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Ghost Bites (Equites Property Fund | MiX Telematics | Brikor | Sappi | Southern Palladium)

The Finance Ghost
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Ghost Bites (Equites Property Fund | MiX Telematics | Brikor | Sappi | Southern Palladium)

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

Equites is focused on “portfolio optimisation” (JSE: EQU)

And in the meantime, the distribution is heading lower

With a share price down around 25% this year, it hasn’t been a happy time for Equites. The logistics-focused fund has been hurt by the interest rate cycle and these types of funds were generally trading at lofty valuations coming into this year, unlike office funds that had been decimated during the pandemic.

The strategy with the portfolio is to reduce exposure to land holdings (down from 8% of portfolio value to 5%) and dispose of the UK development pipeline, while also selling non-core assets with sub-optimal sustainability credentials. Equites owns 60% in the ENGL development platform in the UK and the idea is to sell non-income producing assets in favour of income-producing assets. The long term impact is a smaller land bank, which may hurt growth down the line. For now though, the focus is on reducing the loan-to-value ratio.

The results include this creatively named “LTV flightpath” that reflect the target of 35.6% by February 2024:

The SA and UK portfolios are performing “in line with expectations” – and those expectations were clearly for a drop, as distributable earnings fell 19.6% for the six months to August. The dividend per share is down 19.9%. The net asset value per share is down 10.9% to R16.73, with the share price having closed at R12.60.

Despite the obvious pressure in the markets in which Equites operates, the SA portfolio valuation increased by 1.7% and the UK is up 2.1% in GBP terms.

At this stage, Equites is focused on pre-let developments in South Africa. No further substantial development expenditure in the UK is expected.

To give you an idea of why developments are under pressure, look at the initial yield on these developments and consider them in the context of where 10-year government bond yields in South Africa are sitting (10.8%):

The principle is that over say 20 years, the internal rate of return ends up being attractive. In the initial years though, the yields aren’t lucrative.

Based on the interim dividend of 65.37 cents, the annualised yield is 10.4%. I’m not a buyer at that yield.

MiX Telematics has attracted a US suitor (JSE: MIX)

The lovely news is that we won’t be losing a listing here

There’s just about an audible groan when we see an offer come in for a JSE-listed company, as it inevitably ends in the loss of yet another listing on the local market. The good news is that this is a share-for-share offer to MiX Telematics shareholders by a company named PowerFleet and the plan is for the enlarged PowerFleet to list on the JSE, so we’ve actually gained something as a market in the form of additional underlying businesses to consider.

I know, right? Unreal.

PowerFleet describes itself as being a global leader in “Internet of Things” solutions, so the buzzwords are coming to our market. That’s really just a fancy way of talking about monitoring of assets and related services. The company has been listed on the Nasdaq since June 1999. It also happens to be listed on the Tel Aviv Stock Exchange.

If the deal goes ahead and MiX Telematics shareholders swap their shares for a holding in the enlarged PowerFleet instead, then they will hold 65.5% in that enlarged company. In other words, PowerFleet isn’t exactly a global giant planning to swallow up MiX, which explains why the JSE listing of PowerFleet will be part of the deal.

The enlarged business would obviously have the benefits of scale, with lots of promises around the combined data strategy and R&D capabilities as well. One would certainly hope that liquidity will benefit as well.

The share price closed 15.6% higher on the day, with the scheme circular and prospectus due for circulation on 5 December. This will be an interesting one to dig into!

Nikkel Trading acquires another block of Brikor shares (JSE: BIK)

More shares have changed hands at 17 cents per share

On 12 September, Brikor announced that Nikkel Trading 392 reached a 64.11% holding in the company. This triggers an offer to remaining shareholders at a price of 17 cents per share.

This doesn’t preclude Nikkel Trading from picking up more shares along the way, also at 17 cents per share. This is exactly what has happened, with the stake now up to 68.01%.

Sappi is facing serious challenges in graphic paper (JSE: SAP)

Another European mill faces closure

Cyclical businesses are tough things to stomach. It gets even more volatile when you look at specific segments in Sappi, rather than just the businesses as a whole. For example, the graphic paper market is struggling with overcapacity, which means there simply isn’t enough demand for the level of supply. This forces periods of downtime at the mills, which destroys profits.

In July 2023, Sappi started the process to possibly close the Stockstadt Mill in Germany. An agreement has been signed to sell the site, although the announcement also mentions that the site will be closed during Q1 of 2024. Either way, the impact on Sappi is cash neutral.

As conditions have worsened since then, the Lanaken Mill in Belgium is next on the list. A closure is possible, although Sappi is also looking at how to cut overheads, presumably in an attempt to avoid closure and the impact on the 644 workers at the mill.

Sappi will continue to serve the graphic paper market through the mills that can operate competitively. The overall focus in Europe is the packaging and specialities segment. In a business like this, it’s all about knowing where to focus.

Southern Palladium gives us a geology lesson (JSE: SDL)

Latest drilling results from Bengwenyama have been released

Junior mining updates are incredibly good at alienating nearly everyone. For example, here’s an actual sentence from the Southern Palladium announcement: “Assay results for 39 UG2 intersections from SPD’s 70% owned Bengwenyama project have now returned an average grade of 8.00g/t (3PGE+Au) and 9.63g/t (6PGE+Au) over an average reef width of 69cm.”

Wonderful. I’m sure someone, somewhere knows what that means.

I always just skip to the commentary by the executives, in this case noting that the consistency of the grade and continuity of the reef continue to be confirmed by the latest drilling results. You don’t need a geology degree to understand that this is a good thing.

The company is busy with a second Mineral Resource update, scheduled to be announced in the fourth quarter of this year.

