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In this episode of Ghost Wrap, we recap a busy couple of days:
Strong results at Spur that gave the share price another boost on top of the strong positive response to the trading statement.
Earnings growth at Adcock Ingram that benefitted from a “normal” flu season, although other segments were perhaps disappointing for investors.
An excellent year thus far for Bidvest, supported by strong earnings growth and clear evidence of pricing power.
Continued momentum at Bidcorp, which has gone from strength to strength since the depths of the pandemic.
NEPI Rockcastle’s appeal as a play on Central and Eastern Europe, a region of real economic growth and demand for retail space.
A whirlwind update on recent mining and resources updates from DRDGOLD, Harmony Gold, BHP and Sasol.
Sasol’s financial results for the year ended 30 June 2023 were impacted by the volatile global economic landscape and the underperformance of state-owned enterprises in South Africa, which continue to impact both our Energy and Chemical businesses. This impact was, to an extent, offset by a weakening of the Rand/US Dollar exchange rate.
Earnings before interest and tax (EBIT) of R21,5 billion declined 65% compared to the prior year, mainly due to the impairment of assets, inflationary impact on costs, the softening of the Brent crude oil price and refining margins in the latter part of the year. Chemicals basket prices were on a declining trend during 2023, and while we have recently seen some respite with lower feedstock and energy prices, gross margin and global demand remained depressed particularly in our American and Eurasian segments.
Operating profit of R55,4 billion before remeasurement items increased 8% from the prior year, benefitting from gains on the translation of monetary assets and liabilities and valuation of financial instruments and derivative contracts of R6 billion compared to R17,6 billion losses in 2022. Remeasurement items contributed a net loss of R33,9 billion compared to a net gain of R9,9 billion in 2022.
The remeasurement items for 2023 mainly relate to:
The full impairment of the South African wax CGU of R0,9 billion, the full impairment of the Essential Care Chemicals CGU in Sasol China of R0,9 billion, and the full reversal of impairment recognised in 2019 on the Tetramerisation CGU in Lake Charles of R3,6 billion; and
The Secunda liquid fuels refinery CGU impairment of R8,1 billion at 31 December 2022 after being negatively impacted by an update in macroeconomic price assumptions including higher electricity price forecasts and lower gas selling prices. An additional impairment of R27,2 billion was recognised for this CGU resulting in it now being fully impaired. Sasol continues to advance implementation of its emission reduction roadmap (ERR) in South Africa to achieve a 30% reduction in greenhouse gas emissions by 2030 and comply with the requirements of the National Environmental Management: Air Quality Act 39 of 2004. The ERR involves the turning down of boilers, implementing energy efficiency projects, reducing coal usage and integrating 1 200 MW of renewable energy into our operations by 2030. With no significant additional gas to restore volumes back to historic levels, the ERR assumes lower production volumes post 2030 and also results in increased cost of coal and capital expenditure. Optimisation of the ERR is ongoing with several technology and feedstock solutions underway to partially recover volume post 2030, however the maturity thereof needs to be further progressed before it can be incorporated in the impairment calculation. Although the chemical CGUs in the Secunda complex were also negatively impacted, their respective recoverable amounts remained above carrying values given the products’ higher derivative value.
The safety and wellbeing of our employees remain our top priority. We remain unwavering in our commitment to embed operational discipline across all our sites, striving towards our ambition of Zero Harm. Sadly, there were two tragic fatalities in the second half of the financial year. We continue to drive our frontline leadership engagements and implement risk mitigation measures to prevent future incidents, ensuring that every member of our workforce returns home safely.
Sasol has made steady strides on our decarbonisation roadmap, with the signing of additional renewable power purchase agreements which are advancing implementation, with renewable power from the Msenge wind farm expected to be online by the first quarter of calendar year 2024. This will support the production of green hydrogen from our existing assets at Sasolburg Operations. We continue to refine our roadmap for a sustainable and affordable transition.
Looking ahead, Sasol is committed to resetting and building resilience across our business, continuing to adapt to market dynamics and mitigate macro environment challenges to the extent possible.
Fleetwood Grobler – President and Chief Executive Officer
Accelerate looks to sell Eden Meander for R521 million (JSE: APF)
The buyer is Sasol Pension Fund
Accelerate Property Fund has an ambitious strategy in most of its portfolio and this is a risky time to be following that route. To free up some capital, the fund has decided to sell the Eden Meander Shopping Centre in George to Sasol Pension Fund. I’m a little surprised by that move, as George is growing quickly. It shows how badly they need to sort out the balance sheet, as this reduces the loan-to-value by 300 basis points.
The property was valued at the end of March at R521.7 million and the purchase price is expected to be a minimum of R521 million, based on a 7.5% net income yield capitalised for 12 months from 1 December 2023.
Accelerate bought the property in 2016. I don’t understand why they don’t mention the original purchase price in this announcement, which was R376.9 million at a yield of around 9%. I haven’t dug through to see if they spent more on the property since then, but the yields alone suggest that they’ve done well in terms of timing the acquisition and subsequent disposal.
If the disposal yield was 9%, the price would only be R438 million.
Adcock Ingram grows, but perhaps less than I thought (JSE: AIP)
Was it just my own poor health this year, or was this a serious flu season?
Adcock Ingram needs people to get sick in a normal way, not a Covid-or-nothing kinda way. This winter featured the good ol’ fashioned flu, including the immensely dangerous strain known as man flu. This is good for Adcock Ingram.
