In the past few months, the United States’ (US) Treasury Office for Foreign Assets Control (OFAC) and the Department of Commerce’s Bureau of Industry and Security (BIS) have announced significant violations of US sanctions and export controls while imposing further sanctions on Russian and Belarussian entities. The interconnectedness of global markets means that the sanctions imposed on Russian and Belarussian entities have ripple effects on African and linked entities, particularly those involved in trade and business partnerships with the sanctioned entities. The impact of such sanctions on African entities is often indirect but existential, as they can create economic and trade disruptions, limit access to financial services, and impact reputation.
This article unpacks the OFAC listing and delisting process (OFAC listing) and discusses some of its likely impacts for African businesses.
Entities are listed by OFAC as part of a process which develops from identifying entities which may be engaging in sanctionable activities, investigating those entities and their activities, and coordinating a review with other US government agencies before publishing an OFAC listing. Collectively, the OFAC-listed individuals and entities are referred to as Specially Designated Nationals or SDNs. Being listed by OFAC imposes economic and trade sanctions on the listed entity. Upon listing, an entity is likely to experience several immediate impacts which disrupt trade and limit access to financial services.
The listed entity is likely to first be notified of its designation by its banks, which would typically inform the entity that its bank accounts will be closed. Further notices may follow from other sources, including that the entity’s US assets will be frozen, and that existing commercial relationships may be severed (especially with US companies and citizens).
After being OFAC-listed, an entity will need to apply for delisting and take other immediate actions to prevent further harm. The process of being removed from OFAC listing is complex, time-consuming and arduous.
A formal application seeking OFAC delisting must be submitted to the US Department of Treasury. The adjudication of an application is not an objective judicial process, and no third-party, independent oversight exists for OFAC delisting applications. Delisting applications also have a higher legal standard of evidence than OFAC listings, so it is easier to be listed by OFAC than it is to be removed from the OFAC list with the same evidence. Nevertheless, the US government is required to operate broadly under sets of rules and cannot act arbitrarily. Should an entity wish to engage with OFAC, OFAC is required to respond, provide information and engage with the listed entity. Further, OFAC is held to the reasons that it used to make the listing determination in the first place.
The OFAC listing of individuals poses a major challenge as people cannot change their family or their relations, but commercial businesses are different. If a commercial business becomes OFAC listed, it is important that it severs ties with any OFAC-listed entities to limit its exposure. This can include disinvestments by designated entities, removal of designated entities from commercial structures, disengaging in existing commercial ties, and changing business approaches.
US entities are generally prohibited from any commercial relationship with OFAC-listed entities. Since listed entities cannot transact with US persons, US-exposed entities may experience the most significant financial impact. Non-US persons should also be cautious of transacting with listed entities as they may be subjected to secondary sanctions. If a sanctioned entity has a controlling interest in any other entities, each of these entities is also automatically designated. Accordingly, it is important for businesses to be aware of these designations and their potential bearing on commercial activities, particularly if they have significant connections to US entities or operate and trade in US dollars.
Most financial institutions with US relationships will prevent transactions with listed entities, and financial institutions based in the European Union and United Kingdom may also adopt OFAC decisions. Financial institutions may initially be inclined to summarily terminate their relationships with designated entities, but they have a duty to act fairly and reasonably in all their dealings with clients. While the banking sector understands the scope of OFAC’s jurisdiction and ensures broader compliance with OFAC and the Organisation for Economic Cooperation and Development (OECD) guidelines, these may contradict the contractual agreements between the banks and their now OFAC-listed clients. Should African Banks service any designated entities, the banks are placed in a challenging position as they face conflicting demands in servicing or terminating their relationships with sanctioned entities.
African bank accounts may also be needed for sanctioned intermediaries to conduct their business and pay their employees and suppliers. Should a bank proceed to close its accounts, sanctioned intermediaries will have no option but to seek urgent relief from the courts and pursue a claim for damages and costs against the appropriate bank.
The only way for designated entities to reassure the banking sector is to approach the US Treasury for removal of the designation. Hence, it is important for sanctioned intermediaries to seek proper legal recourse and explore options for delisting to avoid financial, reputational and commercial damages. Given the unique nature of the application and issues to delist from the OFAC list, it is best attended to by experienced attorneys who specialise in this area.
Brandon Irsigler is a Partner, Noushaad Omarjee a Senior Associate and Davin Olen a Legal Professional Assistant | Dentons South Africa
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
Congratulations to Mazars on their appointment as the auditors of Fairvest Limited!
Anglo American notes soft demand at De Beers (JSE: AGL)
Again, I can’t help but think that lab-grown diamonds are hurting them
I’ve been sharing my views publicly about lab-grown diamonds this year and how I think they are a very real threat to the De Beers business model. There’s been some robust debate around this point and a number of smart views on both sides of the argument. It is obviously relevant to Anglo American as holding company.
Although the numbers never lie, the problem is that soft demand is being blamed on the prevailing economic conditions without bluntly highlighting lab-grown diamonds. Of course, when times are tough, the cheaper diamond becomes an even more attractive alternative.
In Cycle 7 of 2023, De Beers managed sales of $370 million. That’s miles off cycle 7 last year ($638 million) or cycle 6 of 2023 ($411 million).
This trajectory doesn’t look very shiny to me.
Aspen with the ol’ bait and switch (JSE: APN)
Two announcements on the same day, with very different consequences
You really have to feel sorry for whoever bought Aspen for R195 in morning trade, as the price ended the day at R171. This is what happens when good news is released in the morning, following by tough results in the afternoon.
I’ll start with the good news, which is a distribution agreement with Lilly for products in South Africa and some Sub-Saharan African countries for 10 years, with an automatic renewal for two further periods of 5 years. Aspen will pay $41.5 million for these distribution rights. The Lilly portfolio includes medicines in neuroscience, oncology, diabetes and immunology. There are key pipeline products, as one would expect from a major pharmaceutical house. Lilly’s products generated revenue of R440 million in South Africa in 2022. Remember that Aspen will earn a gross margin on the products (i.e. the R440 million wouldn’t have been the profit to Aspen), so don’t assume that they just locked this in for a bargain price. Still, it’s good news strategically.
I really don’t understand why the Lilly news was announced separately, as it was included in the results announcement alongside other strategic news anyway. Speaking of those results, revenue for the year ended June increased by 5% but that was nowhere near enough, with HEPS down by 4% and normalised HEPS down by 8%. Despite the drop in HEPS, the dividend was 5% higher.
A major negative in this result was the loss of COVID vaccine manufacturing contribution, which negatively impacted gross margin. Other significant factors included forex swings and higher interest costs.
Aspen called this a solid set of results. The share price response sent a very different message.
The outlook is positive overall, with management focused on filling existing manufacturing capacity. They even go so far as referring to the second half of 2024 as a “significant inflection point” that should “form the foundation for sustainable strong future earnings growth” – let’s hope for the sake of investors that this is the case.
Despite the drop in HEPS and even in the share price on the day of release, Aspen remains 25% up for the calendar year.
Bidcorp’s numbers look delicious (JSE: BID)
Dividend growth that almost perfectly tracks HEPS growth is great to see
Revenue at Bidcorp has increased by 33.4% in the year ended June, driving trading profit growth of 38.4% and a tasty jump in cash generated by operations of 66%. This is a particularly strong result in terms of cash conversion, adding to what is already a great financial story this year.
HEPS increased by 35.4% and the dividend by 34.3%, so the payout ratio is similar. It’s a big tick in the box to see the cash follow the earnings.
To give you an idea of how quickly this group is growing, there were no fewer than nine bolt-on acquisitions in the year. It’s like a United Nations meeting, with deals everywhere from the UK to Estonia, Spain and even the Czech Republic. Bidcorp is an incredible market consolidator in the food service industry. In many cases, the company doesn’t acquire 100% of the target, leaving behind a piece of equity for the local management team. That’s smart.
