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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?

There was not much happening in the local M&A space this week – all eyes were on the SARB governor Lesetja Kganyago as to whether he would hike interest rates further. The sigh of relief was palpable with the governor announcing on Thursday to keep the repo rate unchanged at 8.25% and prime at 11.75%. He did add however that this may not be the end of the hiking cycle, but would reassess the data at each meeting going forward.

Exchange-Listed Companies

Super Group, through its UK subsidiary, SG International Holdings, has acquired a 78.82% stake in UK transport and logistics business CBW Group (t/a Amco) from management for a cash consideration of £30,3 million. Amco delivers its logistics services to 250 active UK and European customers operating in a diverse range of manufacturing sectors. The deal will significantly enhance Super Group’s supply chain offering providing opportunities for market share gains across the UK and Europe.

Northam Platinum (Northam) advised shareholders this week that it had submitted its acceptance of the Impala Platinum (Implats) mandatory offer to acquire its 34.5% stake in Royal Bafokeng Platinum (RBPlat). The protracted struggle for control of RBPlat began in November 2021. Northam will receive R9 billion and 30,065,866 Implats shares (a 3.3% stake) valued at c. R4,1 billion. In a market statement, Northam said the disposal provided a well-timed opportunity for the company to secure a significant cash injection which would materially strengthen its balance sheet and liquidity position at a time when prevailing PGM market conditions and the decline in the PGM basket price may signal a potentially protracted cyclical downturn.

Unlisted Companies

RSM South Africa is to merge with local accounting services firm Ngubane Johannesburg. The combined business will operate under the RSM South African brand. Financial details were undisclosed.

Transnet announced International Container Terminal Services Inc., a Philippines-headquartered company, as the preferred bidder for the 25-year joint venture to develop and manage the Durban Container Terminal Pier 2.

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

Ghost Bites (Amplats | Anglo American | Balwin | BHP | Famous Brands | Jubilee Metals | Karooooo | Kumba | Northam Platinum | Telkom | Truworths)

The Finance Ghost
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Ghost Bites (Amplats | Anglo American | Balwin | BHP | Famous Brands | Jubilee Metals | Karooooo | Kumba | Northam Platinum | Telkom | Truworths)

Amplats really isn’t shining (JSE: AMS)

Production pressures have come at exactly the wrong time

In the second quarter, there really aren’t many highlights at Anglo American Platinum, or Amplats as it is more commonly known.

Total PGM production is down 9% year-on-year, with reasons ranging from planned infrastructure closures through to Eskom load curtailment. Refined PGM production fell by 13%, with lower metal-in-concentrate as an additional factor.

Sales volumes fell by 8% based on lower refined production.

Despite this, guidance for 2023 in terms of volumes is unchanged. Unit cost per ounce is expected to be at the upper end of the range, which makes sense in the context of production challenges and inflationary pressures.

With PGM basket prices down horribly, Amplats simply cannot afford a poor production result.

Anglo gets a boost from Quellaveco (JSE: AGL)

Other production numbers were a mixed bag this quarter

In the quarter ended June, Anglo American increased overall production by 11% year-on-year.

The Quelleveco copper mine in Peru was a big part of this, driving copper production up by 56% (despite operations in Chile falling by 2%).

Beyond copper, there were drops in Nickel (4%), PGMs (9%) and diamonds (5%), with the latter impacted by the De Beers Venetia mine transitioning to underground operations.

Iron ore increased by 9% thanks to a big performance at Minas-Rio and steelmaking coal was up 28%, with unseasonal poor weather in the base period.

In several commodities, unit cost guidance has been increased. This is usually a combination of production pressures and inflationary impacts.

Over the last six months, realised commodity prices have fallen almost across the board. Notably, Nickel is down 22%, the PGM basket price is down 29% and De Beers down 23%. Iron ore and steelmaking coal are also on the wrong side of 20% declines.

The share price is down around 20% this year.

Balwin takes out the B-BBEE lock-in (JSE: BWN)

This potentially sets very important precedent

In an announcement innocently titled “amendments to the notice of annual general meeting”, there’s a bit of a bombshell for B-BBEE Ownership deal structuring.

Balwin’s initial proposed deal would see the B-BBEE partner (Tatovect) locked in for 10 years. This is quite long even by recent deal standards, but lock-ins are generally seen as part of the B-BBEE landscape.

Well, they were at least.

The transaction was registered as a Major Transaction with the B-BBEE Commission and that’s where the trouble started, as the Commission wasn’t happy with it. Although the lock-in is perfectly legal, Balwin chose to amend the terms to get the Commission across the line.

So, instead of a 10-year lock-in structure, Tatovect can exit at any time provided (1) the loan from Balwin is repaid in full and (2) the 20% discount on VWAP initially granted to Tatovect on its entry price can be refunded.

If the exit takes place after 10 years, then the refund of the 20% discount would not apply.

BHP released an operational review (JSE: BHG)

Full year production guidance was mostly achieved

For the year ended June 2023, BHP achieved guidance for copper, iron ore, metallurgical coal and energy coal. Nickel achieved revised guidance, finishing in line with the lower end of original guidance.

Full year unit cost was a mixed bag, with facilities generally meeting or being slightly above guidance.

BHP can’t do much about prevailing commodity prices, with average realised prices for copper, iron ore and metallurgical coal being lower in the 2023 financial year than the prior year. Nickel prices were stable and thermal coal prices were stronger, but mainly in the first half of the year.

The acquisition of OZ Minerals was completed in May, with this deal expected to lift production in the South Australian copper business.

Although profitability will only become clear once financial results are released, the CEO commentary does note that inflationary pressures impacted the business.

Famous Brands gives a trading update at the AGM (JSE: FBR)

The company is highlighting the costs of load shedding

I must say, I’ve generally held the view that quick-service restaurants are net winners from load shedding. When the lights are off, the local Steers is your friend. If you’ve seen the menu prices though, you’ll also know that inflation is high and consumer budgets are finding it very hard to keep buying burgers.