On that basis, I was a bit surprised that revenue only increased by 5% and gross profit by 4%. That’s pedestrian to be honest, with trading profit up 6% because the company kept costs under control. At least the operating environment is better overall, giving the company confidence to increase the total dividend by 17% year-on-year despite HEPS only increasing by 12%.
If we dig a bit deeper, we find that the flu season was indeed the primary source of growth. The OTC segment grew by 11% and the consumer segment grew 6%. The prescription and hospital segments could each only grow by 2%. Yet despite this, the prescription segment put in the best performance in terms of trading profit, up 16%.
Perhaps the biggest challenge for this business is that the price of medicine is regulated. The single exit price was only granted a 3.28% increase in January 2023, with a 1.73% adjustment recently allowed as well. This is clearly well below inflationary pressures on costs.
Based on HEPS of 561.3 cents, the Price/Earnings multiple is just below 9.9x and the dividend yield is 4.5%. The share price closed 3.4% higher on the day.
Bidcorp just keeps growing (JSE: BID)
Can anything derail this story?
In the period leading up to the pandemic, Bidcorp wasn’t exactly the fastest growing story on the JSE. The unbundling from Bidvest had been at a significant valuation and the share price wasn’t really rewarding shareholders.
That was then and this is now, with a pandemic in the middle that crushed earnings temporarily.
In a trading statement for the year ended June, Bidcorp has flagged HEPS growth of between 32% and 36%. I’ve used the midpoint of the full year range of 2,030.6 cents and 2,092.1 cents as the inspiration for my chart of the day:
It makes for rather impressive viewing, doesn’t it?
The share price has also been on a rampage since the depths of the pandemic, as evidenced by this chart:
DRDGOLD was saved in this period by the gold price (JSE: DRD)
HEPS growth of 13% is masking the production story
DRDGOLD has released results for the year ended June 2023 and they reflect growth in revenue of 7% and HEPS of 13%. At first glance, that sounds really good. If you look deeper though, you’ll see a drop in production of 8% and a jump in cash operating costs of 16% per kilogram.
It would’ve been a very ugly outcome had the average gold price not done good things for the company, up 16% year-on-year. This was entirely due to rand weakness, as the dollar price was flat.
The production issues included challenges like load shedding and depletion of high-volume reclamation sites.
The company expects throughput for the next financial year to be higher than this year, although cash operating costs are expecting to rise from R697,382/kg to R770,000/kg. All commodity companies live and die based on the price of the underlying commodity, but DRDGOLD is particularly sensitive to the rand gold price. This is why the share price has increased by 72% over the past 12 months.
Harmony Gold has delivered a big jump in HEPS (JSE: HAR)
The company met the upper end of production guidance
When the gold price is doing useful things, miners need to make sure that they deliver on production targets. For the year ended June 2023, Harmony achieved production at the upper end of guidance and achieved an all-in sustaining cost below R900,000/kg.
It says something about the outlook and recent performance that no impairment was recognised in this period after write-downs of R4.4 billion in FY22.
HEPS is expected to be between 747 cents and 850 cents, a jump of 50% to 70%. The share price closed nearly 11% higher on the day at R73.06.
RCL gives tighter guidance on the earnings drop (JSE: RCL)
A special levy by the sugar association has been anything but sweet for shareholders
In the initial trading statement released in July, RCL Foods guided that HEPS would be at least 30% lower for the year ended June 2023. The group has now released more accurate guidance, which has unfortunately deteriorated even further.
The drop in HEPS is now between 39.3% and 46.0%, which means a range of between 64 cents and 72 cents for this period. With a share price of R11, this puts RCL Foods on a Price/Earnings multiple of roughly 16x.
There were various reasons for the drop, ranging from the special levy by the South African Sugar Association through to unrecovered feed costs and the impact of load shedding.
The investment in The LiveKindly Collective (a plant-based eating business) has suffered a R127.4 million negative fair value adjustment.
Rebosis agrees to sell R7bn worth of properties (JSE: REA | JSE: REB)
Two distinct disposals have been announced
The first portfolio that has been sold by Rebosis in the business rescue process is called the CBD Disposal Properties portfolio and the price is just over R3 billion. In a separate transaction called the Hanger 18 Disposals, there’s a deal with two separate components and a total value of R4 billion.
The buyers are various private companies and there are various regulatory and other conditions that need to be fulfilled to finalise the transactions. This is likely to include the Competition Commission so it won’t happen overnight.
The disposals are very close to the independent valuations performed in April 2023, which came out at just under R7.2 billion vs a selling price of R7 billion.
The announcement doesn’t make it easy for anyone to figure out what is still coming in the process. Based on previous announcements, it’s likely that further disposals related to other bank disposals will be announced soon. These properties would be part of the Nedbank-related portfolio based on communicated timelines in previous announcements.
RMB Holdings makes some progress with Integer (JSE: RMH)
Atterbury is causing many headaches but at least there is progress elsewhere
RMB Holdings is in the process of trying to realise its various property investments and return the proceeds to shareholders. It’s easier said than done I’m afraid, as evidenced by the ongoing issues with Atterbury around repayments of loans.
Aside from Atterbury, RMB Holdings also holds 50% in Integer Properties. Integer holds 33.3% in Milanick Properties and has agreed to sell those shares and the related loan account to another shareholder of Milanick for R50 million. This is in line with the property valuation as at the end of March.
