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Saturday, April 5, 2025
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Ghost Bites (Barloworld | Bidcorp | Capital Appreciation | Dipula Income Fund | Glencore | Netcare | Novus | Santam | Sibanye-Stillwater | Stor-Age | Trematon | Tsogo Sun)

The Finance Ghost
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Ghost Bites (Barloworld | Bidcorp | Capital Appreciation | Dipula Income Fund | Glencore | Netcare | Novus | Santam | Sibanye-Stillwater | Stor-Age | Trematon | Tsogo Sun)

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

Barloworld’s HEPS has inched forwards (JSE: BAW)

This is a perfect example of the importance of continuing vs. discontinued operations

When a group has either disposed of or shut down an important part of its business, the concept of continuing and discontinued operations becomes critical. If a business is no longer there, then obviously the total level of earnings is not comparable to the prior period in which it was there.

Where a business was loss-making, then excluding it makes the current results seem better than they really are on a year-on-year basis. When a successful business is sold or unbundled (as in the case of Barloworld and Zeda), then excluding them can make results look worse.

Barloworld has released a trading statement for the year ended September and the numbers are heavily skewed by the Zeda deal (and the disposal of Barloworld Logistics to a lesser extent), so the only year-on-year change worth looking at is HEPS from continuing operations, as this tells you how the rest of the group is doing.

For this period, HEPS from continuing operations grew by between 4.8% and 6.2%.

Bidcorp is still growing by double digits (JSE: BID)

Watch out for volatility based on the rand, though

Food services giant Bidcorp is one of the very best rand hedges on the local market. The company is a top performer and the vast majority of income is earned outside of South Africa. That’s good when the rand is weakening and bad when the rand is strengthening. This causes volatility in the JSE-listed share price because both the currency and sentiment about the underlying company have an impact.

Bidcorp has given the market an update on the four months to October, with headline earnings showing “real growth” in an environment of 8% inflation. In other words, headline earnings is up by more than 8%. It could be a fair bit more than that actually, as revenue for the four months is up 12.8% year-on-year. What we do know is that gross margin has dipped slightly year-on-year and operating costs as a percentage of net revenue improved by 10 basis points to 18.4%. This has offset the decline in gross margin, allowing EBITDA margin to remain steady at 5.8% of net revenue.

Looking at regional exposures, trading margins have improved in both Australia and New Zealand as well as Europe. Sales are doing well in the UK where food inflation sits at 12%, but it’s been difficult to pass on increases and so margins are underperforming. The Emerging Markets segment includes a huge number of countries and they haven’t given commentary on the margin performance as a whole. A comment that I wouldn’t ignore is that gross margin in China has come under pressure.

Capital expenditure of R1.4 billion is higher than R1.0 billion in the comparative period, with R1.0 billion going into replacement of capital equipment and R0.4 billion into creation of future capacity. There has only been one bolt-on acquisition in Australia in this period.

Capital Appreciation has gone slightly backwards (JSE: CTA)

The use of normalised earnings is helpful here

In a business update published towards the end of September, Capital Appreciation gave an idea of the difficulties being faced in this environment. This is distinct from the expected credit loss at GovChat, with R56.3 million raised in the prior period and R9.4 million in this period. This has obviously driven a very attractive jump in HEPS that isn’t reflective of the performance of the underlying business.

It’s important to note that this is because the credit loss is included in headline earnings, with the number for the comparative period having been restated to reflect this accounting treatment.

To give a better idea of how the core business is performing, the company has also reported normalised earnings. This excludes the GovChat impairments from the previous and current periods, showing a drop of between 7.3% and 5.5% in HEPS for the interim period. On this basis, it came in at between 7.19 and 7.33 cents,

The share price closed 4.6% higher at R1.15 per share.

Putting the dip in Dipula: interest rates are biting (JSE: DIB)

Distributable earnings have dropped under the pressure of interest rates

Dipula Income Fund has released a trading statement for the year ended August. It gives actual numbers rather than an estimated range.

Distributable earnings fell by 6.94% year-on-year. After the restructure of the capital structure that saw B shares issued for every A share held, there are vastly more shares in issue than before. Distributable earnings per share thus dropped by 22.2%.

Glencore acquires 77% in Teck’s steelmaking coal business (JSE: GLN)

If the name sounds familiar, it’s because Glencore has been flirting with Teck for a while now

Glencore has agreed with Teck Resources to acquire a 77% effective interest in Teck’s steelmaking coal business, Elk Valley Resources (EVR), for $6.93 billion in cash. There’s also the acquisition of shareholder loans worth between $250 million and $300 million on closing.

In a separate deal, Nippon Steel Corporation will roll its 2.5% interest in Elkview Operations up into equity in EVR. That company will also acquire equity in EVR from Teck such that it will hold a 20% interest in EVR on closing.

In case you’re keeping track of the maths, POSCO is going to exchange its 2.5% interest in Elkview Operations and its 20% interest in the Greenhills joint venture for a 3% interest in EVR.

In short, this gives Teck an exit from the steelmaking coal business. It gives Glencore a solid business in Canada, one which generated profit before tax of C$6 billion in the 2022 financial year. This makes it sound like the purchase price is a steal, if you’ll exclude a bad pun.

Within 24 months of the close of this deal, Glencore still hopes to move forward with a demerger plan that would see the coal and carbon steel businesses spun out as a standalone entity. Such a transaction would be triggered by sufficient deleveraging of the balance sheet.

Netcare’s HEPS is significantly higher (JSE: NTC)

This trading statement is the pre-cursor to results being released next week

Netcare has released a trading statement for the year ended September, reflecting strong growth in HEPS of between 35% and 38%. Adjusted HEPS grew by between 25.5% and 28.5%.

If we simply use HEPS as reported, the expected range is 99.9 cents to 102.1 cents. The share price closed 4.4% higher at R13.19, so that’s a Price/Earnings multiple of around 13x.

Detailed results are due on Monday, 20 November.

Novus gives an exact HEPS number for the interim period (JSE: NVS)

I’m not entirely sure what the point of this trading statement was

Novus will be releasing earnings on 15 November. I’m therefore not entirely sure why a further trading statement came out on 14 November, particularly when it gives the exact HEPS number for the interim period anyway.

Perhaps the company was just very eager to tell you that HEPS for the interim period will be 28.77 cents. The share price closed 2.4% lower at R4.10.

Santam is facing a difficult underwriting environment (JSE: SNT)

And this announcement came out before all the videos of the hail storm in Joburg

Short-term insurance has been a difficult game in South Africa, with some major loss events and a lag effect in premiums that has seen replacement and repair costs move substantially higher before insurance premiums could catch up. I’ve learnt through this process that inflationary conditions are tough for short-term insurers because policies are generally only revised once per year.

Santam is trying hard to improve the underwriting performance through various initiatives, including geo-coding that gives a comprehensive risk-based view of property locations. The hail storm this week is a perfect example of why over-exposure to a single area can be a disaster for insurance companies.

In an operational update covering the nine months to September, Santam announced that the Conventional Insurance side of the business achieved net earned premium growth of 7%, with positive contributions from all business units excluding Santam Re. This is because non-profitable business was cancelled in Santam Re. This is a theme throughout the announcement actually, with Santam referring to corrective measures taken on poorly priced insurance business.

The partnership with MTN seems to be going well, with almost 100,000 new policies sold to date. The transfer of the in-force book of MTN device insurance is still subject to regulatory approval.

Although top-line growth in Conventional Insurance looks alright, the net underwriting margin was below the target range of 5% to 10%. Natural disasters and property fires have been largely to blame.

The good news is that the investment return on insurance funds, a key part of the business, improved significantly year-on-year. The key float portfolio produced excess returns relative to the benchmark.

Moving on to the Alternative Risk Transfer business, the announcement has just one sentence that talks to strong growth, underwriting results and investment margins.

In the Sanlam Emerging Market partner business, disposal proceeds of EUR126.4 million were received in September for the disposal of the 10% interest in SAN JV to Allianz. These are gross proceeds of R2.6 billion, of which R2 billion was distributed to shareholders in the form of a gross special cash dividend of R17.80 per share. Shriram General Insurance achieved strong premium growth and saw underwriting margins improve.

The outlook doesn’t make for great reading, with an ongoing volatile environment as the backdrop to Santam’s efforts to improve the underwriting performance. The property book is the biggest focus area, particularly based on large fire losses.

