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Bell Equipment gave investors the shock of a CEO resignation and the great news of strong earnings growth, all in the same week!
Invicta has been busy with offshore acquisitions, with two voluntary announcements this week.
Tharisa’s quarterly production update is a reminder of why having both PGM and chrome exposure is useful.
Sasol is on the wrong side of air quality regulators, which will surely be costly for investors.
RMB Holdings is in a complicated battle with Atterbury over its balance sheeet.
Accelerate Property Fund gave the market the bad news of the distribution falling away, with the fund having to focus on its balance sheet.
Bytes Technology Group is still growing strongly, although the market is pricing that in.
Absa guided low-single digit HEPS growth for the six months to June, a result that was severely impacted by a jump in the credit loss ratio.
Absa gives an update for the interim period (JSE: ABG)
Credit provisions are biting
After the other major banks gave us fairly recent updates on performance, Absa has now joined the fray with earnings guidance for the six months ended June. I always appreciate it when listed companies play open cards like this, rather than leaving it until the last minute to release full results.
The results are normalised based on the separation from Barclays, which is reasonable. This helps investors understand how the business is really performing.
Before we take into account credit losses, things look good! Group revenue for the interim period is expected to be up by low-teens, driven by net interest income in an environment of higher interest rates. Net interest income is expected to be up by mid-teens, with low double-digit growth in loans and deposits. In a higher rate environment, there is also net interest margin expansion.
The story is less exciting in non-interest income growth, which is an important driver of return on equity (ROE). This metric only grew by high-single digits, driven by the African Regions and insurance revenue.
An important term to look out for in banking is “JAWS” – less about the shark, more about operating margin. JAWS measures income growth vs. expenses growth, with the goal being that the former outpaces the latter. Positive JAWS is the name of the game here, which means the cost-to-income ratio has improved further to around 50%.
On a pre-provisions basis (i.e. before credit losses), profit is up by mid-teen rates.
Unfortunately, South Africans are under a lot of financial pressure and this is coming through in the numbers. The credit loss ratio is up from 0.91% to between 1.25% and 1.30%, which means that HEPS will only increase by low-single digits. On a per share basis, earnings will be up by mid-single digits.
The good news is that Absa has a strong balance sheet, so the dividend payout ratio will increase ever-so-slightly from 51% to at least 52% for the period. Don’t spend that difference all at once.
Return on equity is likely to be slightly below 17%. That’s a significant drop from 17.7% in the comparable period.
One-way traffic in the Ninety One assets (JSE: NY1)
If you enjoy range trading, take a look at a Ninety One chart
Every quarter, Ninety One releases an update on assets under management (AUM). This is a function of (1) market prices of assets and (2) net flows into or out of the funds.
This is why asset management firms tend to be highly correlated with broader asset prices.
As at 30 June 2023, total AUM was £124.8 billion. That’s down from £129.3 at the end of March 2023. It’s significantly down from £134.9 as at the end of June 2022.
The share price didn’t love this update, trading 2.7% lower in late morning trade. Here’s the share price chart that might appeal to range traders:
A monthly update on the Rebosis garage sale (JSE: REA | JSE: REB)
Final binding offers are expected by 17 July 2023
After a bumpy start to the process, the Rebosis sale of assets seems to be making progress.
After expressions of interest were received, 22 preferred bidders were selected to proceed to the due diligence phase. This ranges from private individuals through to listed REITs.
There have been various subsequent meetings with the management teams, as well as site visits by certain bidders.
Based on this, the company and its business rescue practitioners believe that they are on track to receive final binding offers by 17 July. By 14 August, they hope to have selected the final purchasers and executed final sales agreements, so the process is expected to move quickly once binding offers are received.
Importantly, the bidders are being “encouraged” to include proof of funding in the binding offers, like credit approved term sheets from banks. This will play a big role in helping the business rescue practitioners choose serious buyers.
Although the business continues to run in the background and rental collections sit at 100%, commercial vacancies have increased from 26.7% to 27.27%. This is well above the South African Property Owners Association (SAPOA) vacancy rate of 16.7%, which is a scary number in and of itself. The Rebosis office portfolio is primarily in the Johannesburg and Pretoria CBDs, where supply of office space far outweighs demand.
Little Bites:
Director dealings:
Pay attention to this one: the CFO of The Foschini Group (JSE: TFG) has sold shares worth R1.8 million. A director of a major subsidiary also sold shares to the value of R2.3 million.
