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Weekly corporate finance activity by SA exchange-listed companies

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

Quilter plc is to launch an odd-lot offer to shareholders holding fewer than 200 ordinary shares in the company on 28 April 2023 and who will still hold those shares on 10 November this year. This applies to approximately 134,000 (67%) of the company’s shareholders, representing 1.21% of the total number of shares in issue. If all shares eligible to participate are tendered, Quilter will pay out £16,1 million for 17 million shares based on a price of 90.1 pence per share which represents a 5% premium to the market price.

OUTsurance will pay shareholders a special dividend of 8.5 cents per share payable on 9 October 2023.

A further 31,096,000 shares have been issued by Kore Potash following the approval by shareholders of the issue in respect of the conversion of convertible loan notes into equity by its chairman David Hathorn.

Argent Industrial has repurchased a further 325,487 ordinary shares representing 0.58% of the issued share capital of the company for an aggregate R5,11 million. The company is entitled to repurchase a further 10,82 million shares in terms of the general authority granted at the last annual general meeting.

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 9,650,000 shares for a total consideration of £44,13 million.

South32 continued with its programme of repurchasing shares in the open market. This week a further 5,605,784 shares were acquired at an aggregate cost of A$18,68 million.

The JSE has warned Labat Africa that it may face suspension and possible removal of its listing from the bourse if it fails to release its Annual Financial Statements before 30 September 2023.

Three companies issued profit warnings this week: York Timber, Southern Sun and Astral Foods.

Two companies issued or withdrew a cautionary notice: PSV and African Equity Empowerment Investments.

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

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

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

DealMakers AFRICA

Turaco has acquired MicroEnsure Ghana (to be rebranded as Turaco Ghana) from MIC Global. Financial terms were not disclosed. The deal sees the tech-enabled insurance company expand its footprint in Africa and will now operate in four countries – Kenya, Uganda, Nigeria and Ghana.

Incofin’s Rural Impulse Fund has sold its 28% equity stake in Rwanda’s Unguka Bank to LOC Holdings. Financial terms were not disclosed. Incofin first invested in the microbank over a decade ago and has help the company increase its total assets from US$14 million to $29 million.

Kuwait’s Foreign Petroleum Exploration Company (KUFPEC) has acquired a 40% stake in Egypt’s Nile Delta offshore Block 3 from Shell’s BG International. No financial terms were disclosed.

Lupiya, a Zambian neobank, has announced a US$8,25 million Series A funding round. The round was led by Alitheia IDF Fund and included INOKS Capital SA and the German Investment Bank KfW DEG.

Nigerian auto-tech firm Fixit45 has raised US$1,9 million to drive growth in its existing business and expand into Kenya and Uganda. The pre-seed round was led by Launch Africa Ventures with participation from Soumobroto Ganguly, David DeLucia and a number of angel investors.

Ghanian agritech Complete Farmer has raised US$10,4 million in equity and debt in a pre-Series A. The $7 million in equity was raised from The Acumen Resilient Agriculture Fund, Alitheia Capital via its Munthu II Fund, Proparco, Newton Partners and VestedWorld Rising Star Fund. Sahel Capital’s SEFAA Fund, Alpha Mundi Group’s Alpha Jiri Investment Fund and Global Social Impact Investments provided the $3,4 million debt funding.

Automotive technology platform Mecho Autotech has secured a US$2,4 million pre-Series A funding round. The Nigerian company raised the funds from Global Brain Corporation, Ventures Platform and Uncovered Fund.

Côte d’Ivoire SaaS e-commerce platform ANKA has raised a US$5 million pre-Series A extension round of debt and equity led by the IFC with participation from Proparco and the French Public Investment Bank. The $3,4 million equity investment from the IFC marks its first investment into the African creative sector.

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

Business Rescue practitioners beware: publish or prison

Brian Jennings and Sasha Schermers
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Business Rescue practitioners beware: publish or prison

Section 34 of the Insolvency Act, 24 of 1936 (Insolvency Act) is an important creditor protection mechanism ensuring that when a trader transfers a business or any goods or property forming part of the business, creditors will either (if the notices were published) be alerted and have their liquidated liabilities become due or, if the notices were not published, have recourse against the purchaser within a period of six months from the date of transfer.