The amount is expected to be received during September and Integer will apply these proceeds towards repaying RMB Holdings a portion of the shareholder loan account.
As useful as this is, the disposal only represents less than 5% of RMB Holdings’ market cap. Still, it’s a step in the right direction.
Sasol’s HEPS increased by 13% this year
The inclusion of impairments tells a different story
For the year ended June 2023, Sasol faced many of the same headwinds as other mining companies, like a drop in commodity prices and the ongoing challenges with local infrastructure. Sasol is a complicated beast, so the earnings are also highly impacted by valuations of derivative contracts.
To show you how much difference those valuations can make, there was a positive move of R6 billion this year vs. a loss of R17.6 billion last year. On an operating profit number of R55.4 billion before impairments, that’s a very big difference.
Within impairments, the most significant negative move was in the Secunda liquid fuels refinery unit, which has now been fully impaired. This is based on lower volumes as part of emissions reduction plans and other pressures like higher electricity prices and lower gas selling prices.
With all said and done, HEPS increased by 13% despite EBIT (Earnings Before Interest and Taxes) dropping by 65%. This is because HEPS excludes impairments and EBIT includes them.
The total dividend for the year was R17, a 15.6% increase vs. last year when there was no interim dividend.
Little Bites:
Director dealings:
The company secretary of Oceana (JSE: OCE) has sold shares worth R382k.
The CEO of AECI (JSE: AFE) has bought shares worth R210k.
An associate of Des de Beer has bought another R55k worth of shares in Lighthouse (JSE: LTE).
A director of Mantengu Mining (JSE: MTU) has sold shares worth R37k.
Lewis (JSE: LEW) announced that Global Credit Ratings affirmed its national scale issuer rating of A+(ZA) with a stable outlook. This says a lot about the quality of the company in this macroeconomic environment.
Aveng is calling this a “year of transition” (JSE: AEG)
Shareholders will hope they transition rather quickly
I must hand it to Aveng, it takes bravery to refer to an operating loss of R1.06 billion as a year of transition, particularly when the underlying businesses made an operating profit of R360 million in the comparable year. The company has re-presented its 2022 numbers to show Trident Steel as a discontinued operation, as this business has been disposed of.
The first paragraph of the overview section makes it sound like this was just a bump in the road for the company. If this isn’t putting perfume on a pig, then I don’t know what is:
In reality, revenue increased 28% and that didn’t help much because of substantial losses at projects like the Batangas LNG terminal project in Southeast Asia. Subsidiaries McConnell Dowell (-R815 million) and Moolmans (-R110 million) both reported an operating loss in this period.
The good news is that at least the balance sheet looks a lot better after the Trident Steel disposal. Other good news is that McConnell Dowell has secured 100% of its FY24 planned revenue and Moolmans has secured 93% of planned revenue. However, as FY23 has just taught us, revenue means nothing without profits.
Let’s hope that the next year will look nothing like the 2023 performance thus far:
BHP: another strong example of how cycles work (JSE: BHG)
With revenue down 17%, you can guess what happened to profits
If you want to see how quickly a mining cycle can swing around, BHP is a wonderful example. The company has released results for the year ended June, reflecting a drop in revenue of 17% and in HEPS of 42%. The dividend is down 56%. All of those percentage movements are in dollars.
The announcement also includes the 2021 numbers, so it’s interesting to see the how the past few years played out. HEPS was 284.8 US cents in 2021 before jumping to 438.1 US cents in 2022. It has now come back down to earth at 256.1 US cents.
Despite the negative year-on-year move, operating profit margins remain highly lucrative. EBITDA margin was 54% in this period, down from 65% in FY22.
Net debt of $11.2 billion is nicely in the middle of the target range of $5 billion and $15 billion.
The share price has been hanging on for dear life over the past year, with rand weakness as the major support for the story:
Bidvest flags strong results for the year to June (JSE: BVT)
Even on a normalised basis, this looks really good
When I was asked to contribute to the Financial Mail Hot Stocks article back in January this year, I was tasked with choosing a stock in the industrials sector. I went with Bidvest and I’m definitely not embarrassed by that pick, with a year-to-date share price return of 26%.
This has been driven by strong earnings growth as Bidvest has enjoyed pricing power and decent demand in its operations. For the year ended June, HEPS is expected to be between 22% and 26% higher. This is a range of R17.59 to R18.17. At the midpoint, this is a Price/Earnings multiple of 15x.
Normalised HEPS excludes acquisition costs and a few other things, with a range of R18.42 to R19.06 and a movement of between 15% and 19%.
Whichever metric you use, this is a strong result for Bidvest. Full details are due on 4 September.
Murray & Roberts sells its non-core solar business (JSE: MUR)
You didn’t even know about this business, now did you?
As a construction business, Murray & Roberts prefers to give shareholders sleepless nights over major projects rather than own a small profitable solar wholesaler. Jokes aside, a solar business simply doesn’t fit with the rest of the group. I’m not even sure what it’s doing there.
Murray & Roberts will sell its 80% stake in Aarden Solar to a private buyer for R73 million. That implies a company valuation of R91.25 million, which is very high on a profit of R6 million for the year ended June 2023. I have no idea why the buyer is paying a 15x Price/Earnings multiple for a business that sells solar equipment on a wholesale basis. I can certainly see why Murray & Roberts is quite happy to let it go, with the R73 million giving a boost to working capital.