This global approach is clearly visible in the note dealing with regional capital expenditure:
Every segment saw a significant jump in trading profit this year, with Europe (up 53.6%) and Australasia (up 51.9%) as the big year-on-year movers. Here’s your chart of the day:
Be careful extrapolating this kind of growth in those regions. There’s definitely a base effect here related to the back-end of the pandemic. Still, these are really strong numbers.
Blue Label Telecoms keeps inspiring 4th year accounting papers (JSE: BLU)
I don’t think you’ll find a more complicated set of numbers anywhere on the local market
It’s bad enough that Blue Label Telecoms has financials that would scare even the most sadistic of 4th year Financial Accounting lecturers. The situation is even worse when the company releases results on such a ridiculously busy day of news.
For the sake of my sanity and yours, I’m not going into details here. I would be surprised if there are more than 10 people in the entire country who fully understand the numbers from start to finish.
Core HEPS has dropped from 121.01 cents to 45.55 cents. Within core HEPS, there are “core businesses” and apparently they did well. There are also “extraneous contributions” to Cell C that are included in Core HEPS, but somehow not in the core businesses. Sigh.
If you exclude the Cell C contributions, core HEPS grew by 9%. The Blue Label management team has a long history of destroying shareholder value in acquisitive adventures, so I wouldn’t just exclude this number as an inconvenience.
The share price has lost 33% this year, probably because nobody actually understands what is going on. Here’s what the long-term chart looks like, in case you’re worried that you are missing out on management’s capital allocation prowess:
Cashbuild gives full details of the pain (JSE: CSB)
The final dividend has halved
In the current South African environment, you probably wouldn’t wish the Cashbuild business model on your worst enemy. It really is tough out there, with South African consumers nervous to invest in their homes and getting gently obliterated by interest rates when debit orders go off every month. From recent company news, they managed to scrape together enough coins for a trip to Spur and that’s about it.
Revenue down by 4% for the year ended June 2023 doesn’t seem that bad in this environment, with gross profit down by 8% as gross profit margin deteriorated from 26.3% to 25.4%. Sales volumes dropped sharply though, as selling price inflation was 5.4%. This means that if volumes were flat, revenue would’ve been up by roughly that amount. Instead, it was down by 4%.
Speaking of inflation, the pressure on costs is clearly visible with operating expenses up by 5% if you exclude the looting in the prior year and the P&L Hardware goodwill impairment this year. Without those adjustments, operating expenses jumped 20% in this period, absolutely hammering operating profit by 73%.
The best measure is HEPS, which fell by 37% year-on-year. The total dividend for the year is down by 42%. It’s worth highlighting that the final dividend fell by 51%, so things have gotten worse as the year went on.
I don’t even have good news for you on the balance sheet, with stock levels up by 12% despite revenue being lower. In an environment where capital is expensive, this really isn’t good news either.
In the six weeks subsequent to year-end, revenue is down 1% year-on-year. The pain continues.
The share price closed just over 2% lower on a day that was slightly green on the ALSI, so the market wasn’t shocked by this but wasn’t happy either.
Caxton and CTP flags a nice jump in HEPS (JSE: CAT)
A trading statement is the precursor to earnings due to be released by 11 September
The Caxton and CTP trading statement for the year ended June 2023 was light on details but heavy on HEPS growth, so that shouldn’t upset too many shareholders. HEPS is expected to be between 16.6% and 24.8% higher, coming in at between 183 cents and 196 cents.
For reference, the current share price is R10.00 and has been sideways since March, with a year-to-date positive move of over 8%. In other words, that jump all happened in the first couple of months of the year.
Thanks to the gold price, flat production at Harmony was good enough (JSE: HAR)
A 60% jump in HEPSis why the share price is up more than 80% over 12 months
If you manage to time a commodity cycle correctly, it can be very rewarding. If you think that’s easy to do, you are in for a nasty surprise. Predicting gold price moves is harder than guessing what the next political party in South Africa will be.
For the year ended June 2023, Harmony Gold increased revenue by 16% despite a 1% drop in production, which tells you how helpful rand depreciation was. Operating free cash flow more than doubled and the company swung beautifully into a net profit position.
HEPS was up by 60% to R8.00 which puts Harmony on almost exactly a 10x Price/Earnings multiple.
Looking ahead, the guidance for all-in sustaining cost is less than R975,000/kg. Considering it was R889,766/kg in this period, that’s hopefully very conservative guidance. If not, I’m not sure shareholders will be feeling quite so harmonious by this time next year unless the gold price does something exciting.
KAP gets a klap – a big one! (JSE: KAP)
Bye-bye, dividend
There are a number of industrial players on the local market that are doing really well at the moment. KAP isn’t one of them.
The record result last year is a distant memory, with Safripol and Unitrans as the major pressure points. Group revenue increased by 6%, but EBITDA fell by 11% as margins went firmly in the wrong direction. There’s no saving the result from there, with HEPS dropping 43% thanks to the poor result in EBITDA and a 59% increase in net finance costs.
Cash flow from operations dropped by 5%, so this was actually a period of working capital improvement as this is lower than the drop in EBITDA. We have to try look for the rainbows here.
Safripol is the large, ugly elephant in the room. Although revenue increased 2% to R10.3 billion, operating profit plummeted by 45% to R764 million. This is a cyclical business based on polymer prices and the prior year was a record. Still, this result was below expectations because of softer demand. Load shedding impacted local customers who saw a drop in production volumes, with a direct impact on Safripol.
Unitrans is the other ugly part of this story, with revenue up 3% to R10 billion and operating profit down by a nasty 33% to R385 million. The food business was hit by a contract cancellation and the agriculture operations were impacted by rainfall and flooding, with an insurance claim having been registered but no further details given on this. Mining, passenger and petrochemical operations were OK in this environment. There has been significant restructuring activity at Unitrans that will hopefully improve things soon.
PG Bison grew revenue by 10% to R5.35 billion and operating profit by 12% to R933 million. The business won market share after increasing its annual raw board capacity. Demand was impacted by particularly high levels of load shedding in the third quarter.
Restonic increased revenue by just 1% to R1.63 billion, but managed to achieve operating profit up by 17% to R81 million after restructuring its operations. Sales volumes fell 7% in South Africa, returning to pre-pandemic levels. I guess the old beds will do when the home loan repayments have become so expensive for most people.
At Feltex, revenue increased by 27% to R2.3 billion and operating profit was around 6x higher at R211 million. Welcome to the effect of operating leverage in an industrials company, particularly when moving from barely break-even to decent levels. Local automotive assembly volumes increased by 32%, as we recovered from the floods in KZN and the global chip shortage.
Finally, Optix (previously DriveRisk) somehow more than doubled revenue from R242 million to R523 million and yet reported an operating loss of R7 million vs. profit of R22 million. The optics aren’t good at Optix.
The group is focused on reducing debt, as tough conditions are expected to largely continue in the next financial year. Along with the capital projects on the table, this is why the dividend is now a thing of the past.
Lots of revenue at Motus, but what happened to HEPS? (JSE: MTH)
This result requires a lot of digging
When you are skimming a financial result on SENS, one of the first things to look for is any kind of mismatch between top-line growth and profits. Motus is a perfect example. For the year ended June, revenue increased by 16% and EBITDA by 19%, yet HEPS was only 1% higher at R20.46. The dividend per share is R7.10, which is identical to the previous year.
What happened between EBITDA and HEPS?
Before we get to that, let’s look at revenue. It was up by 52% in Aftermarket Parts (an acquisition is part of that), 14% in Retail and Rental, 9% in Mobility Solutions and 3% in Import and Distribution. The mix is also worth touching on: 13% new vehicle sales, 31% parts sales, 9% pre-owned vehicles and 13% rendering of services.