In the back-end, Famous Brands and its manufacturing plants must keep the power on even during stage 6, otherwise they can’t supply restaurants. This is why diesel usage for the first quarter is up from R1 million last year to R8.8 million this year. It dropped again in June, as load shedding improved.

Looking at sales for the four months to June, Leading Brands increased by 9% and Signature Brands fell by 1% with a slowdown in evening dining. Affordability, perhaps?

The retail portfolio is up 61%. A good way to feel better during load shedding is to pile on the Steers sauce at home.

In the UK and in the AME segment, revenue increased by 20%. SA was up 10% overall. This means that group sales increased by 11%, with no indication of net profit for the period.

Jubilee Metals mostly beat production guidance this year (JSE: JBL)

PGM and chrome production were ahead, while copper lagged guidance marginally

In an operational update for the year ended June 2023, Jubilee Metals noted a strong operational performance from the South African PGM and chrome operations. In both cases, production was ahead of guidance. PGM production was 2% higher year-on-year and chrome was 7% higher.

Copper production increased by 2% but narrowly missed guidance (2,923 tonnes vs. guidance of 3,000 tonnes) due to power and water disruptions in Zambia in the first half of the year that impacted ramp-up of the Roan Concentrator. Jubilee is pushing hard with the copper strategy, with a planned capital investment of $8.5 million for further upgrades.

The company expects further growth in production in FY24.

Karooooo accelerates subscriber growth (JSE: KRO)

It’s also good to see positive growth in cash from operations

In the first quarter of the 2024 financial year, Karooooo grew Cartrack subscribers by 14% to 1.757 million. Importantly, the rate of growth increased sharply. There were 40,375 net new subscribers in this quarter, vs. 16,800 net new subscribers in the comparable quarter.

Total revenue increased by 24%, or 19% on a constant currency basis. As the group has increasingly invested in non-subscription businesses (to my irritation as a shareholder), subscription revenue was up 18% or 12% in constant currency – quite different to the group total revenue growth.

Cash generated from operating activities was up 7%. Growth is generally a drain on cash for Karooooo, as the telematics devices are an expensive initial outlay to get a new customer onto the Cartrack system.

Net cash increased by 33% to R1.137 billion.

Kumba on track to achieve full-year production guidance (JSE: KIO)

The first half of the year has delivered encouraging numbers – other than re: Transnet

It sounds like a fairly successful interim period at Kumba, with the management team feeling bullish about meeting full-year guidance. Well, guidance for production, that is.

Iron ore production was 6% higher in this period, although ongoing issues on the Transnet rail line meant that ore railed to port at Saldanha Bay was down 3%. Sales fell by 4% due to lower finished stock levels at the port.

Production and unit cost guidance for the full-year has been maintained but sales guidance has been revised downwards because of rail constraints. Non-critical capital expenditure has been deferred based on logistical challenges, so there’s yet another example of Transnet scoring more own goals for SA.

If you read far enough down, you’ll find a trading statement in this announcement that was almost hidden from view. For the six months to June, HEPS is expected to decrease by between 14% and 22%. This puts HEPS at between R28.16 and R31.17. For reference, the share price is around R444 and has dropped more than 9% this year.

Northam Platinum takes a bath on RB Plats (JSE: NPH)

Impala Platinum is the overall winner…right?

The saga around Royal Bafokeng Platinum (JSE: RBP) has been quite something to behold. After Impala Platinum (JSE: IMP) finally got through all the hurdles, including the ones raised by Northam Platinum (JSE: NPH) at the Takeover Regulation Panel (TRP), the questions remained around what Northams would do with its 34.5% stake in RB Plats.

We now know what the company will do. It will be accepting the mandatory offer from Implats, locking in a substantial loss (roughly R4 billion) but also liquidating the stake at a time when the PGM market has deteriorated since the initial deal.

To be fair, the original stake in RB Plats was acquired back in November 2021. The deal has taken an incredibly long time to be concluded.

Northams will receive R9 billion in cash and shares in Implats worth roughly R4.1 billion as consideration for the stake. This is a 3.3% stake in Implats, so it should be liquid enough to sell down over time if the company so chooses.

The market didn’t care about the loss being locked in by Northams. Instead, it added over 6% to the share price in celebration of cash coming into the group during a period of uncertainty in PGMs.

Is Implats the winner here? In a strict reading of the deal, then yes. But have they ended up overpaying for an asset and being incredibly distracted along the way by Northams’ tactics? There’s an argument to be made along those lines as well.

Telkom declares victory in court (JSE: TKG)

Now here’s a rare thing: some good news for Telkom!

Back in January 2022, a Presidential Proclamation was gazetted that gave the Special Investigative Unit the power to investigate various matters that included the disposal of former Telkom subsidiaries.

Telkom went straight to court and has won in the Pretoria High Court, which declared the proclamation unconstitutional, invalid and of no force or effect. Considering the amount of financial pain Telkom has been taking recently, it’s also quite handy that they were awarded costs.

The argument here isn’t that nothing had been done wrong historically, but rather that Telkom had taken action based on its own investigations and had launched legal proceedings where appropriate.

Truworths: a slowdown in H2 sales in the local segment (JSE: TRU)

Load shedding and high interest rates: when the fun stops for retailers

Truworths has released a sales update for the 52 weeks to 2 July 2023. The first important point is that the prior period was a 53-week reporting calendar, so the numbers aren’t directly comparable to what was reported. Truworths does the right thing by giving us growth rates based on 52 vs. 52 week periods, and even goes so far as to split this into H1 and H2 (the two halves of the year).

I will only be quoting the 52 vs. 52 week numbers as the others are worthless.

For the full year, Truworths Africa (which includes SA) grew sales 9.1%. Office in the UK was up 18.8% and the group total was thus 13.2%.

Split into halves, the group level numbers are remarkably consistent: growth of 13.0% in H1 and 13.4% in H2.