It is trite that, leaving aside the difficulties of print media’s slow demise, notice of the intended transfer must be published in the Government Gazette, two issues of an English newspaper and two issues of an Afrikaans newspaper circulating in the district in which the business is carried on, within not less than thirty days and not more than sixty days before the date of transfer.

In practice, because this section is not peremptory, and for a variety of commercial reasons notices of the sales of businesses are not always published in terms of s34 of the Insolvency Act. It is obvious that sellers would prefer to avoid their liquidated liabilities becoming due, or due to the time periods involved, it may not be practical to publish.

The rise of the modern business rescue proceedings on the back of the Companies Act, 2008 (Companies Act) has resulted in a conflict with the ancient Insolvency Act.

The trigger for a company to enter into business rescue proceedings is when it is considered ‘financially distressed’, where:

i) it appears to be reasonably unlikely that the company will be able to pay all of its debts as they become due and payable within the immediately ensuing six months; or

ii) it appears to be reasonably likely that the company will become insolvent within the immediately ensuing six months.

One of the tools available to a business rescue practitioner to realise value for creditors (and shareholders, if there is any residue), is to sell the business of the company in business rescue proceedings. If a business rescue practitioner, pursuant to a business rescue plan that has been adopted by the necessary majority of creditors, sells a business of a company, must that practitioner publish a notice under s34 of the Insolvency Act? At first glance, this seems nonsensical. The very body of creditors who approved the sale pursuant to the business rescue plan do not need to be alerted to the fact that the sale is now taking effect. S129(4) of the Companies Act already provides that a company must publish a copy of the notice appointing a business rescue practitioner to any shareholder or creditor of the company, registered trade union representing employees of the company, and to each employee (if such employee is unrepresented), thereby notifying them that the company is undergoing business rescue. In addition, what is the purpose in publishing, and purportedly accelerating one’s liquidated liabilities, when one’s creditors’ claims are regulated pursuant to the rules governing business rescue?

At this stage, unfortunately, delving deeper brings more questions than answers. What is the position if a business rescue practitioner, on behalf of the selling company, does not publish and the sale is completed, but within six months of the sale, the business rescue proceedings are converted into liquidation proceedings? Does the liquidator become entitled to regard such sale as being void pursuant to s34? Would a purchaser find comfort then in the aforesaid “nonsensical” argument?

Another caution is that if the “nonsensical” argument is incorrect, then assuming that the liabilities of the company in business rescue exceeded its assets at the time of the sale, or where the business rescue proceedings were converted to liquidation proceedings within six months of the sale, the business rescue practitioner may have exposed him or herself to the risk of criminal prosecution. This is because s135(3)(b) of the Insolvency Act prescribes that an insolvent person is guilty of an offence and liable to imprisonment for a period not exceeding two years if, prior to the sequestration of his estate:

“at a time when his liabilities exceeded his assets or during the period of six months immediately preceding the sequestration of his estate, he … alienated any business belonging to him, or the goodwill of such business or any goods or property forming part thereof not in the ordinary course of that business, without publishing a notification of his intention so to alienate in the Gazette and in a newspaper, in terms of the provisions of subsection (1) of section thirty-four” (our emphasis).

Obviously, one would need to consider whether, by virtue of the adoption of a business rescue plan which contemplates the disposal of a business, it could then be said that the sale of that entire business becomes “in the ordinary course of that business”. That would be the saving grace to avoid this rigmarole, but we are not aware of any judgment on this point as yet.

Our thoughts, in conclusion, are that business rescue practitioners should be mindful of publishing s34 notices when disposing of a business in the context of a business rescue plan, and ought to do so where the company’s liabilities exceed its assets, so as to avoid the possible commission by the business rescue practitioner of an offence in terms of s135(3)(b) of the Insolvency Act.

Brian Jennings is a Director and Sasha Schermers a Candidate Attorney in the Corporate & Commercial practice | Cliffe Dekker Hofmeyr.