When you see growth in revenue like this in an asset-heavy business, you need to wonder about what the impact on the balance sheet is. Another clue to what happened to profitability is that the announcement simply talks about net finance costs increasing, without giving the comparable number. That’s like a red flag to a bull, or even a ghost. Sure enough, that’s what happened to profits:
It costs money to fund growth in a business like this, with an outflow of R5.8 billion in net working capital. Net debt to equity jumped from 36% to 77%. In this environment of higher interest rates, this makes the banks very happy, especially when just 7% of funding is at fixed interest rates. Net debt to EBITDA has increased from 0.8x to 1.8x, which is still well below the debt covenant of 3x. With all this additional capital in the system, return on invested capital fell from 17.8% to 14.1%.
In terms of interesting trends, it’s not surprising to read that South Africans are moving from luxury vehicles into more affordable alternatives. Tracking NAAMSA unit sales is one thing, but of course the economic profit pool is based on units multiplied by selling prices. Although unit sales have been ahead of expectations, I question how well the more luxury-focused dealerships out there are doing. Despite this, Motus was happy to acquire three Mercedes Benz passenger dealerships and a commercial dealership in Gauteng in November 2022. Motus achieved 19.8% retail market share in South Africa for the 12 months to June 2023.
The South African operations contributed 61% to revenue and 73% to EBITDA for the year. The rest is contributed by the UK, Australia and South East Asia.
In the UK, economic pressures aren’t really filtering through into the new vehicle market. To give an idea of the relative size, there were over 2.1 million new vehicles sold in the UK in the 12 months to June 2023 vs. 541,000 in South Africa. It’s a much bigger market, with Motus focusing primarily on the van and commercial segments as well as the aftermarket parts business, evidenced by the acquisition of Motor Parts Direct in October 2022. And in Australia, another market in which Motus operates, new vehicle sales were 1.1 million over the same period.
Murray & Roberts is a horror story (JSE: MUR)
I’m not surprised that they released after the market closed
The fact that Murray & Roberts has had a shocking year isn’t a surprise. This doesn’t mean that the share price won’t dive even further when the market opens on Thursday, as these numbers came out after the market close on a ridiculously busy day.
The Clough and RUC Cementation businesses in Australia have been restated as discontinued operations, so this makes the year-on-year result look a lot better than it actually is. I’ll just ignore the comparatives, as the real story is the diluted headline loss per share of -71 cents. This is why the share price has been slaughtered in the past year, now barely keeping head above water at 65 cents.
The net asset value has collapsed from R13 last year to R4 this year.
Obviously, there is no dividend for shareholders.
This is genuinely a game of survival now. Murray & Roberts keeps talking about having a future. That isn’t the same thing as a bright future. Many tears have been shed over the ATON offer of R17 a share back in 2019 that the management team decided wasn’t good enough. The pandemic will always be blamed for the destruction in value since then, but that doesn’t make investors any less angry.
Nampak sells off property and equipment in Nigeria (JSE: NPK)
It doesn’t make a huge dent in group debt, but every bit helps
Nampak has agreed to sell the Nigeria Metals property and various associated equipment to Twinings Ovaltine Nigeria. The effective date of disposal is expected to be in the first half of this financial year. The Nigerian Metals operations had been shut down from 31 July 2023 anyway, so this is actually a pretty good turnaround on getting rid of the assets.
At current exchange rates, this raises around R180 million in cash for Nampak. It will be used to reduce debt.
It certainly helps, but there’s a very long way to go with asset disposals here.
STADIO’s growth is being driven right from the top (JSE: SDO)
An education business needs growth in students, which STADIO is delivering
With growth in Semester 1 student numbers of 9% and an inflationary environment as well, STADIO reported revenue growth of 16% in the six months to June. It’s interesting to note that as at the end of August, student numbers were up 11% year-on-year, so second semester enrolments must be going well.
There was pressure on the loss allowance (related to fee revenue), so EBITDA only increased by 10%. Strategic investment in technology also impacted EBITDA in this period. Core HEPS tells a better story, up by 20% as the group has earned significantly higher investment income on its cash balance.
As was the case last year, no interim dividend has been declared. STADIO only pays a final dividend.
Notably, contact learning student numbers grew 3% after shrinking 4% in the prior year. Nature is healing. STADIO is still predominantly an online business, with a substantial 86% of students being distance learning candidates. This is the core investment thesis, with cash from operating activities of R180.7 million in this period and capex of just R22.2 million on fixed assets.
Keeping Woolworths Food cold is very expensive (JSE: WHL)
Thankfully, the food is organic and so is the growth across the business
When looking at the 52 weeks ended 25 June for Woolworths, you need to know that David Jones has been accounted for as a discontinued operation, bringing to an end one of the most awful deals in South African corporate history. The new management team will be thrilled to close off that legacy nightmare, leaving them to focus on the continuing business.
That business is doing well, with turnover from continuing operations up by 10.6% and HEPS up by 14.8%. The dividend per share has increased by 36.4%, a reflection of growth in the core business and perhaps more certainty with David Jones out of the system.
The greatest irony of all is that including David Jones in this result makes them look better for once, thanks to lockdowns in Australia in the prior year. Total group HEPS increased by 29% vs. 14.8% from continuing operations.
Looking deeper into the remaining business, the Fashion, Beauty and Home (FBH) segment grew turnover by 8.3% on a comparable basis and 8.9% overall. Price movement was 11.6%, which suggests that volumes fell by 3.3%. Online sales only grew by 3.8% and contributed 4.3% of South African sales. Notably, sales growth in the second half was only 6.7%, which is quite a bit slower than the first half. Gross margin improved by 90 basis points to 48.5% and expense growth was 6.8%, so the net effect on adjusted operating profit was a very juicy increase of 21.3%. Management’s strategy in this space is working really well.
Woolworths Food, which I’m convinced has been a major mitigating factor for the emigration trend, grew turnover by 8.5% overall and 6.3% on a comparable basis. Unlike in FBH, the second half was better than the first half. Price movement of 8.3% tells us that volumes fell by 2%. Inflation was 9.9%, so it also tells us that Woolworths Food is being forced to be more competitive on price. If you’re wondering why, it probably has something to do with those turquoise scooters all over our roads. Speaking of online, Woolworths Food grew online by 28.5%, contributing 3.8% of South African sales. Gross margin increased 40 basis points to 24.4% and expenses were up 12.4% because of the impact of load shedding. After all, the ambient temperature of the average Woolworths Food is -493 degrees Celsius and that requires a lot of diesel. With operating margins down, the Food business could only grow adjusted operating profit by 2.9%.
Woolworths Financial Services saw the book increase 14.5%, with the impairment rate up substantially from 4.7% to 7.3%. This is to be expected in this environment.
In Australia and New Zealand, the business of relevance is Country Road Group. Sales grew 12.0% overall and 12.4% in comparable stores, which tells you that net space actually reduced during the year. This hasn’t stopped consumers from returning to stores, with online sales contributing 27.1% to sales vs. 31.6% in the prior year. Importantly, sales growth in the second half slowed severely to 0.6%, so the cadence isn’t promising here. A focus on gross margin management saw that margin increase by 310 basis points to 62.6%. Expenses jumped by 15.9% because of lockdowns in the base. Adjusted operating profit was 25.6% higher.
Based on the slowdown in the second half of the year and the sobering outlook statements, I’m not surprised the share price dropped 1.5% on the day.
Little Bites:
Director dealings:
In a shock to precisely nobody, Des de Beer has bought another R764k worth of shares in Lighthouse Properties (JSE: LTE)
The family trust of a director of Mantengu Mining (JSE: MTU) has sold shares worth R117.5k.
The company secretary of Exemplar REITail (JSE: EXP) has bought shares worth R100k in an off-market trade.
There are more sales by directors of Argent Industrial (JSE: ART), though they are very small this time with a total value of under R4k.