If we dig a little deeper, we find that Truworths Africa slowed down sharply in H2, growing just 4% vs. 13.4% in the first half. That’s a direct result of consumer pressures and load shedding. It really doesn’t help that power backup costs were elevated in that period, so I’m quite sure that the eventual release of full financial results will show a tough profitability result in Truworths Africa.

For the full year, volumes fell sharply as like-for-like sales growth was 4.4% and product inflation was 12.6%. This means an 8.2% drop in volumes.

Account sales were 70% of the Truworths Africa total (vs. 69% last year) and overdue balances as a percentage of gross receivables increased from 14% to 16%, so credit quality is showing a negative trend.

This means that Office in the UK had a phenomenal H2 performance, in order to balance out the local performance and give a consistent group result over the year. Sure enough, H1 growth was 12.3% and H2 was 27.1%. Online sales contribution was unchanged at 45% and this sales growth was achieved despite a decrease in trading space of 12.6%.

No guidance for profitability has been given. Truworths Africa is 73% of group revenue, so don’t get too excited by the UK results.

Little Bites:

  • Director dealings:
    • After a major recent sale by directors of The Foschini Group (JSE: TFG), a different director has now sold shares worth nearly R2.9 million. Given the risks in local retail and the level of debt that TFG took on, this is a strong negative signal for me.
    • The company secretary of Oceana (JSE: OCE) has sold shares worth R201k.
    • A director of RFG Holdings (JSE: RFG) has bought shares worth R39k.
    • In one of the strangest SENS announcements you’ll see, included here for comedic value rather than anything else, a trust linked to the CEO of Argent Industrial (JSE: ART) sold one share.

Weekly corporate finance activity by SA exchange-listed companies

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

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 280,009 Investec Plc shares at an average price of 435 pence per share (LSE and BATS Europe) and 294,217 Investec Plc shares at an average price of R107.73 per share (JSE).

Datatec has issued 4,606,140 new Datatec shares in terms of its scrip dividend election at R36,42 per share amounting to R167,7 million.

The specific repurchase by Texton Property Fund of 72,1 million of its shares from the Government Employees Pension Fund for R155 million is unconditional and the shares will be delisted on 20th July.

Tsogo Sun, which dropped ‘Gaming’ from its name in June, proposes to implement an odd-lot offer to facilitate a reduction in the large number of shareholders who hold less than 100 Tsogo Sun shares. The offer price will be announced is expected to be announced in mid-August with the results of the offer released on 11 September 2023.

The consolidation of Nampak’s shares as set out in the circular sent out in May will take effect next week on 26 July, 2023. The authorised and issued share capital will be consolidated and reduced in the ratio of 1 share for every 250 shares.

The JSE has flagged the following companies as having failed to submit their provisional reports within the three-month period as stipulated in the JSE’s Listing Requirements: Accelerate Property Fund, Salungano Group and Sebata Holdings. If provisional reports are not submitted on or before 31 July, 2023, their listings may be suspended.

The following companies reported repurchasing shares. They were:

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. Over the period 10 -14 July 2023, 329,4031 shares were repurchased at an average price per share of R106.73. Since November 21 2022, the company has repurchased 13,041,882 shares at a cost of R1,39 billion.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 10-14 July 2023, a further 2,677,348 Prosus shares were repurchased for an aggregate €179,76 million and a further 431,515 Naspers shares for a total consideration of R1,4 billion.

Four companies issued profit warnings this week: Anglo American Platinum, Arcelor Mittal, Pick n Pay and Kumba Iron Ore.

Two companies issued or withdrew a cautionary notice: Astoria Investments and Trustco.

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

Access Bank Plc and Standard Chartered Bank have reached agreement on the sale of Standard Chartered’s shareholding in its subsidiaries in Angola, Cameroon, The Gambia, Sierra Leone and its Consumer, Private & Business Banking divisions in Tanzania. Financial terms were not disclosed.

Vantage Capital has acquired a controlling stake in Aquasantec International. The US$25 million investment of mezzanine debt and equity is part of a leveraged management buy-out which saw the exit of the founding Shah family, Ramco Group and Terra Mauricia. Aquasantec manufactures and distributes water tanks, pipes and related products across East Africa.

UGFS North Africa has invested an undisclosed sum in Tunisia’s Kaco. The mobility startup was founded in 2018 and the new fundraising round will provide the financial support the company needs to complete the construction of a new production facility with the capacity to manufacture a thousand scooters a year.

Egyptian fintech Flash has announced a US$6 million seed round led by Addition. The round also included Flourish Ventures and some angel investors. The funding will accelerate the fintech’s product development and customer and business acquisition in Egypt.

Sahel Capital has extended a three-year term loan and renewable working capital line to Tanzania’s Rogathe Dairy Farm Products. The investment was made from its impact fund – Social Enterprise Fund for Agriculture in Africa.

Scatec ASA has agreed to sell its 52.5% equity stake in the 40MW Mocuba solar power plant in Mozambique, to Globeleq for US$8,5 million. The Mocuba solar power plant is located in the Zambézia province; has an approximate 75GWh annual production and a 25-year PPA with state-owned utility, EDM.

Ventures Platform, Founders Factory and Techstars (follow-on investor) have made a pre-seed investment of US$1,25 million in Nigerian insurtech, MyCover.ai.

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

Ghost Bites (Accelerate Property Fund | Pick n Pay | Super Group)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | Pick n Pay | Super Group)

Accelerate releases detailed results (JSE: APF)

Investors can now see why the distribution is a thing of the past

Property funds are supposed to pay dividends. When they don’t, there is much unhappiness and understandably so.

Accelerate Property Fund released results for the year ended March 2023 and they make for ugly reading. Distributable income has dropped from R210.5 million to R56.8 million, with the distribution itself dropping from 21.98 cents to absolutely nothing.

Decelerate Property Fund, more like it.