Little Bites:

  • Director dealings:
    • If I understood the announcement correctly, two directors of Capital & Regional (JSE: CRP) exercised options for shares worth R1.3 million. I usually ignore share awards, but the difference here is that the directors cash funded the tax i.e. didn’t sell shares to cover the tax. That’s a buy in my books.
    • A prescribed officer of Sasol (JSE: SOL) retained shares worth R4.7 million and sold shares worth R4.3 million. I’m including this as a good example of how share-based awards usually play out, with a big sale to cover the tax.
    • Substantial share awards have vested for several ADvTECH (JSE: ADH) directors. The announcement doesn’t note any selling, but I’ll be surprised if we don’t see any in days to come.
  • The current CFO of Hulamin (JSE: HLM), Mark Gounder, has been appointed as the CEO of Hulamin. He replaces Geoff Watson who was appointed interim CEO in October 2022. Pravashni Nirghin will be appointed as interim CFO, an internal appointment.
  • The CFO of WBHO (JSE: WBO), Charles Henwood, is retiring after 12 years in the role. His replacement is Andrew Logan, who has been with the group for 20 years.
  • I’ve previously noted a truly poetic end to Steinhoff’s (JSE: SNH) unfortunate life, with the company due for liquidation on Friday the 13th. This is also the date on which the company will be delisted in Frankfurt. The JSE delisting date is the 16th of October. Good riddance.

Ghost Wrap #49 (Famous Brands vs. Spur | Sibanye-Stillwater | De Beers | Mondi | Life Healthcare | Datatec | Fortress)

The Finance Ghost
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Ghost Wrap #49 (Famous Brands vs. Spur | Sibanye-Stillwater | De Beers | Mondi | Life Healthcare | Datatec | Fortress)

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

In this episode of Ghost Wrap, I recapped a week’s worth of news across a variety of sectors:

  • Famous Brands vs. Spur is becoming a very interesting battle indeed, with the latter as my pick.
  • Sibanye-Stillwater has given the green light to the next phase of the Keliber lithium project.
  • De Beers is really struggling with demand for diamonds at the moment.
  • Mondi has managed to exit Russia, with letters of credit securing the final two payments from the buyer of the asset.
  • Life Healthcare announced a deal for Alliance Medical Group, reflecting what looks to me like a modest investment return on that asset since 2016
  • Datatec is proof that you can find fast-growing companies on the local market, if you know where to look.
  • Fortress has proposed a rather clever way to get rid of the dual-class structure in its shares, by using a portion of its stake in NEPI Rockcastle.

SHEIN a light on fast fashion

Dominique Olivier
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SHEIN a light on fast fashion

Have you ever asked yourself why SHEIN is so cheap? Dominique Olivier loves clothes. She loves saving money. She doesn’t love arguably damaging business practices, with many questions being asked around the world about SHEIN.

SHEIN. Wish. Temu. Cider. 

These days, you can barely open up Facebook without encountering endlessly scrollable ads showcasing items of clothing at ridiculously low prices. Over on Instagram, more and more fashion influencers are jumping on the “haul” trend, creating videos that show them opening and trying on large amounts of clothing ordered through the SHEIN app. 

And it’s not just our social media feeds that are flooded. According to a report compiled by Money.co.uk, SHEIN had already overtaken giants like Nike and Adidas as the most-Googled clothing brand in the world in 2022. In terms of revenue, they supposedly made more than fast fashion powerhouses H&M and Zara combined in Q1 of 2023, with a projected annual revenue of $58.5 billion. 

It sounds like a runaway success story – but if you read between the lines, the math doesn’t seem to add up. With an average unit price of just $7.90 across more than 600,000 products, SHEIN would have to shift a genuinely massive amount of stock (roughly 7.4 billion units!) in order to achieve the kind of revenue that they are reporting. And not just shift it, but deliver it to more than 195 countries worldwide. 

So, is it a question of many little steps conquering the mountain, or is SHEIN taking a shortcut to the top?

Is the price right?

When you purchase a new t-shirt, you might not immediately realise the intricate web of processes, materials, and labour that goes into its creation. It’s easy to take for granted the seemingly simple garment hanging on a rack. However, upon closer examination, you’ll discover that a T-shirt’s value extends far beyond its price tag. 

Fabric, pattern-making, sampling, trims, sewing, handwork, packaging, duties and shipping are an incomplete list of what you’re really paying for. And that’s before a wholesale markup (the profit a brand makes on the item) or the additional retail markup if you’re buying it in a store.

The industry standard markup for a designer to retailer is typically between 2.2 and 2.5 times the production cost. In this case, let’s consider a 2.2x markup. So, if a t-shirt costs the designer R100 to make, they might sell it to a retailer for R220. This markup helps the designer cover not only the production cost, but also make a profit that sustains their business and allows for future designs.

Let’s apply that exercise to SHEIN and work backwards.

On SHEIN, a plain women’s t-shirt costs R79. Let’s say a third of that price covers packaging, duties and shipping. That leaves us with R56. If we assume that Shein is making a 60% gross margin (which is typical of clothing retailers), we have a cost of around R22 to SHEIN. The factory no doubt gets squeezed by SHEIN, but we can surely assume a 30% gross margin for the manufacturer. This suggests that the cost of the garment is actually R15 in round numbers. That R15 needs to cover the material that went into the item, the wages of the workers that constructed it, the water and electricity needed to keep a factory running, maintenance of sewing machines – the list seems nearly endless.

Sure, there are bulk discounts that would apply when fabrics are bought in large quantities and other such loopholes. We know that China and Asia in general is a cheap labour environment, but to what extent? After all, if it were that easy, every store would have the option of selling a t-shirt for R79.

So, at which point in the process is the fat being trimmed? Is SHEIN taking smaller markups in order to keep their prices low? Maybe. Or have they simply found a way to make clothes at an unsustainably low cost?

