Many consumers, especially in the developed world, give little to no thought to where the food they eat originates from, and the intricate production, processing and distribution chains necessary to ensure that it arrives and is fit for human consumption. Knowledge of the subject is essential to sustaining and improving these processes, bearing in mind that the world’s population continues to grow. While such growth has slowed over recent decades,1 pressure on global resources continues to increase. According to the United Nations, the 46 least developed countries in the world host some of the world’s fastest growing populations. Many are projected to double in population size between 2022 and 2050, putting additional pressure on resources in countries where they are scarce.2
Of these 46 countries, a significant number are in Africa. Today, a fifth of Africa’s population (278 million people) is undernourished, and 55 million of its children under the age of five are stunted due to severe malnutrition.3
In affluent countries, access to education and training, water and electricity, funding and other elements essential to the food and agricultural value chain, is more widespread. However, in many African countries, these ’luxuries‘ are not readily available, and the daily struggles just to ’get by‘ inhibit the ability to grow and prosper.
While, in 2021, 52% of people employed in sub-Saharan Africa were active in agriculture, and roughly 45% of the world’s area suitable for sustainable agriculture production expansion was located in Africa, the continent had the lowest average agricultural productivity per worker globally.4 The low productivity and agriculture yields are attributed to a number of reasons, including, inter alia: • lack of access to inputs; • limited access to technologies and advisory services; and • low input use efficiency under rainfed conditions, where climate change and associated climate variability results in frequent droughts and floods, reducing crop yields.5
Agriculture in Africa is critical for the provision of employment and nutrition to the population, and ultimately, for wealth creation and prosperity. With almost half of the world’s suitable arable land – and with human capital that is available and expanding – there is enormous potential for Africa, provided that the necessary ingredients available are combined correctly.
According to the African Development Bank Group, current productivity levels within Africa are low. Raw produce is exported abroad, where it is refined and processed, and then sold back to Africans at a much higher price, with the majority of consumer goods being imported. The lion’s share of the economic benefit derived, therefore, remains abroad. With the correct training and resource allocation, the growing, processing and ultimate sale can all be realised on the continent, greatly increasing the value add and wealth generation per capita within Africa.
So, what does Africa require to enable this: • access to funding on terms that are commercially viable for African farmers. This should be combined with education on how best to utilise the funding to ensure that it is effectively deployed and managed. The likes of development finance institutions (DFIs) could play a pivotal role, provided that they are willing to be flexible with their payment terms, to cater for the cyclical nature of the agriculture industry;
• education and transfer of skills – this includes farming in a way that is smarter and more sustainable, with the likes of artificial intelligence and new technologies (with the assistance of local and international experts in the field) creating platforms to unlock this, to achieve greater efficiencies. In recent years, there has been a vast increase in agri-tech developed, with the likes of ‘Farmers Friend’ launched by IQ Logistica, which is a mobile application tool that allows farmers to manage their farming operations and easily view, manage and access all of their operational data to mitigate risks;
• new policies (to the extent that adequate ones are not in place), improved disaster management (to counter the risk of disease, drought, floods and other consequences of climate change) and access to emergency funding/assistance at short notice; and
• acknowledgement from African leaders that policy, education practices and resource allocation will need to be refined to enable and unlock all of the above with a resounding consensus that ‘Africa is open for business’.
It is only through continued and consistent engagement by all stakeholders that meaningful progress will be made. There is an abundance of skills and knowledge within Africa, including corporate advisors who are au fait with the landscape, that can be drawn on to assist with capitalising on the opportunity. In addition, increased cooperation with players outside the continent (e.g. multi-nationals partnering with local entrepreneurs) would assist Africa to overcome the challenges facing it and achieve a successful and sustainable outcome.
Major Trends in Population Growth Around the World – The National Library of Medicine. (https://www.ncbi.nlm.nih.gov/pmc/articles/PMC8393076/#:~:text=Continuing%20Gowth%20of%20the%20World%20Population%20at%20a%20Slowing%20Pace&text=The%20slowing%20pace%20of%20the,1980%2C%20and%205.0%20in%201950)
World Population Prospects 2022 – United Nations Department of Economic and Social Affairs (https://www.un.org/development/desa/pd/sites/www.un.org.development.desa.pd/files/wpp2022_summary_of_results.pdf)
Over 20 million more people hungry in Africa’s “year of nutrition” – OXFAM International (https://www.oxfam.org/en/press-releases/over-20-million-more-people-hungry-africas-year-nutrition#:~:text=Today%20a%20fifth%20of%20the,stunted%20due%20to%20severe%20malnutrition.)
Revitalizing African agriculture: Time for bold action – UNCTAD (https://unctad.org/news/blog-revitalizing-african-agriculture-time-bold-action)
Increasing Agricultural Productivity in Africa: Can STI help Africa to make a quantum leap in agricultural productivity? – Food and Agriculture Organisation of the United Nations (https://www.fao.org/science-technology-and-innovation/increasing-agricultural-productivity-in-africa-can-sti-help-africa-to-make-a-quantum-leap-in-agricultural-productivity/en#:~:text=The%20low%20yields%20are%20largely,and%20floods%20reduce%20crop%20yields.)
James Moody is a Corporate Financier | PSG Capital
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
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Acsion is an oddball that is still at a huge discount to NAV (JSE: ACS)
I’m not sure the market knows what to do with this one
Acsion is a property development firm rather than a REIT. That’s fine in principle, as there are other such firms on the market. The problem, I think, is that the strategy is all over the show, as the company has various rental properties and even generates 10% of its revenue from the hospitality industry, actually operating hotels itself.
The market likes things that are easy to understand, especially among the more obscure names with little or no liquidity anyway.
Acsion’s revenue is up 20% and net asset value (NAV) per share is up 17% to R26.16. The interim dividend is 16.40 cents, down from 18 cents last year. The market couldn’t care less about the NAV, with the share price languishing at R5.56.
The problem is that the dividend yield and the NAV don’t really make sense next to each other, so the market is focusing on the cash flow from the assets rather than the paper value. If the NAV is a genuine reflection of what the assets are worth, this should be a slam-dunk take-private opportunity.
The percentage moves at Crookes are a bit daft (JSE: CKS)
Agriculture is many things, but steady and smooth isn’t one of them
Crookes Brothers has released results for the six months to September. Thanks to a previously released trading statement, we knew they would reflect a huge improvement. Revenue from continuing operations is up by 17% and operating profit after biological asset fair value movements has jumped by a ridiculous amount, from R8.8 million to R108 million!
Once finance costs and other things are taken into account, the swing is from a headline loss of R29 million to headline earnings of R49 million. Importantly, cash generated from operations came in at R112 million, a huge increase from R28.9 million previously.
Despite this, there’s no dividend for the interim period.
In case you’re wondering how the group makes money, sugar cane generated operating profit of R166.9 million, bananas came in at R7.6 million and macadamias registered a loss of R33.9 million. These numbers are all net of fair value movements in biological assets. In particular, world macadamia nut prices are severely depressed.
Adjusted earnings are a lot higher at Deneb (JSE: DNB)
And in this case, the adjustments are appropriate
I’m normally skeptical of adjusted HEPS. The concept of HEPS is already somewhat adjusted in nature, as there are rules about what can be excluded as once-offs or non-recurring items. Still, those rules don’t capture every possible reality. In this case, Deneb received a large insurance claim in the prior year that was included in HEPS, which is why HEPS as reported is down by 36%.
In reality, it’s up 69% if that amount is excluded from the base, driven by revenue up 9.4% and adjusted profit up by 30.4%. The net asset value per share is up by 3%. Notably, the operating profit growth was driven by very strong cost control and a decline in gross margin of only 10 basis points.
Like last year, there’s no interim dividend.
eMedia was resilient in this period (JSE: EMH)
There were many reasons why the numbers should be a lot worse
Load shedding. Inflation. Fuel prices. General pain in FMCG, which is where a lot of advertising revenue comes from. It’s been a perfect storm for many businesses, yet eMedia has managed to constrain the revenue decrease to just 0.8%. Clearly, all those years of showing Anaconda on e.tv built some resilience into the place.