Metrics have really deteriorated, like interest cover down from 2.1x to 1.8x and loan-to-value down from 42.8% to 44.8%. The net asset value (NAV) has nosedived from R6.21 to R4.13.

The share price is 79 cents, so it still trades at a huge discount to NAV. As we’ve just seen though, the NAV can quickly diminish.

The group sold R146.7 million worth of assets in this period and has another R292.4 million held for sale. With discussions underway to restructure debt and reduce covenants on a temporary basis to give the balance sheet some breathing room, these disposals are important. Of total debt of R4.5 billion, a whopping R2.4 billion is short-term in nature.

This is a crunch year for Accelerate, which is why the distribution is gone.

Pick n Pay’s volumes have dropped sharply (JSE: PIK)

Grocery retail isn’t nearly as defensive as people think it is

I frequently write about the “defensiveness” of grocery retail, or the lack thereof. Yes, people need to eat. No, they don’t need to put fancy cheeses in the basket that carry a high margin. Instead, they can put baked beans in the basket that are on promotion, because every grocery retailer is fighting over the same base of consumers and their affordability challenges.

Pick n Pay has released a trading update for the 20 weeks ended 16 July 2023 that supports this view. Although there are rainbows among the clouds like Boxer and growth in the online business, the core Pick n Pay grocery business is taking pain.

At group level, sales for the first 4.5 months of the financial year were up 4.8%. South Africa grew 4.4% and Rest of Africa was up 15.9%.

Clothing in stand-alone stores grew 10.9%, which is solid. Group liquor was up 9.8%. Online jumped by 75.3%, showing how consumer preferences have shifted since the pandemic.

If we dig into South Africa though, Pick n Pay SA fell by 0.3%. The result was 0.0% on a like-for-like basis, with internal selling price inflation of 9.5%. This means that volumes fell by 9.5%! Although inflation was well below the Stats SA Food CPI of 13.2%, Pick n Pay notes that sales were impacted by less promotional activity in this period as they had to try and protect margin with pressures from load shedding. Diesel costs for generators for 4 months was R300 million, with incremental net energy costs of R165 million.

Conversely, Boxer managed to grow by 15.4%. The like-for-like growth was only 3.0%, so most of this was from new stores. Growth in volumes would’ve been negative as well.

The stores that have been upgraded under the Project Ekuseni programme are outperforming other stores, as one would hope. To help pay for it, the next phase of Project Future (a voluntary severance programme and a restructuring of junior store management) incurred a restructuring charge of around R250 million, with expected annual cost savings of R300 million.

Interestingly, Pick n Pay is putting debt back on the balance sheet. The group raised R5.5 billion of medium- and long-term facilities, a significant strategic shift from the deleveraging strategy a few years ago.

For the interim period ending in August, the net incremental energy cost for the period is expected to be R250 million. To add to the struggle in a period of heightened load shedding, there was R110 million in duplicated supply chain costs during the Longmeadow / Eastport handover and R250 million in Project Future restructuring costs, as noted above.

If you add that up, you get to R610 million. Profit before tax in the comparable period was R588 million, so Pick n Pay is going to report a headline loss in this period. The full-year result should be profitable, as the worst of the once-off costs are all being taken in the first six months.

Either way, this is a perfect example of why I’m not invested in local retailers in a load shedding environment.

Super Group is acquiring CBW Group (JSE: SPG)

This is a transport and logistics business in the UK

Super Group has announced the acquisition of a 78.82% stake in CBW Group in the UK, which trades as Amco. The deal value is £30.3 million, settled in cash. Existing management will retain the remaining 21.18% and will remain employed in the business, so that’s good for alignment.

Super Group has paid for the deal by raising a five-year corporate bond of R810 million. The announcement doesn’t give an indication of what the cost of this debt is.

Amco is a transport and logistics business in the UK. It has been around since 1983 and operates across 11 locations in the UK, with strategic hubs in Europe as well. The company services a number of sectors. Super Group likes this business because it complements the existing supply chain offering and provides opportunities for market share gains in the region.

The business generates EBITDA of £9.2 million and profit after tax of £6.65 million. If we scale up the purchase price to a 100% stake, it implies a value of £38.44 million for the entire business. That’s a Price/Earnings multiple of roughly 5.8x.

There are no outstanding conditions and the deal closed on the day it was announced i.e. 19 July 2023.

Little Bites:

  • Director dealings:
    • The CFO of Famous Brands (JSE: FBR) loves a bit of contracts for difference (CFD) trading in Famous Brands shares. His latest purchase is CFDs to the value of R871k.
    • The company secretary of CMH (JSE: CMH) has sold shares worth R1.13 million.
  • Trustco (JSE: TTO) has been trading under cautionary for a while. One of the potential transactions relates to a management fee with Next Capital. The other relates to the Meya asset in which a third party is looking at subscribing for shares. Trustco has been waiting for a ruling from the JSE on the categorisation of that deal. As a terms announcement will be coming soon, we can assume that it is a Category 2 deal (although the announcement doesn’t explicitly say that).

Ghost Global: Champagne Problems

The Finance Ghost and Dominique Olivier
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Ghost Global: Champagne Problems

It’s the old story, isn’t it? Would you rather own a Louis Vuitton bag, or Louis Vuitton shares?

If you bought Swatch shares 10 years ago instead of one of the watches, you would’ve been better off with the watch! There’s never a guarantee of success when it comes to investing.

As we discover in Magic Markets Premium this week, Swatch isn’t really a luxury goods company. Although it includes brands like Omega and Blancpain, Swatches themselves are far from luxurious and are facing disruption from smart watches and fitness watches.

The Louis Vuitton (or Richemont) products face no such disruptions from tech-enabled substitutes. This doesn’t mean that there are always customers available for the products though, evidenced by Richemont’s drop in revenue in the Americas in the latest update. That gave the share price a nasty knock of 9.5% on the day of the release.

How big is luxury?