For context, you hopefully noticed further up that Bidvest (as in Bidvest GROUP) is trading at 15x. Even with adjusting for a control premium, this solar valuation is wild.
NEPI Rockcastle gives full details on a strong period (JSE: NRP)
Distributable earnings per share is up by 24.9% – an excellent result
Of all the property funds available on the local market, NEPI Rockcastle is putting its hand up as a strong contender for top spot at the moment. The Central and Eastern Europe exposure is really paying off, despite the terrible situation playing out nearby in Ukraine. On a like-for-like basis, net operating income increased by 15%.
This is a fast growing region that is also attracting the attention of international retailers, with NEPI Rockcastle ready to capitalise with its shopping malls. It says something about shareholder support for this story that the last scrip dividend was elected by holders of 85% of shares in issue, helping the company retain cash and bring down the loan-to-value ratio. That ratio was further improved by higher valuations of the portfolio, up 1.6% since December 2022. The loan-to-value ratio of 33.4% is well below the strategic threshold of 35%.
There’s another scrip dividend on the table at a 3% discount to the five-day VWAP. If you read the Little Bites section today, you’ll see that scrip dividends are popular among property funds
Interestingly, the distribution per share is a capital repayment as the default option. Shareholders should consider what that means for them from a tax perspective.
Spur gives full details on its strong earnings (JSE: SUR)
The share price added another 3.7% to the recent gains
Spur certainly has the wind in its sails, with the company creating excitement in the market that has been on par with Toddler Ghost’s joy at seeing the large pirate ship at our local Spur. He’s not much of an ice cream fan (shockingly), so I use that as an excuse to eat most of his waffle. I view this as good parenting.
Waffles and pirate ships seem to be the order of the day for plenty of families, with Spar reporting growth in HEPS of 81.1%. As I indicated when the trading statement first came out, this isn’t just a base effect. This is truly a blowout performance, with the year ended June being a period that Spur won’t easily forget.
The result has been driven by strong revenue growth, although the cadence over the year is sobering. In the first half, franchised restaurant sales were up 31.5%. In the second half, they were up 15.1%, so the growth for the year was 23%. The Spur brand has been the shining star within the group, with a strong menu offering even during load shedding. This is in sharp contrast to my local Mugg & Bean that inexplicably closes when the power goes off.
A final dividend of 110 cents per share has been declared, taking the full-year dividend to 192 cents. At the current price of R28, this is a dividend yield of 6.9%. A yield like this is the benefit of buying a company like Spur on a Price/Earnings multiple of 10.7x.
The question is: will the share price momentum continue?
WBHO bucks the construction trend (JSE: WBO)
Here’s some rare good news in this sector
For the year ended June 2023, WBHO’s revenue has increased by at least 30% and operating profit is up by 25%. The order book is 47% higher, which bodes well for ongoing revenue.
Although the exit from Australia has been slower than expected, there’s no change to the expected costs of the exit.
Based on what is clearly a strong underlying result, HEPS from continuing operations is up between 27% and 33%. Based on total operations, HEPS is up by a silly range of 139% to 141% as the group has swung from a loss to a profit when everything is included.
Wesizwe finally resumes operations at Bakubung Platinum Mine (JSE: WEZ)
With PGM prices under pressure, the company cannot afford a drop in volumes
After prolonged negotiations, Wesizwe has announced that the Bakubung Platinum Mine is finally operational again. The company even calls it a “peace agreement” which gives you an indication of how unpleasant it has been
A collective agreement needs to be signed between Wesizwe and employee representatives within 30 days of ending the strike.
Importantly, the guidance excluding David Jones is unchanged
Woolworths released an initial trading statement at the end of July, noting that group earnings would be at least 20% higher for the 52 weeks ended 25 June. This has been updated to show HEPS growth of 25% – 35% and adjusted HEPS growth of 30% – 40%.
This includes nine months’ worth of David Jones in the current year vs. twelve months in the prior year. This would normally have a negative impact on current earnings vs. comparable earnings, except where David Jones was doing badly in the comparable period.
This is why HEPS growth from continuing operations is between 10% and 20%, as this excludes David Jones from both periods. This is the correct number to focus on and this guidance is unchanged from the July announcement.
Little Bites:
Director dealings:
The CEO of Equites (JSE: EQU) sold shares in the company worth R3.8m. It’s a small portion of his holding, but still relevant.
A director of British American Tobacco (JSE: BTI) bought shares worth £200k. This was in addition to a number of executives who acquired shares under company investment plans.
A director of AngloGold (JSE: ANG) has bought shares worth $80.6k (in the form of American Depository Receipts)
You guessed it – Des de Beer has bought more shares in Lighthouse Properties (JSE: LTE), this time worth R582k.
The CEO of Sirius (JSE: SRE) and a close associate bought shares for a total of £25k.
The lead independent director of Nedbank (JSE NED) bought shares worth R250k.
A prescribed officer of Thungela (JSE: TGA) sold shares worth R191k.
In case you’re wondering why Des de Beer keeps buying up shares in Lighthouse Properties (JSE: LTE), part of the reason is that the scrip dividends help him build up his stake even further. The scrip dividend price has been announced as a 3% discount to the closing price on 21 August. It’s very likely that he (and other executives) will accept the scrip dividend instead of a cash distribution.