Operating profit fell by 4.4% and HEPS is down by 8.4%. Again, it could’ve been so much worse. The dividend per share is down by 14.3%.
eMedia is the biggest broadcaster in South Africa, so it has considerable potential upside if things improve. I would argue that an environment where rates start to taper off would be supportive of growth here. Most media companies have been treading water in 2023 at best.
There have been numerous legal battles with the other broadcasters in South Africa as they all fight over sports rights in particular. This resulted in significant legal fees in this period.
The numbers in the Media Film Service business are quite frightening, where profit fell by R20.9 million as a direct result of the actor and writer strike in Hollywood. The company relies on international film productions. It seems like there’s a tentative agreement to end the strike.
Exxaro is navigating a tough climate (JSE: EXX)
Local infrastructure problems remain a challenge
Exxaro released a financial director’s pre-close message. Basically, that’s just a pre-close update for the year ending December 2023.
It won’t go down as the happiest of years, with the API4 coal export price having dropped quite spectacularly from $271 per tonne in FY22 to $122 in FY23. Those elevated coal prices are but a distant memory. Total coal production is flat, with sales volumes down 2%.
The group net cash balance is R13.5 billion and the company wants to retain R12 billion to R15 billion to fund the growth strategy. On that basis, I wouldn’t expect much of a dividend here.
In some regions, product originally destined for the export market was rerouted for domestic sales. This is why we see a growth rate of 19% in Mpumalanga domestic thermal coal sales. Transnet Freight Rail (TFR) remains an issue, although the company has put a number of initiatives in place to try mitigate this issue. Concerningly, Exxaro notes that attempts by the coal export industry to support TFR have not yielded an improvement in tonnage railed.
None of this is stopping Exxaro from investing further in its business, with capital expenditure up 57% year-on-year.
The company seems fairly upbeat on near-term prices, while acknowledging that coal demand is being dampened in the long term by Europe’s drive for decarbonisation. On exports, higher prices would support the economics of sending coal by trucks rather than train.
The Fairvest B dividend is lower this year (JSE: FTA | JSE: FTB)
But the 100% payout ratio has been maintained
Fairvest has an unusual dual-share class structure that was popular several years ago on the JSE. The A shares increase their dividend by the lesser of 5% of CPI inflation, with the B shares then picking up the variability in the rest of the earnings. In other words, the A shares give more certainty and the B shares are the crazy cousin at the Christmas party.
In the year ended September 2023, inflation was high and so the A shares increased the dividend by 5%. Given the broader operating challenges in the country, the B shares saw the dividend drop by 4.6%.
The group is selling non-core assets and is working towards being a retail-focused fund. Progress was made in this strategy in this financial year, with guidance for the B shares being modest growth in distributable income per share.
The A shares are trading on a yield of 9.2% and the B shares on a yield of 12.4%.
Grindrod Shipping’s final quarterly report is a large loss (JSE: GSH)
The company is changing to a semi-annual reporting cycle, like most local groups
When people talk about highly cyclical industries, shipping is often used as an example. If you read the latest report from Grindrod Shipping, it’s not hard to see why.
In the three months ended September, the company generated revenue of $112.5 million and a gross profit of $4.2 million. Adjusted EBITDA was $11.2 million, which tells you that ship sales also play a role on the income statement. Despite this, the attributable loss for the quarter was $8.5 million. This takes the year-to-date situation into a loss as well, with an attributable loss of $7.2 million for the nine months.
After a large capital distribution this year, no further cash distributions are envisaged for 2023. The company has also reduced debt by $36.1 million, in some cases achieved through sales of ships.
The good news heading into the fourth quarter is that the shipping rates agreed thus far are ahead of the year-to-date numbers and well ahead of the third quarter. Festive demand obviously plays a role in this. Still, a 10% drop in the share price after this announcement tells you that some are still being caught out by how cyclical this industry is.
Mothership HCI is, as usual, a mixed bag (JSE: HCI)
The most severe drop in earnings was in the coal business
Hosken Consolidated Investments (or HCI) sits at the top of a structure that includes various unlisted and listed businesses, including Deneb and eMedia that I’ve covered elsewhere today. Frontier Transport Holdings is also in there, having recently released results.
For the six months to September 2023, EBITDA increased by 18%. That sounds good, yet HEPS is down by 13% and there’s no dividend as the company needs to preserve cash for the oil and gas investments in Namibia.
If we dig deeper, we find that higher finance costs and equity-accounted losses were a major driver of the EBITDA increase not translating into a happy HEPS result. There were also substantial gains on investments that are excluded from headline earnings.
Here’s the segmental view, with the more important moves highlighted:
Note the huge difference between profit and headline earnings on the “other” line, which is where the group recognises gains on investments (which are reversed out for headline earnings) and funding costs (not reversed out).
With no dividend to shareholders because of the investment in oil and gas, all eyes will be on the performance of that investment.
At some point, PBT Group had to run out of puff (JSE: PBG)
The share price has corrected this year, with the five-year performance still ridiculously good
PBT Group is a good little business. It’s ultimately a technology and data consulting business, not hugely dissimilar to Accenture. Many of the clients are in the financial services sector. PBT Group sells time, but a quick look at Accenture will show you that selling time can be very lucrative.
After an almost perfect run of performance, eventually something had to go wrong. This is especially true in a country that is struggling for economic growth.
The group has released a trading statement for the six months to September. It includes a lot of financial information, so this is more like a mini-results release than a traditional trading statement.
Before we dig into them, it’s important to understand that PBT Group Australia was disposed of on 30 September 2023, so it comes through as a discontinued operation in these numbers. Focusing on continuing operations is a good idea.
On that basis, revenue is up by between 5.4% and 9.8%. EBITDA is only up by between 0.5% and 4.6%, so there’s clear margin pressure there. Although profit after tax looks better at growth of 7.7% to 12.1%, normalised HEPS is down by between -6.2% and -2.4%. HEPS as reported is down by between -20.2% and -17.0%, but there’s a significant distortion from the accounting treatment of B-BBEE shares.
The share price closed 10% lower at R7.11. The interim normalised HEPS range is 30.8 cents to 32.0 cents. By small cap standards, the multiple had moved too high here.
Despite an extra trading week, Pepkor’s dividend fell sharply (JSE: PPH)
Here is yet another example of why I’m bearish on South African retail shares
For the year ended September 2023, which has a 53rd week of trading in it, Pepkor’s revenue grew by 7.7%. That’s not enough, sadly. Operating profit fell by 8.1% and HEPS was down 8.2%. The dividend payout ratio moved lower as well, so the dividend per share is down 12.9%.
The drop is payout ratio is despite a 15.9% improvement in cash generated from operations. I guess when you’re staring deep into the abyss of South African consumer spending, conservatism around the balance sheet is advisable.
The highlight, unsurprisingly, is that performance in Avenida in Brazil is ahead of the original plan. Latin America is a vastly more appealing consumer opportunity than South Africa. I genuinely don’t know why more South African retailers aren’t looking for opportunities there.
Based on HEPS of 149.2 cents, Pepkor is trading on a P/E multiple of 12.4x. The dividend yield is only 2.6%.
Prosus – Naspers expect the eCommerce businesses to break-even in the second half of this year (JSE: PRX | JSE: NPN)
Of course, there’s no mention of return on capital yet
Prosus has released interim results for the six months to September. There’s more focus on talking about profitability than before, which can only be a good thing. Consolidated trading losses in the eCommerce business (all the frothy stuff they bought with Tencent dividends) came in at $36 million, which is a lot better than $220 million in the comparable period. The company has given a bold prediction that breakeven can be achieved in the second half of this financial year!
I must point out that on an economic interest basis, trading losses improved from $820 million to $249 million. There’s still a long way to go here for shareholders.