Sibanye hosted a battery metals investor day (JSE: SSW)

The company regularly gives detailed strategic updates to the market

If you are interested in battery metals or if you are a shareholder in Sibanye, then you’ll want to refer to this presentation delivered by the company on Tuesday. This slide gives a very good idea of how Sibanye has developed over the past decade or so and where the group is headed:

Stor-Age’s dividend is higher, but only just (JSE: SSS)

Where so many property funds have faltered though, Stor-Age has been dependable

Investors in high quality REITs are generally looking for a hybrid return of debt and equity. This takes the form of a dependable dividend and some growth, ideally in line with inflation. Although Stor-Age has only managed to increase the dividend per share by 2% in the six months to September, there’s also an increase in net asset value of 7.2% to help the investment thesis.

Same-store rental income is up 13.6% in SA and 3.1% in the UK, with closing occupancy of 90.6% locally and 83.9% in the UK. The rental rate (i.e. the impact of just pricing, not pricing and occupancy etc.) increased by 9.6% in South Africa and 5.1% in the UK.

The loan-to-value ratio is 31.9% and over 75% of net debt is subject to interest rate hedging.

The full year dividend guidance is 118 to 122 cents per share. This is based on maintaining a 100% dividend payout ratio, which tells you a lot about how seriously Stor-Age takes its role as a dividend conduit for shareholders. Based on the current price of R12.20, this implies a six-month forward yield of 9.8%.

The net asset value is R15.58, based on SA REIT Best Practice Recommendations.

Trematon’s NAV went the wrong way (JSE: TMT)

Intrinsic NAV is the most sensible metric here

Trematon is an investment holding company, which means that using a metric like HEPS doesn’t make a lot of sense as some investments are consolidated and others aren’t. This doesn’t stop the company from including HEPS guidance in its trading statement, though I struggle to see the point. The move in HEPS is what triggered the release of a trading statement, coming in at less than half of the comparable period for the year ended August.

The thing to focus on is intrinsic net asset value, or INAV. This is the supposed to be the value of the portfolio assuming an efficient disposal of assets, net of debts and taxes. INAV per share has dropped by between 11% and 10%, coming in at 435 cents to 440 cents.

The share price closed slightly lower at R2.95, reflecting a discount to INAV that is typical of locally-listed investment holding companies.

The sun is shining at Tsogo Sun (JSE: TSG)

Part of this is the base effect of hotel management contract cancellations

Tsogo Sun published a trading statement for the six months ended September 2023, reflecting a massive jump of between 43% and 51% in HEPS. This equates to an expected range of between 83 cents and 87.5 cents.

The base period included the negative impact of hotel management contract cancellations, so this contributed to the substantial year-on-year move.

To fully understand this result, we need to wait for detailed results on 28 November.

Little Bites:

  • Director dealings:
    • The Chief Information Officer at Capitec (JSE: CPI) has sold shares worth around R10 million.
    • A director of a major subsidiary of Super Group (JSE: SPG) received a significant award of performance shares and sold the entire lot for over R9.3 million.
    • Des de Beer bought another R1.6 million worth of shares in Lighthouse Capital (JSE: LTE).
    • A non-executive director of Shaftesbury Capital (JSE: SHC) bought shares worth £56.5k.
    • A director of Harmony Gold (JSE: HAR) has sold shares in the company worth R741k, perhaps taking advantage of the spike after the release of results.
  • Orion Minerals (JSE: ORN) announced that Clover Alloys (SA) has notified Orion that it will not exercise the options expiring 30 November. Clover has a 9% stake in Orion and remains a supportive shareholder with representation on the board. Clover is just taking a measured approach here (according to Orion at least), with Orion’s work at the Prieska Copper Zinc Mine being funded by the IDC and the Triple Flag facility. In contrast, previous director Thomas Borman exercised his option to acquire shares at R0.20 for a total value of $2.27 million.
  • Universal Partners (JSE: UPL) released a quarterly update that shows a flat NAV vs. June 2023. The dental side of the business is growing and Universal followed its proportional rights, investing a further £1.4 million in payment-in-kind notes in that business. The UK contractor accountancy and payroll solutions business is holding its own in a tough market. Credit investing group SC Lowy achieved good performance in its funds. Recruitment group Xcede is unfortunately not doing so well in these conditions, although new management is having a positive impact. Despite “reinventing the toilet”, Propelair is still way behind the original business plan and is recognised at a nominal value.
  • There’s a rather unusual situation at Brikor (JSE: BIK), which is currently under offer by Nikkel Trading. The circular for the offer hasn’t been sent out yet, despite an extension having been granted by the Takeover Regulation Panel (TRP). A further extension has been granted, as they are now sorting out an issue related to the expiry of the irrevocable undertaking given by the CEO of the group. He previously gave an irrevocable not to participate in the offer. That irrevocable has expired and he refuses to give another irrevocable, which means Nikkel now needs to stump up a guarantee showing it can acquire all the planned shares plus those held by the CEO. It’s an extraordinary swing to see the CEO now potentially exiting his stake after the initial offer was made based on him not accepting it.

Ghost Bites (Alexander Forbes | Altron | Ethos Capital Partners | Harmony | Premier | Raubex | Shoprite | Vodacom | Zeda)

The Finance Ghost
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Ghost Bites (Alexander Forbes | Altron | Ethos Capital Partners | Harmony | Premier | Raubex | Shoprite | Vodacom | Zeda)

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

Alexander Forbes grew earnings sharply (JSE: AFH)

Despite this, the share price ended flat for the day

Alexander Forbes has released a trading statement for the six months ended September. It makes for attracting reading, with operating profit up by between 5% and 15%. The continuing operations benefitted from various factors, not least of all higher investment income driven by interest rates.

There are several other reasons for this year-on-year move, including once-offs in the base. Either way, HEPS from continuing operations is up by between 55% and 7%%, while group HEPS is up by between 85% and 105%.

For the interim period, group HEPS is expected to be between 26.1 and 28.9 cents. The share price is R6.00 and the market must’ve seen this coming, as it ended the day flat.

Altron achieved a meaningful increase in HEPS (JSE: AEL)

Is the “ugly duckling” of the Bytes spin-off turning the corner?

The Altron share price closed 6% higher on Monday in response to results for the six months to August. They came out early in the morning, as the company wanted the market to spend the day digesting and discussing them.

This is because the numbers are solid, with revenue up 11% and EBITDA up 26% if we exclude the ATM Business. Before you get worried about this adjustment, it makes sense as that business was sold with effect from 1 July 2023.

Operating profit improved by 25% and HEPS increased by 19% to 50 cents a share. The interim dividend jumped 56% to 25 cents per share, as the payout ratio increased from 40% to 50% of HEPS from continuing operations.

The blemish on the result is that EPS was flat, impacted by an impairment on Altron Nexus that is equivalent to 9 cents a share. That business is classified as a discontinued operation. The impairment refers to the restructuring that was necessitated by the loss of a major contract in Gauteng and the exposure to the City of Tshwane.

There are a number of highlights within the group, one of which must be 26% subscriber growth at Netstar. Enterprise customers grew by 13% and the consumer side was up 8%. They have a really fun stat in the announcement:

“At the end of the financial year 2023, Netstar was fitting one car every four minutes, Netstar now fits four cars every one minute.”

There are various other businesses in the group, which is half the problem. This is a classic case of a value unlock strategy that included the spin-off of Bytes, which has turned out to be exceptional for those who held onto it. Perhaps Altron is finally ready to reward shareholders as well!

Ethos Capital Partners won’t make more investements (JSE: EPE)

Shareholders are clearly tired of the discount to NAV

Ethos Capital Partners is expected to update the market on its NAV after Brait releases results on 15 November. Even if you knew nothing else about this company, this already tells you that you’re dealing with a multi-layer listed structure. This only ever means one thing: large discounts to NAV.

The board of Ethos has been engaging with large shareholders and the message was clear: focus on the existing 22 portfolio companies and realising value from them. No new fund commitments or investments are to be made.

Is this the start of the classic value unlock strategy, where management is lauded for trying to claw back some of the value that was lost? A 7.2% rally in the share price suggests that it just might be.

Harmony in tune with the market (JSE: HAR)

An 8% rally was the happy outcome of this update

Harmony released an operational update for the three months to September and the market clearly liked it. Gold production was up 17% and gold revenue jumped by 33%. Together with a drop in all-in sustaining costs of 7%, this created a ridiculous 278% increase in group operating free cash flow.