Capitec (JSE: CPI) founder Michiel Le Roux has debt in an associate company called Kalander that is secured with Capitec shares. A collar structure is regularly used in these scenarios. Based on maximum exposure of R449 million, the put price is R1,498.69 and the call price is R2,700.00. The current price is R1,615.97. Kalander intends to cash settle the hedge to the extent necessary, so no sales of shares by Kalander is envisaged.
Delta Property Fund (JSE: DLT) has very little remaining value, so I guess this is as good a time as any to internalise the management company for a price of just R1,000.
Sebata Holdings (JSE: SEB) is acquiring a building from Reunert Limited (JSE: RLO) for R32 million. This will help Sebata put all its investee companies under one roof, saving on various leases. The property is in New Germany, KZN.
If you’re a shareholder in Mahube Infrastructure (JSE: MHB), be aware that there’s a revised AGM notice that includes additional agenda items related to the appointment of a director and chairperson of the company.
Structured products have come a long way. From a specialised, exotic investment tool, they are now mainstream, and financial advisers are now more comfortable about investing in them on behalf of clients.
A perfect example is the Investec USD S&P 500 Autocall, where investors can earn a potential return of up to 8.4% p.a. if the index ends flat or positive on one of the call dates in year 3, 4 or 5. Provided the index does not end below 70% of the initial index level, there is full capital protection in USD. The minimum investment amountis R100,000 and there is a maximum 5-year term. This is a limited offer that closes on 16 October 2023. T’s and C’s apply and full details can be found on the Investec website at this link.
To explain structured products in general and the Investec USD S&P 500 Autocall as the latest offering, Brian McMillan joined The Finance Ghost on this episode of Ghost Stories.
Topics covered included:
The other side of options: using options as hedging instruments rather than tools of speculation;
A history of structured products in the South African market;
How to invest in Investec structured products through an independent financial advisor or broker;
An overview of the key terms of the latest structured product, including the downside protection calculation and the upside potential;
Liquidity in this structure; and
The versatility of the product in terms of types of investors and portfolio strategies.
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, we recap a busy couple of days:
Super Group is living up to its name and with growth in profit in every segment, there’s much for shareholders to feel good about here.
Grindrod is in a different part of the logistics industry, yet the growth numbers are remarkably similar to Super Group.
In the education sector, we’ve seen strong updates from ADvTECH and STADIO, with both shares prices ahead of rival Curro this year.
CA Sales Holdings is getting on with delivering its strategy to a high standard, with the FMCG business doing well in this inflationary environment.
Transpaco is a great example of what happens when small improvements are made in operating margin.
Master Drilling is as close to the shovel in the gold rush as you’ll find, with ongoing HEPS growth at a time when mining houses are seeing HEPS fall sharply.
Master Drilling put in a solid year in ZAR (JSE: MDI)
In a great show of masochism, the company also likes to report in dollars
For the six months to June 2023, Master Drilling continued to benefit from an improved global mining environment after the pandemic. Although commodity prices have come off pretty sharply this year, mines are still making money and need to develop their assets on an ongoing basis. That’s good news for Master Drilling.
If you’re wondering which commodities are relevant, there’s a really nice spread:
The company focuses on its numbers in dollars, which tends to blunt the experience. In the world’s hardest currency, revenue increased 12.1% and profit was up 8%. HEPS increased by just 5.7%. If you put that HEPS number in ZAR instead, you get growth of a much more exciting 25.0%.
Investors will want to keep an eye on cash from operating activities, as this decreased by 5.7% in dollars. A decrease in cash vs. an increase in profits is an eyebrow-raiser regardless of which currency you look at. There has been substantial investment in inventory this period of $1.8m vs. a release of $0.2m in the comparative period.
The share price is down roughly 13% this year. Be careful with this one, as liquidity is low and the bid-offer spread can really bite you. Welcome to trading locally listed mid-cap names.
Get ready for Nampak’s rights offer (JSE: NPK)
The circular should be released on 4th September
Nampak needs to raise R1bn in equity through a partially underwritten renounceable rights offer. A simple way of saying this is that the company is going with hat in hand to shareholders to save it. The balance sheet has really deteriorated over the course of the pandemic, with management interventions to steady the ship not being enough. Sometimes, a company just has no choice but to raise fresh capital.
Commitments to the value of R500m have been received from existing shareholders. Importantly and in addition to this (unless the wording in the announcement is extremely poor and this amount is included in the R500m), there is R450m worth of underwriting from Coronation (R300m), A2 Investment Partners (R100m) and Numus Capital (R50m), all of whom will receive an underwriting fee of 2.33% of the underwritten amounts. That’s a little bit high as a fee but to be quite frank, Nampak has no choice.
In addition to the R1bn rights offer, the group needs to raise R2.6bn from asset disposals.
Full details, including the price for the rights offer, will be announced on Thursday 31st August. The circular is expected to go out on 4th September.
The market dished out more punishment for Sibanye (JSE: SSW)
Despite a decent day for commodities, the share price fell 6.7%
Now trading at R30 after trading as high as R73 during the pandemic, Sibanye-Stillwater investors have been on the receiving end of a real hammering. In case you think it can’t get worse, this thing was trading below R8 five years ago.
For the six months to June, lower platinum group metal (PGM) prices dominated the story. Group adjusted EBITDA fell by 37% and HEPS tanked by 51%.
In the US, because of production issues due to unfortunate events, all-in sustaining costs in this period of 1,717 US$/2Eoz were a problem compared to the average basket price of 1,390 US$/2Eoz. The US business still generated adjusted EBITDA of $53m, but this was way down on $261m in the comparable period. The US PGM recycling business also went the wrong way, with adjusted EBITDA of $20m vs. $39m in the comparable period.
This all pales in comparison to the South African PGM business performance, which is far larger and hence more important than the US business. The average basket price is different vs. the US because the US business is measured based on 2Eoz and the local business is 4Eoz. Rand depreciation offered a partial shield, with the local price dropping from R43,379/4Eoz to R34,006/4Eoz. All-in sustaining cost also moved higher but cost control was decent. Despite this, the net result was a squeeze on margins and adjusted EBITDA of R11.8bn vs. R21.2bn in the comparable period.
In the gold operations, the comparable period was a catastrophe because of labour issues. This is why gold production increased from 5,962kgs to 12,962kgs. The average gold price also moved firmly in the right direction, so adjusted EBITDA swung wildly from -R3.1bn to R2.4bn. This helped offset some of the pain in PGMs.
On top of these pressures, the investment in metals like nickel and zinc is not doing the income statement any favours at this stage. The nickel operations lost R0.6bn and the zinc business in Australia lost R0.5bn. Sibanye really has had the worst luck recently, with the nickel operations in France impacted by social unrest in the country. If you want to guess where the next disaster or social issue will be, perhaps just draw a map of Sibanye’s operations.
They can’t even catch a break in the US, where Tiehm’s buckwheat has been classified as an endangered species at the Rhyolite Ridge lithium project, necessitating an alternative mine plan and updated feasibility study.
One of the silver linings is the balance sheet, with a net debt to adjusted EBITDA ratio of just 0.01x. There is nearly as much cash as there is debt. The other positive spin is that with the shaft now repaired at the US PGM operations, the second half of the year should be better.
A performance befitting Super Group’s name (JSE: SPG)
Although there’s margin pressure, HEPS has grown beautifully
For the year ended June 2023, Super Group put in a solid performance with revenue up 30.6% and EBITDA up 20.8%. Although this immediately tells you that margins went the wrong way, HEPS growth of 23.3% is a lovely outcome for the company, with a 31.5% increase in net finance costs not having spoiled the party.
Operating cash flow increased by 18.9%, so cash conversion is decent as well.