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

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

Unlocking opportunities: exploring the evolving landscape of private equity in Southern Africa

Makole Mupita
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Unlocking opportunities: exploring the evolving landscape of private equity in Southern Africa

Private equity, previously seen as a specialised investment approach, has experienced remarkable growth in recent years, particularly in emerging economies like Southern Africa. The region has become an attractive destination for global investors, leading to the unlocking of new opportunities and a transformative shift in the private equity landscape. While the private equity space has historically been male dominated, lately, the landscape is changing to include women, and there is a noticeable shift towards greater gender diversity and inclusion within the sector.

Southern African countries have become a highly appealing investment destination for private equity funds. The region’s attractiveness stems from a combination of factors, including its diverse range of sectors and favourable investment climate. Additionally, the region’s energy sector presents opportunities for investment in renewable energy projects, as there is a growing demand for sustainable energy solutions. Abundant natural resources, a growing middle class, and improving political stability have fuelled investor interest, making Southern Africa an attractive proposition for private equity funds. Private equity firms are recognising the untapped potential of the region’s markets beyond South Africa. Neighbouring countries offer significant growth prospects, due to factors such as an expanding consumer base, improving infrastructure, and favourable regulatory frameworks. By identifying and partnering with local companies with strong growth prospects, private equity funds are unlocking value and driving expansion in these untapped markets.

Private equity in Southern Africa is not solely focused on financial returns; it also plays a crucial role in addressing development challenges. By investing in sectors such as healthcare, education and renewable energy, private equity firms contribute to the region’s sustainable development goals. This impact investment approach is gaining traction among investors, who see the potential for both financial returns and positive social impact. The Mahlako Energy Fund, part of Mahlako Financial Services, aims to bring transformation to South Africa’s energy sector by promoting black economic participation and socio-economic development. The Fund’s primary focus is investments in gas, green hydrogen, renewable energy and energy services. By investing in these areas, the Mahlako Energy Fund aims to contribute to the transformation of South Africa’s energy sector, ensuring energy security for the country. These investments will help to diversify the energy mix, reduce reliance on fossil fuels, and promote the use of cleaner and more sustainable energy sources. The projects funded through Mahlako ensure energy security for the country, while creating employment and advancing South Africa’s ‘Just Transition’ plan.

Technological advancements and innovation are reshaping the private equity landscape in Southern Africa. The region has witnessed a surge in tech startups and entrepreneurial ventures, particularly in sectors like fintech, e-commerce and agritech. Private equity funds are actively seeking out innovative companies, providing not only capital, but also strategic guidance and operational expertise to fuel their growth. One of the projects under the Fund is the Prieska Power Reserve project, which has the goal of producing competitively priced green hydrogen and ammonia. The project recognises South Africa’s competitive advantage in the renewable energy market, and seeks to leverage it by positioning the country as a significant player in the global green hydrogen and ammonia markets.

Green hydrogen and ammonia are renewable energy carriers that can be used in various industries, such as agriculture, transportation, chemicals, and electrical backup generation. Prieska will also develop black and female industrialists within the green industry, create employment and develop small businesses, with the majority being black-owned. The project is an example of how rich the region is with opportunities for innovation, investment and sustainable development.

The integration of technology and innovation into private equity investments enables companies to scale rapidly and access new markets. Fintech startups are revolutionising financial services, providing innovative solutions for banking, payments and lending. E-commerce platforms are driving digital trade and transforming the retail sector, while agritech companies leverage technology to enhance agricultural productivity and food security. Private equity firms are capitalising on these opportunities, supporting the growth of technology-driven businesses, and positioning themselves at the forefront of industry disruption.

Successful private equity investments in Southern Africa often rely on strong local partnerships and collaborations. Recognising the importance of local knowledge and networks, many private equity firms are teaming up with local players to navigate the complex business environment and identify promising investment opportunities. These partnerships bring together global expertise and local insights, creating a powerful synergy that enhances investment outcomes.