Big. Very big. Depending on which reports you look at, the industry delivers annual revenue somewhere between $300 billion and $350 billion, with very juicy profit margins as well. This characteristic arises from the allure of exclusivity and the aspirational status associated with these coveted products. Brands within this realm often have long-standing traditions of craftsmanship, unparalleled attention to detail, and the use of the finest materials, creating an aura of unmatched prestige.

They also tend to write adverts that sound just like that paragraph.

Of course, it doesn’t hurt that the target audience for these ultra-luxe brands is the upper 0.01% of earners – in other words, the kind of folks who don’t get their feathers ruffled by silly things like recessions.

Economists and finance geeks call these Veblen Goods – products where demand increases as the price increases. In motoring, Ferrari is another good example.

Burberry, not BlackBerry

We’ve covered LVMH, Farfetch (the pure-play online luxury goods business) and Ferrari in Magic Markets Premium. We haven’t covered Burberry in detail yet, but we touch on the latest earnings here.

Burberry’s latest earnings report makes a lot of noise about a strong recovery in Mainland China. In the wake of a pandemic and on the heels of a global recession, the richest of the rich are back to swiping their black cards, resulting in a 46% rise in store sales in what was formerly Covid-19 ground zero. 

The global expansion of a brand like Burberry, which carries a deeply ingrained association with the British elite, might appear paradoxical at first glance. Traditionally tied to British heritage, Burberry’s foray beyond the British Isles reflects a complex interplay of factors and strategic decisions that have driven its international success.

The allure of British heritage and the aristocratic connotations that Burberry embodies have a universal appeal. Across the world, there exists a fascination with British culture, history, and the sophistication associated with the British elite. The fact that Kate Middleton’s signature blowout (her hairstyle) is recognisable to people from South America to the UAE is nothing if not a testament to the reach of the royal family. 

Burberry has capitalised on this fascination by leveraging its rich heritage to craft a powerful and aspirational brand identity that resonates with consumers far beyond the borders of the United Kingdom.

The fashion industry thrives on the concept of luxury and exclusivity. By expanding internationally, Burberry has embraced the opportunity to cater to a broader clientele, many of whom are drawn to the allure of owning a piece of British luxury. This strategy allows the brand to access new markets and tap into the spending power of consumers from diverse cultural backgrounds.

Burberry’s expansion is also a response to the evolving landscape of the global luxury market. As emerging economies have experienced rapid growth and an increase in affluent consumers, luxury brands have sought to establish a presence in these regions. 

Remember, almost every economy has a rich top layer, even if the layers below are knee-deep in trying to afford food. The aspiration for prestigious and high-end products has become increasingly universal, creating a demand for renowned luxury brands like Burberry in the places you might least expect it. 

The numbers

Here are a few financial highlights from Burberry’s latest quarter (Q1’24):

  • Comparable group sales up 18% year-on-year, with Mainland China up 46%.
  • In the most British thing ever, “heritage rainwear” was one of the fastest growing categories.
  • Leather goods grew by 13%, trailing the growth in other categories.

The group has been targeting a high single-digit revenue CAGR (Compound Annual Growth Rate) off the FY20 base. To achieve that, they will need double-digit growth in FY24. So far, so good.

Where to from here for the industry? Probably only up

In our most recent report on luxury goods powerhouse LVMH, we deduced that the luxury industry is not only making strides in new territories but also breaking the age barrier when it comes to attracting consumers. This begs the question: with every generation becoming more socially conscious and spendthrift than the one before, will luxury survive yet another turn of the wheel? 

According to research gathered by Bain, the Gen Z demographic is embracing luxury items at an astonishingly young age, splurging on these coveted products 3 to 5 years earlier than their Millennial predecessors. The trend starts as early as 15 years old, indicating a growing fascination with luxury goods among the younger generation. 

This shift in behaviour can be partly attributed to the influence of social media and the ability to access brand messages and aspirational lifestyles with unprecedented ease. As a result, luxury brands have become more accessible and appealing to a wider audience, even those in their teenage years.

As the saying goes: there’s a millionaire born every minute. And it would appear that the luxury goods industry is standing at the ready to receive those #blessed dollars.

Stock picking needs deeper research

One thing that should never be considered a luxury is knowledge. Deep research into these companies is the only way to assess the investment quality of each business. Investment success is always a function of what you buy and what you pay for it.

With well over 80 research reports on global stocks available in the library, a subscription to Magic Markets Premium for just R99/month gives you access to an exceptional knowledge base that has been built since we launched in 2021. It may say Premium in the name, but that doesn’t mean you’ll pay a premium price!

There is no minimum monthly commitment and you can choose to access the reports in written or podcast format – whatever floats your boat. Sign up here and get ready to learn about global companies>>>

Unlock the Stock: PBT Group

The Finance Ghost
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Unlock the Stock: PBT Group

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.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 21st edition of Unlock the Stock, PBT Group returned to the platform to update investors on recent performance and the way forward.

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:

Ghost Bites (ArcelorMittal | Coronation | Kore Potash | Indluplace | Sebata | Tsogo Sun)

The Finance Ghost
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Ghost Bites (ArcelorMittal | Coronation | Kore Potash | Indluplace | Sebata | Tsogo Sun)

ArcelorMittal gets smoked (JSE: ACL)

There’s nothing quite like a 42.7% drop in one day with the next best bid at 1 cent per share

Investing in cyclical businesses requires a strong stomach. If they look cheap based on the Price/Earnings (P/E) ratio, it’s usually for a good reason. A low trailing P/E is a widowmaker of note in cyclical stocks.

ArcelorMittal is the latest example, with a huge drop in the price after releasing a trading statement for the six months to June 2023. Headline earnings swung wildly from R2.71 per share to a headline loss of between -R0.38 and -R0.46 per share. I can understand now why the CFO left with immediate effect before this result was released. I would also rather find something else to do!