A big portion of the group’s business sits outside of South Africa. 54% of revenue and 56% of operating profit came from beyond our borders, with the UK as the largest international revenue business and Australia as the biggest contributor to operating profit.
The segmental story is best told with a chart. It’s not every day that operating profit increases in every single segment:
The next set of numbers will include the acquisition of Amco, a transport company in the UK. Super Group raised R1.81bn in debt during this financial year and R810m was for this acquisition, which was concluded after year-end.
With net debt of R4.38bn and EBITDA of R8.49bn, the net debt to EBITDA ratio is more than manageable.
A final dividend of 80 cents a share has been declared. The share price traded 1.7% lower at time of writing at R34.78, with the ALSI down by 0.59%. This doesn’t take anything away from the year-to-date share price performance of roughly 33%.
Thungela goes in search of a life beyond Transnet (JSE: TGA)
The acquisition of the Ensham mine in Australia has been concluded
Earlier this year, Thungela told the market that it would be investing in Australia. The biggest appeal of this transaction must surely be the prospect of having coal operations in a country with a working rail network.
The mine is expected to achieve export saleable production at an FOB cost of between $110 and $120 per tonne. Based on the announcement, the correct price to work off is the Newcastle export coal price. From what I could see on the Trading Economics website (and please correct me if I’m looking at the wrong price), the current level is around $158 a tonne. But don’t get too comfortable, because in June it was trading at a level similar to Ensham’s production cost.
It’s been a rough ride for Thungela shareholders this year, with the share price having approximately halved based on a drop in coal prices.
Transpaco signs off on a great result (JSE: TPC)
This is a wonderful example of growth despite difficult conditions
For the year ended June, Transpaco’s revenue increased by 10.8% and operating profit was up 13.3%. That tells a good story around operating margins (10 basis points higher at 9.7%). It gets better as you move through the result, with HEPS up by 19.4%. As the final icing on this cake, the dividend is 20.9% higher, so the cash has followed the profits.
The packaging industry can be a dangerous place because of the fairly low operating margins. The best businesses are rewarded though, winning market share and increasing those margins off a low base, which does terrific things for shareholders. In this result, both the Plastics division and Paper and Board division did well, with revenue up 7.4% and 15.0% respectively.
And on top of all of this, the balance sheet is in great shape too.
I can’t be bothered to include Nampak on this chart because we all know how that played out. Instead, here’s Transpaco vs. Mpact over 5 years:
Little Bites:
Director dealings:
Des de Beer has bought R1.02m worth of shares, but this time in Resilient (JSE: RES). Before you wonder whether he’s neglecting Lighthouse (JSE: LTE), he also executed purchases there of R1.46m.
An associate of a prescribed officer of Dis-Chem (JSE: DCP) has sold shares worth R799k.
The CEO of AECI (JSE: AFE) has bought shares worth R416k.
A director of Adcorp (JSE: ADR) has bought shares worth over R134k.
NEPI Rockcastle (JSE: NRP) has released a circular dealing with the scrip dividend alternative. The cash dividend is 25.67 euro cents per share and the scrip alternative is valued at 27.10 euro cents, a 5.6% premium to the cash dividend to entice shareholders to take the scrip instead of the cash. Furthermore, the issue price of the shares for the scrip alternative will be at a 3% discount to the five-day VWAP that will be calculated on 5th September. Property funds incentivise the scrip dividend as a way to retain cash. You can almost think of it as a small rights offer.
The timetable for the disposal by Rebosis (JSE: REA | JSE: REB) of the Standard Bank-funded properties has been extended once more. The finalisation of sale agreements has been pushed out from 28 August to 4 September.
There is yet another updated trading statement from Woolworths (JSE: WHL), with the benefit of the completion accounts process for the David Jones sale having been concluded. This only affects Earnings Per Share (EPS) rather than Headline Earnings Per Share (HEPS), which is why I’ve only mentioned it in Little Bites. For the total group, EPS is up by between 35% and 45% for the 52 weeks ended 25 June and HEPS is up by 25% to 30%. Adjusted HEPS is up by between 30% and 40%.
RCL Foods’ (JSE: RCL) disposal of Vector Logistics has become unconditional. To refresh your memory, the buyer is A.P. Møller Capital – Emerging Markets Infrastructure Fund II K/S. Private equity buyers don’t always have names that roll off the tongue!
In case you are in the unfortunate position of being stuck with shares in W G Wearne (JSE: WEA), you’ll probably want to know that the company is in discussions with buyers for the Muldersdrift property and mining right. The sale of this property would enable the company to pay VAT and employees tax going all the way back to 2018. Yes, that’s how bad it is.
ADvTECH: a masterclass in operating leverage (JSE: ADH)
This story is going from strength to strength
For the six months ended June 2023, ADvTECH put in an excellent performance that saw revenue up by 16% and operating profit up by 23%. Most pleasingly, operating profit growth was ahead of revenue growth in each of the four divisions. HEPS was up by a juicy 24% and the interim dividend increased by 30% to 30 cents a share.
Looking deeper, Schools South Africa grew student numbers by 6% and revenue by 13%, so price increases are helping greatly. Operating margin increased from 19% to 20.1%.
Schools Rest of Africa did even better, with student numbers up by 10%, revenue by 26% and operating profit by a fantastic 73% as scale benefits started to come through. Operating margin jumped from 18.1% to 24.7%.
In the Tertiary business, student numbers only increased by 4%. Thanks to pricing power, revenue was up 13% regardless and operating margin improved to 25.0%.
The Resourcing division certainly can’t boast these kinds of margins, with operating margin of just 5.9%. The good news is that revenue increased by 26% and operating profit was 44% higher, so it’s heading in the right direction.
It’s all looking very good, so I decided to make a chart to do this performance justice:
There was a pretty awkward situation at the end of December 2022 when a systems migration led to a much higher trade receivables balance than would otherwise by the case. There’s a long way still to go in collecting the receivables, with R281 million of the R670 million tertiary balance collected. The company hopes to achieve a normalised debtors balance by the end of the year.
STADIO is leading the pack at the moment, but any of the education plays have been solid performers this year (although you needed a strong stomach):
CA Sales Holdings delighted the market (JSE: CAA)
The share price closed 9.7% after the release of results
This group is on a charge. Revenue is up by 22.5% for the six months to June and for all the right reasons, with volume increases alongside benefits of inflation, acquisitions and expansion into new regions. This is a proper growth company that is doing all the right things for investors.
Even more impressive than the revenue performance is the operating profit jump of 75.5%. You need to read very carefully now, as HEPS was up by 21.5%. When you see such a big difference between operating profit and HEPS growth, you need to dig.
In this case, the reason is that operating profit includes a “gain on bargain purchase” (an accounting concept) linked to an acquisition in Namibia at a really great price that was below the fair value of the net assets acquired. This isn’t related to revenue, which is why the operating profit growth looks odd next to revenue.
To show you how to find this kind of information, here’s the relevant line on the income statement that you can see is unusual:
CA Sales Holdings doesn’t pay an interim dividend, so no dividend has been declared for this period. If this performance carries on, the full-year dividend should be juicy!
Cognition inches forward (JSE: CGN)
The disposal of Private Property defined the latest financial year
Cognition Holdings has released a trading statement for the year ended June. HEPS has increased by more than 6x from 0.46 cents to between 2.68 and 2.78 cents per share. But with a share price of 92 cents, that earnings jump seems a little irrelevant.
Of far more relevance was the disposal of a majority stake in Private Property South Africa, which is why EPS is between 28.10 and 32.53 cents per share.
Italtile is suffering in this environment (JSE: ITE)
Volumes are down and HEPS has dropped 13%
Italtile is very much a casualty of broader South African pressures at the moment. Consumer confidence is low and the willingness to invest in property is even lower, with interest rates as a root cause of great stress on household budgets. When the priority list includes things like food and school fees, I’m afraid that new tiles for the bathroom are impossible to justify.