Environmental, Social and Governance (ESG) factors are increasingly influencing private equity investment decisions in Southern Africa. Investors are placing greater emphasis on responsible investing practices, seeking opportunities that align with sustainable development goals and promote good governance, so private equity firms are incorporating ESG considerations into their investment strategies, driving positive change and long-term value creation in the region. At Mahlako, ESG principles are embedded in the investment philosophy of the Fund.

The Fund’s stringent investment decision-making process is followed with an intentional focus on ESG. As a 100% female-owned organisation with 65% of employees at executive level, Mahlako is ahead with transformation and promoting historically disadvantaged individuals through equity and board membership.

The organisation believes that transparency and accountability are essential to building trust with stakeholders, including investors, portfolio companies, and the communities which are impacted by the various investments. The Fund is committed to advancing economic transformation and meaningful economic participation of black people, particularly women and the youth in South Africa. By focusing on creating opportunities and promoting equity, the Fund actively contributes to the empowerment and development of marginalised groups in the country, and demonstrates a comprehensive approach to sustainable and inclusive investment practices.

By investing in companies that prioritise sustainability and social responsibility, private equity firms contribute to a more resilient and equitable future for Southern Africa. This approach not only benefits local communities, but also enhances the long-term performance and reputation of private equity investments.

Makole Mupita is an Executive Director and Fund Principal for Mahlako Financial Services.

This article first appeared in Catalyst, DealMakers’ quarterly private equity publication.

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

Unlock the Stock: Harmony Gold

The Finance Ghost
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Unlock the Stock: Harmony Gold

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 25th edition of Unlock the Stock, we welcomed Harmony Gold for the first time to talk to investors about the recent performance and the way forward.

As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:

Ghost Bites (Bidvest | Hyprop | PPC | Southern Sun)

The Finance Ghost
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Ghost Bites (Bidvest | Hyprop | PPC | Southern Sun)

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

Bidvest swallows the brave pill: an Aussie acquisition (JSE: BVT)

The facilities management operations in Australia will be doubled in size

South African corporates don’t have a fantastic track record in Australia. Bidvest is trying to buck that trend, with shareholders able to take some comfort from the fact that the company already has operations in the country. This is a bolt-on acquisition that doubles the size of the Australian operation.

The target is Consolidated Property Services, a private company established in 1977. The company services more than 145 sites across Victoria, New South Wales and South Australia. Many of the customer relationships span in excess of ten years. With a team of around 3,500 people, this is a big business. Another point that Bidvest highlights is that 80% of the current management team worked their way up from the operations.

I can certainly see the appeal here, particularly in creating a larger overall business in Australia. The deal is small in the group context and this is only a voluntary announcement, so we don’t know what the acquisition price is. Bidvest has done many a deal, so hopefully they haven’t overpaid.

Hyprop scales back its payout ratio (JSE: HYP)

Property funds are trying to keep more equity on the balance sheet

If you look at the high level metrics at Hyprop, they really do look good. Retail vacancies are low and trading densities are significantly higher, up 11.8% in SA and 16.9% in Eastern Europe. Foot count is up across both portfolios.

Net operating income is up 9.6%, a pretty decent outcome but one that does also show the inflationary cost pressures in the system. Distributable income per share is up by a solid 18.3%, so this is usually the moment when investors rub their hands together in anticipation of a juicy dividend.

But alas, the dividend per share is only up by 1.9%. The new dividend policy is to pay an interim dividend based on 90% of the distributable income from the South African portfolio, with a final dividend that takes the annual distribution to 75% of distributable income from the local and Eastern European portfolios.

The payout ratio last year worked out to 85.7%. This year, it’s only 73.9%. Instead of going to shareholders, a chunk of cash will be used to strengthen the balance sheet and fund capex.

There’s a further attempt to retain cash, with a dividend reinvestment alternative (DRIP) with a maximum reinvestment amount of R500 million. Hyprop did this successfully in 2022, retaining R500 million on the balance sheet and using that to help reduce the loan-to-value ratio (36.3% in June 2023). This is usually done at a discount to market price to entice shareholders to choose to reinvest their dividends.