In a similar vein, Capital & Regional (JSE: CRP) has announced that the scrip dividend will be calculated based on a share price of R12.70783, That’s a helpful discount to the current price of R13.30. Again, property funds do this to entice shareholders to take shares rather than cash.
In a step that might give us a clue about the strategic direction of the company, PSG Konsult (JSE: KST) is changing its name to PSG Financial Services. The ticker (i.e. KST) remains the same.
Structured products have come a long way. From a specialised, exotic investment tool, they are now mainstream, and financial advisers are now more comfortable about investing in them on behalf of clients.
As the acceptance of structured products has grown, so has the need to keep clients informed about their role in an investment portfolio and the specific types of products available.
So, what do advisers and their clients need to understand before proceeding with an investment? Let’s look at some of the key issues.
What is the client’s broad investment strategy? As an adviser, you’ll have a detailed investment strategy in place for your client, considering life stage, income requirements, risk tolerance and so on. A structured product needs to fit into this broad strategy.
While each investor’s investment plan will differ, broadly speaking a structured product will be included in a portfolio as they are an ideal alternative that can be used for several reasons:
To build up an exposure in a particular asset class, i.e. offshore country exposure such the US, UK etc or sector specific exposure such as tech or financial indices.
To gain capital protection in a specific market or index where the returns might be volatile.
As a useful strategy to diversify currency exposure across your investments.
To take advantage of short or medium-term market conditions where the use of gearing can amplify returns while protecting the downside.
While each structured product is different, most share the following features, which could influence the decision about which structured product to invest in:
Capital protection: Capital protection is probably the best-known feature of structured products. A typical structured product (usually with a maturity of between three and five years), will have 100% capital protection, or with protection of losses up to a certain percentage (say 20% or 30%). This feature is attractive for investors concerned about stock market volatility over the medium term.
Geared returns: This simply means that investors earn a multiple of the return of the underlying index or group of indices. Returns are often capped at a certain level, but investors will still earn the multiple up to that level, at which point the investment return is capped. For example, the structure may give the investor two times the return of the underlying index, capped at 60%. So, if the index grows by 50% over five years, the investor will earn a 100% return. If the index grows by more than the 60% cap, the investor will earn 120% (the 60% times two). Only if the index returns more than 120%, will the investor lose out on the upside beyond that level. These payoffs are therefore very useful for investors only mildly bullish about the underlying market.
Returns can be in rands or foreign currency: It’s important to look at the currency to which the product is linked. Structured products will often link returns to a well-known stock market index, such as the MSCI World, S&P 500, or FTSE 100. Others will be linked to a portfolio of various indices. Some may offer the return in US dollars, euros, or sterling, while for others, the returns will be in rands. Investors will choose the investment product depending on which currency exposure they are looking for.
What are the liquidity requirements of the investor?
Structured products come with a defined term (three or five years are the most common investment periods). While most issuers will provide some sort of commitment to pay out, should the investor need to access funds before the product matures, this can result in the investor not realising the full potential of the investment. On this score, investors in structured products should only invest with cash that they can tie up for the duration of the investment period.
What are the risks?
Structured products are generally low-risk investments but are not risk free. Investors should for example be cognisant of credit risk. A structured product is essentially a contract between the investor and issuer, with the latter promising to deliver the returns described in the contract. Most structures will be issued by well-known, highly rated banks, so the risk is generally low, but not zero. On this score, it should be noted that the recent high-profile takeover of Credit Suisse by UBS would not have a negative effect on the underlying credit of structured products that were linked to the senior debt of Credit Suisse.
“Structured products can be a true enhancement to an investment strategy”.
Brian McMillan, Head of Retail Structured Products, Investec
Finally, each structured product will have its own combination of features, and when the adviser and client assess their role in the context of the overall investment portfolio, they can be a true enhancement to the investment strategy.
About the latest Investec Structured Product:
The Investec USD S&P 500 Autocall is a structured product that is linked to the performance of the S&P 500 Index.
Listed on a stock exchange, it is designed to provide investors with an attractive return, even if the S&P 500 Index makes only modest returns over the investment term.
It provides exposure in US Dollars with a high degree of capital protection.
However, capital is at risk if no early maturity occurs, and the Index has fallen more than 30% on the maturity date. Learn more here.
The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.
In this episode of Ghost Wrap, we recap a busy couple of days:
Aveng’s poor recent results and the volatility in the share price around the time of the earnings release.
Curro’s solid year-on-year growth, driven mainly by pricing increases in tuition fees.
Libstar’s substantial drop in HEPS, with mushroom production as the biggest problem after the Shongweni facility was destroyed.
Transpaco’s encouraging trading statement, putting another tick in the box for the packaging sector this year.
Standard Bank’s massive jump in earnings, with the African regions shining through.
Various mining sector updates that are almost all negative, including Thungela, Exxaro, Sibanye, Gold Fields and Master Drilling.
Attacq posts the Waterfall deal circular (JSE: ATT)
Here’s a good example of how corporate finance works
Attacq’s proposed transaction with the Government Employees Pension Fund (GEPF) has been in the news for a while now. It did great things for the share price, much to my enjoyment as a shareholder. The GEPF is taking a 30% stake in the Waterfall portfolio and the price on the table is effectively a lower discount (15%) to the net asset value than the listed share trades at. This triggered a value unlock for shareholders.
To get the deal across the line, Attacq needs shareholder approval. This means that a circular has to be sent to shareholders. You’ll find it here.