After an administrative oversight meant that the announcement about this dealing wasn’t made at the time, we now know that a Bytes (JSE: BYI) director bought shares worth nearly £3k in May.
An associate of a director of Mantengu Mining (JSE: MTU) bought shares worth R51.5k.
Entities linked to the CEO of Spear REIT (JSE: SEA) and his family bought shares in the company worth R33k.
Astoria Investments (JSE: ARA) has issued a cautionary announcement regarding a potential acquisition. No further details have been provided to the market at this stage.
Grindrod Shipping (JSE: GSH) has issued a notice for an extraordinary general meeting. Shareholders will be asked to vote on the proposed capital reduction of $45 million that will take the form of a payment to shareholders. There are important tax implications here, as this isn’t a normal distribution.
Vukile Property Fund (JSE: VKE) announced that Global Credit Ratings has affirmed the credit rating for the group, citing robust property metrics and the diverse funding structure as positives.
The ex-CEO of Santam, Lizé Lambrechts, has been appointed as an independent non-executive director of PSG Konsult (JSE: KST).
Deutsche Konsum REIT (JSE: DKR), perhaps the strangest of all listings on the JSE, has announced that the dividend of €0.12 was approved at the AGM.
Choppies Enterprises has acquired a 76% controlling stake in the Kamoso Africa, an industrial group whose businesses include milling, the import of value for money food, the distribution of medical equipment, the manufacturing of tissue and plastics, the retail of building material and the sale of liquor. It is, according to the company, the well-established and dominant liquor business that is behind the rational for the acquisition. Choppies Botswana is the only one of the four countries in which Choppies is present that does not have a liquor business. Choppies will pay R2.00 for the business and take cession of the existing shareholders loans of P28 million.
Mondi plc is to acquire the 250,000 tonne per annum Hinton Pulp mill in Alberta, Canada. Mondi will pay West Fraser Timber Co. US$5 million for the mill and enter into a long-term partnership with West Fraser to access local, high-quality fibre from a well-established wood basket.
Invicta announced two deals during the week. The company acquired through its wholly owned subsidiary KMP, a 50% stake in KMP Far East Pte, a company established in Singapore with the primary objective to promote and strengthen market coverage of the KMP Brand. In a second transaction, executed via its subsidiary Euro Driveshaft, which forms part of its Replacement Part Auto-Agri business segment, Invicta acquired Imexpart, a UK distributor of truck parts. Financial details were undisclosed.
Unlisted Companies
Magnora ASA and Globeleq have signed and executed an agreement that paves the way for developing large-scale battery storage and renewable energy projects in South Africa. Globeleq, which is 70% owned by British International Investments and 30% by Norfund, will acquire a permitted site from Magnora and will develop the project further. The agreement provides for an upfront payment with additional payments on condition Globeleq reaches certain commercial and technical milestones. Magnora entered the SA renewable energy market in 2021 with the acquisition of an 850 MW project portfolio and went on to acquire African Green Ventures, a renewable project development company.
Africa Oil, a Canadian oil and gas company listed on the TSX, is to acquire a 6.25% interest in Block 3B/4B – an area of 17,581 km² within the Orange Basin offshore South Africa. The stake is to be acquired from Azinam, a wholly-owned subsidiary of Eco (Atlantic Oil & Gas) for US$10,5 million.
As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 1,081,632 Investec Plc shares at an average price of 443.1 pence per share (LSE and BATS Europe) and 631,560 Investec Plc shares at an average price of R106.39 per share (JSE).
Lighthouse Properties Plc has taken a secondary listing on A2X. The company’s shares, which have a primary listing on the JSE commenced trade on A2X with effect 12 July 2023.
The following companies reported repurchasing shares. They were:
RMB Holdings has repurchased 5,500,000 shares from shareholders representing 0.3896% of the company’s issued share capital. The shares, which were repurchased in terms of section 164 of the Companies Act, were repurchased at a s164 fair value offer price of 197.76 cents.
Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. Over the period 3-7 June 2023, 461,101 shares were repurchased at an average price per share of R105.64. Since November 21 ,2022, the company has repurchased 12,712,479 shares at a cost of R1,36 billion.
This week Glencore repurchased a further 12,894,549 shares for a total consideration of £56,53 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.
Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 3-7 July 2023, a further 1,827,073 Prosus shares were repurchased for an aggregate €118,69 million and a further 366,934 Naspers shares for a total consideration of R1,2 billion.
Two companies issued a profit warning this week: Accelerate Property Fund and Sebata.
Three companies issued or withdrew a cautionary notice: Telkom SA SOC, RMB Holdings and Choppies Enterprises.
Dubai Investments and E20 Investments announced the signing of a MoU to develop 3,750 Ha of agricultural land in Angola. The new joint venture plans to cultivate 28,000 tons of rice and 5,500 tons of avocados over an 18-month period. The project aims to contribute to Angola’s food security and economic growth.
Practical VC has announced an undisclosed investment in Egypt’s EXITS MENA. The M&A advisory firm recently obtained its securities promotion and underwriting license from the Egyptian Financial Regulatory Authority to further expand its services.
Egyptian fintech, Menthum has secured pre-seed funding from Acasia Ventures, A15 and several angel investors. The value of the funding was not disclosed. This is the digital savings platform’s first round of funding and will be used towards expanding the existing team, customer acquisition, marketing and development of the firm’s tech infrastructure.
Verod Capital Growth Fund III has exited its investment in Nigeria’s CSCS. The investment, held through Artemis, saw FMDQ acquire a 21.6% stake in the clearinghouse through the acquisition of Artemis’ and Leadway Insurance’s stakes (16.61% and 5% respectively).
Yara International, the Norway-based plant nutrition group has disposed of its majority stake in Yara Cameroon to NJS Group who will now become the sole shareholder. Financial terms of the deal were not announced.
Absa CIB has made another investment in mobility fintech, Moove, this time to support its expansion of its vehicle in Ghana. The US$8 million investment is the second time that Absa has backed the fintech – in 2022, they investment $20 million to back the South African operations.
The board of Zimbabwe’s Border Timber has advised shareholders that it has received an offer from Cicada Plantations Zimbabwe to acquire 100% of Border Timbers plus 100% of Makandi Estates in exchange for Cicada shares. The board will advise shareholders of their recommendation in due course.
Touton has sold its palm oil plantations in Côte d’Ivoire to PALMCI, a subsidiary of SIFCA. Financial terms of the deal were not disclosed.
“There is no news” – the 18:45 news bulletin on BBC, 18 April 1930
This looks a little different, doesn’t it? With so many delistings on the JSE, we finally reached a point where there was (almost) no company news of any real importance on Thursday. Sad. Luckily, there’s a big world of things you can invest in, so I decided to give Ghost Bites an international flavour rather than writing it off altogether.
Welcome to Ghost Bites – but with a passport. And as luck would have it, two of the companies (Delta Air Lines and PepsiCo) have been covered in detail in Magic Markets Premium before. At just R99/month, this research library is your best way to learn about far deeper pools of capital than we are seeing on the local market. >>”>You can subscribe here>>>
Right at the bottom, you’ll find information on the only two local announcements of the day, one of which was embarrassing.
A record quarter at Delta Air Lines ($DAL)
Yes, aviation businesses CAN make money
In the quarter ended June, Delta Air Lines demonstrated that Americans have money and will travel. A lot, actually.
This was the largest ever trans-Atlantic summer schedule in the company’s history, with over 650 weekly flights to 32 destinations and a 20% increase in seat capacity vs. the prior year.
Operating revenue was a record $15.6 billion. Operating income was a record $2.5 billion, at a pretty healthy operating margin of 16%. Quality of earnings was solid, with operating cash flow of $2.6 billion that enabled payments on debt and finance lease obligations of $1.8 billion.
The full-year outlook is for revenue growth of 17% to 20%, with operating margin of over 12%. Earnings per share is expected to be between $6 and $7, with the share currently trading at just under $48.
In case you’ve ever wondered what the revenue split at a predominantly passenger airline is, here’s some insight into that:
Note the drop in cargo revenue as the costs of moving goods around has come off substantially. The growth in passenger revenue is what Delta really cares about.
Before you jump into this stock, you may want to consider the recent flight path and how much of the recovery has been priced in:
PepsiCo upgrades guidance for the year ($PEP)
We sure do love our Doritos
PepsiCo is one of the best performing businesses you’ll find in an inflationary environment. When we want our calorie fix, we tend to be less worried about what it costs. Realistically, there is no known alternative in the universe for blue Doritos. That’s my hill and I’m dying on it.