The outlook for FY24 is concerning, despite the strength in the Hyprop portfolio. Distributable income per share is expected to drop by between 10% and 15% due to high interest costs. Again, this demonstrates why they are trying to retain equity to keep the debt as low as practically possible.

The announcement came out after the market closed, so keep an eye on Hyprop in the morning.

PPC’s volumes are still dropping in South Africa (JSE: PPC)

The company needs economic growth and investment in infrastructure

I always find it sad to read that PPC’s volumes continue to come under pressure in South Africa. We are a developing country and supposedly one of the most exciting emerging markets in the world, so where is the infrastructure and private sector investment?

For the five months ended August, PPC’s volumes fell by 6% in South Africa and Botswana Cement. Thankfully, selling price increases of 10% took the revenue performance in this segment into the green. Growth in revenue of 5% was matched by growth in EBITDA of 5%, so margins were stable at 11% as the company focused on profitability in this low-growth segment.

Gross debt in this segment is unchanged since March 2023 but cash has increased, so net debt has dropped from R800 million to R648 million.

The company can’t do much about the economy, but it can do a lot about its own strategic execution and focus on profitability. On those metrics, PPC has performed well. It’s also worth highlighting that the Materials business in South Africa and Botswana is now marginally positive at EBITDA level.

The story gets a lot better when you look at the subsidiaries in the rest of Africa, where infrastructure investment seems to be booming.

In Zimbabwe, cement sales volumes increased 42% and the average selling price (US$ parallel rate) was up by 12%. These are obviously strong numbers, with EBITDA margin skyrocketing from 14% to 27%. That’s vastly higher than 11% in South Africa and Botswana. The cash is even making its way to the mothership, with a $3.5 million dividend received in July 2023 and another dividend expected in November. After a repurchase of shares under a previous indigenisation structure, PPC now holds 90% of PPC Zimbabwe and will receive 99.5% of dividends until notional funding has been repaid.

Rwanda is also a great story for volumes, up 13%. The impact of competition is being felt though, with pricing increases of only 6% and growth in EBITDA of 9%, which is revenue growth. Although EBITDA margin contracted from 32% to 29%, Rwanda has the highest EBITDA margin in the group.

In terms of outlook, the focus in South Africa remains on cash generation and profitability in an environment of low demand. In Zimbabwe and Rwanda, the focus is on growth and market share.

If you would like to find out more about PPC, you can refer to the presentation from the RMB Morgan Stanley Off Piste Conference at this link.

Southern Sun gets a boost from events (JSE: SSU)

But you need to look at adjusted HEPS to see it

Southern Sun released the prepared comments from the AGM and a preliminary trading statement for the six months ending September. You have to read the earnings ranges quite carefully.

Before we get to the earnings, we need to talk about the underlying metrics. Occupancy was 55.3% for the five months to August, up from 44.2% in the comparative period. Importantly, it’s only 190 basis points below the 57.2% achieved in 2019.

The big difference between Southern Sun and the likes of City Lodge is that Southern Sun has also enjoyed pricing power. Average room rate is up 13% year-on-year and 26% compared to 2019.

Events like the Netball World Cup in Cape Town and the BRICS summit in Sandton were a significant boost in this period. It’s not all good news though, as some offerings (like the more basic Sun1) haven’t recovered fully. This is another really useful insight for City Lodge, as Southern Sun also isn’t achieving great pricing in that segment of the market.

In general, my view is that leisure and destination hotels stand to benefit from consumers who learnt a hard lesson from Covid and are now ticking off their bucket lists at a much faster rate. The same simply isn’t true for cheaper, more business-focused hotels. Covid has had the opposite lasting effect, with the use of video calling as an accepted alternative to in-person meetings for all but the most important discussions.

As a final bit of context before we look at HEPS, Southern Sun’s recent repurchases have reduced the numbers of shares in issue by 6.7%. That’s obviously very helpful for HEPS.

Against this backdrop, you may find it very surprising that HEPS is down by between 23% and 36%. The trick is that the comparable period included a R313 million after tax payment from Tsogo Sun for the separation agreement, with the gain recognised in HEPS.