Racing to the bottom 

SHEIN brings together an estimated 6,000 clothing factories in China under its label, adding anywhere between 2,000 and 10,000 individual styles to its app each day. The brand’s ability to not only keep introducing this tremendous amount of new styles at a breakneck pace, but to keep their prices as low as they are, is putting most brands in the fashion retail space under serious pressure. 

The South African textiles industry has been decimated historically and it could get even worse if SHEIN continues like this. Share prices of local clothing retailers are under pressure and were already underperforming in previous years. This is a problem.

Now, we can make all sorts of guesses about how SHEIN is managing to make a profit on clothing items that barely cover their own construction in price. Popular theories in the media range from circumventing import taxes and underpaying workers to running unsafe factories and using hazardous materials – all of which are under investigation. So, let’s focus on what we know for sure. 

Regardless of how SHEIN is cutting their costs, the fact is that they are competing with some of the biggest brands in the world for consumer attention – and in most cases, they are getting that attention and then some. Once a consumer has adjusted their expectations of what an item of clothing could cost (not what it should cost), it becomes very difficult for them to transition back to paying “regular” prices for clothing. 

For brands to compete with SHEIN, they need to be able to drop their prices in order to make their wares appealing again. This is the start of a race to the bottom for the fashion industry, and sadly consumers won’t be the winners at the end of this one. 

Of course, the only reason SHEIN exists (and continues to exist, despite the ever-growing noise about its ethics) is that consumers are buying what it’s selling. This is capitalism 101 – massive demand for cheap clothes meets massive output. In the middle of that Venn diagram, a business like SHEIN finds the fertile ground it needs to rocket to the top.

Is the consumer really winning?

Here are some of the things that a fashion brand might do to competitively lower its prices while maintaining its margins:

  • Cheaper, lower quality fabrics;
  • Less factory hours, which means less attentive construction;
  • Shoddier packaging; and/or
  • Less experienced designers and pattern makers, resulting in ill-fitting clothing and size discrepancy.

As the saying goes: if the price seems too good to be true, that’s because it usually is.

For far too many consumers, the reality is that they are all about sustainability in the streets and SHEIN in the sheets. It doesn’t bode well for the fashion industry elsewhere in the world, especially in South Africa that already has an unemployment crisis.

Is this little piggy coming to market?

We’re not quite sure yet. But with SHEIN rumoured to be filing an IPO in the US soon (although the company denies this), you can bet that we’re watching this space very closely.

In the meantime, you can learn about a variety of retail and fashion stocks in the Magic Markets Premium library. The team has covered the likes of Nike, Levi’s and Crocs (and the best of that bunch may absolutely shock you). At R99/month, you get the entire library of 100 research reports and podcasts – with a new one each week!

And to celebrate reaching the 100-show milestone, we are giving R100 off an annual subscription for the month of October only. You can get access for 12 months for just R899, which works out to around R75 a month. Even SHEIN would struggle to compete with that! Use the coupon MAGIC100EPS on checkout for Magic Markets Premium.

About the author:

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

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

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

Ghost Bites (Alphamin | Famous Brands | Sirius Real Estate | Transpaco)

The Finance Ghost
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Ghost Bites (Alphamin | Famous Brands | Sirius Real Estate | Transpaco)

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

Alphamin’s EBITDA is up quarter-on-quarter (JSE: APH)

There’s a big spike in sustaining capex, though

Alphamin reminds us every quarter that it produces 4% of the world’s mined tin. Thankfully, the company gives us new content each quarter in the form of financial results as well.

In the third quarter (the three months ended September), tin production was down 1% vs. the second quarter and sales were up 1%. The average tin price achieved was 4% higher, so this contributed to 8% growth in EBITDA. Importantly, sustaining capex jumped by 39%. Note, these are all quarter-on-quarter numbers (i.e. sequential) rather than year-on-year.

Looking at the nine-month period, the run-rate for tin production is ahead of the level required to achieve market guidance for the full year.

The Mpama South project is still expected to be “substantially completed” within the budget of $116 million, of which $99 million in total has already been spent. To help with liquidity requirements on this journey, debt facilities have been increased.

Towards the end of the quarter, a bridge on the primary export / import route was damaged. Alternative routes have apparently proven effective in the past, so the company expects the negative liquidity impact from this issue to reverse during the fourth quarter.

Famous Brands is struggling (JSE: FBR)

This is a very different tune to the one that competitor Spur has been singing

Even before this update, I wouldn’t have had any difficulty choosing Spur (JSE: SUR) over Famous Brands. The Wimpy at the shopping centre near my house never seems to have anyone under the age of 75 in it and the Mugg & Bean doesn’t operate during load shedding. In stark contrast, Spur always seems to be buzzing.

Although one has to be very careful of interpreting the “local store” and then applying that to a national footprint, it’s also true that there’s no due diligence quite like seeing the business in action. After all, you could’ve saved yourself a lot of pain in the grocery sector by just asking your friends where they are shopping.

For the six months ended August, Famous Brands expects HEPS to be between 3% higher and 17% lower than the comparable period. This means it is very likely that HEPS has gone backwards. The company blames load shedding, cost pressures and the overall economic environment for the profitability of the group.

Personally, I blame the strategic execution vs. competitors. They need a wake up call, as this chart shows:

Sirius sounds upbeat about performance (JSE: SRE)

The strategy remains to sell mature assets and acquire assets that need some work

Sirius Real Estate is focused on the German and UK markets. The company has given an update on trading performance for the six months ended September.

In Germany, like-for-like rent roll growth was 7.7%, measured on a constant currency basis. Rental growth is ahead of inflation and the company thinks that this will be enough to offset yield expansion and the negative impact that this is having on property valuations in the region.

In the UK, rent roll growth is ahead of Germany, but the company doesn’t say by how much. They have indicated that it has exceeded the £50 million milestone for the first time.