Net debt to EBITDA is now zero. Zero. Thanks to a seriously impressive performance, not least of all from the Hidden Valley mine in Papua New Guinea, the company managed to get rid of its debt.

It’s also worth highlighting that silver production was 35% higher and uranium production was up 50%. Major initiatives are in progress to bring copper into the mix as well.

The share price is up a rather glorious 48% this year!

Premier improved margins in this period (JSE: SHP)

It’s unusual to see a company this relaxed about load shedding

Brait spent a very long time dressing Premier up for listing. Liquidity is fairly light at the moment despite the R7.7 billion market cap, with the share price roughly flat since it debuted on the market (having given shareholders a scare to the downside along the way).

The business itself is doing very nicely, with revenue up 7.1% in the six months to September. EBITDA is up 23.9% and normalised HEPS has increased by 25.4%.

HEPS as reported is only up 0.8% because the prior period included foreign exchange moves and a once-off tax adjustment.

Interestingly, the company believes that load shedding was “only” a R17 million impact on EBITDA of R1 billion. Group EBITDA margin expanded by 150 basis points despite that challenge, thanks to Millbake (EBITDA up 27.3%) rather than Groceries and International (EBITDA down 4% because of issues in Mozambique).

As a further note on Millbake, that division’s revenue growth of 8.1% was thanks entirely to price and mix, with overall volumes flat. This period included some price relief to consumers due to softer commodity prices. There are still many other inflationary factors, like fuel prices and the rand.

Voluntary debt repayments of R357 million were made during the period.

Strategically, it’s interesting to note the acquisition of a 35% stake in UK-based niche skin care treatment range Science of Skin.

In terms of outlook, revenue growth is expected to moderate because of slowing inflation in soft commodities, driving an expected increase of low single digits in revenue for the second half of the year. The company believes that it can maintain the first-half margins. With less debt on the balance sheet, there’s also a boost to net profit from a reduction in finance costs.

Life after Beitbridge still looks good at Raubex (JSE: SHP)

Despite the completion of that project in the prior period, earnings have powered forward

For the six months to August, Raubex grew revenue by 14.5% and HEPS by 19.4%. That’s particularly impressive when you remember that the company cautioned shareholders that the flagship Beitbridge Border Post Project was completed in the year ended February. There were other reasons why they felt that the full-year was a bumper period.

But despite this, earnings for the first half of the new financial year are clearly very strong. The cash looks good too, with cash generated from operations up by 23.6%. The interim dividend has increased by 18.7% to 63 cents per share.

If you dig deeper, the Materials Handling and Mining Division was the star performer, with a 56.3% growth rate in revenue and an improvement in operating margin from 8.5% to 10.9%. Substantial improvement in the operations of recently acquired Bauba Resources seems to be the main driver here. Performance in the other two divisions of the group wasn’t fantastic, so be careful in extrapolating this result.

Shoprite is still hammering the competition (JSE: SHP)

But this has already been priced in, which is why I don’t hold the stock

At its AGM, Shoprite gave shareholders an update on trading conditions for the first quarter. The group marches on, with a whopping 13.3% growth rate in Supermarkets RSA during a period of inflation of 8.3%. This means substantial growth in volumes, with market share for the 52 weeks to September up by 124 basis points according to the company.

Shoprite has now achieved uninterrupted market share gains for 55 months.

Load shedding has been better recently, but the quarter to September still saw an incremental increase of R90 million in diesel costs vs. the comparative period.

Store growth in this part of the group continues, with a net 42 stores opened during the quarter. This includes eight Petshop Science, two UNIQ and two Checkers Outdoor stores. If you wondered why Wooloworths acquired Absolute Pets, perhaps the Shoprite strategy gives you a clue.

The numbers look good in the other segments as well, for the most part at least. Supermarkets non-RSA grew 9.7% as reported or double digits in constant currency. Store growth is minimal in that part of the business. In Furniture, sales were up by just 0.5% as consumers buckled under current pressures. Other operating segments grew 22.2%, with OK Franchise doing particularly well.

Overall, group sales for the quarter grew 13.2%. It’s another mega result, yet the share price closed 1.3% lower. This tells you just how much is priced in.

Vodacom shows why I still don’t like telecoms (JSE: VOD)

Organic growth is pedestrian

Vodacom fell 4% on Monday after releasing results for the six months to September. Vodafone Egypt is in these numbers, which means you need to be careful of things like a 35.5% increase in revenue, as this company now contributes 24.1% of Vodacom group revenue. The “pro-forma” numbers exclude the impact of that acquisition, showing revenue growth of 7.9% and EBITDA growth of 5.5%.

HEPS is where the rubber still hits the road, particularly when an acquisition is paid for with shares. Although the Vodafone Egypt earnings are now in Vodacom, there are many more shares in issue as a result. HEPS fell by 4.2% in this period.

The interim dividend per share is even worse, down 10.3%. Perhaps this free cash flow table will explain why there’s less to go around for Vodacom shareholders:

I am not a fan of this sector at the moment at anything higher than a very cheap valuation. The growth story is primarily in Africa (particularly in ancillary areas such as financial services, which contributed 5.6% of Vodafone Egypt’s service revenue) and the macroeconomic situation with currencies is just too difficult, even in East Africa where Vodacom has really staked its claim.

The share price is down 17% this year.

Zeda defies debt skeptics and rallies 14.5% on earnings news (JSE: ZZD)

These are impressive numbers

There have been experienced voices in the market who have been skeptical about Zeda and the balance sheet. I was less worried, having written on the company in Financial Mail back in June (you can read it here if you’re a subscriber). Spot was R10.19, my target was R14.00 and the current price is R12.40. On the whole, I felt that the company would manage to do well despite the debt.

It’s nice to occasionally get one right, with Zeda releasing a trading statement for the year ended September that the market loved. Although we don’t have full details yet, we know that revenue growth is over 10% and EBITDA growth is over 15%. Operating profit margins were sustained.

Although net finance costs did indeed jump sharply by over 60%, a net positive tax benefit vs. last year helped mitigate that impact. I’m certainly not going to suggest that I saw the tax benefit coming, but either way HEPS was up by between 15% and 20% and the jump in EBITDA was the primary driver of that gain.

Net debt as at the end of September is R5.1 billion, with the unbundling legacy debt having been fully settled. This bodes very well for the coming year.

HEPS is between 373.4 cents and 389.6 cents, which suggests a Price/Earnings multiple of roughly 3.3x at the mid-point.

Little Bites:

  • Director dealings:
    • A director of Vunani (JSE: VUN) sold shares worth R2.5 million in an off-market deal.
    • A number of Hyprop (JSE: HYP) directors chose the dividend reinvestment alternative, with a total value of nearly R800k split across several directors.
    • Des de Beer is back! He bought shares in Lighthouse Properties (JSE: LTE) worth R662k.
    • The CEO of British American Tobacco (JSE: BTI) reinvested dividend income in shares worth £5.9k.
    • An associate of a director of Wesizwe Platinum (JSE: WEZ) has sold yet more shares, this time worth R35.6k.
  • The Chairman of Sasol (JSE: SOL), Sipho Nkosi, has stepped down with a cautious approach to perceived conflicts of interest based on his business interests. This is of course the correct approach at that level. Current lead independent director Stephen Westwell will fill the role on a temporary basis.
  • Hudaco (JSE: HDC) announced that 85% held subsidiary Hudaco Trading has entered into a lease with Dufomo Investments in respect of its Ambro Steel division. The CEO of Hudaco is an 82% shareholder in Dufomo. This is therefore a related party transaction, but Ambro has been renting the same building for over 29 years so this is nothing new. This is a small related party deal, which means it can go ahead provided an independent expert opines that the deal is fair. Merchantec Capital was appointed as expert and has given the green light.
  • Kibo Energy (JSE: KBO) subsidiary Mast Energy Developments really is bending over backwards for its new joint venture partner, extending the payment date of the initial sum by the new partner yet again. The blame is on administrative and international banking transfer delays. I really do hope they get the money, or it will be terribly embarrassing.
  • Bytes Technology Group (JSE: BYI) has confirmed the exchange rate applicable to the interim dividend. A gross dividend of R0.6173591 per share will be paid to local shareholders.
  • In case you love staring at tables of numbers, AngloGold (JSE: ANG) has released gold production tables for the third quarter. This is a supplement to the previously announced numbers. Check out the SENS announcement if for some reason you want to read tables and tables of numbers with no commentary.

