula | Ethos | MultiChoice | Ninety One | Novus | Reinet | Telkom | Woolworths)

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

African Media Entertainment’s recovery continues (JSE: AME)

This isn’t a great environment for advertising, but at least events are back

It seems counterintuitive, considering we were all stuck at home over that period, but the worst of the pandemic was actually really tough for the radio industry. Live events are a big part of their revenue streams and obviously those didn’t happen during COVID. Although we are clearly in an environment where advertising budgets are stretched, outside broadcasts and events are possible once more and the benefit seems to be coming through in the numbers.

That’s my theory at least, as African Media Entertainment’s trading statement is very light on narrative. What we do know at this stage is that HEPS for the six months to September 2023 will be between 30.8% and 44.2% higher, coming in at between 195 cents and 215 cents.

There is very little liquidity in the stock, with a current bid-offer spread of R30.11 to R37.99!

Brait’s NAV per share drops further (JSE: BAT)

And Virgin Active is still carried at a very ambitious valuation within that NAV

In Brait’s earnings announcement for the six months to September 2023, we find that net asset value (NAV) per share has dropped from 840 cents at the end of September 2022 to 706 cents at March 2023 and then 684 cents at September 2023. Those aren’t the gains that the personal trainers at Virgin Active are pushing for.

Speaking of Virgin Active, that business is 65% of Brait’s assets. Membership sales generally seem to be good, except for in South Africa where affordability issues are impacting growth. I still find it absolutely ridiculous that Brait values Virgin Active on a two-year forward EBITDA multiple of 9x. The peer group is valued at 8.4x and even that seems insane to me. The Brait share price of just R2.28 (a huge discount to NAV) suggests that I’m not the only one who feels this way.

Premier is 24% of Brait’s assets and is separately listed now. That business has performed very well in difficult conditions.

New Look is 7% of Brait’s assets and the troubles in this UK fashion retail business seem to be back. Revenue fell 11.3% and EBITDA tanked by 28.4%.

Of the R3.6 billion in proceeds from the Premier listing, R2.1 billion was used to settle debt and R756 million was invested into Virgin Active as Brait followed its rights to fund growth initiatives.

Caxton is lining up a take-private of Cognition (JSE: CGN | JSE: CAT)

2024 might be the end of Cognition’s JSE listing

Cognition has “commenced formal discussions” with holding company Caxton and CTP Publishers and Printers regarding a take-private of the company. It makes sense, as there’s really no benefit to the ongoing separate listing of Cognition.

The last price that Caxton paid for Cognition shares was 99 cents, so an offer wouldn’t be below this level. As Caxton is really the only buyer in town for Cognition, I also wouldn’t bank on a huge premium to that price.

Cognition has also made it clear that an offer is unlikely to be received before interim results are released in February 2024.

The current share price is R1.05.

At Dipula, don’t look at the per-share numbers this period (JSE: DIB)

The significant change to the share structure has skewed the results

Right at the end of the 2022 financial year, Dipula implemented the scheme of arrangement that saw B shares issued in exchange for A shares. This means that there are now far more B shares in issue than before, so the earnings and dividend per share have fallen sharply as a result.

This can’t be blamed entirely on having more shares in issue, as the underlying business is under pressure. Revenue only increased by 3% and distributable earnings fell by 6.9%. It didn’t help matters that the average interest rate moved from 8.4% to 9.2%.

The group net asset value increased by 2.1%, so this definitely didn’t work well as an inflation hedge in this period. Having 17% of the portfolio in office properties doesn’t do anyone any favours at the moment.

Ethos gives more details on the drop in NAV (JSE: EPE)

The listed portfolio had a tough time this quarter

Ethos Capital Partners experienced a decrease of 4.3% in net asset value (NAV) per share in the quarter ended September. The unlisted portfolio returned 1.5% in that period, so the pressure was in the listed portfolio (Brait and MTN Zakhele Futhi).

As announced a few days ago, the fund is not making any new investments and is now focused on managing the existing portfolio.