The reduced losses in that side of the business contributed to an increase of 85% in core headline earnings to $2 billion. On a per share basis, it helps that Prosus has repurchased 16% of its shares. Core HEPS is up 99% and HEPS as reported is up 27%, both in dollars.
At Naspers, core HEPS is up 546% and HEPS as reported is up 143%.
One of the headaches in the business at the moment is the Edtech business, where Stack Overflow certainly isn’t overflowing with profits. The other business there is called GoodHabitz. The jokes write themselves. The group has intervened in both businesses to improve profitability.
I always look for disclosure on Takealot as well. With Amazon about to enter the market, there’s yet another period of losses at Takealot. The loss is admittedly 85% lower as measured in dollars, which is great news, but it’s still a loss. Takealot group revenue grew 9% in ZAR, which isn’t exactly a high growth story. It shows you just how broken the broader general merchandise market really is.
FARFETCH is going as badly as I expected, with some relevance to Richemont (JSE: CFR)
We covered FARFETCH in Magic Markets Premium previously and concluded that the name was appropriate
I’m not even slightly surprised that things aren’t going well at FARFETCH. The business model of selling luxury goods online continues to make no sense to me at all. This is the group that Richemont hopes to shift YOOX NET-A-PORTER to, as Richemont has perhaps also realised that the online side is actually rather difficult.
After a disastrous US listing, there are rumours of FARFETCH being taken private. Richemont has confirmed to the market that it has no plans to lend or invest into FARFETCH. The company has no financial obligations towards FARFETCH either. The deal for YOOX NET-A-PORTER is also still subject to conditions and Richemont is reviewing them carefully.
I maintain my view that FARFETCH is a mess.
PGM operations in the US aren’t immune from job cuts either (JSE: SSW)
Sibanye-Stillwater is restructuring operations on that side of the pond as well
Due to the ongoing state of the PGM market, Sibanye-Stillwater is having to restructure operations to reduce costs. The US operations are also impacted by this, with the company announcing that 100 employees (mainly at the Stillwater Mine) will be affected. A further 187 contract workers will also be impacted.
This restructuring should not significantly impact production, but will of course reduce costs. Simply, PGM prices aren’t playing out the way Sibanye hoped they would.
Purple Group will report a full-year loss (JSE: PPE)
This isn’t surprising in this economic climate and the loss is smaller than I think many expected
Building in public is hard. Most startups are built in private, so that the extreme volatility is known only to a few. EasyEquities is very much a startup in the true sense of the world, only now expanding into its second market in the form of the Philippines. The product range is still being fully developed even in the South African market.
I’ll say it again: this is a startup. This means that expecting a smooth ride at Purple Group is like expecting to have fun at the dentist.
For the year ended August 2023, the headline loss per share is between -1.94 cents and -2.15 cents. The comparable period saw HEPS of 1.12 cents. In a market where interest rates and inflationary pressures have hammered South Africans and their ability to invest in the market, I’m not surprised by this downturn at all. In fact, I think this loss is quite modest vs. what might have been.
The two things to watch here are (1) performance as interest rates ease and (2) how successfully they achieve product-market fit in the Philippines.
If you can’t handle volatility, you shouldn’t be anywhere near this thing as an investor. And if you had listened to experienced voices during the pandemic instead of the army of overnight influencers on Twitter, you would’ve known that sooner. Perhaps lessons have been learnt by retail investors as they’ve journeyed from over R3.40 per share down to the current level of 62 cents.
Transaction Capital will keep SA Taxi in its entirety (JSE: TCP)
The net asset value range is R11.30 to R12.07, so the share price is still at a significant discount
I was one of the investors who was severely caught out by the capitulation in the Transaction Capital share price. Now at R6.98, it’s at least shown some signs of life recently. It still has a very long way to go and I don’t think it will ever return to the levels seen previously.
In a trading statement for the full year ended September 2023, the headline loss from continuing operations is between -R784 million and -R703 million. In the previous year, headline earnings came in at R1.6 billion. As swings go, that’s a violent one.
The group tries to make shareholders feel better by reporting a “core earnings” range of R220 million to R282 million, which is between 77% and 82% lower than last year.
The more important news is that there isn’t much difference between continuing operations and total operations, as Transaction Capital has decided to keep SA Taxi’s auto refurbishment and repair facilities. There’s a new strategy focusing on pre-owned taxis at lower volume, as affordability for new taxis is a serious problem in the current economy. This means that we are heading back to having older taxis on the road in general, yet another symptom of this country’s economic policies.
The ongoing support of debt funders is critical to the viability of SA Taxi. Importantly, Transaction Capital hasn’t put in any additional equity funding since March 2023.
Looking at the other businesses, WeBuyCars actually did better than expected in the latest quarter, with previous guidance being that full year earnings would be down by around 20%. No updated guidance is given. Debt collection business Nutun is performing in line with previous guidance.
Results will be released on 5th December.
Vukile gives hope for the property sector (JSE: VKE)
Key metrics are looking much stronger
Vukile Property Fund is proof that not all property funds are created equal. Where some are struggling at the moment, others are doing really nicely.
In the six months to September, Vukile’s South African portfolio has grown like-for-like annualised net operating income by 5.1%. Vacancies are at 2.0% and reversions turned positive (+2.4% vs. -2.4%, a big swing). Even valuations are 3.9% higher on a like-for-like basis.
The Spanish portfolio showed normalised net operating income growth of 13% and vacancies of just 1%. Reversions are positive.
There is no debt maturing in FY24, so there’s no immediate refinancing risk. The loan-to-value of 42.9% is perhaps slightly high, but more than manageable. Thanks to the strong underlying performance, the interim dividend is 10% higher and guidance for the full year has been upgraded to reflect expected growth in the dividend per share of 8% to 10%.
The net asset value per share is R21.16 and the share price is R13.48. This is certainly one of the better local REITs.
Little Bites:
Director dealings:
There’s some strong buying in Sibanye-Stillwater (JSE: SSW) shares by very high ranking executives including Neal Froneman. The total purchases are worth around R18.5 million, so that’s material.
An associate of a director of Afrimat (JSE: AFT) has sold shares worth R12 million.
A director of STADIO (JSE: SDO) sold shares worth R1.1 million.
A non-executive director of Richemont (JSE: CFR) has bought A share warrants with a value of R86k.
Des de Beer has awoken from his slumber and is off to a modest start, buying just R12.7k worth of shares in Lighthouse Properties (JSE: LTE).
Delta Property (JSE: DLT) is fighting inch by inch, with the latest news being the sale of the Smartxchange property in KZN for R46 million. A previous attempt to sell the property failed after the buyer couldn’t meet the required conditions. The proceeds will be used to reduce debt and the loan-to-value is expected to fall by 20 basis points to 59.8%. Vacancy levels will reduce by 60 basis points to 33.9%. The valuation of the property as at 28 February 2023 was R50 million, so the sale is below that value.
Mantengu Mining (JSE: MTU) only commenced its Langpan operations midway through this interim period. Chrome production continues to ramp up monthly and the new processing plant is scheduled to be commissioned in the first quarter of calendar year 2024. Shareholders will be looking for the income statement to turn green, as the loss for the six months to August is R16 million.
Copper 360 (JSE: CPR) announced the acquisition of all the shares and claims in Nama Copper for R200 million. This will take expected 2025 output to more than double the original estimates. The CEO of Copper 360 calls it a “game changer” for the company and it certainly seems that way. The deal includes an offtake agreement with the sellers of Nama Copper. The operations of Nama Copper are adjacent to Copper 360’s existing operations and are similar in many ways, although they are currently in care and maintenance state. Unlike most junior mining deals that require an issue of fresh equity, Copper 360 is looking to finance this from a combination of debt and royalty agreements.