Other than the price, another highlight of the deal is that the proceeds from the sale will help Attacq reduce its gearing ratio from 38.1% to 26.3% based on December 2022 numbers. This is achieved without losing control of the Waterfall business, as Attacq will retain a 70% shareholding in it and will manage the properties for a fee.
Assuming the transaction goes ahead, the net asset value per share based on December 2022 numbers would be R16.779. Attacq is trading at R8.40. You don’t need to get the calculator out to see why the investment by the GEPF at a 15% discount to adjusted NAV of the portfolio is a good one.
The cost of the deal to Attacq is R11.3m, with Java Capital getting R5m for the corporate finance work and ENSafrica taking home R2.1m on the legals. EY gets nearly R1.8m as the reporting accountant.
Castleview to move higher in the Collins structure (JSE: CVW | JSE: CPP)
Transactions like this aren’t unusual in the listed space
Castleview Property Fund currently holds 25.7% in Collins Property Projects, a subsidiary of Collins Property Group (previously called Tradehold). This is where the logistics and industrial portfolio with a net asset value of around R3.6bn is held.
To make life simpler for Collins and to give it 100% control of its major operating subsidiary, the 25.7% stake will be acquired by Collins Property Group in exchange for the issue of listed shares to Castleview. This is effectively just a swap to the top, giving Castleview a 21.78% stake in Collins.
The issue price is R13.64 per share, which is much higher than the traded price of R7.35 because this is more like a NAV-for-NAV deal that is designed to avoid hurting Collins shareholders. If Collins was acquiring the underlying stake at NAV and issuing shares at a discount, it would be extremely damaging for existing shareholders.
This is a Category 2 transaction for Castleview and for Collins and so no shareholder approval is needed for either listed company.
Curro’s interim report is out: insert A+ puns here (JSE: COH)
Recurring HEPS is up by 36%
After 25 years of trying to plug the gap between government schools and very expensive private schools, Curro has released a set of numbers that looks strong. Weighted average learner numbers increased by 3%, revenue was up 16% (thanks to tuition fee growth of 14%) and recurring HEPS jumped by 36%. Recurring HEPS is the right metric because the base period included subsidy income received by Meridian.
It does give a sense of inflationary pressure on middle-income households in this country that tuition fees grew by 14%, while obviously noting that learner numbers are part of that. Still, tell us again about that average inflation number? Despite this, credit loss provisions were flat year-on-year, which actually suggests an improvement in credit quality considering the jump in revenue.
Despite the big jump in earnings, cash from operating activities only increased by 2% because of tax and interest payments along with working capital requirements.
The group reports its various income sources in great detail, allowing me to create this chart of the day:
Curro is a business, so being able to reduce the percentage allocated to bursaries is actually good for shareholders. Welcome to the inevitable emotional conflict that comes with investing in private school education.
If you would like to attend the Unlock the Stock session featuring Curro that is scheduled for 31 August at midday, then register at this link. It gives you a wonderful opportunity to ask questions directly to the management team, brought to you by A2X.
Jubilee Metals pushes forward with chrome and copper (JSE: JBL)
With PGM prices under pressure, diversification is very helpful
If you’ve been following recent mining updates, you’ll know that the PGM players have been under immense pressure. Focusing on a single commodity (in this case the PGM basket gets treated as one exposure) is dangerous and leads to volatile earnings. This is what Jubilee Metals is trying to avoid.
For context to how volatile mining can be, we can look at the Jubilee share price over the past few years. After it went crazy in 2021 and traded above R4 a share, it’s all the way down at R1.60. A negative move in the mining cycle and a general shift away from riskier equities has not been kind to investors. Having said that, it’s still up over 250% with a five-year lens!
The company cannot control the share price but it can control its strategy. In an update to investors, Jubilee noted the continued expansion of the chrome operations at a time when chrome prices are supportive of this decision. The company is actively seeking additional chrome processing partnerships to increase production.
On the copper side, the roll-out in Zambia is ahead of schedule with commissioning of the Roan upgrade scheduled for October 2023. Jubilee is also busy with refining process trials to find better ways to recover copper from historical tailings materials. This is a major opportunity in Zambia and the CEO’s commentary around the trials is bullish.
Kore Potash affirms ongoing governmental support (JSE: KP2)
This might help settle the serves among investors
Kore Potash has been in the process of negotiating the required construction contracts for the Kola project for what feels like forever. Along the way, there’s been some awkwardness with the government of the Republic of Congo, which didn’t do anything to improve the growing nervousness among investors.
The company seems to be on the front foot now, announcing the receipt of a letter from the Ministry of Mines of the Republic of Congo that affirms ongoing support for the project. Of course, this is by no means a guarantee that the government won’t get jittery again if there are further delays.
Kore Potash is dealing with numerous moving parts here. The planned timeline is that the Engineering, Procurement and Construction (EPC) contract will be finalised by January 2024, with the financial proposal in place a few weeks later.
As the company is in the process of raising more funding to help it reach that date, this letter is critical.
After presumably a number of awkward boardroom discussions, RMB Holdings has released an announcement about the Atterbury loan problem and has withdrawn its cautionary announcement. Instead of trading with caution, you can now trade with confusion.
Atterbury owes R487m to RMB Holdings. R162m will be repayable by the end of December 2023, unless Atterbury can’t afford that repayment, in which case it’s repayable in June 2024. Interest is payable at JIBAR plus 2.75%.