Looking at the balance sheet, the weighted average cost of debt will be 2.1% when a new £58.3 million facility with a cost of 4.25% kicks in from December 2023. The weighted average debt expiry will be 4.2 years. Obviously, any debt being refinanced in this market is going to be at a higher rate than the weighted average.

In terms of recycling of capital, Sirius prefers selling mature assets and buying fixer-uppers that need active asset management to unlock value. In this period, they sold a property in Germany on a 6% net initial yield and acquired two properties in the UK on a net initial yield of 9.6%.

Detailed interim results are expected to be released on Monday 20th November.

Transpaco releases the circular for the share repurchase (JSE: TPC)

This is a mature allocation of capital

In case you would like to read the full circular, you’ll find it at this link.

Long story short, Transpaco wants to repurchase 3.67% of shares in issue from a single seller who is not a related party. Here’s the paragraph from the circular that I really like, explaining why the repurchase makes sense:

I wish there were more companies on the market that had the maturity to return capital to shareholders instead of pursuing dicey acquisitions.

Transpaco is repurchasing the shares at R27.83, which is a 10.1% discount to the 30-day VWAP.

Little Bites:

  • Director dealings:
    • Des de Beer has bought another R527k worth of shares in Lighthouse Properties (JSE: LTE)
    • A director of AVI (SE: AVI) has bought shares worth R37k.
    • A director of Mpact (JSE: MPT) has sold shares worth R15.5k.
  • Gold Fields (JSE: GFI) has announced the appointment of Mike Fraser as CEO with effect from 1 January 2024. He will take over from Martin Preece who has been interim CEO since 1 January 2023. Fraser is currently the CEO of AIM-listed Chaarat Gold Holdings and previously served as COO of the aluminium, nickel, SA manganese and energy coal businesses at South32. His other senior roles have been at BHP.
  • In case you thought the restructure of AngloGold Ashanti (JSE: ANG) and the move of the primary listing to New York wasn’t already expensive enough, the transaction triggered a tax liability of $286 million across South Africa and Australia. Only $46 million of that is in Australia, with the rest boosting our battered local fiscus.
  • Salungano Group (JSE: SLG) has reminded the market that subsidiary Wescoal Mining is in voluntary business rescue, hence the group is trading under a cautionary announcement.

Ghost Bites (Equites | Renergen | Sibanye-Stillwater)

The Finance Ghost
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Ghost Bites (Equites | Renergen | Sibanye-Stillwater)

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

Equites suffers a drop in the interim dividend (JSE: EQU)

The property fund is still on track for the annual distribution guidance

Back in May, Equites Property Fund guided that the distribution per share for the year ending February 2024 would be between 130 and 140 cents per share. The company has confirmed that it remains on track for that guidance.

For the interim period, being the six months to August, the dividend is 65.36 cents per share. This is a 19.9% decrease vs. the comparable period, which shows you what is happening to property funds in this climate. The company also notes the exclusion of income from cross-currency interest rate swaps as a factor.

Interim results will be published next week on 10th October.

Don’t do it this way, Renergen (JSE: REN)

The company is handling a social media storm in the wrong way, in my opinion

There are some very big personalities on local Twitter / X. Sometimes, they spout absolute rubbish. At other times, they ask pertinent questions. Distinguishing between the two isn’t always straightforward.

Renergen has been at the centre of a heated debate on the platform, led by outspoken local investor Albie Cilliers. Leaving aside any personal feelings I may have towards any of the parties involved, the reality is that a market can only work if both positive and negative views are given appropriate airtime. After all, for every buyer there must be a seller (and vice versa).

Now, where there are defamatory or untrue accusations, that’s a different matter. We have laws for that. But where someone is raising genuine investment concerns, they need to be dealt with appropriately. In my view, this excerpt from Renergen’s announcement on SENS isn’t appropriate (or correct):

It’s really very simple. With the share price having lost a quarter of its value in the past month, then the directors have the option to buy more shares (when not in a closed period) if they believe that the price is below fundamental value. That would send the strongest message to the market and would be far better than releasing a SENS announcement complaining about negativity.

Of course, the very best way to deal with the criticism is to deliver on the helium project. That will quickly put the naysayers to bed, at least in terms of the project getting off the ground.

Here’s how significant the drop has been in the past month, with a positive blip on Friday after the announcement was released:

Sibanye-Stillwater approves phase two at Keliber lithium (JSE: SSW)

The capex budget has been revised higher to meet water quality conditions

Sibanye-Stillwater has had a terrible year from a share price perspective, down roughly 42%. Mining is volatile, especially with limited commodity diversification. This is why the company is pushing forward with its strategy for future metals, like lithium.

The environmental permit for phase two of the Keliber lithium project was received in December 2022. Sibanye is querying 6 of the 144 permitting conditions, but this process won’t hold up the development of the project.

With a capital expenditure budget that has increased by €10 million to €230 million, the company has approved the commencement of the second phase of the project, which includes the construction of the concentrator and the development of the open pit mine. The increase is due to the revision of the effluent water treatment facility, as stricter conditions need to be met.

The total project capital for Keliber has been estimated at €656 million, which is well up from €588 million in 2022. Equity funding has been secured, with negotiations for debt funding in process.