Life Healthcare (JSE: LHC) released updated pro-forma accounts related to the potential disposal of Alliance Medical Group. These should be read in conjunction with the transaction circular. Assuming the deal was effective on 30 September 2023, then the group HEPS per share would be 3.9% higher and the NAV per share would be 0.1% lower.
If you would like to learn more about the AngloGold Ashanti (JSE: ANG) business and strategy, then you should refer to the latest investor update presentation by the company. It’s difficult to pick out highlights from it, as this really does cover all the strategic initiatives in detail. I suggest you read the full presentation at this link.
The chairman of Trellidor (JSE: TRL) has decided to move on after 16 years in the role. The ex-CEO of Holdsport (you might remember that company as it was listed several years ago), Kevin Hodgson, looks set to join the board.
Go Life International (JSE: GLI) released results for the six months to August 2023. Revenue is once again zero, with an operating loss of $62k. The company is changing its name to Numeral Limited, perhaps because some numerals will eventually be found on the revenue line?
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ArcelorMittal is the latest economic casualty (JSE: ACL)
Years of poor economic policies in South Africa are coming home to roost for workers
ArcelorMittal has given the market the unfortunate news that the broader long steel products operations are going to be put on care and maintenance. This is despite the best efforts of the company to try and save these jobs. Nothing could be done about low GDP growth in South Africa (steel consumption has dropped 20% in the past 7 years), high transport and energy costs and other policies that have made it more appealing to produce steel from scrap than from iron ore.
The company will commence s189 proceedings at various operations, impacting approximately 3,500 employees. Eventually, years of infrastructure decline and slow economic growth start to take their toll on jobs.
Double digit growth in trading density at Attacq’s malls (JSE: ATT)
The group is on track to deliver FY24 distributable income per share growth of 8% to 10%
Attacq is one of my favourite local property funds, as the group has fewer properties rather than broad exposure. I remain unconvinced that diversification is the right strategy in South Africa, as there are only pockets of growth in a sea of load shedding and other issues.
The pre-close update from Attacq has done nothing to change my mind here, with the company on track to deliver its FY24 distributable income per share guidance of growth of between 8% and 10%. The retail portfolio has delivered growth in 12-month average trading density of 10.6%, which is a measure of sales per square metre.
Attacq does have some diversification and that seems to be where the headaches are. There are no buyers for the assets in Ghana at the moment. The sale of Ikeja City Mall in Nigeria is subject to the closing of Actis’ fund raising, with scarcity of dollars in that country remaining a problem. And as for MAS, the share price is still well below June 2023 levels after the dividend was suspended in September 2023.
Importantly, gross interest-bearing borrowings are down from R8.4 billion to R6 billion in the past four months, with the weighted average cost of debt down from 10.3% to 9.9%.
The company’s closed period begins on 1 January 2024, ahead of the release of results for the six months ending December 2023.
Bidvest gets a smack back down to earth (JSE: BVT)
Although still up for the year, a big chunk of gains was given up on Tuesday
Bidvest was my pick in the Financial Mail Hot Stocks edition for 2023 in the industrials sector. It’s now only up 12.9% for the year, so I certainly haven’t embarrassed myself. Things were looking a whole lot better before the latest announcement, though:
At the AGM, the company gave an update on trading conditions during the four months to October 2023. This is what drove a 10% drop in the price in a single day. This period represents the first four months of the FY24 financial year. When the company uses words like “muted” and a slowdown that was “greater than anticipated”, then you know you’re in for a rough ride.
Admittedly off a high base, revenue growth was impacted by a dip in demand (including in durable consumer spending) and increasing pricing competitiveness. They do talk about pockets of growth (particularly travel and hospitality), but the overall message here is that gross margins couldn’t be protected here through cost management.
Concerningly, retention of contracts came at the expense of margin. Although Bidvest hopes to claw this back over time, pricing power is what I want to see here and that is now in doubt. Even B2B business models have to face the realities of this economy.
It’s interesting to note that renewable energy sales fell in this period as load shedding reduced over the four months. One area where government will definitely give a helping hand to Bidvest is in that part of the business.
The automotive business was “significantly weaker” as customers were “very price sensitive” – not a good read-through for any of the car dealership groups.
Of course, a group the size of Bidvest hasn’t been built by standing still. Acquisitions worth R3.5 billion have been concluded, with most having become effective in recent weeks. This includes various acquisitions (bolt-on and otherwise) both in South Africa and abroad. Oddly, Bidvest has also opened its first Mahindra dealer. I’m not so sure about that one, particularly in this environment, but they will know the numbers a lot better than I do.
Delta Property’s NAV per share falls 14% year-on-year (JSE: DLT)
At least the loan-to-value ratio has come down slightly
Delta Property Fund is hanging on for dear life, trying to sell properties to bring down an unsustainably high loan-to-value of 60%. It was 61.4% in February 2023, so there’s been some progress in the past six months.
Although the net asset value (NAV) per share is down 14% year-on-year, it’s actually up ever so slightly vs. February 2023, coming in at R3.70 vs. R3.60. That’s another signal that there might be some hope here.
Rental income is down 9.2% year-on-year but property operating expenses are down 8.4% and administrative expenses increased by just 1.8%. There’s a real effort here to improve things.
Nedbank is still willing to put new debt into the group, evidenced by the revolving credit facility of R37.5 million. As the old joke goes: a rolling loan gathers no loss.
This is still as speculative as can be, even at a share price of R0.27 which is miles below the NAV per share. There are at least some signs of stabilisation over the past six months.
Tragedy strikes Impala Platinum (JSE: IMP)
The “darkest day” in the history of Implats
Mining is dangerous for the workers in the mines. Far too regularly, there are SENS announcement that go out with stories of injuries and often fatalities in mining accidents. This is a problem across the sector, which is why mines place great emphasis on safety statistics.
Impala Platinum has suffered a tragedy that is easily the worst mining update anyone has seen in a long time, with 11 employees losing their lives in an accident at Impala Rustenburg’s 11 Shaft on Monday afternoon. A further 75 employees were injured.
The accident happened while employees were being hoisted to the surface at the end of their shift. The conveyance rapidly started descending and the rest is a very ugly story.
The share price dropped 8.6%, as the market is well aware that a loss of life of this magnitude is also going to be an operational nightmare for the company. Aside from the obvious human tragedy, this is exactly what the business didn’t need when PGM prices are under pressure and the industry is suffering job losses.
The CEO called this the darkest day in the history of Implats. I think we can all agree with that sentiment. It really is a terrible story.
Murder on the Nampak dancefloor (JSE: NPK)
As I once wrote – wait for the dust to settle after the rights issue before having a punt
There’s still plenty of uncertainty at Nampak. When the rights offer was announced, here’s what I wrote in Ghost Bites:
Now, they did raise the capital in the end, so the existential crisis is off the table for the time being at least. They raised at R175 and the price is now below R172, so my concern about the pain to be felt during and after the capital raise seems to have been valid.
The almost 4% drop on Tuesday was thanks to a horrible trading statement for the year ended September 2023, reflecting a spectacular headline loss per share of between R461 and R476 per share. I had to read it a few times to be sure. The loss per share (i.e. including impairments) is between R1,169 and R1,178 per share. I’m still questioning whether there’s a typo. Sadly, there isn’t.
The impairment losses are enormous, as are the forex losses and the net finance costs. When full results come out on 4 December, we can try make sense of it all.
RH Bophelo’s NAV dips, but investment income is much higher (JSE: RHB)
This healthcare investment company has just over R1 billion in assets
RH Bophelo has announced its results for the six months to August 2023. Although investment income jumped 229% to R56 million and total income after tax increased by a similarly silly percentage, the net asset value (NAV) per share fell by 2% year-on-year.
As an investment holding company, the NAV per share is what you want to see heading in the right direction. Having said that, with the NAV at R13.76 and the share price at R2.00, the discount is so astronomical that one wonders what the catalyst will be for improvement in the price.
Perhaps a dividend of 31 cents a share will help, payable in December.