To split this out, the group reports adjusted HEPS from continuing operations. This has jumped from just 1.2 cents in the comparable period to between 14.5 cents and 17.4 cents.

Adjusted HEPS for the six months to September 2019 was just 6.9 cents, so this has been a strong recovery.

Little Bites:

  • Director dealings:
    • Stashed away at the bottom of an announcement dealing with vesting of shares to directors, we also find the news of Des de Beer buying another R2.8 million worth of shares in Resilient REIT (JSE: RES)
    • The company secretary of MTN (JSE: MTN) has sold shares worth R1.2 million.
    • A non-executive director of Richemont (JSE: CFR) has bought shares worth R720k.
    • A director of Libstar (JSE: LBR) has bought shares worth nearly R28k.

Ghost Bites (Aspen | Capital Appreciation | Grand Parade | ISA Holdings | Mustek)

The Finance Ghost
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Ghost Bites (Aspen | Capital Appreciation | Grand Parade | ISA Holdings | Mustek)

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

Aspen lands an important manufacturing contract (JSE: APN)

The company is making progress with filling capacity in Gqeberha

If you’ve been following recent news at Aspen, you’ll know that the company is working on filling the manufacturing capacity at the R6 billion plant in Gqeberha. This is obviously very important to that city’s economy, as the Eastern Cape isn’t exactly seen as an economic powerhouse on a good day.

The latest contract sounds like a big one, with Aspen set to manufacture human insulin for Novo Nordisk. The collaboration aims to supply 1 million patients in 2024, ramping up to 4 million patients by 2026.

I like Aspen’s positioning as a gateway to Africa for global pharmaceutical giants. Not only does it reduce the carbon footprint of transporting drugs (something Aspen points out), but it makes our country less vulnerable to supply disruptions for important medicines. Let’s not forget the job creation angle as well, with Aspen deploying 250 people for this project when it commences in 2024.

Good news indeed!

Capital Appreciation’s business is under pressure (JSE: CTA)

Even the technology industry cannot escape the realities of our economy

Capital Appreciation released a “business update” for the six months to September, which is heavy on narrative and light on financial details. Shareholders will have to wait for results to come out on 4 December before getting all the details. In the meantime, investors must read between the lines in this announcement.

The software division isn’t really a problem, with revenue up high single digits excluding the acquisition of Dariel. With that acquisition included, revenue is up by more than a third. Although this is below management’s expectations and profit has been adversely impacted by revenue below plans, it’s still unlikely to be a bad outcome.

The payments division is a different story. The announcement doesn’t give specific revenue guidance but the narrative isn’t encouraging, noting a reluctance by customers to upgrade their terminals and invest in equipment in current economic conditions. Linked to this, customers are interested in leasing rather than buying terminals, which does at least provide annuity income at the expense of short-term profits. My view is always that when management teams are shy to give detailed guidance, it’s usually because the numbers aren’t great.

As a brief comment on GovChat, Capital Appreciation will limit further funding of that business and attributable losses will be materially lower. The Competition Tribunal recently decided in GovChat’s favour, giving it the right to intervene in the Competition Commission’s prosecution of Meta.

The good news is that the balance sheet remains incredibly strong, with R500 million in cash and no debt.

Grand Parade swings into the green (JSE: GPL)

The share price didn’t give much of a reaction, closing 3% higher

For the year ended June 2023, Grand Parade Investments swung from a headline loss per share into a profit.

Compared to a headline loss per share of 3.2 cents last year, the company has reported HEPS of between 2.24 cents and 2.88 cents.

ISA Holdings expects a juicy jump in earnings (JSE: ISA)

A trading statement sent the share price 9.8% higher in late afternoon trade

ISA Holdings has a market cap of roughly R200 million, so this is small even by small cap standards. The technology company is doing well though, releasing an initial trading statement that the market liked.

For the six months to August, HEPS will be at least 20% higher. With wording like “at least” and the fact that this is an “initial” trading statement, the eventual growth could be a lot higher.