MultiChoice would love load shedding to go away (JSE: MCG)

It’s hard to justify a subscription when the TV doesn’t work

In the six months to September, MultiChoice experienced a 2% decrease in the 90-day active subscriber base. Load shedding was a huge problem here, as Rest of Africa actually achieved 1% subscriber growth. The pressure was therefore in South Africa, with total customer numbers down by 5%. They previously had some kind of campaign that brought non-paying subscribers in the base. These subscribers were terminated, so the drop in revenue-generating customers was only 2%.

As a silver lining, the premium subscriber base grew by 5%, the first signs of life in that base for many years.

Although group revenue was only up 4%, pre-forex trading profit grew by 10% and that’s after the impact of significant investment in Showmax. The core business is showing promise, but the forex challenges in Africa continue to ruin the story. Net of those adjustments, trading profit fell 18%. Group headline earnings fell by 5%.

The most significant decline in this period was in free cash flow, which dropped by 40% because of difficulties in the South African business and the investment in Showmax.

As a final comment, Showmax is showing the typical growing pains that we’ve seen in streaming businesses across the world. Although revenue grew from R381 million to R555 million, the trading loss worsened from R279 million to R799 million. The economics in streaming are very difficult.

Note: if you would like to read the release in more detail, MultiChoice has placed the results in Ghost Mail at this link.

Ninety One needs a return to form for equity markets (JSE: N91 | JSE: NY1)

Asset management firms are exposed to broader market values as the basis for their income

For an asset manager like Ninety One to do really well, they need to enjoy a combination of net inflows of client funds and an increase in market prices that boost assets under management. Sadly, Ninety One had the exact opposite in this period, with a 5% drop in closing assets under management and net outflows of GBP 4.3 billion.

Headline earnings per share fell by 5% and the interim dividend per share was down 9%.

The staff shareholding at Ninety One is 29.4%, so that’s pretty solid alignment with insiders!

Novus printed many things in this period, including money (JSE: NVS)

Important financial metrics have moved in the right direction

Novus has released results for the six months to September 2023 and they reflect an increase in revenue of 36.8%. Before you get too excited, most of the revenue growth (R406 million of R544 million) relates to the inclusion of Maskew Miller Learning (MML) in the group results after that business was acquired.

Operating profit grew from R23.3 million to R168.6 million, with R100.2 million coming from MML.

In the Print segment, revenue increased by 19.6% and the business swung from an operating loss of R7.8 million to an operating profit of R34.9 million. Excluding the Department of Basic Education contract, volumes fell by 15.8% as magazines and retail inserts showed material declines. Interestingly, newspaper and book volumes increased vs. the prior period.

In Packaging, revenue dipped by 2.3% but gross margin improved from 16.3% to 19.2%, driving a 32.8% increase in operating profit to R38.6 million.

This puts into perspective just how important the MML deal is, as the operating profit in that business is significantly higher than the rest of the group combined.

The closing cash balance of R621.1 million was an increase of R228.8 million for the six months. The group is now in a net cash rather than net debt position, helped by the sale of the Linbro Park property. It also helped that the reduction in paper stock largely offset the seasonal investment in working capital.

Overall, the Print segment is the headache and the group is looking at ways to reduce costs. It is highly dependent on the level of retail advertising spend, which in turn is linked to the economy.

And in management news that I don’t think is a surprise to many, Andre van der Veen has been permanently appointed as CEO and Adrian Zetler has been appointed as Chairman.

Reinet’s net asset value fell 1.8% in the past six months (JSE: RNI)

There’s an inaugural dividend from Pension Insurance Corporation

Reinet Investments is the “stay rich” fund in the Rupert stable. It has supposedly defensive investments like British American Tobacco and Pension Insurance Corporation. Including dividends, the total return is a CAGR of 8.5% in euro terms since March 2009, so that has worked out decently for investors.

In the six months to September though, the net asset value (NAV) fell by 1.8%. NAV per share is up year-on-year though, from EUR 29.93 to EUR 30.89.

In addition to the dividend of EUR 65 million received from British American Tobacco during the period, a dividend of EUR 57 million was received from Pension Insurance Corporation. Additional commitments worth EUR 39 million in respect of new and existing investments were made during the period.

Telkom has achieved a significant increase in earnings (JSE: TKG)

I would definitely wait for full details before getting excited about this one

Telkom released a trading statement for the six months to September. Believe it or not, there’s some pretty good growth here!