At the start of the year, the outlook was reasonable with positive movements in international steel prices. Globally, de-stocking and lower energy prices were tailwinds for the sector. ArcelorMittal saw none of those benefits in South Africa, with load shedding and negative growth in key steel consuming sectors (like manufacturing and construction) having a substantial effect on the business.

The company simply couldn’t respond to the extent of load shedding. Aside from the obvious impact on earnings, the company also struggled to release working capital. That’s just a way of saying that the balance sheet also came under strain, evidenced by net borrowings remaining too high.

With the company talking about a “weaker-for-longer steel trading environment”, the market ran for the exit.

A slight uptick in AUM at Coronation (JSE: CML)

And I mean slight…

Each quarter, Coronation releases its assets under management. The company never gives comparatives in the announcement, forcing me to go dig through the archives to find the history.

Here it is, with the latest number included:

  • 30 Jun 2023: R627bn
  • 31 Mar 2023: R623bn
  • 31 Dec 2022: R602bn
  • 30 Sep 2022: R574bn
  • 30 Jun 2022: R580bn
  • 31 Mar 2022: R625bn
  • 31 Dec 2021: R662bn

If you’ve been paying attention, you’ll know that Coronation was recently in trouble with SARS and got hit with a major penalty. Along with the pressure on AUM, that’s why the five-year share price chart looks like this:

Coronation is historically a strong dividend payer, so a total return chart would be a fairer reflection. The tax issue wiped out the dividend temporarily, so investors are waiting for the yield play to return.

Kore Potash still needs to finalise the EPC contract (JSE: KP2)

The focus remains on the Kola Project

Way back in 2021, Kore Potash signed a Memorandum of Understanding with the Summit Consortium for the Kola project. By 2022, an optimisation study had been concluded, with heads of agreement signed with SEPCO for the construction of Kola.

A year later, Kore Potash and SEPCO are still trying to finalise the Engineering, Procurement and Construction (EPC) contract. As part of this, Kore looked to SEPCO’s parent company (PowerChina) to provide guarantees, including performance and retention bonds. With PowerChina’s involvement in the project, some design improvements have been suggested that would reduce the cost and shorten the construction time.

Within six weeks of the EPC terms being finalised, the Summit Consortium will provide the necessary finance.

The company also needs to manage impatient government officials in the Congo, so there’s a lot of pressure on getting this across the line.

Kore Potash spent $1.08 million on exploration this quarter. It has $2.6 million remaining in cash.

Indluplace declares its clean-out distribution (JSE: ILU)

This is part of the buyout by SA Corporate Real Estate (JSE: SAC)

Indluplace and SA Corporate Real Estate released a joint announcement confirming that the buyout of Indluplace is now unconditional, with the Takeover Regulation Panel (TRP) having issued a compliance certificate.

The transaction structure includes a clean-out distribution to Indluplace shareholders to reward them for recent earnings before the shares are sold to SA Corporate Real Estate. This distribution has been confirmed as 7.73562 cents per Indluplace share.

For reference, the Indluplace share price is R3.45 and the cash offer from SA Corporate is R3.40. The share price started the day at R3.39, so it moved higher after the distribution was confirmed.

Sebata reported another operating loss (JSE: SEB)

The cash outflow from operating activities has been consistent

In the previous financial year, Sebata recognised some large impairments and fair value losses in operating profit, leading to a substantial loss. This year, there is still a loss but it is much smaller at R21.6 million instead of a whopping R939 million.

Although that sounds much better, the reality is that the company has seen an outflow of cash from operating activities of around R21 million for two years in a row. It only has R4.7 million in cash on the balance sheet, with a potential receipt of cash for the disposal of assets to Inzalo Capital Holdings as the major asset. It’s very touch-and-go whether this amount will be received. If not, the sold businesses come back to the group.

Based on this balance sheet, they need the cash a whole lot more than they need the underlying assets.

Tsogo Sun is the latest odd-lot offer (JSE: TSG)

At the current share price, there isn’t an exciting arbitrage opportunity here

Odd-lot offers can sometimes dish up free money, if the price offered by the company to holders of fewer than 100 shares ends up being significantly higher than the prevailing market price. In that case, you buy up the shares in the market and then wait for the automatic offer to kick in.

Tsogo Sun only trades at R12.34 per share, so you’re dealing with only R1,234 as the maximum value off which to earn an arbitrage profit. At best, this is McDonald’s money. It probably won’t cover the trading fees even if there is an arbitrage available.

In case you’re curious, the price will be the 10-day VWAP calculated on 23 August 2023, plus a 5% premium.

Little Bites:

  • Dipula Income Fund (JSE: DIB) announced that Global Credit Ratings affirmed its rating and maintained the stable outlook. The ratings agency noted “solid gearing metrics” and “improved financial flexibility” as part of the decision.
  • Look out for a big change in the Nampak (JSE: NPK) share price (but theoretically not the market cap unless the price does something crazy in response to this) as the share consolidation is due to take place on 26 July. Don’t get a fright when you see the price that day, as this is a 250-to-1 consolidation.
  • Although not specifically related to a local listed company, Transnet announced that International Container Terminal Services Inc. (ICTSI) is the preferred bidder for the 25-year joint venture with Transnet Port Terminals to develop and upgrade the Durban port. This should improve Transnet’s biggest container terminal, which handles 46% of South Africa’s port traffic. ICTSI trades on the Philippine Stock Exchange and over-the-counter in the US.
  • Deutsche Konsum REIT (JSE: DKR) issues more SENS announcements than the number of its shares that ever change hands on the JSE. I ignore most of them because there is truly no liquidity, but I did find it interesting that the company is on the wrong side of a tax dispute in Germany to the value of €16.2 million. The company had fully provided for this amount previously and is considering further options after the latest court blow.
  • Go Life International (JSE: GLI) is another penny stock zombie on the JSE, trading at one cent per share. The auditors haven’t finalised the audit, so the company has received approval from the Stock Exchange of Mauritius (its primary regulator) to extend publication of the financials for the year ended February 2023 to 31 July 2023.