There’s far more to PepsiCo than the drink you’re forced by Burger King to occasionally have instead of Coke. The Frito-Lay side of the business is brilliant, with numerous dominant products in your local snack aisle. We don’t know the brand in South Africa, but Pepsico also plays in the consumer staples space with Quaker oats.
After a brilliant performance in the last quarter, Pepsico followed it up with another solid quarter that boasts 13% revenue growth in constant currency. Frito-Lay achieved 14% revenue growth with a 1% increase in volumes, so pricing increases were 13% and people still bought more chips.
This table shows you the segmental performance in operating profit, as well as the huge impact of the strong dollar on earnings from Africa, Middle East and South Asia:
Don’t judge a share price by the soft drinks available in the fridge at your local grocery store. South Africa is a small place in the global context. Exhibit A:
Swatch is running like a Swiss clock (SWX: UHR)
The first half of 2023 is a record period for the watch company
For the first six months of the year, Swatch grew sales by 18% at constant exchange rates, or 11.3% as reported. That’s a good reminder that even European companies have been struggling with currency volatility.
The group achieved double-digit growth in all watch and jewelry price segments, though the cheaper stuff achieved the strongest growth. That makes sense in an environment of constrained consumer spending. We want to look good, but on a budget.
Operating profit grew by a delicious 36.4% as operating margin expanded from 13.9% to 17.1%. Net income was 55.6% higher, with net margin of 12.4% vs. 8.9% in the comparable period.
Best of all, Swatch sounds bullish on the second half of the year. With net sales having smashed the record set in the first half of 2018, it seems like the full-year record may be under threat here. To make sure that happens, Swatch is focusing on product innovation in the lower and mid-range segments.
This is the beauty of an adaptable brand.
Northam’s production for FY23 (JSE: NPH)
All operations have made strong contributions
Mining is a tough industry, so it’s impressive to note that all the Northam Platinum operations were either flat or up for the year. Eland was the star of the show in terms of Northams’ owned operations, with Zondereinde bringing up the rear with a flat performance.
Refined production from own operations was up 13% and the inclusion of purchases from third parties takes this to 19.5%.
A whoopsie at RMB Holdings (JSE: RMH)
When in doubt, the mic is hot
To add insult to injury on a day of almost no local news, one of the announcements was an example of amateur hour at RMB Holdings. Mistakes happen obviously, but microphones should always be treated as hot.
The recording of the formal results call earlier in the week including a portion of private conversation between the CEO and CFO. I don’t know what was said, but it was juicy enough for the company to issue an apology and replace the recording. I’m sad that I missed it!
As a reminder, RMB Holdings is in dispute with investee Atterbury, requiring the immediate payment of a R487 million loan. This will almost certainly end up in court. If RMB Holdings is found to be correct, then Atterbury will need to come up with the liquidity to pay this loan.
Little Bites:
Blink and you’ll miss it! Telemasters (JSE: TLM) announced a dividend of 0.1 cents per share.
If you can’t beat them, join them. Or – in the case of many of the businesses that we’ve covered in Magic Markets Premium – make them join you.
The bolt-on acquisition strategy is a commonly employed approach by large firms seeking to expand their presence or market share within a specific industry. In most cases, this strategy involves the acquisition of a smaller firm that operates within the same industry – often one that was once considered a direct competitor.
The goal? To integrate the acquired firm’s resources, technology and expertise in order to gain a competitive advantage, all while neatly mopping up a competitor’s share of paying customers.
It’s a little bit like forming a coalition in government, except in most bolt-on cases, the merger actually benefits the consumer and makes their life more convenient.
Does that mean every bolt-on acquisition is a guaranteed success? Of course not. If it were that simple, we’d probably be living in a world where three mega-companies own every other business ever conceived. Bolt-ons can be beautiful, but they can also be a serious drag on their parent companies.
Let’s dive into two examples from opposite ends of the spectrum:
Salesforce: yes, you can pay too much for a good thing
Salesforce was born and raised in the heart of Silicon Valley, a region renowned for its dynamic and fast-paced environment. This has cultivated a culture where the pursuit of growth takes centre stage, often at the expense of other considerations. Like many of its contemporaries in the tech field, Salesforce is a bit of an expansion-junkie, relentlessly striving to own more of the playing field – and sometimes disregarding the potential consequences.