Liquid gold: why gangsters choose olives over cocaine

Dominique Olivier
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Liquid gold: why gangsters choose olives over cocaine

Miniature cameras hidden in tie pins. Bribery money counted under tables. Swiss bank accounts, Turkish tankers and Caribbean shell companies. No, we’re not talking about the cocaine trade. We’re talking about the Italian agromafia. 

If you walk into your kitchen right now, odds are you would find some version of olive oil, either in your pantry or right next to your stove. I would guess that the vast majority of us start our cooking with a splash of a pure olive oil, or at the very least an olive and seed-oil blend. 

The most coveted in the olive oil family – the extra-virgin variety – will set you back between R88.99 and R169.99 for 500ml at your local Woolworths. Yet despite having a substantially higher cost than other cooking oils like vegetable, sunflower and canola, extra-virgin olive oil reigns supreme in our hearts and in our shopping baskets. 

Here’s the thing though: about 80% of all of the extra-virgin olive oil on the market is either fake or adulterated. Turns out there’s real money to be made in olive oil-related fraud, which industry insiders have described as being “as lucrative as the cocaine trade, but with less violence”.

We know this because in 2016, a special Italian police taskforce dubbed “Mamma Mia” (I promise I’m not making this up) uncovered that thousands of tons of low-quality oils from Spain and Greece  – some of which didn’t even originate from olives – were being bottled, labelled and sold as extra-virgin Italian olive oil. 

Extra-virgin, extra problems

As consumers, we are generally savvy enough to know when a price is too good to be true. That’s why we might look at the R90 bottle of oil at the local retailer that claims to be extra-virgin and know that the label is probably fibbing a bit – but we’re OK with it, because we like the price. 

The real anger starts when you pay upwards of R500 for an extra-special, extra-virgin bottle of oil that claims to be from a quaint Italian monastery on a verdant hill, only to learn that you’re paying for something that came from neither Italy nor an olive. 

The surge in the counterfeit olive oil trade – dubbed the agromafia – can be attributed to several factors. Firstly, for the past 10 years, there has been a 35% increase in olive oil consumption in southern Europe, its traditional market, and a remarkable 100% rise in North America. This growth is primarily driven by the popularity of the Mediterranean diet, which relies heavily on extra-virgin olive oil and the promoted health advantages associated with its consumption.

So on the one hand, we have a keen market. On the other, we have the fact that the extra-virgin variety of olive oil is time-consuming and difficult to make. 

In adherence with European Union regulations, extra-virgin olive oil must be produced solely through physical methods, such as pressing or centrifugation, and must satisfy thirty-two chemical criteria. 

The prestige of making it through these rigorous processes justifies the price that customers are willing to dock up for the real deal – but it also invites the devious intentions of those seeking a shortcut to profit.

Remember that SHEIN article from a few weeks ago, where I wrote about the problems that occur when a consumer base adjusts to paying a cheaper price for knockoff products? You’re seeing it play out in real time here. In Puglia, which is responsible for around 40% of Italy’s olive production, farmers have grappled with this crisis for over a decade. 

Instead of prioritising support for small producers creating unique, high-quality oils, the Italian government has consistently favoured quantity over quality, which has benefitted large corporations specialising in bulk oil sales. Small-scale farmers are getting squashed as a result. 

As always, demand continues to shape supply. 

A problem as old as olives

One of my favourite tidbits that I picked up while researching this topic is just how old the olive oil industry is – and how long the adulteration of olive oil has been a problem.

Let me give you some context to what I mean by “how long”. Somewhere between the 1st-3rd centuries AD, Emperors Trajan and Hadrian ruled over the Baetica region in southern Spain, now known as Andalusia. The amount of olive oil sent from Baetica to Rome during that time was so vast that the discarded clay amphorae, used for transportation of the oil and left in a dump at the southeastern edge of the city, formed a hill standing fifty metres high.

Upon closer inspection of the shards, it became clear that these amphorae exhibited thorough anti-fraud measures. Each container was meticulously marked with the precise weight of the oil, the origin farm where the olives were pressed, the merchant responsible for shipping, and even the name of the official who verified the information before dispatch. 

Upon delivery, reverse checks were conducted when the amphorae were emptied to ensure that the weight and quality had remained consistent throughout transportation. This stringent labelling system – which, may I remind you, was hand-carved into the side of a clay amphora –  supposedly aimed to counteract the risk of merchants substituting an inferior product during transit. 

So, clearly not a new idea at all. Although dare I say, it sounds a bit like the ancient Romans had more stringent anti-fraud measures in place than the olive oil producers of today. 

These days, you might want your salad sans-oil

Sadly, things aren’t looking up for the industry at the moment. 

Bad weather over the Mediterranean, including a massive drought in Spain (which is currently the world’s largest olive producer), has negatively affected the most recent olive harvest. According to a statement by The European Commission, olive oil production in Spain, Italy and other European Union countries would recover only slightly from last season’s 40% decline, limiting supplies and pushing up prices.

In Greece, the demand for olives is so high that gangs of chainsaw-wielding bandits are breaking into unguarded groves and literally stealing whole branches off of olive trees. 

As you can imagine, the shortage of genuine olive oil does not bode well for the purity of the extra-virgin splash that you’ll be adding to your next salad. With supply at a low, demand sky high, and customers demonstrating that they are willing to pay inflated prices as a result, the incentive for oil-substituting crooks to create their own blends is higher than ever. 

About the author:

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

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

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

Ghost Bites (Eastern Platinum | ISA Holdings | Montauk Renewables | Quantum Foods | RFG Holdings | Richemont | The Foschini Group)

The Finance Ghost
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Ghost Bites (Eastern Platinum | ISA Holdings | Montauk Renewables | Quantum Foods | RFG Holdings | Richemont | The Foschini Group)

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

Eastern Platinum grew sharply in Q3 (JSE: EPS)

Chrome prices have helped the story here

Eastern Platinum has released results for the third quarter of 2023 and they reflect a rather silly growth rate of 505.6% in revenue. On a year-to-date basis, revenue is up 94%.

Operating income has jumped from $1.9 million to $7.0 million despite gross margin falling from 52.5% to 32.1%. For the nine months, operating income is up from $9.4 million to $25.5 million.

At group level, operating income was $3.6 million in this quarter vs. a loss of $0.9 million in the comparable quarter. Over nine months, it improved from a barely break-even result of $0.1 million to a far more palatable $17.5 million.

The trick has been third party chrome revenue from the sales of chrome concentrate by the retreatment project at Barplats Mines.

The problem is that chrome revenue is expected to wind down into 2024 as the retreatment project approaches its completion date, which means the company will go back to PGMs as the main source of income. The company is raising capital as part of this strategy.

The whistleblower special committee is also still busy with its investigation into allegations of undisclosed related party transactions. A great deal of progress was made this quarter (including collecting over 135,000 documents) and findings will be provided to the board by the end of the year.

ISA Holdings reports strong profit growth (JSE: ISA)

This is a JSE-listed group that you’ve perhaps not heard of

With a market cap of around R220 million, you won’t often hear anyone talking about ISA Holdings. The listing dates all the way back to 1998, so it’s actually been around for a long time! The company is involved in network, internet and information security solutions.

Results for the six months to August look strong, with turnover up 42% and profit after tax up 27%. HEPS increased by 27% as well to 7.7 cents.

Interestingly, 89% of turnover is subscription in nature, so that’s a pretty solid underpin. A change in product mix resulted in gross margin decreasing from 55% to 47%, so the turnover growth wasn’t fully translated into profit growth.

One concern is the balance sheet, with a drop in cash and cash equivalents by 11% and a higher trade receivables (and payables) balance than would normally be the case. Management attributes this to the change in product mix and the timing of settlement.

The interim dividend of 7.7 cents per share is 27% higher.

There is some liquidity in the stock but not much, with a wide bid-offer spread. It closed at R1.29, down 1.5% for the day.

Montauk Renewables reports a drop in revenue (JSE: MKR)

The company makes zero effort to help JSE shareholders understand the numbers

I can’t really comment on the Montauk Renewables investor relations strategy because they don’t actually have a strategy, at least not one aimed at investors on the JSE. The SENS announcements never give any additional insight or commentary. Instead, we have to go digging in the US reports (as the company is listed on the NASDAQ).

The group generates 91% of its revenue from the RNG segment, which is the sale of gas at fixed price contracts and a few other bits and bobs. Whether you look over three months or six months, revenue has dropped significantly for the group.