In other news related to the company, Katekani Mhlaba is resigning as CFO, replaced by Aviwe Metu with effect from 1 December.
Stefanutti Stocks is still making losses from continuing operations (JSE: SSK)
The group is trying to extend its debt and going concern status remains in doubt
There’s a difference between a going concern and an ongoing concern. Stefanutti Stocks is arguably the former and certainly the latter, as liabilities exceed assets at this stage. The cash flow projections suggest that the group is commercially solvent, but there are many uncertainties.
For the six months to August, revenue from continuing operations grew by 16% and operating profit by 27%. Sadly, there is still a net loss of R5.7 million, which is at least a lot better than the loss of R33.5 million in the comparable period. The discontinued operations actually made a profit, so the loss from total operations is R2 million.
The headline loss per share is 22.41 cents. The current share price is R1.20.
As part of the restructuring plan, the group is negotiating with lenders to extend the duration of the loan to June 2025. This is because of various receipts that have been delayed for reasons beyond the group’s control. Priced at prime plus 3.6%, Stefanutti Stocks is basically like an overindebted consumer trying to crawl out of a dark hole filled with unsecured loans. The difference is that there are no credit protections for corporates that get themselves into trouble.
Vodacom is in the process of trying to acquire a 30% interest in Maziv, which is the entity that would house Vodacom’s fibre assets with Vumatel and Dark Fibre Africa. Remgro sits on the other side of this transaction through Community Investment Ventures Holdings.
The Competition Commission has been having none of it, having recommended to the Competition Tribunal that the deal be prohibited. That recommendation was made in August 2023. The wheels turn slowly in South Africa, with the Competition Tribunal scheduled to hear this matter in mid-2024. It will still take a while thereafter to obtain a ruling.
The parties have therefore extended the longstop date of the deal to 29 November 2024, by which time conditions precedent must have been fulfilled. Thank goodness we are in such a vibrant economy that we can afford for our regulators to take this much time.
Little Bites:
Director dealings:
An executive director of Richemont (JSE: CFR) has exercised warrants to buy B shares worth R24.3 million.
The CEO of Bytes Technology Group (JSE: BYI) has bought shares worth £300k (R7 million).
The CEO of Mr Price (JSE: MRP) seems to agree with my sentiments about the recent rally in the share price, selling every single one of the shares received under the latest award. The sale was worth R977k. I really don’t think you can get a stronger signal than that. The company secretary only sold the portion needed to settle taxes. I would follow the CEO’s lead on this one.
A director of AngloGold Ashanti (JSE: ANG) bought shares worth $52.4k (R975k).
A director of a major subsidiary of STADIO Holdings (JSE: SDO) has sold shares worth R335k.
enX Group (JSE: ENX) has renewed the cautionary announcement regarding the potential divestment of the interest in Eqstra Investment Holdings. The company has been trading under cautionary since June 2023. These negotiations take time and there’s still no guarantee of a deal being announced, hence the need for caution.
Clover Alloys has opted to invest further in Orion Minerals (JSE: ORN), which may go a little way towards calming down some nervous among investors. Clover Alloys will invest R5 million in the company via options with a strike price of 20 cents a share. The current share price is 18 cents a share, so that’s particularly interesting. Clover’s current shareholding is 9%. I did note that the resolution related to an approval to issue shares to Clover Alloys was withdrawn at the AGM. I haven’t dug into the structure in detail, but you should certainly go digging here if you’re an Orion shareholder.
There’s a rather interesting non-executive director appointment at Mr Price (JSE: MRP). Refilwe Nkabinde has been appointed to the Mr Price board, a role she will hold while still serving as Finance Director of Vodacom South Africa.
The CFO of Cashbuild (JSE: CSB) will be stepping down in June 2024 after serving for 13 years. At this stage, no replacement has been announced. They certainly have a while to find one, though!
Mazars has announced a landmark network with Forvis, creating a top 10 firm in the USA. The CEO of Mazars in South Africa, Anoop Ninan, joined me to unpack why this is important. Of course, I didn’t waste the opportunity to tap into his extensive business knowledge at the same time!
Topics discussed included:
An overview of the unique network with Forvis and why this is important in a professional services environment that is highly fragmented in the assurance and related services space.
How audit firms try to differentiate themselves in the market, specifically across technology, people and partner-led service.
The ownership structure of these audit firms and how that works in this network situation.
The impact of this network on existing and prospective South African clients.
The Mazars growth strategy in South Africa and the sectors that are seeing significant activity, with reference to the advisory teams in Mazars and the work that they do.
The public company vs. private company landscape in South Africa, particularly in the context of an ever-shrinking JSE.
An overview of the broader Mazars service offering, including data insights and related services.
The impact of greylisting on how we are perceived internationally and the level of foreign direct investment.
South Africa’s ongoing positioning as the gateway to Africa and where the “good news” stories are in our economy.
Listen to the show here:
For more information on the Forvis Mazars network, you can read this article.
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.
In the 29th edition of Unlock the Stock, we welcomed TWK Investments back to the platform. The management team gave a presentation on the performance and strategy and took numerous questions from attendees.
As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.
In the 28th edition of Unlock the Stock, we welcomed Karooooo to the platform for the first time. The management team gave a presentation on the performance and strategy and took numerous questions from attendees.
As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:
The Satrix Balanced Index Fund (with assets under management of R9.5 billion) has just turned ten. Over this decade, the fund’s consistent performance demonstrates why rules-based or indexed balanced funds are dominating their category.
Kingsley Williams, Chief Investment Officer at Satrix*, attributes the fund’s consistent performance to a rigorous and systematic Strategic Asset Allocation process, which focuses on the medium to long term, while ignoring the noise in the short term.
“The proof of our pioneering approach is in the pudding. Since inception, the fund has consistently been in the top quartile of performers more than half the time on a rolling three-year basis, while beating the median active manager 91% of the time over the same period. On a rolling five-year basis, it has never underperformed the median active manager, lending credence to its long-term approach”.
Source: Satrix. Data: Morningstar. November 2013 – October 2023.
A Revolutionary Approach
In 2013, the Satrix Balanced Index Fund was one of the early adopters of an indexed or rules-based approach to constructing multi-asset funds locally.
Williams says, “In the multi-asset space, from an active management perspective, you can add value at building block level in terms of strategic asset allocation to different asset classes, including equities, bonds, commodities, etc., as well as timing your trades within each asset class. Active managers in this space can tactically change allocation both between and within asset classes – with varying degrees of success.”
Satrix chose to do neither. “Instead of actively managing each asset class, we track indices that provide investors with cost effective and representative performance of each asset class. By focussing on getting our building block balance right, we have succeeded in gaining a long-term edge. The self-enforced discipline of not tactically changing course in the short term keeps costs, both management and trading, lower while allowing our strategic positioning to pay off. We review our position every two years and only make changes if we deem it necessary. Research has shown that acting more often seldom adds value and definitely adds cost. We believe this approach puts the odds firmly in favour of investors to outperform their more active counterparts.”
Next, Williams shares their balanced index funds’ key differentiators:
1. The Evidence Is In The Returns: Williams says, “Despite the upside potential of tactical asset allocation, the difference between active managers’ and rules-based providers’ returns has been remarkably small. Most rules-based funds have consistently done very well, which raises the question of whether investors are being adequately compensated through more expensive offerings. In fact, often human intervention ends up destroying value rather than adding it – the global research on this is quite clear in that more than 90% of return and volatility variation comes down to setting strategic asset allocations. For this reason, we focus entirely on getting the strategic asset allocation right.”
2. The Fee Differential: Rules-based funds offer a lower pricing point, which compounds the value proposition of robust returns. Over the medium to longer term, active managers need to be correct quite often in their tactical decisions to justify a higher fee – which has proven exceedingly hard to do consistently, especially as markets are becoming more efficient and complex.