The “land grab” strategy employed by Salesforce in its aggressive quest to dominate market share introduces multiple risks for shareholders. The exorbitant costs associated with these bolt-on acquisitions and the subsequent pressure to demonstrate returns on investment can lead to potentially unfavourable outcomes when investors start to put the screws on management. Or even the bolts.
In our report, we highlighted that Salesforce currently finds itself navigating a slower growth environment, necessitating a shift in focus towards profitability. As the company adjusts its strategies to maintain sustainable growth, there is a need to recognise the importance of balancing expansion with financial prudence.
Will they be able to kick the bolt-on habit and get their heads back in the game? Only time (and the balance sheet) will tell on that one. It’s not that the deals have been bad, but rather that the pricing has simply been too rich.
Nuts and bolt-ons: they just go together at Home Depot
When bolt-ons work, they work well. Perhaps our favourite example of this comes from our recent report on Home Depot.
Home Depot’s claim of a 17% market share within a massive $950 billion total addressable market is a notable accomplishment. However, there is still significant room for further growth and expansion. Based on our research covering over 80 companies in Magic Markets Premium, we’ve noticed that the leading company in any given industry can usually command over 20% market share.
This indicates that there is ample space for Home Depot to increase its presence and capture a larger market share. And what would be a smart way for them to gain that extra 3%? You guessed it – bolt-ons.
Over the past decade, the company has completed a total of 13 acquisitions. That’s an average of more than one bolt-on acquisition per year. These acquisitions have served as a means for Home Depot to expand its reach, venture into new markets, and integrate complementary businesses to strengthen its overall market position, all without betting the farm on one given deal or losing focus on the core business.
This approach aligns with the company’s objective of proactive expansion, allowing it to leverage its existing infrastructure, supply chain, and customer loyalty to drive growth in new markets. The assimilation of these acquired companies also enables Home Depot to benefit from economies of scale, operational efficiencies, and increased bargaining power with suppliers.
By focusing on acquiring companies that not only make sense under its brand but also add value to its customer base, Home Depot is winning the bolt-on game.
With well over 80 research reports on global stocks available in the library, a subscription to Magic Markets Premium for just R99/month gives you access to an exceptional knowledge base that has been built since we launched in 2021. Consider it a bolt-on to your existing investment knowledge!
The painfor shareholders in Accelerate never seems to end
In March, Accelerate Property Fund released a trading statement dealing with the year ended March 2023. It suggested that the distribution would be at least 15% lower than the prior year, attributed to an increase in the number of shares in issue by 26.5%.
Rather shockingly, the company has now said that there is no distribution for the year. At all. This has nothing to do with the number of shares in issue and everything to do with a need to “strengthen its financial position and liquidity requirements” – in other words, they can’t afford to pay anything to shareholders.
Bell Equipment releases a great trading statement (JSE: BEL)
This is much happier news than the last update
The ink is barely dry on Bell Equipment’s last announcement that gave the market the surprising news of a resignation by the CEO. Leon Goosen will be leaving on a high note it seems, with incredibly strong HEPS growth in the six months ended June 2023.
HEPS will be at least 30% higher, which suggests a minimum of 273 cents for this interim period. On a share price of R15.30, you get to a pretty appealing valuation multiple if you annualise that number.
The increase has been attributed to stronger market conditions this year, so that’s also good news.
Some bites from Bytes in Ghost Bites (JSE: BYI)
There’s a brief update on recent trading from the AGM
Bytes Technology Group has had a cracking year. I’ve been very pleased to have it in my portfolio, up 53% this year alone.
This is a UK-based software, security and cloud services group that was unbundled by Altron. Ahead of the AGM on Wednesday afternoon, the company released a short update on recent trading conditions since the release of full year results on 23 May 2023.
The first four months of the new financial year have seen double digit growth in gross profit and adjusted operating profit, which is lovely. However, margins have come under pressure, with gross invoiced income growing at a significantly higher rate than gross profit. There have been high volume, lower gross margin software deals in this period.
So although the net picture looks good for shareholders, investors need to be mindful of the impact of potential margin pressures going forward. For now at least, double digit growth in earnings is rather delicious, although Bytes is trading on a fat multiple that reflects high growth expectations.
Bad news at Hulamin (JSE: HLM)
NUMSA has embarked on a strike
Perhaps the only saving grace for the South African economy is that we’ve seen relatively less labour action in recent years than I remember seeing a decade ago. Hulamin isn’t quite so lucky at the moment, with NUMSA deciding to embark on a strike.