Little bites:

  • Director dealings:
    • A director of Motus (JSE: MTH) has bought shares worth R438k.
    • A prescribed officer of ADvTECH (JSE: ADH) has sold shares worth R222k.
    • Des de Beer has bought more shares in Lighthouse Properties (JSE: LTE), this time worth R140k.
  • It seems like Delta Property Fund (JSE: DLT) can’t catch a break at the moment. The fund is selling a property in Potchefstroom and the price was originally agreed at R21 million. After due diligence, it’s dropped by R500k to R20.5 million. Transfer is expected in January 2024. The really important thing is that the buyer still needs to obtain funding, so anything is possible here.
  • At African Rainbow Minerals (JSE: ARI), financial director Michael Arnold is stepping down after 8 years. Hamilton Mkatshana, the CEO of ARM Platinum, is also stepping down from the board. Notably, Brian Kennedy (who used to run Nedbank Capital) is joining the Investment and Technical Committee.
  • Trematon Capital Investments (JSE: TMT) has been trading under a cautionary announcement since July. As a solid reminder that these deals don’t always come to fruition, the cautionary has been withdrawn.
  • Hilariously, the liquidation date for Steinhoff (JSE: SNH) is Friday the 13th of October. Can this really be a coincidence, or do the lawyers just have a sense of humour?
  • The business rescue practitioners at Tongaat Hulett (JSE: TON) hope to publish the amended business rescue plan within the next two to three weeks. The meeting related to the plan will be on 7 November, as approving the plan is urgent.
  • Harmony Gold (JSE: HAR) announced a loss-of-life incident at the Tshepong North mine, in another reminder that mining remains dangerous for employees.
  • After announced the resignations of a few directors all at once, DRA Global (JSE: DRA) has announced an executive appointment to the board. This is an internal promotion.

Ghost Bites (De Beers – Anglo American | Datatec | Fortress | Kibo Energy | Life Healthcare | Newpark)

The Finance Ghost
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Ghost Bites (De Beers – Anglo American | Datatec | Fortress | Kibo Energy | Life Healthcare | Newpark)

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

I stand by my view on natural vs. lab-grown diamonds (JSE: AGL)

De Beers is investing an additional $20 million in natural diamond marketing

As many of you will know, I write a weekly column for the excellent Financial Mail publication. A couple of months ago, I wrote about my views on the diamond industry facing a similar type of disruption to the quartz crisis that hit the Swiss watchmaking industry a few decades ago. This was based on the research I did on Swatch for Magic Markets Premium. The similarities are clear for me. If you’re a Financial Mail subscriber, you can read it here.

The latest update from De Beers (part of Anglo American) has done nothing to change my mind. Diamond sales have been dropping for the past couple of sales cycles. My opinion is that lab-grown diamonds offer an excellent alternative for consumers who are facing numerous pressures. When you only have a certain budget for the ring, wedding and honeymoon, it’s perfectly reasonable to assume that a significant percentage of couples will choose to focus on the latter two. After all, only an absolute expert can tell the difference between lab-grown and naturally mined diamonds. And whether you agree with the logic or not, the lab-grown diamonds are seen as ESG-friendly. This matters to the younger generation, which also happens to be the generation getting married at the moment.

Rough diamond sales are down to $200 million in Cycle 8 of 2023. That’s way off $370 million in Cycle 7 of 2023 and barely 40% of what was achieved in Cycle 8 of 2022 ($508 million). There’s a long story about how they reduced availability in this cycle to help establish equilibrium in supply and demand. Looking through the narrative, the reality is clear to me: demand has dropped.

If you need further convincing, De Beers is investing $20 million in natural diamond marketing during the holiday season.

I’m not suggesting that natural diamonds are dead. Not at all. I’m merely pointing out that this is a luxury good that has been masquerading as an affluent good for far too long. It makes perfect sense to me that lab-grown alternatives should be doing well in this economic climate.

The question to ask isn’t whether lab-grown is going to steal market share, but rather whether De Beers can adapt its business accordingly.

Datatec expects strong growth in HEPS (JSE: DTC)

And before you point out the rand weakness, HEPS is measured in US dollars

Datatec is sounding upbeat, noting strong demand for its solutions and services across the various global markets in which it operates. Interestingly, the group also references ongoing supply chain challenges, something that we aren’t seeing too often anymore.

All divisions have grown in the six months to August 2023, although Logicalis Latin America is still struggling with currency weakness and hyperinflation in Argentina.

The company reports earnings in dollars. This makes it even more impressive that HEPS for the period is up by between 29.8% and 38.3%.

The share price is trading roughly in line with where it was just before the pandemic.

With reference to the daily article on Ghost Mail and how I approach SENS, should I ...

Fortress has a solution for the dual-class structure (JSE: FFA | JSE: FFB)

The trick is to use a portion of the investment in NEPI Rockcastle

If you’ve been following the Fortress story, you’ll know that the company used to be a REIT. It lost that status thanks to a dual-class structure in its shares, which meant it failed the rules around distributions. Previous attempts to solve the issue were unsuccessful, with shareholders voting against them.

There’s now a new proposal on the table, with the intention being to repurchase and cancel all FFB shares in exchange for shares in NEPI Rockcastle. Fortress currently has a 23.9% shareholding in NEPI Rockcastle and the fund is popular with investors at the moment, so this isn’t a bad choice of carrot to try and get the deal across the line.

With that said and done, the FFA shares would then be converted to have the same terms as the FFB shares.

Although the eventual premium to VWAP would vary based on the relative share prices of Fortress and NEPI Rockcastle, the offer to FFB shareholders is roughly a 25% premium to the 90-day VWAP. It’s a 9.9% premium to the 30-day VWAP.

Non-binding letters of support have been received from holders of 40.7% of the FFA shares and 51.9% of the FFB shares.

Kibo Energy accepts more shares in Mast Energy Developments (JSE: KBO)

The nervousness remains around the proposed joint venture at MED

Kibo Energy has accepted MED shares as partial settlement of the total amount owed by MED to Kibo’s wholly-owned subsidiary, Kibo Mining in Cyprus.

This represents £469,000 worth of the loan. The remaining outstanding amount is £762,535. Following this partial settlement, Kibo Energy will hold 56.02% in MED.

The concern is that MED may need more funds to complete the previously announced joint venture, a deal that has suffered delays. There’s a lot to be nervous about here, which is just one of the reasons why Kibo trades at two cents per share.