The good news is that this quarter was at least profitable, taking the year-to-date operating loss to $610k. The comparable six-month period is an operating profit of $22 million, so this is a very big negative move year-on-year.

Quantifying the pain at Quantum Foods (JSE: QFH)

The avian flu outbreak has directly cost the company R155.3 million in this period

Quantum Foods has had a year to forget, with conditions in the poultry industry creating a perfect storm. Aside from consumer pressures and the lack of ability to put through pricing increases to recoup input costs, the outbreak of avian flu has been a disaster.

In this period, the value of biological assets written off (i.e. chickens culled) was R155.3 million. This works out to 56.8 cents per share.

With that loss for context, perhaps a swing in HEPS from 14.1 cents in the comparable period to a loss of between 16.7 cents and 18.1 cents in this period isn’t too bad.

There is very little liquidity in the stock, so I’m not sure that a year-to-date drop of around 7% in the share price is much of an indication of anything.

The juice is worth the squeeze at RFG Holdings (JSE: RFG)

There’s a sharp increase in HEPS this year

RFG Holdings released a trading statement dealing with the year ended 1 October 2023. HEPS will be between 33% and 38% higher, which is obviously great news for shareholders.

Top-line growth was driven by price increases, with the group focused on recovering input cost increases of the past two years. This was the case across categories like fruit juice, ready meals, dry foods and meat. The pie category continues to do well, appealing to consumers looking for more affordable ways to fill tummies around the dinner table.

The HEPS range is between 183.4 cents and 190.3 cents. The share price closed 5.5% higher at R11.50, so it is trading on a Price/Earnings multiple of just over 6x. For a food producer, that’s quite low.

Richemont calls it a “strong performance” but the market says no (JSE: CFR)

A drop of over 5% on the day was the market’s response to these numbers

Richemont has released results for the six months to September and the market didn’t love them. Sales from continuing operations grew by 6% in this period as reported or 12% in constant currency, so the volatile currency environment is having quite an impact here.

The Americas region looks weak, with sales down 4%. Asia Pacific is singing a different tune, with sales up by 14% and a particularly strong performance of 23% growth in China, Hong Kong and Macau combined. Europe managed to grow by 3% and Japan grew 2% after a massive year of growth in the prior-year period.

I remain very skeptical of online sales in this space. Buying a timepiece that costs as much as a family car (and sometimes a house) is surely quite the experience, so I would imagine that an in-store shopping experience is preferred. The group’s directly-operated store network grew by 9% and accounts for 69% of total sales, supporting my thesis. Online sales fell by 7%.

Looking deeper, the Jewellery Maisons led the way with sales up 10%. Specialist Watchmakers fell 3% and the Other business area was down 1%. YNAP, an online-only business that I really can’t see being successful, recording a 13% drop in sales. Richemont is busy implementing a transaction to plug YNAP into Farfetch, another business model that I fear is aptly named.

Although gross margin is still exceptionally high at 68.2% of sales, gross profit only increased by 5% because gross margin actually dropped by 70 basis points.

Margin pressure continues further down the income statement, with operating profit down by 2% at a margin of 26.0%. Negative foreign exchange rate movements were a major contributor here, with Richemont noting that constant currency operating profit would be up 15%.

Profit from continuing operations rose by 3%. Although that performance is in the green, Richemont trades at a premium valuation that requires growth as well as resilience. The share price has fallen by 30% in the past six months as the market has come to terms with the current environment and the impact on valuations.

TFG results came in better than the market had feared (JSE: TFG)

But they still reflect a significant drop in profits

The Foschini Group has reported results for the six months to September 2023. I’ve been bearish on this group this year and share price volatility has been immense, with a 52-week range of R81.00 to R121.48! As things stand, the share price is ever so slightly in the green for the year.

The high level numbers show record group revenue for this period, with growth of 12.9%. The acquisition of Tapestry is in there though, so we need to take that into account. TFG Africa’s revenue grew by 17.3% with Tapestry and 11.9% without it. That still sounds decent, but the company needed to clear out inventory and so these sales came at the expense of gross margin.

Looking abroad, TFG London and TFG Australia faced very difficult base periods to grow against. Neither of them managed to do it (TFG London fell 10.5% and TFG Australia fell 7.2%, both in local currency), but TFG London at least maintained margins whereas TFG Australia saw margins contract.

The pressure on selling prices means that gross profit only increased by 7.7%, well below revenue growth. The impact of cost inflation saw operating profit before finance costs increase by just 0.8%, which means the company was a sitting duck in terms of net profit because of the higher levels of debt on the balance sheet.

HEPS fell by 15.3%, though the market expected a worse outcome based on the previously communicated trading statement. The interim dividend fell by 11.8% to 150 cents per share.

Diving back into some of the detail, cash retail turnover was up 14.6% and credit turnover was up 3.5%. Even with inventory needing to be sold, the group was strict on credit lending criteria.

Another important metric is online turnover growth, which was 23.9% in this period. Online sales are now 9.8% of total group turnover and I am sure that this contribution will keep growing. TFG Africa only generates 4.1% of sales revenue online vs. 7.0% in TFG Australia and a whopping 40.8% in TFG London.

Based on economic conditions, the group has scaled back some of its store opening plans. There will be fewer openings in the second half of the financial year vs. the comparative period. Interestingly, the situation in the UK hardly sounds any better for consumers than in South Africa, with the group hoping that the Australian consumers will at least remain resilient.

Little Bites:

  • Director dealings:
    • There are more disposals by an associate of a director of Wesizwe Platinum (JSE: WEZ), this time worth R245k.
    • An executive at Pan African Resources (JSE: PAN) bought shares worth around R110k. A different executive also bought shares to the value of R90k.
    • Associates of two members of the Ackerman family bought shares in Pick n Pay (JSE: PIK) worth R163k.
    • An associate of the family behind Collins Property Group (JSE: CPP) bought shares worth R48k.
  • Quilter (JSE: QLT) puts forward a resolution every year dealing with political donations or expenditure. Such a resolution is commonplace in the UK, designed to avoid inadvertent breaches of UK company law. South African shareholders always panic when they see this resolution though, evidenced by only 55.88% support on the South African register and 99.92% on the UK register. The company then engages with shareholders to explain the need for the resolution. This says a lot about political sensitivity in South Africa.

Ghost Wrap #53 (Bell Equipment | MTN | AVI | Truworths | De Beers)

The Finance Ghost
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Ghost Wrap #53 (Bell Equipment | MTN | AVI | Truworths | De Beers)

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

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

  • Bell Equipment can take a bow, with a trading statement showing very strong earnings growth and a few weeks left this year to still achieve a further positive earnings surprise.
  • MTN is a casualty of African currency weakness, which makes it vulnerable to further dollar strength and a slow Chinese recovery – complicated look-through exposures that are important to understand.
  • AVI is achieving reasonable revenue growth at the moment, with a focus on margins paying off for the company.
  • Truworths has demonstrated just how tough the SA consumer retail environment still is, with the UK business saving the day.
  • De Beers has experienced another sharp drop in sales, with a perfect storm of macroeconomic challenges and cheaper lab-grown diamonds clearly visible in the numbers.

Ghost Bites (AngloGold | Life Healthcare | MultiChoice | Novus | PPC | Primeserv | Sappi | Sephaku | Sibanye-Stillwater | Truworths)

The Finance Ghost
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Ghost Bites (AngloGold | Life Healthcare | MultiChoice | Novus | PPC | Primeserv | Sappi | Sephaku | Sibanye-Stillwater | Truworths)

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

AngloGold’s production rises sequentially (JSE: ANG)

Annual production guidance for 2023 has been affirmed

AngloGold owns a number of mines and they don’t all improve at the same time, but the direction of travel at group level is positive. Production in the third quarter was 3% higher than the second quarter. They had to grind it out the hard way though, with higher ore tonnes processed and a lower overall recovered grade.

This is good news with more international eyes on the company, as the primary listing was moved to the New York Stock Exchange on 25 September.

The other piece of good news is that production is expected to increase further into the final quarter of the year, thereby helping the company achieve full-year guidance.

Before you get too excited, the nine-month view still reflects a 3.2% drop in production year-on-year.

Life Healthcare releases the Alliance disposal circular (JSE: LHC)

The deal was first announced in early October

Life Healthcare is selling its investment in Alliance Medical Group. This is a Category 1 deal that requires shareholder approval. The purchaser is iCON Infrastructure.