Ghost Bites (Anglo American Platinum | Datatec | Merafe | Oceana | Orion | Richemont | Schroder)

The Finance Ghost
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Ghost Bites (Anglo American Platinum | Datatec | Merafe | Oceana | Orion | Richemont | Schroder)

Barely a bronze performance at Anglo American Platinum (JSE: AMS)

Earnings have been crushed by commodity pricing and production issues

Mining is a tough game. Even the biggest names can get hammered from time to time, especially if production issues come through at the same time as commodity pricing pressures. This is exactly what has happened at Anglo American Platinum.

In a trading statement dealing with the six months to June, the company noted a sharp decline in rhodium and palladium US$ prices (47% and 29% respectively) as a major driver of the drop in revenue. Although the weaker rand does help our local mining industry, it thankfully didn’t weaken by enough to offset that kind of commodity price drop. The rand basket price for PGMs fell by 15% year-on-year.

To add to the pain, sales volumes fell by 12%, a direct result of lower refined production from the Polokwane smelter due to the ramp-up in January after its rebuild. There were also maintenance requirements and of course the ongoing joys of Eskom, particularly load curtailment.

To add further insult on top of the insult that was already added to injury, inflationary pressures on costs caused a decrease in margins.

Overall, HEPS is likely to be down by between 65% and 75%. To truly appreciate the magnitude of this number for the company and even the fiscus based on associated taxes, headline earnings will drop from R26.7 billion in the comparable interim period to between R6.7 billion and R9.4 billion. On a per share basis, this means a drop from R101.40 to between R25.44 and R35.69 per share.

The share price was trading at roughly R888 in late afternoon trade.

Datatec hangs on to R167.7 million in cash (JSE: DTC)

A scrip dividend is like a miniature rights offer

When listed companies are looking to retain cash, they can offer a scrip dividend alternative to shareholders. This is the option to receive more shares instead of a cash dividend, often incentivised through a calculation ratio that makes the scrip dividend more lucrative than the cash dividend. There are also tax considerations.

Every shareholder that receives shares instead of cash is effectively participating in a small rights offer. Conversely, every shareholder electing cash instead of shares is choosing not to participate.

This can be an effective and cheap way for a corporate to retain equity capital. In the case of Datatec, the cash dividend was R270.8 million and the scrip dividend was R167.7 million, so that’s a substantial portion of shareholders who were happy to receive shares in lieu of cash.

Merafe deliberately reduced its production (JSE: MRF)

The company prefers to scale down during a period of peak electricity prices

Ferrochrome producer Merafe has reported on production from its joint venture with Glencore. For the six months to June 2023, production fell by 9% vs. the comparative period.

This is due to a planned pullback in production, driven by higher electricity costs over the winter season. Only the Lion smelter operates over the peak period.

The odd thing about this is that the comparable period also included winter, so this is surely more to do with electricity pricing reaching an inflection point, rather than pure seasonality?

Either way, attributable production is down.

Oceana’s US subsidiary is proactive with debt (JSE: OCE)

Daybrook has refinanced its facilities early based on a tightening credit market

Balance sheet management is critical to success in any corporate, especially when debt has been raised as part of a corporate action. When Oceana acquired Daybrook Fisheries in the US all the way back in 2015, term debt at the time was $142 million. Depressingly, the announcement reminds us that the exchange rate at the time was roughly R12 to the dollar!

In 2019, the debt was refinanced with a final payment due in September 2024. The net debt balance as of June 2023 was $95.6 million, so there was still a very long way to go. Regular refinancing of debt is nothing unusual in the market, as corporates look to maintain a target debt : equity ratio.

With US credit markets tightening as rates have increased, the group decided to be proactive and refinance this facility well before the due date. As part of this, $15 million was repaid from cash generated during the year, so the new facility is $80.6 million. All the current lenders participated in the refinancing led by Bank of Montreal, with the refinance being 1.4 times subscribed.

Yes, banks compete for the right to lend to corporates! This isn’t your most recent home loan application, that’s for sure.

The new facility matures in 2028 and pricing on the “performance component” of the debt cost is unchanged, ranging from a spread of 1.75% to 2.5% depending on the level of debt in the group. The base rate that the spread is added to is unchanged, being the Secured Overnight Financing Date Rate (SOFR) which is 5.2%.

Here’s the really scary maths though: the original facility was R1.7 billion and the balance after the latest repayment is around R1.5 billion. Without the latest $15 million repayment, the rand value of the debt had made no progress since 2015. That’s what happens when a currency devalues to the extent that the rand has.

Orion draws down on Prieska funding (JSE: ORN)

This is a big step for the company

Putting funding arrangements in place is one thing, but meeting the conditions precedent is quite another. Finally, when all is ready, the company can draw down on the debt and actually get the money.

With conditions having been met for AUD30 million worth of facilities, Orion can get its hands on the money. AUD20 million is from the IDC and AUD10 million is from Triple Flag. The initial drawdown is AUD13.8 million, or around R167 million. This will be pro rata on both facilities.

The money will be used for pre-development mine works, including trial mining in the upper levels of the mine and construction and commissioning of mine dewatering installations.

Richemont’s share price takes a 9.5% knock (JSE: CFR)

The market had a wobbly over the US growth, or lack thereof

Richemont announced its sales performance for the quarter ended June 2023. There is no information on profitability, so this is purely a revenue announcement.

At group level, sales grew 14% as reported or 19% at constant exchange rates. That’s hardly a bad outcome, so why did the share price take such a knock?

It seems as though the performance in the Americas was to blame, where sales fell 2% in constant currency or 4% as reported. This is now the third largest region, overtaken by Europe which grew by 11% in constant currency or 10% as reported. The largest is Asia Pacific, with a major rebound in China driving growth of 40% in constant currency or 32% as reported.