Life Healthcare finally announces a deal for Alliance Medical Group (JSE: LHC)

These negotiations have been going on for months

After several months of trading under cautionary announcements, Life Healthcare has confirmed that it will sell 100% of Alliance Medical Group to entities advised by iCON Infrastructure LLP. The enterprise value is roughly R21.3 billion and the cash proceeds are around R13.9 billion.

The net assets of the business were almost R14 billion as at the end of March 2023. Profits for the six months to March were R25 million. That profit number seems incredibly low so I’ll wait until the circular comes out to fully understand how the purchase price was calculated.

Life Healthcare needs to settle offshore debt and transaction costs and will keep some of the cash for growth. An amount of R8.4 billion has been earmarked for a special distribution to shareholders. For reference, Life’s market cap is R29 billion.

This has been a reasonable story for Life Healthcare, having acquired 95% of the asset in 2016 based on an enterprise value of £760 million (R16 billion) to £800 million (R16.8 billion). Alliance Medical Group’s revenue has grown by 63% in the past six years, measured in GBP. In the year ended September 2022, it contributed 27.2% of the group’s revenue.

This is a category 1 transaction and a circular will be sent to shareholders.

Newpark: cash up, property valuations down (JSE: NRL)

There’s no liquidity, but we can still learn things from this company

Newpark operates a highly focused REIT. It has only four properties, including the JSE building and 24 Central in Sandton. I have many clear memories of that precinct and a few that are blurry at best, mainly thanks to the banker-friendly bar in 24 Central.

The other properties are somewhat less glamorous, including one in Linbro Business Park and another in Crown Mines.

Glamour doesn’t matter, but profits do. Cash profits (measured as funds from operations per share) increased by 28.9%, driving an increase in the dividend for the six months to August 2023 of 40%. That’s a very healthy outcome.

Headline earnings tells a different story, as this is impacted by a negative fair value movement of R70 million related to the JSE building. HEPS fell by 24.7%. Importantly, the loan-to-value is down slightly to 33.3%, a perfectly acceptable level.

The guidance for full year funds from operations per share is growth of between 13.62% and 25.58%. These are weirdly precise numbers at either end of a range! The full-year dividend is expected to be between 5% and 15% higher, so the big jump in the interim dividend won’t repeat in the full year dividend. This is because of planned capital expenditure.

There is far more liquidity at 24 Central than in Newpark stock, so it’s very unlikely that you can get your hands on this company

Little Bites:

  • Director dealings:
    • There were extensive sales by directors of Truworths (JSE: TRU) on Thursday. The announcement is a little vague, as most (but not all) of the sales are to cover the tax or debts related to vested shares. There were sales to “rebalance the investment portfolios” of the directors but we aren’t sure by how much.
  • Delta Property Fund (JSE: DLT) has announced that Sibongile (Bongi) Masinga has been appointed as CEO of the company for a period of three years. She has had a couple of stints as interim CEO of the company since 2020. The focus is firmly on selling down properties and keeping funders at bay. It’s definitely not an easy task.
  • DRA Global (JSE: DRA) announced several changes to the board all at once. It’s not good seeing three directors resign with immediate effect.

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

Marylou Greig
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0
Who’s doing what this week in the South African M&A space?

Exchange-Listed Companies

Life Healthcare (LHC) has entered into binding agreements with entities advised by iCON Infrastructure for the sale of Alliance Medical Group for a cash consideration of £593 million (R13,88 billion). The deal excludes LHC’s interests in Life Molecular Imaging Limited, Life Molecular Imaging GmbH and Life Molecular Imaging (LMI). The company intends to return the majority of the net proceeds to shareholders by way of a special dividend. Post completion, LHC will be positioned as a diversified and integrated healthcare services provider with strong growth potential in southern Africa through its integrated care model and international growth potential through LMI’s radiopharmaceutical portfolio.

In a bid to simplify the company’s dual share capital structure into a single class of ordinary shares Fortress Real Estate Investments has made an offer to acquire the remaining issued Fortress B shares in exchange for NEPI Rockcastle shares. In terms of the scheme, Fortress will repurchase all FFB shares in issue (with the exception of the FFB shares held as treasury shares, which will be cancelled). FFB shareholders will receive the 0.060207 NEPI Rockcastle shares per FFB share, resulting in 56,683,619 NEPI Rockcastle shares currently held by Fortress being used as consideration. FFA shares in issue will be converted into FFB shares. The Company has received non-binding letters of support for the Scheme from the shareholders holding 40.7% of the FFA shares and 51.9% of the FFB shares. The Scheme will have the effect of removing the current impediment which prohibited the Board from declaring dividends. 

Renewable energy-focused development company Kibo Energy has, as part of its declared strategy to divest from all hydrocarbon and coal-based assets, entered into an agreement to dispose of its coal interest in Botswana. While Kibo will indeed dispose of its remaining 35% stake in Kibo Energy to Shumba Energy for US$375,000, the consideration is payable by means of ordinary shares in BSE-listed Shumba which is itself a coal and energy development company. Loss making Kibo Energy Botswana consists of the Mabasekwa Coal to Power Project.

Telemedia, a subsidiary of Rex Trueform, has entered into an agreement with two parties, The Three Basset Holdings and Saalbach, to acquire a 35% stake in Interactive Television Africa. ITV Africa is an automated sports coverage company providing broadcasts and streaming services of school sports in South Africa. Telemedia will pay R18 million in cash for the stake.

Sirius Real Estate has disposed of a business park in Kassel, Germany for €7,3 million, representing a net initial yield of 6.0%.