Alliance Medical Group has significant capex needs going forward, so Life Healthcare shareholders have dodged that bullet at a time when money is expensive. The cash will be used to reduce group debt, so this transaction makes a significant difference to the balance sheet vs. what might have been. The net proceeds from the transaction after offshore debt and expenses are estimated to be GBP360 million, or around R8.4 billion. The plan is to distribute this to shareholders within three months of completion date.

You may find this cash flow waterfall rather interesting:

Goldman Sachs and Barclays Bank acted as joint transaction advisors, earning GBP 10 million each in the process. Tough life.

If you’ve ever wondered how the relationship between doctors and hospitals works, here’s an interesting paragraph from the circular:

Doctors may have rental agreements in place where they practise, but do not otherwise work under contracts with Life Healthcare. To assist with the retention and motivation of doctors, Life Healthcare allows doctors to make equity investments in some of the operating companies where they practise. Life Healthcare also maintains a medical advisory committee at each of its hospitals, which provides an opportunity for doctors to be involved with the management and monitoring of the quality of care at the respective hospital. Life Healthcare has historically experienced low rates of turnover of doctors at its facilities.

Multichoice is getting burned by African forex (JSE: MCG)

If money needs to be remitted from Nigeria, life becomes painful very quickly

Much like MTN or Nampak, Multichoice is suffering because of what is going on in African currencies. A trading statement for the six months to September confirms this problem.

In fact, the board has now approved something called “adjusted core headline earnings per share” (yikes!) to show the operating performance with losses incurred on cash remittances from the Rest of Africa markets in the group. Simply, the quoted exchange rate and the actual rate at which cash can be remitted are two different things.

On a constant currency basis and despite significant investment in Showmax and a 16% increase in local content investment, trading profit is expected to be between 7% and 12% higher. But after forex losses, trading profit as reported is between 16% and 21% lower than previously reported.

Core HEPS is down between 3% and 8%. This excludes the losses on cash remittances from Nigeria. To put those losses in perspective, they came in at R0.5 billion which also happens to be the extent of additional investment in Showmax. These forex issues are a big problem.

Adjusted core HEPS is between 22% and 27% higher, but that must be because the base period had even worse cash remittance losses than this period.

Finally, HEPS in the same way that everyone else reports it will be a bigger loss than in the comparable period. After reporting a headline loss per share of 58 cents in the comparable interim period, the loss should now be between 287 cents and 291 cents.

Even the Rugby World Cup probably won’t save the result for the second half of the year. It’s all about the Nigerian currency and ever Pieter-Steph du Toit can’t tackle that problem.

Novus expects a massive increase in HEPS (JSE: NVS)

But take note that this is off a low base

Novus has released a trading statement dealing with the six months to September. The base period saw HEPS of only 2.89 cents, with this period reflecting at least a 500% increase on that number. This implies HEPS of at least 17.34 cents for the six months.

The current share price is R4.12.

PPC guides a swing into profits in the interim period (JSE: PPC)

PPC Zimbabwe has been the major positive shift in this period

For the six months to September 2023, PPC will report HEPS of between 25.5 cents and 26.5 cents. The prior period was a loss of 6 cents per share, though this number has been restated for certain accounting errors in the timing of impairments.

The big swing into profitability is a result of PPC Zimbabwe performing well in this period vs. the prior period when it had an extended kiln shutdown. PPC Zimbabwe has also changed its functional currency from the Zimbabwean dollar to the United States dollar, with a positive impact this period.

Little old Primeserv has grown earnings rather nicely (JSE: PMV)

With a market cap under R150 million, this isn’t exactly a widely-followed stock

Primeserv has been around for 25 years on the JSE, yet you’ve perhaps not even heard of it. The group is involved in businesses like outsourcing and staffing services, as well as training.

The company has released a trading statement for the six months to September 2023 that reflects HEPS growth of between 20% and 23%. This implies a range of 14.90 cents to 15.30 cents per share for the interim period.

For reference, the share price is R1.26.

Here’s another reminder of how cyclical Sappi is (JSE: SAP)

EBITDA has more than halved year-on-year

Sappi has released results for the quarter ended September 2023 and they are a useful reminder of how cyclical this sector is. Revenue is down 28% year-on-year and EBITDA excluding special items has fallen 57%. The group has even slipped into a headline loss position vs. a strong profit a year ago.

This quarter caps off the 2023 financial year, with full-year results showing a 20% drop in sales and 45% decrease in EBITDA. Headline earnings fell 62%.

Despite this, the full-year dividend was consistent at $0.15 per share.

Aside from geopolitical stability and a global economic downturn, one of the more specific drivers of the drop in performance was an underperforming Chinese economy. Another factor was that inventory destocking at buyers took longer than expected, with Sappi responding by trying to preserve selling prices and margins to the greatest extent possible. There have also been some major restructuring steps taken at some of the European sites.

There were some positives, like South Africa achieving record EBITDA for full year 2023. Also, net debt of $1.09 billion is the lowest level in 30 years!

None of this was enough to offset sharp drops in sales volumes, so Sappi will be hoping for a better year in FY24. Some parts of the business have experienced a structural decline though, like graphic papers where capacity is being reduced. With a strong balance sheet, Sappi sounds confident about its ability to rise to challenges.

Separately, the company announced several changes to the board among independent directors, including the chairman who is retiring after several years in the role.

Sephaku’s profits dipped in a tough environment (JSE: SEP)

Although revenue moved higher, both operations saw a contraction in margin

Sephaku Holdings has released interim financial results for the six months ended September. As I’ve reminded you before, that’s not quite true, as SepCem (one of the two major operations) has a December year-end and so this period for Sephaku Holdings represents the six months to June for SepCem and the six months to September for Metier and the group accounts.

The reason why the year-ends can’t be aligned is that Sephaku only holds a 36% shareholding in SepCem. This means that it equity accounts for the earnings (recognises its share of them) rather than consolidates the entire financial result.

With that out the way, we can note that although revenue grew in both underlying divisions, a contraction in EBITDA margin to 10% at Metier and 8.6% at SepCem means that HEPS fell from 11.26 cents to 7.54 cents, a 33% reduction in profits.

But if you read more deeply, you’ll find that Metier actually grew its profits because EBIT margin was stable even though EBITDA margin wasn’t. Profit after tax increased from R29.5 million to R37.8 million. SepCem is where the real pressure was felt, with equity accounted earnings swinging from a profit of R3.8 million to a loss of R14 million.

The challenge at SepCem will be to achieve price growth to recover input cost increases. This is anything but easy in such a soft market in terms of demand.

Sibanye-Stillwater isn’t shy of deals in tough times (JSE: SSW)

In fact, this is usually the best time to be buying assets

You need a strong stomach to operate in the mining industry. Neal Froneman and the team at Sibanye have been doing this for a long time, so they understand market timing and the value of buying when everyone is bleeding (including themselves).

To this end, Sibanye announced the acquisition of Reldan, a US-based metals recycler. The enterprise value is $211.5 million and the cash purchase price is $155.4 million.

This is part of Sibanye’s “circular economy” strategy of owning recycling and tailings businesses. Reldan is a bit different to the rest of Sibanye’s business, as the company reprocesses waste streams like industrial waste and electronic waste to recycle green precious metals. This means gold, silver, palladium, platinum and copper from waste items like semiconductor scrap and mobile phones!

In 2022, Reldan generated $371 million in revenue, $42 million in EBITDA, $39 million in earnings and $28 million in free cash flow.

This is an interesting diversification strategy!

Truworths is going backwards in South Africa (JSE: TRU)

My bearishness on SA retailers continues

Truworths released a sales update for the 17 weeks from 3 July 2023 to 29 October 2023. Sales increased by 10.9% year-on-year, which sounds decent at first blush. Account sales were 47% of total sales (down from 52% in the comparable period), so most of the growth was in cash sales (up 22.5%) vs. account sales (up just 0.1%).

So then why did the share price drop 3.8% on a day when the All Share only fell 0.3%?

The challenge sits in the South African business. The Truworths Africa division mostly consists of South Africa and saw sales increase by a paltry 1%. Account sales were steady at 70% of total sales and key credit metrics also appear to be consistent. Comparable store sales fell 2.2% despite high inflation of 9%, so volumes were down by double digits. The group expanded into this environment anyway, with trading space up 1.1% and expected to be up by between 1% and 2% for the 2024 financial period.