The remainder of the loan (R325m) will be settled at the same time that the R162m is settled, by the issuance of shares in Atterbury to RMB Holdings, calculated based on June 2023 NAV. This would increase RMB Holdings’ shareholding from 27.5% to 38%.
In case the R162m is not repaid by June 2024, then the entire amount (i.e. plus the R325m) becomes payable immediately, along with interest.
Ok. Great. But if Atterbury doesn’t have R162m in 2024, then how exactly would they suddenly find the R487m? They will be in the exact same position that we find ourselves in today, having bought themselves nearly another year and given themselves the option to part-settle in equity.
Either the market is a lot smarter than I am (very possible) or people didn’t read properly (always plausible), with the share price up 7% for the day. It doesn’t sound to me like this is a win for RMB Holdings but I’m happy to be corrected.
From bad to worse at Salungano (JSE: SLG)
The signs of trouble were there when directors resigned in July
Things are now going very badly for Salungano, with the listing having been suspended by the JSE for the company’s failure to publish its financials for the year ended March. If that wasn’t bad enough, a mining contractor of Wescoal Mining (a wholly-owned subsidiary of Salungano) has taken legal steps to liquidate that subsidiary, with a notice of opposition to the application due to be heard this week.
In response, Salungano has launched a court application to place Wescoal Mining in business rescue. This includes the mining operations at the Khanyisa and Elandspruit mines.
Dear, oh dear. The share price has lost over half its value this year and shareholders are now stuck.
Thungela: a perfect example of mining cycles (JSE: TGA)
The interim dividend has dropped by 83% year-on-year
Coal prices have not been a happy story this year, leading to a sharp drop in year-on-year profitability at Thungela. HEPS has plummeted from R67.23 to R22.46 and the interim dividend per share is down at R10 from R60 last year. This means that the payout ratio has also come down significantly when expressed in terms of HEPS. Thungela has declared 33% of adjusted operating free cash flow as a dividend.
Despite this, adjusted EBITDA margin is still at 31% which is hardly a low level. It just looks ugly compared to 64% last year.
The group gives an optimistic view that the current pressure on the coal price won’t last, with ongoing demand for coal and underinvestment in most of the world in coal supply (except for China, India and Indonesia). None of this really helps if we can’t get the coal to our ports, with Transnet Freight Rail again covering itself in glory with a 13% deterioration in the coal run rate year-on-year. Things at least got better towards the end of the period after a terrible first quarter with derailments.
The acquisition of the Ensham business in Australia for R4.1bn is expected to close at the end of ths month. To put that number in perspective, Thungela has R13.6bn in net cash and is about to pay a dividend of R1.4bn.
The market reacted positively to the update, with Thungela closing 4.8% higher.
Little Bites:
Director dealings:
Value Capital Partners has board representation on Altron (JSE: AEL) and has bought another R14.9m worth of shares in the company.
A director of AngloGold (JSE: ANG) has bought $121k worth of shares in the company (in the form of American Depository Receipts).
The selling of shares by directors and associates of Argent Industrial (JSE: ART) continues, this time to the value of R350k.
Emira wants to buy the rest of Transcend (JSE: EMI | JSE: TPF)
And they aren’t prepared to pay a premium for it
With a bid-offer spread as wide as the moon and practically zero liquidity, shareholders in Transcend only have one realistic way to exit their positions: sell to Emira. This is because Emira holds 68.15% of the shares in issue, so it can easily block an offer from anyone else.
This leaves major shareholders in Transcend stuck in an illiquid rut and unable to realise the value of their stake. It’s therefore not surprising that holders of 18.61% in the company have already given irrevocable undertakings to accept Emira’s offer of R6.30 per share, even though this implies no premium to the current traded price. This represents 58.41% of the voting class (as Emira can’t vote), so this proposed scheme of arrangement is already a long way down the road towards 75% approval.
With Transcend’s net asset value (NAV) per share as at March 2023 of R8.23, the offer price is a 23% discount to NAV. This is unfortunately what happens when there is only one obvious buyer for the stake and no liquidity to offer people an alternative way to exit. When buying stocks in a takeout basket and hoping for a premium, this is important to take into account.
As a final comment on this price, this discount to NAV isn’t terribly different to other takeout prices we’ve seen on the JSE. Where there has been a premium offered to shareholders, it’s because the traded discount to NAV was much higher.
Libstar suffers a substantial drop in earnings (JSE: LBR)
Here’s another casualty of this operating environment
With a drop in the share price this year of over 30%, the market has been pricing in terrible numbers at Libstar. With the release of a trading statement for the six months to June, we now know just how tough it has been. The numbers seem to be in line with what the market expected, as the share price hardly moved in response.
Revenue growth was just 4% and selling price inflation and mix contributed 10.7% to growth. This immediately tells you that volumes were down, in this case by 6.7%.
Part of the drop in volumes is because Libstar discontinued certain unprofitable lines in the retail business, so that’s technically a good thing. The destruction of the Shongweni mushroom production facility in the second half of 2022 certainly wasn’t a good thing, obviously leading to a sharp drop in fresh mushroom production. Excluding the impact of these issues, retail volumes would’ve been up by 1%.
The industrial and export channels didn’t do well for various reasons.
With lower volumes in a manufacturing company, you would expect to see a drop in gross profit margin. This has played out here, with gross profit down by 5.6% despite revenues up 4%. Gross margin was consistent with the second half of 2022 at least.