Italtile is generally regarded as a well-run business. With system-wide turnover up just 1% for the year ended June despite selling price inflation of 6.7%, even this business couldn’t afford a significant drop in volumes. And of course, lower volumes can only mean a drop in gross profit because of the manufacturing businesses in the group, taking gross margin down from 45.8% to 43.2%.
When the top of the income statement looks like that, the bottom half definitely won’t look like a beautiful new kitchen. HEPS fell by 13% and so did the total dividend, so at least the group managed to maintain its payout ratio.
The recent share price activity in rival Cashbuild is quite extraordinary, leading to this year-to-date chart of the two rivals:
Murray & Roberts “is a group with a certain future” (JSE: MUR)
I don’t think the market believes a word of it anymore
The Murray & Roberts share price tanked by another 12%, now trading at 66 cents. This is the same company that German group ATON wanted to buy for R15 per share back in 2018. At the time, the Murray & Roberts management team called it “opportunistic” and “poor value for shareholders” according to an article I found on Reuters. That offer was subsequently increased to R17 per share and was rejected again by the board in 2019.
You can’t make this stuff up.
This is perhaps why the market didn’t seem to care about the prospects section in the latest trading statement, which promised that “Murray & Roberts is a group with a certain future” – but not necessarily a bright one.
Of course, there was a destructive pandemic between 2018 and now. Nobody is denying that. Still, nobody I talk to in the market is particularly bullish on this story. With a headline loss per share from continuing operations of between -76 and -68 cents, it’s not hard to see why. If you include the full group and its various disasters, the headline loss per share is between -477 cents and -471 cents.
I can’t think of a better chart for SA Inc than Murray & Roberts. If you listen carefully, you can almost hear the vuvuzelas on this chart:
Little Bites
Director dealings:
Value Capital Partners has board representation at Altron (JSE: AEL) and has bought shares worth R37.5m.
The credit executive of Capitec (JSE: CPI) continues to sell shares in the company, this time with a disposal of over R4.9m.
The spouse of the CEO of Calgro M3 (JSE: CGR) bought shares worth nearly R50k.
In what can only be described as disruption on a small scale, Disruption Capital (an associate of a director of Mantengu Mining JSE: MTU) has bought shares worth just under R2k. Separately, a director’s family trust sold shares worth R31.6k.
Bringing an end to a very painful example of value-destructive M&A, Northam Platinum (JSE: NPH) has sold the rest of the shares that it had received in Impala Platinum (JSE: IMP) for the stake in Royal Bafokeng Platinum, which is being delisted. The company raised around R3.1bn from selling all the shares, with the latest disposal being worth R251m.
Orion Minerals (JSE: ORN) has undertaken a detailed geological review and has increased the Mineral Resource for the Flat Mines Area. This has been incorporated in the Bankable Feasibility Study for the Okiep Copper Project. The study is being handed to the independent technical expert appointed by the debt advisor on behalf of the IDC and other interested debt financiers.
Advanced Health (JSE: AVL) shareholders voted unanimously in favour of the proposed clean-out dividend of 20 cents per share, payable ahead of the delisting of the company.
Hudaco’s (JSE: HDC) acquisition of Brigit (the fire business) has fulfilled all suspensive conditions and will become effective from 1 September 2023.
Conduit Capital (JSE: CND) really needs to get the disposal of CRIH and CLL across the line. The fulfilment date for suspensive conditions was first extended from 1st July to 1st August, then to 1st September. The latest extension is to 30th September.
Textainer (JSE: TXT) has confirmed the exchange rate for its dividend. A gross dividend of R5.64 per share will be paid on 15 September.
If aliens had landed on planet earth on the weekend of the 21st of July 2023, odds are they would have come away with the idea that our society venerates Barbie as a deity. What other reason would we have to dress ourselves in her signature style, hoard merchandise emblazoned with her name and image, and queue for ages outside movie theatres for the chance to see her face on the big screen?
By now there’s no denying that the Barbie movie has been a hit at the box office, smashing 15 box office records after the film’s first three weekends. In the film’s third weekend, Barbie became the 6th movie post-Covid to pass the billion-dollar mark at the worldwide box office. It took Barbie only 19 days to achieve this feat, becoming the 9th fastest film in history to make a billion dollars. Barbie also earned the biggest opening weekend ever for a film based on a toy.
Good for Margot. Good for the studios.
Few things are as effective at luring audiences into movie theatres as a touch of nostalgia. Make no mistake: this Barbie movie wasn’t made with kids in mind. Or rather, it was – it’s just that those kids have grown up and have the power to swipe their own bank cards.
Being an adult is hard, and if there’s one thing that helps take the edge off, it’s a two-hour technicolour trip down memory lane to a time when things were simpler and toys were all we cared about. Movie directors who understand this basic human desire are becoming incredibly efficient at translating those nostalgic yearnings into profit.
How much profit, exactly? It’s hard to tell without knowing the full list of post-release expenses. During her interview with The New York Times, Barbie director Greta Gerwig shared that the film’s original budget was approximately $100 million. However, as time passed, it steadily rose to $145 million. Generally, a movie is considered a box office success if it earns two to three times its budget. For Gerwig’s film, that means it needed to gross at least $300 million in round numbers to achieve this status.
Currently, it’s sitting pretty at an approximate international gross of $660.6 million. So far.
But will Mattel smile all the way to the bank?
Mattel, the owners of the Barbie IP, had quite a surprise for their shareholders in the second quarter. They significantly beat analyst estimates in terms of net profit despite sluggish toy sales. Instead of the expected loss of 3 cents a share, they pulled in a profit of $27 billion, or 10 cents per share.
Net sales fell by 12% as consumer spending came under pressure. Although that’s clearly not a happy outcome, it was less severe than expected. Hot Wheels seemed to have a bigger impact than Barbie in this quarter from a toy perspective, with Mattel hoping that the success of the movie starts to filter into the toys. Importantly, the movie was only released a week before the end of the quarter, so the real impact of the movie should be felt in the next results.
Mattel is going all out with commercialising this IP. They’re teaming up with 165 brands to roll out a whole bunch of Barbie-branded merchandise. All eyes will be on the outcome of this.
CEO Ynon Kreiz knows this Barbie movie is a game-changer. He’s calling it a pivotal moment, saying, “The Barbie movie is a showcase for the cultural power of our brand, our knack for teaming up with top creative minds, and our franchise management skills. This moment will be remembered as a key milestone in our company’s history with the release of the Barbie movie, our first-ever major theatrical film.”
Margot Robbie’s balance sheet has already seen this benefit. Will Mattel investors enjoy the same?
So is it a movie, or a very long advertisement?
Mattel may be making headlines with the Barbie movie right now, but they’re definitely not the first toy company to harbour box office dreams.
Hasbro, the company behind Monopoly, Battleship, and tons of other beloved board games, clearly enjoys success in the toybox. But it may surprise you to learn just how often their products have had a turn on the silver screen.
Since 1986, the Rhode Island–based company has been attempting to make it in Hollywood, turning nostalgia into blockbusters. The result is casually referred to as the Hasbro Cinematic Universe, a collection of (mostly unrelated) films, some of which are good, some of which are bad (think Furby-filled nightmares bad) and all of which put nostalgia up on the big screen in an effort to coax audiences back into toy stores.
You may have made the obvious connection between Hasbro and the recent Dungeons and Dragons flick, but did you know that the toy company also holds the keys to such titles as Transformers (yes, all the Transformers movies), My Little Pony, G.I. Joe, Peppa Pig and Power Rangers?
So big are the cinematic dreams over at Hasbro that the company tried to own its own entertainment company, Entertainment One. After buying Entertainment One in 2019 for the tidy sum of almost $4 billion, the toymaker quickly realised that making money from movies was not the simple exercise it appeared to be – and for every blockbuster hit that could triple its budget, there would be multiple flops that would do nothing but cost the company precious revenue.