The Secret Sauce: The Differentiators That Set Satrix Apart:
The consistent performance of the Satrix Balanced Index Fund is tied to two critical differentiators:
1. Structural Premiums Captured
A key differentiator for the Satrix Balanced Index funds is that the local equity building blocks make use of Satrix’s multi-factor index portfolio, SmartCore™. Nico Katzke, Head of Portfolio Solutions at Satrix, says that multi-factor strategies offer exposure to risk premiums shown to pay off over the medium to longer term.
“SmartCore™ offers a refined core exposure to the local equity market. Global and local research suggests that certain company features, including measures of value and balance sheet quality, as well as positive price and earnings momentum, make them more likely to outperform at lower drawdowns. The strategy systematically captures these factor premiums while explicitly targeting risk, both on an absolute basis and relative to the local benchmark index. This aligns with our overall philosophy of exposing our clients’ assets to longer-term sources of return.”
2. Construction
The biennial research-intensive process that Satrix employs for its Strategic Asset Allocation review is its other key performance differentiator.
Williams adds, “Being part of the larger Sanlam Investment Group, we can access multiple perspectives to thoroughly review each of our considered asset classes’ expected returns over the medium to long term. That’s one key variable in the optimisation process; the other is cutting-edge optimisation techniques that enable us to understand the risk interplay between the asset classes.
“We do a significant amount of stress testing to arrive at the most efficient portfolio possible, under different assumptions and scenarios. The biennial review also allows us to update the balanced fund according to regulatory changes and newly accessible asset classes. For example, we recently included global listed infrastructure as this provides a source of differentiated equity returns in an otherwise US and technology-dominated global equity universe. Even with significantly reduced expected return forecasts, our optimisation approaches ‘love’ infrastructure because of how it behaves with other asset classes, and further diversifies the portfolio.”
Crucially, the process is systematic; so the asset allocation is not changed according to market swings, and is only reviewed once every two years. In this way, the fund is being actively managed, but not in a traditional, tactical sense.
A key consideration for Satrix is building solutions that are optimally diversified with sufficient upside potential.
Katzke adds, “true diversification is all about putting your eggs in uncorrelated baskets in the most efficient way possible. This involves prioritising risk source diversification so that the fortunes of our funds are not decided by singular events.”
The Market is Starting to Notice
While rules-based funds still account for a comparatively small proportion of assets within the balanced fund categories (according to Morningstar numbers, roughly 8% and 6% for high- and low-equity balanced fund strategies respectively), the market is starting to notice.
According to Williams, “we’ve seen up to half of all flows in the high equity balanced fund segment going to rules-based strategies in the last year. With a few of these index strategies now having reached ten-year milestones on the back of performances superior to most active managers, the case for indexation in balanced funds has never been stronger. We believe a disciplined, indexed approach puts the odds firmly in favour of clients with an eye to long-term wealth creation.”
*Satrix, a division of Sanlam Investment Management
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.
Listen to the latest episode of Ghost Wrap here, brought to you by Mazars:
The inevitable delisting of Ascendis is upon us (JSE: ASC)
Interestingly, this is a general offer rather than a scheme – and that’s unusual
Typically, a delisting of a company is achieved through a scheme of arrangement. This is called an expropriation mechanism by advisors, as you need 75% approval to force the outcome on 100% of shareholders. Without this mechanism, things would grind to a halt in corporates, as you can’t have just a handful of shareholders blocking the rest from an outcome.
Sometimes, you’ll see a general offer instead. In such a case, shareholders can choose to reject the offer and follow the company into unlisted territory. The downside of course is that liquidity is non-existent in the private space, so you’re probably going to hold those shares for a long time.
In a consortium led by ACN Capital, the offer price to shareholders of Ascendis is 80 cents per share, reflecting a premium of 25% to the 30-day VWAP. The consortium has been put together by Carl Neethling of Acorn Agri fame. I must of course point out that Carl is the current CEO of Ascendis, so this is essentially an offer by the management team to either accept 80 cents a share or join them in the private market rather than the listed market.
The post-delisting strategy includes a variety of restructuring and growth initiatives. This is a classic private equity play of taking a business and fixing it in private rather than in public, as that’s a far more efficient way to do it.
Now, here’s the most important part: the exit offer is conditional upon the delisting resolution being approved by shareholders by no later than 30 April 2024. A delisting requires approval by 75% of shareholders. Based on irrevocable undertakings and strong intentions of support, the company believes that it has already secured 59.98% approval.
Despite the fact that this isn’t a foregone conclusion, the share price jumped to 80 cents anyway. Anyone buying at that price is presumably looking forward to joining the team in private, as the offer of 80 cents is months away from being paid.
Revenue up at Invicta, but HEPS has gone nowhere (JSE: IVT)
The bankers are getting the spoils at the moment, with finance costs up significantly
In an industrials firm, a decent revenue performance is usually accompanied by improved operating margins and a juicy jump in net profits. That hasn’t transpired at Invicta, at least not on a HEPS basis.
Revenue increased by 12% in the six months ended September and so did gross profit, so it’s not a gross margin issue. Operating profit was up 7%, with expected credit losses on trade receivables driving the deterioration in operating margin. Profit before tax increased by 6%, with the further knock to margin coming from the jump in finance costs that offset the improved equity-accounted earnings from joint ventures.
By this stage, you must be wondering why HEPS was flat despite a 6% increase in profit before tax, particularly in a period where Invicta repurchased 1% of ordinary shares outstanding. To figure that out, we have to refer to the note on headline earnings, where you’ll see a substantial profit in the equity-accounted earnings that gets reversed out for headline earnings:
You can now see that headline earnings actually dropped slightly, with the share repurchases bringing this up to a flat HEPS result (269 cents vs. 268 cents in the comparable period).
So, we now know that the sale of a property by Kian Ann (the associate in Asia) is what improved profits, as the operational profit growth from the core business was actually eaten up by finance costs. This is why debt reduction is a strategic focus for the group, as the management team at Invicta is currently working hard so that their bankers can live better lives.
As a final comment, these industrial groups are always far more volatile at segmental level than group level. It’s a game of swings and roundabouts, with some segments doing well (like operating profit up 34% in the Capital Equipment segment) and others taking a nasty smack, like the auto / agri parts business where operating profit fell 28%.
In line with last year, there’s no interim dividend. Invicta only pays a final dividend.
Oceana prioritises volumes over margins at Lucky Star (JSE: OCE)
And in this period, it seemed to work
Oceana reported numbers for the year ended September 2023 and they look excellent. From continuing operations, revenue increased by 22.6% and HEPS was good for 29.2%. That’s the shape that you want to see on the income statement.
In some areas, like fish oil, improved pricing gave the group a significant boost. In others, like the canned fish businesses, the group opted to absorb some of the input cost pressures in an effort to maintain affordability of the products. Along with other challenges like catch rates and load shedding costs, the impact was a drop in gross margin from 30.8% to 28.6%.
They tried to make up for it in other areas, like sales and distribution expenditure from continuing operations up by 9.9%, which means these costs fell as a percentage of revenue from 5.9% to 5.3%. Overheads were up by 16.5%, mainly due to employment costs. Thankfully, that’s still below revenue growth.
Unlike so many other companies at the moment, the net interest cost actually reduced from R168 million to R154 million thanks to debt repayments.
The group is doing a good job of generating cash and is doing an even better job of investing it in the business. Capital investment jumped by 120%, allocated to various projects within the operations.
The only negative in the segmental result was wild caught seafood, which grew revenue by 9.1% and saw operating profit fall by 15.3%. Notably, Lucky Star volumes were up 9%. Canned fish inventory was 18.7% higher, so there’s been significant investment here to ensure availability of product. That isn’t the case everywhere in the business, like local fish oil stocks which have dropped substantially.