Retail growth was the major driver of performance here, contributing 68% of group sales with direct-to-client sales now at 74% of total sales. The difference between those two numbers is online sales, which were flat year-on-year. The YNAP pure-play online business saw sales drop by 8% in constant currency. Farfetch is investing in that business and Farfetch itself is very well named, as the economics of purely online retail for high-end products are more than farfetched.

Jewellery significantly outperformed watchmaking, up 24% in constant currency vs. 10% for the expensive timepieces.

And when I say expensive, here’s a good example:

It will take more than a few tenders to get one of those.

Schroder’s property portfolio dips in value again (JSE: SCD)

Increasing property yields continue to put property valuation movements in the red

Properties are valued based on yields. The higher the yield (required return by investors), the lower the property value. This is the same way that government bonds are valued.

In the case of a property firm, the yield is driven by net operating income. In order for property values to increase during a period of higher prevailing interest rates in the market, the net operating income would need to grow faster than the offsetting effect of a higher required rate of return.

This is why Schroder’s property portfolio has seen a 0.8% decrease in value in the last quarter, as the valuation yield has increased to 6.4%.

If we dig deeper, we find that office assets fell by 2.4% as the yield moved higher by between 5 and 15 basis points. Industrial assets were up 1.2%, with static yields and growth in the returns generated by the properties. The retail portfolio was flat.

Interestingly, one of the pressure points in the valuations has been “sustainability-led provisions” which I think means cash outflows related to upgrading the properties to be more efficient. Elsewhere in the announcement, Schroder talks about sustainability-led capex initiatives.

The loan-to-value is 24% as at the end of June, slightly up from 23% at the end of March. This metric is net of cash.

Little Bites:

  • Director dealings:
    • The credit executive at Capitec (JSE: CPI) sold shares worth nearly R2 million.
    • An associate of a director of Emira Property Fund (JSE: EMI) bought shares worth R1.58 million.
    • An associate of the CEO of Southern Sun Limited (JSE: SSU) has bought shares worth R465k.
    • The CEO of Argent Industrial (JSE: ART) has bought shares worth nearly R223k.
    • A director of Acsion Limited (JSE: ACS) has purchased shares worth R17.5k.
  • The CFO of ArcelorMittal (JSE: ACL), Siphamandla Mthethwa, has resigned with immediate effect. The announcement notes that the immediacy is due to “personal reasons” (among other reasons it seems). Uncertainty usually isn’t good to see, with the company moving to calm the market by announcing the current Strategy Officer, Gavin Griffiths, as the interim CFO.
  • Equites Property Fund (JSE: EQU) announced that GCR Ratings has affirmed its credit ratings, but the outlook has moved from positive to stable.

Sustainable Investing 101: Investing with Impact for a Better World

Sponsored Content
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Sustainable Investing 101: Investing with Impact for a Better World

More and more people are aligning their investment choices with their values, with causes close to their hearts and with the chance to help safeguard the future of our planet and people. At Satrix, we have a range of funds that support investors who wish to invest sustainably.

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The Shift towards Sustainable Investing

While the shift to sustainable investing (also often called responsible or ESG – environmental, social, governance – investing) was already underway before Covid-19, it really gathered steam during and after the pandemic. Now the investment landscape is rapidly evolving, with many investors embracing sustainable investing.

What exactly is sustainable investing? It is about considering not only your financial returns but also the broader impact your investments have on the world. It contributes to a resilient society. It’s about investing in companies that prioritise managing the most pressing environmental, social and governance risks affecting a business or sector, utilising cleaner energy sources and becoming more inclusive.

Benefits of Sustainable Investing

One of the major perks of sustainable investing is the ability to align your financial decisions with your values. It’s a chance to make a real difference by using your resources to create a better world for future generations. At Satrix we give you the opportunity to invest in companies that champion climate change, human rights and a whole array of other ESG issues that truly matter to you.

Let’s Talk Satrix ETFs for Sustainable Investing

We have a strong line-up of Satrix ETFs tailored specifically for those wishing to invest for good:

  1. Satrix MSCI World ESG ETF: This fund helps support positive changes in the world. It focuses on investing in companies from developed countries and specifically aims to make an impact towards the climate transition, by reducing the carbon intensity of the portfolio by at least 30% relative to MSCI World and exceeding the minimum technical requirements laid out by EU Climate Transition Benchmarks (CTB). It targets companies with excellent environmental, social, and governance (ESG) practices while managing risks relative to the MSCI World Index. If you want your investments to make a positive impact on the world, this ETF is a strong option.
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With our Satrix ETFs, we’ve done all the heavy lifting for you. Each of these funds track an index that has been through a rigorous process to offer consistent exposure to a particular theme while incorporating one or more sustainability objectives. All you need to do is choose the ETF that resonates with your investment goals and values.

Kickstart Your Sustainable Investing Journey

Ready to embark on your sustainable investing journey? Education is key! Start by familiarising yourself with some of the general investment terms you will see a lot on our fact sheets:

  • Total Expense Ratio (TER): It measures the overall costs of managing an investment plan. Keep an eye on TERs to minimise investment expenses and make your money work harder for you.
  • Asset Class: Think of asset classes as groups of investment options that share similar characteristics and behave similarly in the marketplace. There are four main asset classes: equities, bonds, property, and cash. Each comes with its own risk level and potential return, so choose wisely based on your risk profile.
  • Exchange Traded Fund (ETF): An ETF is like a basket of stocks that tracks the performance of an underlying index. You can buy or sell ETF shares through a stock exchange in a single trade, offering convenience and diversification.

Armed with this knowledge, you can evaluate your risk profile and choose the asset class that aligns perfectly with your investment strategy and giving-back goals.

Join Satrix on Your Sustainable Investing Journey – we’re here to make your sustainable investing journey as simple as possible. So, what are you waiting for? Join us on this exciting adventure of sustainable investing and start shaping a brighter future. You can now own the market, and make a difference.

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 term 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 disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.

Satrix Managers (RF) (Pty) Ltd (Satrix) 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 it 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.

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