The dispute relates to employee benefits, of course. Hulamin says that it is willing to engage on a complete agreement that is compliant with the law. This implies that NUMSA is only willing to discuss some parts of the agreement and not others.
Either way, this isn’t what any company needs right now.
Kibo Energy’s subsidiary locks in a joint venture (JSE: KBO)
Mast Energy Developments has agreed on a JV with a consortium of investors
Kibo Energy has announced that its UK-based subsidiary Mast Energy Developments (MED) has agreed a joint venture with a consortium led by institutional investors. Under the terms of the deal, MED will contribute low-carbon flexible gas generation peaker plants into the joint venture and the investors will put in £31 million in capital over time. The initial contribution is £5.9 million.
To be clear, there’s no cash contribution from MED, with the company holding 25.1% in the joint venture. Effectively, MED has sold off a 74.9% stake in its asset through contributing it to the joint venture. Interestingly, MED will have joint control of the board and full control of the operations. MED will be paid a fee under a five-year management services agreement.
The investors will receive 90% of profits until the investment has been recovered in full, at which point the dividends will revert to the percentage shareholdings.
It gets complicated, but the entire transaction also allows MED to repay £800k to Kibo Energy, leaving £432k owing to the listed group.
The circular for the unwinding of the cross-holding structure in the Naspers / Prosus group has been released. If you want to read it, you’ll find the whole thing here.
It’s a quantum leap forward for corporate structures. After all that time and money, they’ve arrived at the conclusion that the structure on the right is the correct one:
I know, right? Imagine a world in which Naspers shareholders hold Naspers, Prosus shareholders hold Prosus and Naspers has a big chunk of Prosus. Where is the fun in such a simple structure?
But the best is yet to come, dear JSE investors. I’ve never seen a company get away with not disclosing the costs of a circular, yet this is all that Prosus needed to disclose:
Not significant? What, as a percentage of the gigantic market cap? Come on.
Sasol is focused on air quality, not just earnings quality (JSE: SOL)
But not enough has been done
I’m certainly not going to pretend to be an expert in this space, or even a reasonably useful novice. Thankfully, the Sasol announcement about this issue is pretty clear.
Under the National Environmental Management: Air Quality Act 39 of 2004 (you need a breath of clean air just to be able to say that), Sasol needs atmospheric emission licences that are based on Minimum Emission Standards. There is the ability to apply for a facility or part of a facility to be regulated on an alternative emission load basis.
Sasol made this application for the boilers at the Secunda Operations and this application has been declined by the National Air Quality Officer. Sasol can (and will) appeal this to the Minister of Forestry, Fisheries and the Environment.
The group has spent over R7 billion over the past 5 years on emission reduction projects. This has led to 98% compliance with the Minimum Emission Standards. 98% is not 100%, as shareholders may now learn. Sulphur dioxide emissions from the boilers at the Secunda Operations are the major remaining challenge.
This isn’t something that can be fixed overnight and Sasol has an existing roadmap to try and achieve this. The regulator has clearly sent a message here. For investors, solutions come at a cost, so this isn’t good news for Sasol overall.
It’s probably good news for residents of Secunda and surrounding areas.
A smaller loss at Sebata – but still a loss (JSE: SEB)
The delayed results will be released this week
Sebata Holdings is late in the release of results for the year ended March 2023. Full results will be out this week, with a trading statement available to give shareholders an idea of what is coming.
The headline loss per share is between -13.98 cents and -14.98 cents, a very large improvement over -443.68 cents in the comparable period.
In case you’re wondering, the delay related to valuations that needed to be finalised for the current water and software B-BBEE deals.
Tharisa updates the market on quarterly production (JSE: THA)
Investors are as focused on the cash balance as they are on mining production
Tharisa’s share price has been getting properly whacked in recent weeks, driven by weakness in PGM prices. The 52-week low of R16.70 was hit on 10th July, a far cry from the 52-week high of R26 that we saw in December 2022.
Tharisa can’t control its share price and certainly can’t control commodity pricing. It can control its production and capital allocation though, which is why this quarterly update is important.
PGM output increased by 7.9% in Q3 vs. Q2, thanks to improved recoveries and a steady yield. In chrome, output fell by 6.4% despite a comment that grades, yield and recoveries were steady.