Delta Property Fund has announced two disposals of properties in Bloemfontein in keeping with the decision to exit certain regions. The property known as Sediba & Fountain which is situated at the corner of Markgraff and Zastroon streets, is to be sold to Coffee Shop At Tyres for R19,1 million. For a cash consideration of R7 million Delta is to dispose of the property known as the VLU building to Dimatone. The two properties are located adjacent to each other.

Conduit Capital has agreed to sell back its 30% stake in OracleMed Investments to OracleMed Holdings for R9 million. The stake was acquired in June 2021 by subsidiary Constantia Risk and Insurance for R42 million.

The date for the fulfilment of conditions precedent for Finbond’s acquisition of a 49% stake in Trustco Finance Namibia has been extended once again, this time to 1 November 2023.

Surgical Innovations, a wholly owned subsidiary of Ascendis Health which commenced voluntary business rescue proceedings in May 2023, has advised shareholders that it has successfully exited the business rescue process.

Unlisted Companies

Africa-focused mining and investment company Marula Mining plc through its wholly owned subsidiary Marula Lithium Mining South Africa, has entered into an agreement with Opencast Resources (ORL) and Future Gems (FGL). In terms of the agreement, Marula Lithium Mining will secure a 70% interest in FGL from ORL, the holder of the Korridor 21 Prospecting Right in the Northern Cape. The region is known for its high-grade pegmatite deposits. The acquisition will be satisfied by way of an initial consideration of £125,000 in Marula shares along with a cash payment of up to US$50,000 with subsequent share-based payments subject to completion of key milestones.

Pretoria headquartered intellectual property service provider Hahn & Hahn, which operates across the continent, has sold a majority stake to private equity Gulf Capital’s portfolio company CWB Group.

Data solutions providers Edge DataWave (Edge Evolve Group) and Master Data Management have formed a strategic partnership in Edge Master Data. The joint venture aims to empower businesses across industries to make informed decisions, optimise efficiency and accelerate growth. Financial details were undisclosed.

Airports Company South Africa has reconsidered its decision to sell its 20% equity ownership in Aeroporto de Guarulhos Participações (GRUPAR) given the strong recovery of Sao Paulo’s Guarulhos International Airport from the negative impact of COVID-19. GRUPAR is the holder of 51% of Concessionária do Aeroporto Internacional de Guarulhos.

RWS, a UK-based provider of technology-enabled language, content and intellectual property services, has acquired STComms Language Specialists. The Cape Town-based language services provider covers a wide range of industries, working with a large network of skilled linguistic professionals across 26 African countries.

Property Solutions Africa (PSA), a multi-disciplined real estate advisory firm in South Africa, has been acquired by global flexible office specialist, The Instant Group. The acquisition will enable The Instant Group to expand its footprint across the continent.

South African fintech Stitch, which provides an end-to-end payments solution which enables businesses to build, optimise and scale financial products thereby improving the conversion for online payments, has raised US$25 million in a Series A extension round led by Ribbit Capital. Existing backers, PayPal Ventures, the Raba Partnership and CRE Ventures, also participated in the round.

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

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

Vanessa Aitken
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0
Who’s doing what in the African M&A space?

DealMakers AFRICA

Egyptian deep tech company, Intella has raised US$3,4 million in pre-Series A funding to drive their expansion plans in the Saudi market. The decision has been taken to re-locate the firm’s headquarters from Egypt to Saudi Arabia. The funding round was led by HALA Ventures and Wa’ad Ventures, with participation from Sanabil500, INSEAD’s alumni angel network and other investors.

Tom Preston-Werner, co-founder of GitHub, has invested in Egyptian fintech MoneyHash. The funding forms part of an undisclosed seed round. MoneyHash was founded in 2020 and allows companies to build a payment stack that suits their individual needs.

Renew Capital Angels has invested an undisclosed sum in micro insurance platform, Jamii.one, to drive the expansion of financial inclusion across Ethiopia. Jamii.one’s growth comes from its partnership with self-organised Ethiopian community groups called “Iddirs” that bring together about 50 people who make monthly contributions for informal cooperative-style insurance for funerals and other such events. With more than 30% of Ethiopians participating in Iddir groups, Jamii.one provides an app-based solution for data tracking, registration and management.

Hybrid solar solutions company, WATT Renewable Corporation has raised US$13 million in funding from Empower New Energy to enhance its renewable energy portfolio in Nigeria. This will be achieved through the addition of 8MW of installed generating capacity and 14.3MWh of storage capacity through end-to-end services and operation of towers. This is Empower New Energy’s largest investment to date.

PetroNor E&P ASA has reach agreement to acquire New Age (African Global Energy)’s 32% stake in the OML 113 Joint Operation Agreement in Nigeria. PetroNor will pay US$6 million in cash plus a deferred future gas production payment of up to a maximum of $20 million to acquire the OML stake – OML 113 contains the Aje Field.

Mali’s SAMA Money Group has acquired Première Agence de MicroFinance (PAMF) Mali for an undisclosed sum. The fintech announced the deal just weeks after it received approval as an Electronic Money Establishment from the Central Bank of West African States.

The Kenya government this week, rescinded the deal struck at the end of President Uhuru Kenyatta’s administration last year which saw the government acquire the remaining 60% stake in Telkom Kenya from PE investor Helios for Ksh6 billion. It has now been announced that the 60% stake will be acquired by the UAE’s Infrastructure Corporation of Africa. This means that Helios will have to refund the Kenyan Government and sell its stake directly to the UAE firm, thus avoiding the technicalities of the Government having to sell the Telkom stake as a parastatal.

Acasia Ventures has led an undisclosed Pre-Seed funding round in Senegal’s AI-driven FMCG intelligence platform Lengo-AI. Co-led by Ventures Platform, other investors included P1 Ventures, Launch Africa, Voltron Capital and a number of angel investors.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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0
Weekly corporate finance activity by SA exchange-listed companies

Following the results of the scrip dividend election, NEPI Rockcastle will issue 24,995,752 ordinary shares in the company in lieu of an interim dividend, resulting in a capitalisation of the distributable retained profits in the company of R2,6 billion.