There’s never a drama-free situation with Telkom, with this particular trading statement showing restated HEPS in the base period because of an accounting error in headline earnings that led to an overstatement by 4.3 cents per share. The correct base is therefore 131.6 cents. But however you cut it, a range of 186.1 cents to 199.4 cents for HEPS is strong growth of 40% to 50%.

Looking at the drivers of HEPS growth, both revenue and EBITDA improved. There was also lower depreciation (down 20%) after asset impairments in the prior year as well. Net finance charges have increased this year as one would expect, although an increase of 50% is still quite something to read even when you expected a big jump. Another factor that limited the increase in HEPS was R102 million in forex gains and fair value movements in the base period that didn’t recur in this one.

I’ll be very interested to unpack the drivers of this performance when results are released on 21 November.

Volumes have gone the wrong way at Woolworths (JSE: WHL)

Sales growth isn’t keeping up with inflation

Woolworths is an excellent example of an affluent business rather than a luxury business. Affluent customers feel the economic pinch in a big way. Although they can still afford a quality of life that is good by any standard, they cut back on the nice-to-haves in the basket. The Woolworths aisles are filled with nice-to-haves, as anyone who has walked those aisles on an empty stomach will know.

In a trading update for the 20 weeks to 12 November, turnover grew 4.7% in constant currency terms. What follows is a laundry list of all the things that make this environment difficult, along with a reminder that growth last year was 13.4% and thus Australia is quite a tough base.

Woolworths Food saw turnover sales grew by 8.4% at a time when product inflation was 9.4%. This means that volumes are negative, which is a very different tune to what Shoprite is singing at the moment. Checkers has disrupted their market and nobody is going to convince me otherwise. I can literally see it everywhere in my peer group. When you consider that space grew by 2.7% in this period, the numbers are even worse. At least online sales jumped by 46.2%, taking that contribution to 5% of South African sales.

Fashion Beauty and Home has been a great turnaround story, but this period was tough. The late arrival of summer ranges didn’t help, although Woolworths blames the ports for that. I’m pretty sure that competitors all use the same ports, so pointing to South African challenges to give context to poor performance only gets you so far. Turnover grew just 1.4% and price movement was 11.7%, so volumes were down by double digits. Net trading space fell by 0.2%. Online sales grew 23% and contributed 5.2% of local sales.

The Woolworths Financial Services book grew 10.7% year-on-year and the annualised impairment rate increased from 6.2% to 7.5%, reflecting a deteriorating credit environment.

In Australia, Country Road Group saw sales decline by 8.1%. Sales grew 36.2% in the base period, so this is a correction in trajectory after the post-COVID bonanza. Trading space increased 4.3% and online sales contributed 26% to total sales, which is roughly in line with the prior period.

Overall, I’m not surprised to see Woolworths Food struggling for volumes. The Fashion Beauty and Home result is a significant negative surprise that the market isn’t going to like.

Little Bites:

  • Director dealings:
    • Just when you thought Des de Beer is the only director that buys shares in Lighthouse Properties (JSE: LTE), a trust linked to director Mark Olivier bought shares worth R862.5k. It’s thoughtful of Des to let the others have a turn!
    • A director of Richemont (JSE: CFR) has sold 22 share warrants related to Richemont shares.
  • OUTsurance Group (JSE: OUT) is increasing its stake in OUTsurance Holdings Limited, the South African insurance group. This is happening through the issuance of listed shares to shareholders in the South African subsidiary who want to flip to the top of the listed structure. An issue of shares worth R3.3 million has been executed in a share swap, taking the OUTsurance Group stake in OUTsurance Holdings from 89.77% to 89.83%.
  • Deneb Investments (JSE: DNB) has agreed to sell a property in Epping for R64.35 million to Gerber Advisory Specialists, part of the Gerber Goldschmidt Group. The net asset value of the property in Deneb’s books as at 31 March 2023 was R60.3 million, so this price will result in a gain. For context, Deneb’s market cap is R900 million.
  • If you are interested in MTN (JSE: MTN), you can refer to the various materials from the MTN Nigeria capital markets day at this link.
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