Pricing is where it all went wrong, with PGM prices down 16.6% in Q3 vs. Q2. Metallurgical grade chrome thankfully saw a 7.8% increase in price over the same period.
If we look at the nine months to June instead of just the third quarter, then year-on-year production is almost identical in chrome and is almost 15% lower in PGMs. Pricing for chrome is up by a very healthy 28%, with PGM pricing down nearly 22%. In those statistics, we can see why Tharisa is happy to have both commodities rather than just PGMs.
Importantly, cash on hand has increased from $205.8 million at the end of March 2023 to $242.6 million at the end of June. The net cash position is up from $101.1 million to $141.5 million over the same period. So with a market cap of roughly R5.6 billion, around R2.65 billion is in net cash.
The Karo project is on track, with a $135 million equity contribution by Tharisa over the course of the project. A recently concluded $130 million facility is undrawn as at the reporting period.
Tharisa seems to offer better PGM exposure than some of the alternatives in the market, though you can’t ignore the impact of PGM pricing on the share price.
At the end of June, Tharisa joined the Unlock the Stock platform (alongside property group Attacq) for a management presentation and Q&A. You can watch it here:
Little Bites:
Director dealings:
A director of Oceana (JSE: OCE) has sold shares worth R764.5k.
An associate of a director of Afrimat (JSE: AFT) has sold shares worth R234k.
A director of Growthpoint (JSE: GRT) has sold shares worth nearly R78k.
The scheme to delist Premier Fishing and Brands (JSE: PFB) has become unconditional and the delisting date has been set as 1 August 2023.
The COO of Fortress Real Estate Investments (JSE: FFA | JSE: FFB), Donnovan Pydigadu, has resigned. He will stick around until 31 December 2023 until moving on to new opportunities. He has been with the group for six years.
Delta Property Fund (JSE: DLT) has appointed Fikile Mhlontlo as CFO. His previous roles have included some tricky public sector posts like Denel and SAA, so he seems to bring experience in dealing with difficult financial circumstances.
If you’re in the audit industry, you may find it interesting that Telkom (JSE: TKG) has transitioned from joint auditors to a single auditor. The current auditors are PwC and SNG Grant Thornton, with Telkom selecting PwC as the sole auditor going forward. Shareholders will need to ratify this at the Telkom AGM.
Sable Exploration and Mining (JSE: SXM) could be the smallest company on the JSE, with a market cap of R2.5 million. It now has a full time financial director at least, with the part time director having resigned.
Choppies finally announces the Kamoso deal (JSE: CHP)
I just wish I understood it
At long last, we have a category 2 announcement for the Choppies – Kamoso deal. A category 2 transaction under JSE rules is a deal that is big enough to warrant a reasonable level of minimum disclosure, but not big enough to justify a shareholder vote.
Interestingly, in a category 2 under Botswana Stock Exchange rules, the audit committee needs to confirm that the terms of the transaction are fair to shareholders. Reading further, this also happens to be a related party transaction (as shareholders of the target include the CEO and another important figure at Choppies), which brings the need for a fairness opinion more in line with JSE rules. In this case, it looks like the opinion is prepared by the audit committee rather than an independent expert, although Grant Thornton did assist with the due diligence and valuation.
I must be honest with you: I don’t know what in the Gaberone is going on with these numbers. I read the announcement four times and I would welcome any corrections. Or an explanation. Anything, really.
High up in the announcement, it notes that Choppies will acquire 76% of Kamoso Group for two pula. Yes, just two Botswana pula. The shareholder loans of P28 million are also moving across. Fine, except a table further down in the announcement notes that the EBITDA of Kamoso is P66 million and the enterprise value is P340 million, so that’s an EV/EBITDA of 5.15x. A marketability discount of 15% has then been applied to the company. This suggests an equity value of P116 million that they are paying two pula for. Not two million pula, but two pula.
To add to my confusion, there is then P81 million of goodwill from this transaction. This implies that they paid a whole lot more than the net asset value, except they didn’t. Or they did. I give up.
The remaining 24% will continue to be held by the Botswana Development Corporation. Perhaps they understand the announcement.
The number that I do understand and will highlight is the net loss at Kamoso of 9 million pula. That EBITDA disappears rather quickly as you move further down the income statement.