The same can’t be said for diesel costs. The company spent R8m in H1’22, R31m in H2’22 and a whopping R45m in this period. Pricing increases could only partly mitigate this impact.
Against this backdrop, normalised EBITDA (a good proxy for operating profit) fell by between 17.3% and 19.3%. This is before we consider net finance costs, which jumped by 71% because of higher interest rates.
HEPS has dropped by between 54.9% and 59.8%, so this is a period that Libstar will want to forget. Normalised HEPS from continuing operations fell by between 42.4% and 47.5%.
Detailed results are due on 12 September. The company has noted that initiatives around the strategic direction will be shared at the same time.
Sibanye’s HEPS has approximately halved (JSE: SSW)
All the PGM players are in the same boat, as one would expect
Sibanye-Stillwater is shielded to a small extent from the decline in PGM prices by its gold exposure. It’s nowhere near enough to stop the pain though, with HEPS for the six months to June down by between 48% and 53%. With a 22% drop in the average rand basket price for PGMs, they never stood a chance, even with the base period including the horrors of the industrial action in the gold business.
On top of the negative move in the cycle, Sibanye has had to content with other issues like a shaft incident at Stillwater.
Sibanye cannot control market prices for commodities but can control production. Local PGM production was flat (a solid outcome), Stillwater’s PGM production was down 11% because of the operational issues and local gold increased by 233% because the base period was a catastrophe.
The share price is down 34% this year, though it remains a ridiculous 285% higher over five years. Mining cycles are wild things.
Transpaco: low on stock liquidity, high on earnings growth (JSE: TPC)
This small cap is heading in the right direction
With a market cap of under R900 million and a wide bid-offer spread, Transpaco has a share price chart that is typical of a stock with low liquidity. Whenever you see long horizontal lines, it’s because the stock is thinly traded:
This doesn’t mean that the company isn’t growing. In a trading statement for the year ended June 2023, Transpaco announced that HEPS will increase by between 16% and 22%. This means a range of 554 cents to 582 cents.
The share price is around R29, so that’s a Price/Earnings multiple of roughly 5x.
Little Bites:
Director dealings:
With results now released and Standard Bank (JSE: SBK) no longer in a closed period, a couple of prescribed officers and an associate of a director collectively sold shares worth around R12.8m.
The same is true atInvestec (JSE: INP), where a director and a prescribed officer collectively sold R2.8m worth of shares.
Des de Beer has bought another R6m worth of shares in Lighthouse (JSE: LTE).
A director of Santova (JSE: SNV) sold shares worth R426k.
AngloGold (JSE: ANG) shareholders have said yes to the proposed reorganisation of the company, which effectively internationalises the holding structure of the group.
In this fireside chat, Wichard Cilliers and Andre Botha of TreasuryONE made themselves available to answer any questions that attendees wanted to ask in the session.
Starting with China and ending with the Big Mac Index, we discussed everything from the rand and the South African trade deficit through to the Fed and consumer confidence.
This is a wonderful learning opportunity, brought to you by TreasuryONE
Along with the release of its interim results, MTN announced it had signed a memorandum of understanding with Mastercard. Following a bespoke process to identify and potentially introduce strategic minority investors into the US$5,2 billion (enterprise value) MTN Group Fintech business, the company will, following the completion of the due diligence exercise, close a deal with Mastercard.
RMB Corvest (FirstRand) in partnership with Umoya Capital Partners, has acquired a significant minority stake in SANTS Private Higher Education Institution. Programmes offered by SANTS focus on quality at an appropriate cost, with an emphasis on ease of access and customer service for potential educators. Since its establishment in 1997, SANTS has presented various programmes and qualifications to more than 40,000 educators in South Africa.
The R8 billion BEE deal announced by Sanlam in October 2018 with SU BEE Investment SPV for a 5% stake (111,349,000 new shares) in the company is being unwound. The shares were issued at the time at R70 per share representing a 9.88% discount – the share has traded for the most part below this level thanks to the pandemic and economic fragility of the country. The deal funded via a combination of preference shares and external funding is unlikely to provide the beneficiaries with any benefit and as such Sanlam has taken the decision to unwind the deal. The company will acquire the preference shares held by Standard Bank (the external funder) and secured by 85 million Sanlam shares for R2,4 billion, funded from existing cash resources.
Unlisted Companies
Sylvania Platinum, a low-cost PGMs producer listed on the London Stock Exchange’s Alternative Investment Market, has announced a joint venture (JV) in SA between its local unit and Limberg Mining, a subsidiary of ChromTech Mining. The JV will process PGM and chrome ores from historical tailings dumps and current arisings from the Limberg Chrome mine in the Western Limb of the Bushveld Complex. The JV will trade and operate under the name Thaba Joint Venture. Sylvania will initially fund the R600 million start-up costs and will provide c.US$5 million in the form of a loan for working capital.
Vitruvian Medical Diagnostics, a medical technology startup developing low-cost diagnostic assistance tools for medical laboratories, has raised US$1,25 million in a recent Seed Extension II funding round. The round was led by 27four Investment Managers’ social impact fund, the Nebula Fund. The investment will be used to scale growth by increasing the team and driving growth in new technologies.
Air Products South Africa, via its subsidiary Weldamax, has added to its gas and welding portfolio with the acquisition of a controlling interest in EWN&S. The acquisition will add a further four sales outlets to the existing 13 countrywide outlets. Financial details were undisclosed.
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