At least online sales grew locally, up 41% and contributing 4.7% to Truworths Africa’s total sales.

In the UK, the Office business grew sales by 18.9% in pounds, which is obviously a great result in rands – up 38.8%, in fact. This is despite trading space dropping by 5.5% as Office exited all seven of its stores in Germany. The business is expanding overall though, with trading space expected to be up by 9% for 2024.

In the UK, online sales contributed 45% of total sales, up from 41% in the comparable period and thus growing much faster than the bricks-and-mortar business.

The market is clearly worried about the underlying metrics in South Africa, as rand weakness isn’t a good reason to hold Truworths. In fact, it’s a good reason not to hold Truworths because of the impact on South African consumers and inflationary pressures like fuel and food.

Despite this setback, the share price has still been a great performer in 2023 because of the modest valuation, up 34% year-to-date.

Little Bites:

  • Director dealings:
    • Des de Beer really opened his wallet this time, buying R13.6 million worth of shares in Lighthouse Properties (JSE: LTE)
    • An associate of a director of Wesizwe Platinum (JSE: WEZ) sold shares worth R1.75 million.
    • A director of Old Mutual (JSE: OMU) bought shares worth R624k.
    • Although a prescribed officer of Capitec (JSE: CPI) exercised options to acquire shares, the options must be exercised within nine months of the strike date and hence I’m not sure this gives us much insight into market timing.
  • Finbond (JSE: FGL) has posted the circular dealing with the specific repurchase of 38.55% of shares in issue.
  • Tongaat Hulett (JSE: TON) confirmed that the Secured Lender Group have entered into a transaction to sell their claims and security to a consortium of parties that includes Robert Gumede.

Who’s doing what this week in the South African M&A space?

Marylou Greig
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Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Alexander Forbes and OUTsurance have concluded a binding agreement which will see Alexander Forbes acquire 100% of the shares in OUTvest, a digital wealth platform. The platform integrates automated advice, human advice, administration, and asset management into a digital wealth solution. The disposal by OUTsurance follows a strategic review of OUTvest and the resultant decision to consider a restructuring due to the sub-scale nature of the business. Financial details were undisclosed as the acquisition falls below the threshold for categorisation.

Sibanye-Stillwater is to acquire US-based metals recycler the Reldan Group for a cash consideration of US$155,4 million. With its platform and technology capable of processing a variety of waste streams, the acquisition of Reldan enhances Sibanye’s exposure to the circular economy. The deal is expected to be value accretive, positively contributing to Sibanye’s earning and cash flow from day one.

Clientèle has announced it is to merge its business with that of 1Life, an insurer specialising in funeral and underwritten life insurance products. Clientèle will settle the R1,91 billion acquisition price by way of an issue of shares. The consideration shares (117,815,756 translating into a 26% equity stake) will be issued at R16.25 per share which includes a control premium of 6.23%. The acquisition is accretive, resulting in a combined Embedded Value of c.R7,8 billion and almost 1,5 million contracts.

NEXT176, a venture capital business backed by Old Mutual, has announced a R27 million investment in JOBJACK, a South African tech startup offering a recruitment registration platform for entry-level job seekers. NEXT176 led the R45 million pre-Series A funding round. The funding will be used to scale the business by expanding its network of employers and job seekers nationwide.

Sirius Real Estate has disposed of an industrial park in Maintal, in the German region of Hesse for €40,1 million. The disposal represents a net initial yield of 5.7%. In addition, via its BizSpace subsidiary, Sirius has exchanged and completed the acquisition of a £33,5 million portfolio of three assets located in North London from a closed ended fund.

Unlisted Companies

Legacy Africa Capital Partners (LACP), through its LACP Fund I, has acquired a significant minority stake in Welltec, a local financial wellness technology company and provider for responsible credit solutions for consumers. Founded in 2016, Welltec’s digital Credit Gateway platform offers personalised, actionable guidance for consumers. To date, Welltec in collaboration with partners that license its technology services, has restructured some R1 billion worth of credit for over 170,000 consumers.

Twelve years after being acquired by Dimension Data, SYNAQ, South Africa’s cloud-based email security services, has been bought back by its co-founder David Jacobson. Financial details were undisclosed.

Inclusivity Solutions, a Cape Town-based insurtech startup has raised US$1,5 million in a Series A extension round. Impact investor Goodwell Investments led the round, having backed Inclusivity Solutions in previous fund raises. The insurtech which delivers embedded insurance solutions, will use the investment to scale its expansion plans into at least 12 African markets by end 2024. It will also continue to invest in its no-code, open API platform which enables distribution partners and insurers to offer a full range of insurance products in a matter of hours.

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

Weekly corporate finance activity by SA exchange-listed companies

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

Following the results of the scrip dividend election, Hyprop Investments will issue 20,832,563 ordinary shares in the company in lieu of a dividend, resulting in a capitalisation of the distributable retained profits in the company of R499,981,512.

Due to the disposal of two businesses, enX finds itself in the enviable position of having surplus proceeds to the operational requirements of the company and as such, has declared a special distribution of R1.00 per enX share. The distribution of R182 million will be paid to shareholders on 27 November 2023.

Mantengu Mining has issued 10 million shares, representing 6.49% of its issued share capital, to GEM Global Yield at R1.13 per share. The shares were issued to discharge a commitment fee due by the company for access to a share subscription facility of up to R500 million.

Several listed companies reported repurchasing shares this week. They were:

During the period 27 July to 1 November 2023, Ninety One ltd repurchased 8,900,922 ordinary shares, representing 3% of its issued share capital. The shares, which will be cancelled, were repurchased for an aggregate value of R345,6 million financed from excess cash resources.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 30 October – 3 November 2023, a further 3,965,096 Prosus shares were repurchased for an aggregate €107,7 million and a further 343,784 Naspers shares for a total consideration of R1,02 billion.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of US$1,2 billion by February 2024. This week the company repurchased a further 10,010,000 shares for a total consideration of £43,8 million.

To better reflect the nature of its business, Go Life International will, subject to shareholder approval, change its name to Numeral. The company is a multi-faceted healthcare company offering a comprehensive product range to address needs from pharmaceutical, generic, nutraceutical, medical consumables through to high-end hospital equipment. If approved, the company is expected to trade under its new name on 12 December 2023.

Four companies issued profit warnings this week: Sephaku, Omnia, TWK Investments and MultiChoice.

Five companies issued or withdrew a cautionary notice: Clientèle, Ayo Technology Solutions, Conduit Capital, Ascendis Health and Tongaat Hulett.

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

Royal Exchange has received approval from Nigeria’s Securities and Exchange Commission (SEC) to conduct the signing ceremony for its proposed Rights Issue of 4,116,296,059 ordinary shares at 50 kobo per share (on the basis of four new ordinary shares for every five ordinary shares held).

NGX-listed Japaul Gold & Ventures Plc has applied to the SEC to raise capital of ₦20,000,000,000 through the issue of 8,000,000,000 ordinary shares at N2,5k each via special placements. The capital would be used primarily to fund the acquisition of a 50% equity stake in H&H Mines, 100% of Covenant Gems & Gold Minerals and the establishment of a gold refinery to maximise value.

Pharmaceutical manufacturing company, Me Cure Industries Plc, listed 4,000,000,000 ordinary shares of 50 kobo each at a price of ₦2.96 per share on the Growth Board of the Nigerian Exchange this week, adding ₦11,84 billion to the market cap of the West African bourse.

Francophone Africa super app, Gozem has acquired a majority stake in Beninese fintech, Moneex. Financial terms were not disclosed, but co-founders Florent Ogoutchoro and Henry Ukoha will retain an equity stake.

Zambian social enterprise, Good Nature Agro has closed a US$8,5 million Series B round from new investor OikoCredit International and existing shareholders Goodwell Investments and Global Partnerships.

Kenya’s I&M Group has received notice that British International Investment Plc had agreed to sells its 10.13% stake in the company to East Africa Growth Holding, an investment vehicle set up by AfricInvest Fund IV, AfricInvest IV Netherlands and AfricInvest Financial Inclusion Vehicle. Financial terms of the deal were not disclosed.