After much pain and deliberation, Hasbro agreed earlier this month that they would sell Entertainment One to Lionsgate for $500 million, with the transaction expected to close in late 2023. That’s a $3.5 billion loss on that deal, which is an astronomical amount to squander on what is essentially a series of very long advertisements.
For context – if Hasbro wanted to recoup that loss through movies alone, they would have to have around seven Barbie-level box office hits.
That doesn’t mean that the screen dream has died though. Feature films are still in the works – including a Monopoly-themed film that was this close to being directed by Ridley Scott of all people. Like Mattel, Hasbro has opted to license out their IP to well-established names like Warner Brothers instead of attempting to run the show themselves.
You can’t buy a Barbie for R99, or even a movie ticket
…but you can buy yourself a treasure trove of amazing business insights in Magic Markets Premium. They might not be wrapped in plastic, but they’re still fantastic.
As you’ll learn in our latest recap on Hasbro, the company is scaling down its in-house cinematic endeavours in order to focus on gaming and streaming. With success in the Wizards of the Coast business in particular, Hasbro might still have their Barbie moment if they play their cards right.
With around 90 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. There is no minimum monthly commitment and you can choose to access the reports in written or podcast format. Sign up here and get ready to learn about global companies>>>
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.
AngloGold puts Córrego do Sítio on care and maintenance (JSE: ANG)
At a total cash cost way above the gold price, this mine is losing too much money
The Córrego do Sítio gold mine in Brazil is anything but a “gold mine” in the colloquial sense. With a total cash cost of $2,278/oz, it loses money on every ounce produced and sold. The all-in sustaining cost is a ridiculous $3,031/oz, so it’s no surprise that the mine cannot secure capital to ensure its future.
After the mine reported negative free cash flow of $30m in the first six months of the year, AngloGold simply has to stem the bleeding. This means putting the mine on care and maintenance, with associated job losses for employees that couldn’t be placed elsewhere.
Capital & Regional got some support on the cap raise (JSE: CRP)
I liked the underlying acquisition, but it’s a tough environment to raise capital
Earlier this month, Capital & Regional announced the acquisition of The Gyle Shopping Centre in Edinburgh for £40 million. The asset is being acquired at a net initial yield of 13.51%, which seems like a very attractive price. The debt is being provided by Morgan Stanley at a fixed cost of 6.5% for 5 years.
With those sort of numbers and an underwrite by Growthpoint for the equity raise, I expected to see more shareholders support the capital raise. At first blush, it looks like there was significant support because shareholders took up 74.97% of the shares being offered. You need to remember that Growthpoint is in this number though, so the percentage uptake from other shareholders is actually much lower.
Together with the underwritten portion, Growthpoint is taking up 87.40% of the shares being offered. This increases its stake in Capital & Regional to 67.64%.
It helps a lot to have a huge balance sheet behind you, especially in this environment where raising capital is so difficult.
Grindrod: one of the industrial winners this year (JSE: GND)
HEPS growth looks very strong
As we’ve seen with the likes of Bidvest, Grindrod has put in a strong earnings performance in this inflationary period. Perhaps my biggest learning of the past 12 months is that industrial firms seem to outperform consumer-focused companies in inflationary conditions. Unlike Bidvest though, the Grindrod share price hasn’t been exciting this year.
When looking at the latest Grindrod numbers, you need to note that the prior period has been restated to exclude Grindrod Bank which was disposed of.
In its core business, which is very much a logistics play (ports and rail), revenue increased by 32% and EBITDA was up 16%. Although there is clearly margin pressure, a 26% jump in headline earnings certainly doesn’t hurt.
The non-core business helps explain some of the share price disappointment, with the KZN property portfolio continuing to be a blemish on the story. Along with the private equity portfolio, Grindrod recognised R78.7 million in net impairment and fair value losses. For context, headline earnings was R487 million in this period, so the market doesn’t just ignore these losses.
An interim dividend of 34.40 cents has been declared, which is double last year’s interim dividend of 17.20 cents.
Charting Grindrod against Bidvest this year is fascinating:
The trading statement was so detailed that the market knew what was coming
The main thing to remember about this financial period at Northam Platinum is that HEPS probably isn’t the best measure of management’s performance. This is unusual, as HEPS exists to take out the distortions and give shareholders a view of the underlying performance.
The problem is that in this case, HEPS ignores huge impairments in the group that I believe are relevant. In particular, the loss on the Royal Bafokeng Platinum stake really hurt shareholders, as Northam went on a campaign to make life as difficult as possible for Impala Platinum. Just take a look at this reconciliation to see how that played out:
Northam ended up accepting the offer from Impala Platinum for the shares in Royal Bafokeng Platinum and received R9bn in cash and a whole lot of Impala shares. In a separate announcement, Northam noted that 91.6% of the received shares have been sold for R2.9bn. Although this gives the balance sheet a boost as the cycle deteriorates, it also locks in a major loss.
So, HEPS fell by 7.5% in the year ended June 2023 and earnings per share (EPS) fell by 75% because of the impairments. You can choose which number you want to work with. I would treat HEPS as the operational performance (solid compared to peer group) and EPS as the management performance in terms of capital allocation (very poor).
A dividend of R6 per share has been declared. The share is trading at around R130.
STADIO keeps going from strength to strength (JSE: SDO)
This would’ve been a great addition to your portfolio this year
For the six months to June, core HEPS at tertiary education group STADIO is up by between 18.6% and 22.1%. That’s a rock solid outcome, although it’s arguably a bit light in the context of the valuation multiple.
On core HEPS guidance of between 13.4 and 13.8 cents for this interim period and core HEPS for the second half of the previous financial year of 9.4 cents, core HEPS over the last twelve months is between 22.8 cents and 23.2 cents. On a share price of R5.65, that’s a Price/Earnings multiple of 24.5x at the midpoint of guidance.
It’s been a volatile year in this sector and relative performance has moved around greatly, with STADIO pulling sharply ahead based on this announcement, closing 6.6% higher on the day:
For now at least, STADIO’s high multiple isn’t blunting share price performance vs. peers.
Little Bites:
Director dealings:
Des de Beer has bought another R2.9m worth of shares in Lighthouse Properties (JSE: LTE).
A prescribed officer of Spear REIT (JSE: SEA) has sold shares worth R261k.
Liberty Two Degrees (JSE: L2D) has released the circular for the take-private by Liberty Group. Interested shareholders can find it here.
Salungano (JSE: SLG) announced that the party that had launched a liquidation application against subsidiary Wescoal Mining has agreed to settle the matter. The liquidation has thus been withdrawn. Despite this, Wescoal Mining will commence with a voluntary business rescue process.
The resolutions related to the take-private of Advanced Health (JSE: AVL) were approved almost unanimously at a scheme meeting.
AYO Technology (JSE: AYO) has entered a financial closed period and therefore needs to postpone the general meeting required to authorise the repurchase from the PIC. Of course, the longer the money stays in the AYO bank account, the better for the company.
Kibo Energy (JSE: KBO) announced that subsidiary MAST Energy Development released interim results for the six months to June. The short-form announcement has no information on profitability and I lost interest after spending five minutes looking for the detailed results on the MED website without any luck. Companies usually trade at two cents a share for good reason.
Congratulations to my Ghost Wrap partners Mazars on their appointment as the auditors of African Media Entertainment!
African Rainbow Minerals tracks the cycle lower (JSE: ARI)
It’s the standard playbook of lower commodity prices and logistical challenges
For the year ended June 2023, headline earnings at African Rainbow Minerals fell by between 18% and 27%. The story is in line with what we’ve seen across most of the sector, with commodity prices under pressure and poor infrastructure putting pressure on sales volumes.
The weaker rand did help a bit at least, though obviously not enough to stop earnings from dropping. Full results are due on 4 September.