And in case you need a reminder of how risky this business is, I couldn’t resist highlighting the cancellation of Peru’s main anchovy fishing season due to the high presence of juveniles, resulting from the effect of the El Niño weather pattern. These fishing groups can have good years and terrible years, often for reasons well outside of their control. In this case, that cancellation gave global prices a boost, which helped Oceana. Of course, if Oceana actually owned a business in Peru, it would be a very different outcome. Oceana wasn’t immune to the weather patterns in this period, as La Niña caused local horse mackerel catch rates to drop by 32.4%.
The outlook seems to generally be positive, but of course there are many reasons why the final performance might be very different to expectations.
Shaftesbury celebrates strong trading in the West End (JSE: SHC)
The target is 5% to 7% rental growth per annum – and that’s measured in GBP
London’s West End is world famous and with good reason. Shaftesbury refers to its portfolio as “irreplaceable” – so at least they have no shortage of love for their properties. Shoppers seem to like them as well, with footfall up 12% year-on-year. Leasing transactions signed over the past few months are running at rentals 6% higher than the June 2023 financial year.
The vacancy rate has moved even lower, down at 2.2% from 2.5% in the year ended June 2023.
Perhaps most importantly, asset disposals have been 12% ahead of the June 2023 valuation. They’ve identified 5% of the portfolio to be recycled, which is the REIT term for selling properties to unlock capital for reinvestment elsewhere.
The fund is targeting growth in rentals of 5% to 7% per annum. Provided cap rates (the valuation methodology for properties) remain stable, this implies total annual property returns of 7% to 9%. It’s quite interesting to note that the expectation is for 1% of the total property value to be invested per annum in refurbishment, asset management and “repositioning opportunities”, along with energy upgrades.
The loan-to-value ratio is 30%, adjusted for disposals since June. All of the group’s debt is at fixed rates and the weighted average cost of debt is 4.2%.
Standard Bank affirms guidance for a strong full-year result (JSE: SBK)
Based on the ten months to October, things are still looking good
Standard Bank has released a voluntary trading update for the ten months to October 2023. It’s good news for shareholders, with full-year guidance affirmed. This means the group expects to deliver better margins, a credit loss ratio within the through-the-cycle target range of 70 – 100 basis points and return on equity between 17% and 20%.
Looking deeper, banking revenue growth over the 10-month period is up by more than 20%, although the rate of growth has slowed as the bank has started lapping periods of higher interest rates.
This is why net interest margin expansion has calmed down in recent months, with lower retail demand for credit and more competitive pricing (especially on mortgages) also playing a role. Notably, corporate-related demand for debt is strong, particularly for energy-related opportunities. Dankie, Eskom.
Non-interest revenue is up by low-to-mid teens, helped along by transaction volumes, price increases and general market volatility that supports trading revenues. Remember, banks want volatility in the market, as they provide execution on the market rather than taking a view on the direction of the market. This is very different to asset managers.
As a reminder, cost growth in the interim period was 16%. The group notes that this growth rate has come down, but it remains “elevated” overall. Other than that rather cryptic description, what we do know is that the bank has achieved positive jaws, which means revenue growth has exceeded cost growth i.e. margins expanded.
The credit-loss-ratio “remains below the top of the target range” so we have to assume it is pretty close to 100 basis points, which certainly makes sense given the broader operating environment.
Finally, before you forget that there’s far more to Standard Bank than just South Africa, the Africa Regions contributed 44% of group headline earnings.
Tsogo Sun heads sideways (JSE: TSG)
Load shedding is incredibly expensive for the group
It’s hard out there. When you see a company with revenue growth of 7% and EBITDA growth of just 1%, then you know cost pressures are severe. Tsogo Sun’s results for the six months to September may reflect HEPS growth of 48%, but don’t let that fool you about the story on the ground.
You see, the prior period reflected headline earnings of R607 million, but this included the once-off cost to terminate hotel management contracts. If we strip that out to make it more comparable, we find headline earnings of R896 million. In this period, headline earnings came in at R895 million. It’s a resilient result, but there’s been zero growth here.
The first culprit is load shedding, which the group reckons was responsible for a 100 basis points knock to EBITDA margin. They achieved a margin of 34% this period and they believe it would’ve been 35% without the cost of diesel.
The other issue is the same one that many corporates are facing, a sharp rise in net finance costs. They have increased from R316 million to R370 million. Just like at Invicta as referenced further up, the banks are getting the growth, not the equity investors.
Looking deeper, the bingo and limited payout machines took the biggest knock. There were some encouraging signs elsewhere, like improvement in hotel vacancies despite a jump in average room rate, driving double-digit revenue growth in that part of the business. And perhaps in sync with the commodity that it is named after, Gold Reef City is performing well.
Wesizwe’s Bakubung mine enters a s189 process (JSE: WEZ)
I fear that there is more to come in the PGM sector based on commodity prices
Wesizwe Platinum announced that the Bakubung Platinum Mine has entered into s189 consultations, which is a fancy way of saying that retrenchments are the Christmas present that none of the staff wanted. After two strikes in 2022 and 2023 as well as an unprotected strike over five weeks, executed against a backdrop of plummeting PGM prices, the sad reality is that economic troubles eventually lead to long-lasting consequences.
There are 571 employees that could be affected. The current headcount is 761 employees. This is a huge cutback, with the company referring to it as a “bloated structure” that simply isn’t viable.
Zeda’s rental business looks good, but used cars are struggling (JSE: ZZD)
It seems that the used car market is finally feeling the pinch
Zeda has released its first annual results as a listed company. They will go down as a great start to the company’s life-after-Barloworld, with revenue for the year ended September up by 12% and HEPS up by 17%. A return on equity of 36.7% is exceptional.
The segmental performance is interesting. Car rentals grew 12% and leasing grew by 13%, but the car business recorded flat revenue and unit sales.
Still, it was enough for Zeda to settle the unbundling debt of R1.55 billion two years ahead of schedule. There is now a healthy net debt to EBITDA ratio of 1.5x. Although this obviously puts HEPS growth under pressure, it juices up return on equity as much of the growth is being funded with bank debt rather than shareholder equity.
The share price has been on quite the rollercoaster ride. Despite a rally of 27% in the past 30 days, it’s still slightly down year-to-date.
Little Bites:
Director dealings:
An executive director of Richemont (JSE: CFR) – and we can probably guess who – exercised warrants for B shares and paid R2.2 billion for the new shares. See the note further down regarding these warrants.
A non-executive director of Bytes Technology Group (JSE: BYI) sold shares worth £294k and a senior executive sold shares worth £1.1 million.
An associate of a director of a major subsidiary of Discovery (JSE: DSY) has sold shares worth R8.25 million.
Dr. Christo Wiese has bought shares in Collins Property Group (JSE: CPP) worth R1.02 million.
The general partner of the ARC Fund, UBI General Partner Proprietary Limited, is a related party to Dr. Johan van Zyl. UBI has bought shares in African Rainbow Capital (JSE: AIL) worth R992k.
A non-executive director of Glencore (JSE: GLN) has bought shares worth £49k.
The CEO of Primary Health Properties (JSE: PHP) bought shares worth £3.1k as part of a dividend reinvestment plan.
Take note Sun International (JSE: SUI) shareholders: the company is now trading under cautionary due to a potential acquisition. No further details have been announced at this stage. As always, there is no certainty whatsoever of a deal being put to shareholders. All we know is that discussions are underway.
Ellies Holdings (JSE: ELI) has renewed the cautionary announcement. This company has been trading under cautionary since September 2022, so it’s a bit of a joke now. The share price is down at 5 cents.
The work permit for Matias Cardarelli has finally been issued, so he can replace Roland van Wijnen as CEO of PPC (JSE: PPC) with effect from 1 December 2023.
Vodacom’s B-BBEE scheme YeboYethu (JSE: YYLBEE) released results for the six months to September 2023. These structures are usually highly leveraged and Vodacom’s is no different, so higher interest rates are a problem. An interim dividend of 92 cents per share has been declared. The share price is R28.