Sebata has declared a special cash dividend of 25 cents per ordinary share, payable out of distributable reserves. The company has 114,915,089 ordinary shares in issue.

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

Gemfields has repurchased an additional 1,701,304 ordinary shares at a price for a total consideration of R5,33 million. The repurchased shares will be held as treasury shares.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 26 – 29 September 2023, a further 4,202,494 Prosus shares were repurchased for an aggregate €116,78 million and a further 273,616 Naspers shares for a total consideration of R831,7 million.

Tsogo Sun has repurchased 583,857 shares held by the Gold Reef Share Scheme at a repurchase price of R12.80 for an aggregate R7,47 million. The scheme is being wound down with no further awards being issued. Since the shares are held by a wholly owned subsidiary the repurchase should be cash neutral for the Tsogo Sun Group.

Glencore intends to complete its programme to repurchase the company’s ordinary shares on the open market for an aggregate value of $1,2 billion by February 2024. This week the company repurchased a further 7,360,000 shares for a total consideration of £33,92 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 1,916,492 shares were acquired at an aggregate cost of A$6,54 million.

Shaftesbury Capital and The Foschini Group are the latest in a long list of companies to take a secondary listing on A2X. Shaftesbury listed on 3 October and Foschini will trade on the A2X platform from 10 October 2023.

Two companies issued profit warnings this week: Pick n Pay and Finbond.

One company withdrew a cautionary announcement: Life Healthcare.

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

The future of the mandatory audit firm rotation rule in South Africa

Leonard Bilchitz and Tevin Ramalu
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The future of the mandatory audit firm rotation rule in South Africa

The mandatory audit firm rotation (MAFR) rule was promulgated by the Independent Regulatory Board for Auditors (IRBA) on 5 June 2017, and was to come into effect on 1 April 2023.

The MAFR rule prescribed that an audit firm, including a network firm as defined in the IRBA Code of Professional Conduct for Registered Auditors, may not serve as the appointed auditor of a public interest entity for more than 10 consecutive financial years. After that, the audit firm would only be eligible for reappointment after the expiry of at least five financial years. A public interest entity is either a listed entity or one defined by law as a public interest entity, or any other entity which the law requires to be audited in compliance with the same independence requirements as listed entities.

On 31 May 2023, the Supreme Court of Appeal (SCA) handed down a judgment in East Rand Member District of Accountants v Independent Regulatory Board for Auditors, setting aside the MAFR rule. The SCA did not rule on the substance of the MAFR rule and made no comments on its appropriateness in a South African context, but rather decided the judgment on the basis that the IRBA was acting outside the scope of its powers, in terms of section 4 of the Auditing Profession Act (APA), when promulgating the MAFR rule. Therefore, the MAFR rule was ultra vires and was set aside.

The crisp question posed relates to what the legal status would be of the MAFR rule in the event that the SCA judgment is appealed to the Constitutional Court?

Common Law

It is useful to note the judgment of Municipal Manager OR Tambo District Municipality and Another v Ndabeni [2022] ZACC 3 (Ndabeni), wherein the Constitutional Court reaffirmed that a court order is binding until it is set aside by a competent court, and that this necessitates compliance, regardless of whether the party against whom the order is granted believes it to be a nullity or not.

In the unanimous Ndabeni judgment, penned by Pillay AJ, the Constitutional Court reaffirmed the binding nature of court orders granted by a competent court, irrespective of their validity. The court drew on previous judgments, such as Department of Transport v Tasima (Pty) Ltd [2016] ZACC 39; 2017 (2) SA and Secretary of the Judicial Commission of Inquiry into Allegations of State Capture Corruption and Fraud in the Public Sector including Organs of State v Zuma [2021] ZACC 18, to support its stance. The Constitutional Court emphasised that once a court with jurisdiction has issued an order, it remains in force and must be respected until it is set aside through review or appeal proceedings. The correctness of the decision on its merits does not impact the binding force of the order, which stands until a competent court with jurisdiction overturns it.

In light of the common law above, we note that the MAFR rule will no longer be mandatory unless (and if) the SCA ruling is set aside on appeal by the Constitutional Court.

Future Implications

It is imperative to give due consideration to the MAFR rule in conjunction with the provisions outlined in s92 of the Companies Act No. 71 of 2008, as amended (Companies Act). S92 stipulates that an individual is restricted from holding the position of auditor of a company for a duration exceeding five consecutive financial years. However, this provision only applies to companies that are required by s90 of the Companies Act to have their annual financial statements audited (such as public, state-owned companies, and private, personal liability and non-profit companies meeting specific public interest score thresholds as per the Companies Act), or those private, personal liability and non-profit companies that have voluntarily included the audit requirement in their memoranda of incorporation.

In light of this, the legislature may contemplate the prospect of amending s92 to establish comprehensive regulations encompassing both registered audit firms and individual auditors who operate within the framework of the Companies Act. However, as things stand, the MAFR rule is not mandatory.

Conclusion

The recent ruling by the SCA has raised uncertainties surrounding the legality and future of the MAFR rule in South Africa. As the MAFR rule is currently not mandatory unless the SCA ruling is overturned, stakeholders in the auditing profession and public interest entities should closely monitor further legal developments. In order to address concerns regarding audit quality and independence, potential amendments to the legislation, such as the Companies Act or the Auditing Professions Act, may be required. The legal landscape will continue to evolve, and stakeholders should remain attentive to potential changes that may affect the audit profession in South Africa.

Leonard Bilchitz is an Executive and Tevin Ramalu a Candidate Legal Practitioner | Corporate Commercial | ENSafrica.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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

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