Mustek moves the HEPS dial in the right direction (JSE: MST)

The share price closed 8.9% higher on decent volumes by small cap standards

With a market cap of well under R1 billion, Mustek is one of the more interesting members of the small cap universe on the local market. This inevitably means relatively low valuation multiples, with the share price closing at R15.74 based on HEPS for the year ended June of 375 cents per share. The dividend per share is 77 cents, so that’s a P/E multiple of 4.2x and a dividend yield of 4.9%.

Another way to look at it is return on equity of 15% vs. the net asset value per share of R27.24 and closing share price as mentioned of R15.74. This means the effective return on equity (based on what investors are actually paying per share) is roughly 26%. You calculate this by taking 15% of R27.24 (ROE x NAV per share) and then comparing it to the share price.

Whichever method you choose to use, the conclusion is the same: Mustek doesn’t trade at a demanding valuation. This is why HEPS growth of just 5% is enough to give the share price a boost, as expectations aren’t high.

It’s important to split the operational performance from the effect of the balance sheet. Revenue increased by 14% and EBITDA by 12%. A concern is that cash from operations fell by 35%, so that’s a big disconnect from EBITDA. If you dig into the cash flow statement and supporting notes, you’ll see that an increase in debtors is to blame, so that’s not ideal.

The other important point is that financing costs are much higher than before. In fact, the finance cost in FY23 was higher than FY22 and FY21 combined! This is why EBITDA growth of 12% didn’t translate into exciting HEPS growth.

Still, here’s the benefit of trading at low valuation multiples at a time when technology has enjoyed strong demand:

Little Bites:

  • Director dealings:
    • A director and the company secretary of Omnia Holdings (JSE: OMN) collectively sold shares worth R863k.
    • An independent non-executive director of City Lodge Holdings (JSE: CLH) purchased shares worth R150k.
    • An independent non-executive director of STADIO Holdings (JSE: SDO) purchased shares worth R150k.

Ghost Wrap #46 (Libstar | Gemfields | FirstRand | Metair | Growthpoint)

The Finance Ghost
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Ghost Wrap #46 (Libstar | Gemfields | FirstRand | Metair | Growthpoint)

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 looked at some of the more interesting stories in a busy few days of news.

  • Libstar is a great reminder of why I’m bearish on SA consumer stocks.
  • Gemfields has reminded the market that the risks extend beyond just the rubies.
  • FirstRand isn’t aiming for heroics in this environment, but the share price is demanding more growth.
  • Metair could well be the unluckiest company on the local market.
  • Growthpoint is a perfect example of how tough things are in the property sector right now.

Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

The Finance Ghost
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Ghost Bites (AfroCentric | AngloGold | Fairvest | Gemfields | Mondi | Oceana | Prosus + Naspers | RFG | Zeder)

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

No dividend at AfroCentric (JSE: ACT)

HEPS has fallen sharply

In the year ended June, AfroCentric could only grew revenue by 2%. That’s not going to cut it, with HEPS down by 34%. The dividend of 34 cents a share last year is just a distant memory as no dividend will be declared for the year ended June 2023.

Although once-off restructuring costs were part of the story here, the lack of revenue growth is the real concern. The pharmaceutical cluster normalised after heightened trading during 2022, which explains the year-on-year move. The medical scheme administration business isn’t exactly a rocketship either, but put in a steady performance with a 2.6% increase in revenue.

The strategic focus will be on bedding down the Sanlam relationship after the group took a 60% controlling stake in AfroCentric in May 2023.

AngloGold sells its stake in Gramalote (JSE: AGL)

Bidders were non-existent, so the joint venture partner is buying it

AngloGold is selling its 50% stake in the Gramalote Project for a total consideration of up to $60 million. The buyer is B2 Gold Corp, which already owns the other half. Both parties wanted to sell Gramalote and couldn’t find any buyers willing to make an acceptable offer, so B2 Gold was basically the only buyer in town for this stake.

AngloGold will receive a payment of $20 million at closing date, with the balance dependent on various project and production milestones at the project. The deal unlocks some cash for AngloGold and allows the group to focus on its core assets.