Blue Label continues to confuse everyone (JSE: BLU)
Market apathy is a serious problem when something is too complicated
After the three millionth attempt to save Cell C and turn it into something profitable (this time by Blue Label), the group’s numbers are so confusing that most people just don’t bother. This is despite some trusted voices on Twitter / X shouting Blue Label from the rooftops and hoping that someone will listen.
With HEPS for the year ended May down by between 62% and 66%, the announcement doesn’t get off to a great start. Core HEPS is hardly any better unfortunately.
What would help matters greatly is if the announcement actually made any sense whatsoever. Just take a look at this:
So on an adjusted, adjusted, very-adjusted, please-look-away-from-this-section basis, it’s possibly gone up. But I’m not sure. Nobody is.
There’s momentum at Momentum Metropolitan (JSE: MTM)
For the most part, operating conditions have been more favourable this year
The year ended June 2023 has been a much happier one for Momentum Metropolitan. One of the wins (for all of us) is that the impact of Covid on that period was limited vs. the comparable period. Insurance businesses also enjoyed better investment returns (other than in venture capital portfolios) and a favourable shift in the yield curve.
Aside from pressure on venture capital valuations, this happy story was dampened to some extent by lapses in the life business and underwriting losses in short-term insurance.
Of course, there are other complexities that will come to light when detailed results are released on 13 September. In the meantime, a trading statement has guided growth in normalised HEPS of between 15% and 22%.
HEPS as reported is only up by between 2% and 7%, so pay close attention to the normalisation adjustments in deciding whether you are willing to accept management’s view.
To show you how complicated this can get, here’s a screenshot from the announcement showing how they think about normalised HEPS:
South32: the latest victim of the mining cycle (JSE: S32)
Another day, another mining house where the dividend has come back down to earth
If nothing else this year, investors have hopefully learnt the difference between trailing dividend yield and forward dividend yield. In the mining sector, trailing yields (the last dividend vs. the current price) don’t tell you much. Forward yields (the forecast next dividend vs. the current price) are the real story, which is why the share prices drop as commodity prices drop in anticipation of dividends falling.
This is why mining share prices don’t usually react on the day of results based on those results. Instead, they react based on the day’s commodity price movements. The exception is where there’s a significant surprise in the results, like a production result that differs from guidance.
Production hasn’t been a problem at South32, with three production records this year. This goes a long way towards blunting the impact of a drop in commodity prices.
If you look at profit after tax, you’ll see a negative number for the year ended June 2023. This is because of a $1.3bn impairment related to the Taylor deposit at the Hermosa project. Even if we ignore this, underlying EBITDA fell by 47% and margin dropped from 47.1% to 29.4%. As I have been consistently pointing out in the recent mining results, that is still a decent margin. It’s simply the year-on-year story that looks poor.
An area of concern for me is the deterioration in return on invested capital (ROIC) from 33% to just 10%. The group has been investing for growth and there is generally a lagging effect in mining, where today’s spend typically drives profits that will only be realised in the future. This is something to keep an eye on.
Last year, South32 paid an ordinary dividend of 22.7 US cents per share and a special dividend of 3.0 US cents per share. The total dividend this year is only 8.1 US cents, so that’s a 64% drop in the ordinary dividend. By their very nature, special dividends are not used for year-on-year comparative purposes.
Over five years, South32 is trailing competitors like Glencore and Anglo American. If Anglo hadn’t gifted Thungela to its shareholders at a ridiculously low price, the below chart would look different and Anglo would look better.
Workforce: profitable, but only just (JSE: WKF)
The company invested for growth that simply didn’t come
Although revenue for the six months to June increased by 7% and gross profit inched slightly higher, Workforce Holdings had invested in capacity and the demand didn’t come through. This crushed earnings, with EBITDA more than halving to R32.8m and the Staffing and Outsourcing segment bearing the brunt of the pain.
Even cash conversion on EBITDA wasn’t great, with cash from operations of R22.5m (down from R64.6m in the comparable period).
It gets worse by the time we reach HEPS, which collapsed from 14.6 cents to 1.7 cents. After a revolting first half of the year, the company expects the second half to be better.
A very interesting comment in the earnings is that the recruitment business is under pressure because uncertain macroeconomic conditions reduce the likelihood of high-quality candidates leaving their jobs and changing roles. I had never considered this, but it makes sense.
Little Bites:
Director dealings:
Des de Beer has bought another R12.7m worth of shares in Lighthouse Properties (JSE: LTE)
The CFO of Standard Bank (JSE: SBK) sold shares worth R12.6m and a prescribed officer sold shares worth just over R2m.
Argent Industrial (JSE: ART) directors and their associates continue to head for the exit, with the latest round of sales being a total of nearly R1.9m.
An associate of a director of Mantengu Mining (JSE: MTU) sold shares worth R36k.
I’m not sure what the back-story is, but an associate of two directors of aReit (JSE: APO) had to return 9,600,000 shares in terms of a court order. I’m not sure who they were returned to and the value isn’t specified. At the current traded price, these are worth R33.6m.
WG Wearne (JSE: WEA) is suspended from trading and as a market cap of just R8.3m based on the last time it traded. For those who are stuck in this thing, you may be interested to know that there’s a new CFO as an internal appointment.
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, we recap a busy couple of days:
Strong results at Spur that gave the share price another boost on top of the strong positive response to the trading statement.
Earnings growth at Adcock Ingram that benefitted from a “normal” flu season, although other segments were perhaps disappointing for investors.
An excellent year thus far for Bidvest, supported by strong earnings growth and clear evidence of pricing power.
Continued momentum at Bidcorp, which has gone from strength to strength since the depths of the pandemic.
NEPI Rockcastle’s appeal as a play on Central and Eastern Europe, a region of real economic growth and demand for retail space.
A whirlwind update on recent mining and resources updates from DRDGOLD, Harmony Gold, BHP and Sasol.
We use cookies on our website to give you the most relevant experience by remembering your preferences and repeat visits. By clicking “Accept All”, you consent to the use of ALL the cookies. However, you may visit "Cookie Settings" to provide a controlled consent.
This website uses cookies to improve your experience while you navigate through the website. Out of these, the cookies that are categorized as necessary are stored on your browser as they are essential for the working of basic functionalities of the website. We also use third-party cookies that help us analyze and understand how you use this website. These cookies will be stored in your browser only with your consent. You also have the option to opt-out of these cookies. But opting out of some of these cookies may affect your browsing experience.
Necessary cookies are absolutely essential for the website to function properly. These cookies ensure basic functionalities and security features of the website, anonymously.
Cookie
Duration
Description
cookielawinfo-checkbox-analytics
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Analytics".
cookielawinfo-checkbox-functional
11 months
The cookie is set by GDPR cookie consent to record the user consent for the cookies in the category "Functional".
cookielawinfo-checkbox-necessary
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookies is used to store the user consent for the cookies in the category "Necessary".
cookielawinfo-checkbox-others
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Other.
cookielawinfo-checkbox-performance
11 months
This cookie is set by GDPR Cookie Consent plugin. The cookie is used to store the user consent for the cookies in the category "Performance".
viewed_cookie_policy
11 months
The cookie is set by the GDPR Cookie Consent plugin and is used to store whether or not user has consented to the use of cookies. It does not store any personal data.
Functional cookies help to perform certain functionalities like sharing the content of the website on social media platforms, collect feedbacks, and other third-party features.
Performance cookies are used to understand and analyze the key performance indexes of the website which helps in delivering a better user experience for the visitors.
Analytical cookies are used to understand how visitors interact with the website. These cookies help provide information on metrics the number of visitors, bounce rate, traffic source, etc.
Advertisement cookies are used to provide visitors with relevant ads and marketing campaigns. These cookies track visitors across websites and collect information to provide customized ads.