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

Ghost Bites (Alexander Forbes – OUTsurance | Argent Industrial | AVI | De Beers (Anglo) | Investec | Lesaka Technologies | MiX Telematics)

The Finance Ghost
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Ghost Bites (Alexander Forbes – OUTsurance | Argent Industrial | AVI | De Beers (Anglo) | Investec | Lesaka Technologies | MiX Telematics)

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

Alexander Forbes is the buyer of OUTvest (JSE: AFH | JSE: OUT)

This sub-scale business needed a new home

OUTsurance Group is focusing on its core competencies, which is a good thing. OUTvest was a good attempt at getting into the investments game back in 2017, but they didn’t manage to achieve scale in the business. I must give credit to management for recognising that the business was simply too small and difficult to justify continued involvement.

It didn’t take long to find a buyer, with Alexander Forbes jumping in to acquire 100% of OUTvest. There are certain conditions precedent that need to be met for the deal to go ahead, like regulatory approvals. The idea here is that OUTvest will then be part of a full-scale investment house that will allow it to reach its potential.

In the Alexander Forbes announcement about this deal, the company highlights the digital nature of the OUTvest solution and how this is a good strategic fit.

The deal is below the categorisation threshold for both companies, so this is a voluntary announcement and the value hasn’t been disclosed.

Argent Industrial is showing solid HEPS growth (JSE: ART)

Once again, we have an industrial business moving in the right direction

Here’s another example that supports my overall thesis at the moment that industrial businesses are in a better position than consumer businesses. Argent Industrial has released a trading statement dealing with the six months ended September. HEPS is expected to be between between 12.6% and 32.6% higher, so that’s very encouraging.

This is a range of 204.1 cents and 240.4 cents. For reference, the share price is around R15 and was up 3.7% in the aftermath of the earnings release.

Despite a strong year of underlying performance, the share price has been incredibly choppy and is trading slightly below the levels seen at the beginning of 2023. One of the great frustrations in the market is that you can be “right” about the underlying business without getting rewarded by the share price.

AVI is focusing on margins in this environment (JSE: AVI)

Comments at the AGM point to a soft environment, but strong cost control at AVI

At the company AGM, the chairman of AVI gave an update on trading conditions in the first quarter of the year. Revenue is up 5.2% year-on-year, which isn’t much to get excited about. Volume performance is mixed across categories and I&J is still struggling, with poor catch rates and an unfavourable sales mix.

The good news, however, is that gross margins have expanded because of price increases and cost controls. Operating profit growth for the quarter was “pleasing” despite the I&J challenges, with operating margin also expanding. This means that operating profit growth was higher than revenue growth.

Final allocations in the hake long-term rights allocation were made on 1 October. I&J’s quote is materially in line with the allocation initially made in February 2022, with a final reduction of around 5% relative to the rights held before the 2020 fishing rights allocation process began.

At De Beers, rough diamond sales are looking rougher by the day (JSE: AGL)

The lab-grown debate rages on – and my view is unchanged

Anglo American has released the latest sales data at De Beers. Cycle 9 2023 achieves sales of a paltry $80 million, way down from $454 million in Cycle 9 2022 and also lower than $200 million achieved in Cycle 8 2023.

The company keeps trying to convince the market that this is a deliberate decision to hold back on sales while supply and demand equalises.

Let me reframe that for you: we would like to sell more diamonds, but they aren’t moving quickly enough through retail stores and hence we have to hold back on sales because there isn’t enough demand.

I will say it again: lab-grown diamonds are disrupting this market. The 20- and 30-somethings out there want to buy experiences, not things. There are many people who are more than happy with a pretty ring for half the price, with the rest of the budget available for travel or the wedding itself.

As the excellent American Swiss billboard outside Canal Walk screams to people passing by on the highway: diamonds are for everyone.

Will the De Beers marketing machine manage to convince people that mined diamonds are still superior? Or will demand continue dropping, with mined diamonds only finding a market in premium jewellery? And in the interest of giving a balanced view, can lab-grown diamonds stay this cheap, or are they currently running an unsustainable economic model to try win market acceptance before ramping the price?

We can debate it all day long, but the De Beers numbers are telling quite the story.

Investec did even better than expected (JSE: INL)

Earnings guidance has been revised higher

Back in September, Investec released a pre-close update for the six months to September 2023 that indicated a HEPS range of 33.8 to 35.8 pence vs. 32.0 pence in the comparable period.

The financial services group has released a further trading statement that now reflects a HEPS range of 36.5 to 37.5 pence. This is obviously great news for shareholders.

The updated guidance means that the growth in HEPS is between 14% and 17.2%. This is measured in GBP, so that’s a hard currency return.

The share price is up roughly 16% over the past 12 months. The year-to-date performance is flat though, with this very interesting chart that shows how many times the price has tried to break higher:

Lesaka reports an operating profit for Q1’24 (JSE: LSK)

This platform is still sub-scale, but there are promising signs here

Lesaka Technologies really is an interesting story. If you want to hear that story directly from the management team, you should watch the recording of the recent Unlock the Stock event featuring the company:

We now have results for Q1’24 and the highlight here is that the company has reported an operating profit. That might sound ridiculous, but there are many nuances to this story. The swing into profitability is a result of cost reduction initiatives in the Consumer business and the contribution from the Connect business that was recently acquired.

Unfortunately, there’s still a very big difference between operating profit ($228k) and the net loss attributable to Lesaka ($5.6 million). The net interest charge of $4.5 million is the biggest driver of that difference, up sharply from $3.6 million in the comparable quarter.

Having reminded you that the overall Lesaka platform is still sub-scale, let’s dig into the segments. The Merchant division (which includes Connect) reported revenue of $121.4 million, up 24% year-on-year. EBITDA margin is 6.6%, which is a structurally low margin because of the way that airtime sales are reported. In the Consumer division, revenue was $15.6 million and adjusted EBITDA margin was 15.9% vs. a loss last year.

Another important point to highlight is that the net loss of $5.6 million includes $5.9 million worth of depreciation and amortisation and $1.8 million in stock-based compensation. This is why cash from operating activities is actually a positive $3.3 million, with a total decrease in cash of $3.6 million in this quarter that takes the cash and cash equivalents balance to $55 million.

The balance sheet will also be helped by the specific repurchase of shares that Finbond is currently busy with, as Lesaka will sell its stake in Finbond back to that company for R64.2 million.

Lesaka sits firmly in the growth stock bucket, requiring you to take a long-term view on financial inclusion and fintech in the township economy in South Africa.

MiX Telematics has published first half results (JSE: MIX)

The results for the first six months of the year look pretty good

MiX Telematics reports quarterly because of the US listing. To make life more complicated, the company reports quarterly numbers under US GAAP and then six-monthly numbers under IFRS, which is the type of reporting that South African investors are accustomed to.

I’ll focus on the interim results reported using IFRS. Total revenue is up 13% in constant currency and subscription revenue is up by the same percentage, with the acquisition of Field Service Management having contributed 490 basis points worth of growth.

But despite revenue of R1.38 billion, profit for the period is only R38 million. These aren’t exactly juicy margins, are they? To be fair, this includes forex losses of R15.9 million and a R10 million charge from the income tax effect of net foreign exchange losses. Even with those adjustments, it’s not a high margin business.

Adjusted EBITDA increased 58% year-on-year to R343 million, with margin up 580 basis points to 24.8%.

It’s good to see that free cash flow of R45 million isn’t terribly different to profit for the period. Cash generated from operations was R270 million, so the business is quite cash hungry in terms of capital expenditure. Of the R224.8 million in capital expenditure in this period, R173.2 million was attributed to in-vehicle devices.

The company recently announced a proposed merger with Powerfleet, which would create a significantly larger business with benefits of scale and an expanded investor base on the Nasdaq. It’s early days for that transaction, as shareholders will need to be convinced of the benefits.

Little Bites:

  • With the announcement of the merger with 1Life and the broader relationship with Telesure, it’s not great news that the Clientele (JSE: CLI) group CFO is resigning with immediate effect after 11 years with the business. His replacement on an interim basis is Tiffany-Ann Boesch, the former CFO of PPS.
  • Ascendis Health (JSE: ASC) renewed the cautionary announcement related to the potential take-private by a consortium led by ACN Capital IHC, an entity owned and controlled by Carl Neethling. Discussions are still in progress and it’s quite possible that no deal will take place here, which is why shareholders are advised to exercise caution.
  • Conduit Capital (JSE: CND) has renewed its cautionary announcement related to the liquidation order against CICL (the main subsidiary in the group) and the impact that this will have on the financial results for the year ended June 2022.
  • The next time you feel like your personal admin is falling behind, just remember that Go Life International (JSE: GLI) is holding its AGMs for the years 2018 – 2023 on the same day in November!
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