Back in 2020, Richemont (JSE: CFR) created a “loyalty scheme” to mitigate the reduction in the cash dividend by issuing share warrants to investors. There was a three-year exercise period. 98.9% of those warrants were executed, representing around 2.9% of shares currently in issue. This has obviously been dilutive for shareholders who didn’t receive or exercise the warrants, but those shareholders also benefitted from the company finding an innovative way to retain its cash.
Tiny little Nictus Limited (JSE: NCS) – market cap R33 million – released a trading statement for the six months to September. HEPS is expected to be between 6.86 cents and 7.02 cents, which is a solid turnaround from a headline loss of 0.82 cents in the comparable period. The share price is 62 cents but the bid-offer spread is the size of earth.
Super Group (JSE: SPG) announced that its very strong credit rating has been affirmed by S&P Global Ratings. It has a long-term national scale rating of zaAAA and a short-term rating of zaA-1+. When it comes to credit ratings, seeing a lot of As is a good thing.
In case you are stuck in suspended counter Efora Energy (JSE: EEL), you might want to know that the company has now released results for the six months to August 2021, as well as the year ended February 2022.
At least there’s one less zombie on the JSE, with the listing of W G Wearne (JSE: WEA) being removed from 28 November. The company says that it will consider a listing on other exchanges in South Africa in due course. Good luck to you if you are stuck in that thing with unlisted shares.
The irony behind the most recognisable violin hook in 90s alt-rock, and what it can teach us all about the cost of an original idea.
If you were following local business news last week, you probably already know that Pick n Pay received quite an embarrassing slap on the wrist courtesy of Checkers and the High Court of Cape Town. But in case you missed it, I’ll give you a quick summary of what happened.
In 2021, Pick n Pay decided to introduce a new premium range of products for its core upper customer, with the primary objective of establishing a “foodie brand” across multiple categories. The issue that landed them in court is that the packaging of said range is strikingly similar to the packaging on Checkers’ premium Forage and Feast range, which was launched at the end of 2020.
At a quick glance, you may not even be able to tell which packaging belongs to which retailer. Both feature a navy, white and gold colour scheme, with similar fonts and other design elements.
Following a tussle in the courts, Deputy Judge President Patricia Goliath has ordered Pick n Pay to “destroy all printed materials, product packaging and the like bearing the infringing get-ups, which are under its control, or alternatively to deliver all such material to Shoprite Checkers for destruction.”
Of course, Pick n Pay is denying any wrongdoing on their side, insisting that as a brand, they have always made extensive use of the colour navy. They will seek leave to appeal the judgement. I guess we’ll have to wait and see how that works out for them.
Originality: an expensive commodity
So why all the fuss?
In the competitive landscape of business, originality is not just a rare gem; it’s an advantage. Companies invest considerable resources in cultivating and safeguarding their unique ideas, as originality often serves as a crucial differentiator in the marketplace. Copyright, the legal mechanism designed to protect the expression of creative concepts, plays a pivotal role in this endeavour.
Now, Checkers can’t claim to have the copyright on navy blue packaging, but what they can do (and have successfully done) is to claim that Pick n Pay’s too-similar design is misleading to customers, who could potentially confuse the two brands.
Ultimately, the investment in preserving original ideas reflects a commitment to maintaining a competitive edge and ensuring that innovation remains a strategic advantage. This is why Checkers was willing to fight tooth and nail to make sure that their ideas remain only theirs.
Cue the violins
Perhaps one of my favourite examples of the intricacies of intellectual property comes from the world of music.
Even if you’ve never heard of a band called The Verve, odds are you’ve probably heard their breakout hit, “Bitter Sweet Symphony”, at least once in your life.
Refresh your memory and indulge in a little classic 90s alt-rock:
You probably don’t even have to make it more than two bars into this song to recognise it, thanks to that hyper-memorable violin melody that plays on repeat. And it’s exactly that violin melody that got The Verve into a lot of trouble in 1997.
That’s because the string section that opens “Bitter Sweet Symphony” was based off of a sample taken out of a Rolling Stones song called “The Last Time” – or to be more precise, the orchestral version of “The Last Time” that was recorded by the Andrew Oldham Orchestra in 1965.
You can hear the Oldham Orchestra version here:
What’s a sample, you ask? In music, sampling is like borrowing a snippet (or sample) from one recording to use in another. These samples can be bits of rhythm, melody, speech, sound effects, or even longer chunks of music.
But, here’s the catch – using samples without permission could land you in considerable copyright trouble. And getting the green light for sampling, known as clearance, can be a really complicated affair. If you are asked to pay to use the sample in question, it could also be quite expensive, especially if you’re eyeing samples from big-name sources.
What makes it all the more tricky is that there’s no law that specifically prohibits sampling, and different courts have different takes on whether sampling without permission is OK or whether it constitutes copyright fraud. Most issues are decided on a case-by-case basis.
In the case of The Verve, things did not end well. While lead songwriter Richard Ashcroft had negotiated use of the sample from copyright holder Decca Records, he neglected to obtain permission from the Rolling Stones’ former manager, Allen Klein, who owned the copyrights to all of the Stones’ pre-1970 songs, including “The Last Time”.
When “Bitter Sweet Symphony” was gearing up for its single debut, Klein, who was then at the helm of ABKCO Records, threw a curveball by denying clearance for the sample. He claimed that The Verve had exceeded the portion that they had agreed with Decca Records. A legal skirmish ensued, leading The Verve to surrender all royalties to Klein. As further salt in the wound, songwriting credits on “Bitter Sweet Symphony” were changed to Jagger–Richards (the lead members of the Rolling Stones).
Verve songwriter Richard Ashcroft walked away with his hit song under someone else’s name and a modest $1,000 in his pocket. The band’s bassist, Simon Jones, later went on to reveal that the band were initially promised half the royalties. However, when the single started flying off the shelves, they were given an impossible choice: hand over 100% of the royalties, or remove the song from circulation permanently.
“Bitter Sweet Symphony”’ reached No 2 in the UK and No 12 in the US in its year of release, and was even nominated for a Grammy. To this day, it remains one of the most recognisable songs of the 1990s, eclipsing every other track ever released by The Verve. In 2019, Billboard estimated that the single had generated almost $5 million in publishing revenue since its release. None of that revenue went to Ashcroft or any of the other members of The Verve.
If that isn’t the very definition of bittersweet success, then I don’t know what is.
Fortunately, this story does have a somewhat happy ending
Following the death of Allen Klein in 2009, Ashcroft approached Joyce Smith, who took over the management of the Stones, with an appeal to have his songwriting credits restored. He was successful – in 2019, ABKCO, Jagger and Richards agreed to return the “Bitter Sweet Symphony” royalties and songwriting credits to Ashcroft. There’s no back payment of the 22 years worth of royalties that the Stones pocketed on Ashcroft’s behalf, but he will receive all royalties going forward.
As businesses fight in the realm of innovation, the recent battle between Checkers and Pick n Pay serves as a cautionary tale. It underscores the notion that an original idea is not only a source of competitive advantage but a precious asset worth protecting. In a world inundated with choices and visual stimuli, the distinctiveness of a brand (or a piece of music) can be the deciding factor in capturing consumer attention and loyalty.
The lesson reverberates beyond the courtroom: originality is well worth fighting for. In the end, the battleground may differ, but the essence remains the same. The pursuit of originality is a journey that demands resilience, legal acumen, and an unwavering commitment to protecting the integrity of ideas in a world where imitation lurks just around the aisle or the musical note.
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.
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:
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Southern Sun and City Lodge are enjoying a resurgence in demand for hotel rooms, with the former doing as well as I expected and the latter surprising me to the upside.
Sirius Real Estate executed a successful capital raise on the market, demonstrating that investors are highly supportive of the strategy.
African Rainbow Capital has made sure once and for all that I’ll never touch the company with my money, as the latest capital raise is highly painful for minority shareholders.
Sibanye-Stillwater incurred the wrath of investors with the news of a convertible bond capital raise, but did the market overreact to this news?
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