The rationale for the deal is that Kamoso Group has a liquor licence, which solves a major problem for Choppies as the only major grocery retailer in Botswana without a liquor licence. Kamoso also has a hardware business, which is part of the Choppies strategy.
Seriously – if you understood the numbers, tell me. I’ll update this and credit you for making sense of it.
Conduit Capital finalises the disposal of CLAH (JSE: CND)
All conditions precedent have been fulfilled
In December 2022, embattled Conduit Capital announced the disposal of CLAH to Affinity for R20 million. It’s taken a long time to address all the outstanding conditions in the deal, which led to a couple of extensions for this deal.
All conditions have finally been met, with a disposal date of 3 July.
Another offshore deal for Invicta (JSE: IVT)
It’s been a busy period of deals for the group
Hot on the heels of the deal in Singapore that was recently announced, Invicta has given shareholders the news of another offshore transaction.
Within the Replacement Parts Auto – Agri business segment, Invicta has acquired 100% of the shares of Imexpart Limited (Imex) in the United Kingdom. This is a leading independent truck parts distributor, providing parts for a multitude of brands ranging from Volvo and Iveco trucks through to MAN coaches and buses. They also do parts for cars and vans, among other things.
The customers base is primarily in the UK and Ireland, which gives Invicta further geographical diversification in line with the group strategy. The benefit that Invicta brings to the table is a strong procurement capability, which can help improve gross margin at Imex. There are also Imex products that can be sold into other Invicta operations.
The effective date of the deal was 1 July and no financial information has been given, as this is too small a deal to be categorised and hence Invicta has made a voluntary announcement.
RMB Holdings is keeping its lawyers busy (JSE: RMH)
Beyond the Atterbury dispute, there’s also a fight underway under s164 with shareholders
We’ve reached a point on the JSE where a company cannot do a scheme of arrangement without attracting a group of opportunistic shareholders looking to apply s164 and get paid out fair value in the process. Now, if the share price is well below fair value, that’s a profitable strategy.
The law allows this, so it’s a clever use of s164. Companies hate it for obvious reasons, constantly lobbying for the rules to change. RMB Holdings has taken it a step forward, joining the Minister of Trade and Industry to the court action as the company looks to challenge the constitutionality of certain aspects of s164 of the Companies Act. The Minister will participate in the proceedings.
There were initially five dissenting shareholders to the special resolution back in July 2022. One withdrew the demand before the special dividend payment in October 2022, as a s164 action means you lose your entitlement to any dividends. Two have been settled now at 197.76 cents per share (with at least one of those entities linked to asset manager Chris Logan) and two have decided to go to court. The court action is by shareholders holding 13.27 million shares, so there’s a lot of money at stake here.
At some point, the courts will need to have a close look at how this section is being used in practice, with a common argument being that shareholders who buy after the initial announcement but before the meeting shouldn’t be allowed to use s164 as the behaviour is clearly opportunistic. I’m not sure if that timing applies to the shareholders in this court action, but all will no doubt become clear in months to come.
Either way, being the law firm on retainer from RMB Holdings is not a bad gig.
Little Bites:
Director dealings:
Encha Properties has sold 4.792 million shares in Vukile Property Fund (JSE: VKE), so it has made good progress with the intended sale of between 5.5 million and 6.0 million shares. The company is an associate of a director of Vukile and is the fund’s B-BBEE partner. The sale is being undertaken to deal with loan arrangements with Investec Bank.
If you’ve been wondering about the latest at Steinhoff (JSE: SNH), the next step is an extraordinary general meeting to vote on things like the dissolution of the company. The end is nigh.
In the very unlikely event that you are a Deutsche Konsum REIT (JSE: DKR) shareholder, the latest dividend is 247.61640 cents per share based on the exchange rate used in the calculation. It really does have the most epic bid-offer spread on the JSE, with bids at R0.03 and offers at R999.98. I truly have no idea why this thing is listed.
This episode of Ghost Stories is brought to you by Fedgroup, a diversified financial services group offering a range of financial products across investment, long-term insurance, lending, and fiduciary services. Fedgroup Financial Holdings (Pty) Limited is a licensed controlling company and entities within the Group are authorised financial services providers.
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I was joined on this show by Grant Field, the Group CEO of Fedgroup since 2015, having worked for the group since 2002. We talked about a range of topics related to Fedgroup but we focused on impact investing and the unique product range that Fedgroup offers in this space.
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