Fairvest delivers a pre-close update (JSE: FTA | JSE: FTB)

Investors have been brought up to speed on the year ending September 2023

Fairvest has a portfolio with a gross lettable area split of 49.2% retail, 25.8% industrial and 25.0% office. That split would’ve looked good before the pandemic. As we all know though, office property hasn’t been a happy story in the aftermath of Covid. The vacancy rate in that portfolio is 11.5% vs. 4.4% in the retail portfolio and just 1.2% in industrial.

It’s not surprising that recent property disposals have been focused on office properties, although a couple of retail and industrial sales have also been in the mix.

The group level result is vacancies of 5.3%, positive rental reversions of 2.3% and a loan-to-value below 34%. The guided distribution per B share is between 40.5 cents and 42.0 cents. The B shares closed the day at R3.28, so that’s a yield of roughly 12.6% based on guidance.

If you would like to read the full presentation, you’ll find it here>>>

Gemfields completes its third best year for emeralds (JSE: GML)

It’s just a pity that the final auction of higher quality emeralds won’t work out

At the latest auction of commercial quality emeralds, Gemfields’ offering contained a higher than usual mix of lower value grades. Recent emerald production at Kagem has been of lower quality and quantity than usual, which is why the company has withdrawn from the higher quality emeralds auction scheduled for November.

This means that emerald auctions are now finished for Kagem for 2023, with total auction revenues of $90 million. That’s the third best auction year ever for Kagem, slightly below $92.3 million in 2021 and way below the bonanza in 2022 of $149 million.

That tough base in 2022 has put the share price under pressure recently, with investors realising how quickly the price/earnings multiple is going to unwind this year.

Mondi finds a way out of Russia (JSE: MNP)

The Syktyvkar asset has found a buyer

Mondi’s share price closed 2.6% higher after the market received the happy news that the overhang related to the Russian operation may soon be a thing of the past. It’s been a struggle to sell the Syktyvkar asset, but there’s now a deal with Sezar Invest LLC to dispose of the business for RUB 80 billion. That works out to roughly R16 billion.

The very good news is that regulatory conditions have been met, so this deal is ready to close provided the buyer can make the various payments. There are six monthly instalments to be paid, with the first due at the end of September 2023. The asset will transfer after four payments and the final two will be secured by a letter of credit.

Mondi plans to distribute the proceeds to shareholders once all instalments have been made.

The Russian buyers are absolute winners here, picking up the asset for a profit before tax multiple of 1.7x. Who says that (war) crimes don’t pay?

Oceana gives the market a peek at its performance (JSE: OCE)

Management hasn’t given any overall commentary though

Usually, a voluntary trading update gives the market a useful summary from the management team about the group level performance. This isn’t the case at Oceana, where it dives straight into the segmental performance.

In canned fish and fishmeal (Africa), Lucky Star grew volumes by 8% in the 11 months ended 27 August 2023. In the last five months though, volumes fell 5% because of base effects. Concerningly, margins are under pressure as pricing increases weren’t enough to offset inflationary increases in energy, tin can and other costs. The good news is that local canning production volumes increased by 15%, so there’s a lot of inventory to support demand going forward. Now the company just needs to see more demand!

South African fishmeal and fish oil saw a 32% increase in average rand selling prices over the period. Sales volumes were 8% lower and production volumes fell 24%.

Overall, the local operations incurred costs attributable to load shedding of R28 million.

Moving on to the US, they have electricity there but they also had fewer fish. Based on the 21-week season, landings were 5% lower than the prior period. Not only are there fewer fish, but the fish also had lower fat content, so fish oil yields have dropped. Strong operating inventory levels helped mitigate this impact, with sales volumes up 49% for fishmeal and 28% for fish oil. With major supply problems in Peru, a demand-supply imbalance caused fishmeal prices to rise 9% in dollars and fish oil prices to jump by 38%. With the rand being weaker and the Hurricane Ida insurance proceeds having been received, there’s a good outcome here for Oceana.

In the wild caught seafood division, horse mackerel sales volumes were slightly lower for the 11-month period and hake sales volumes fell by 38% due to a reduction in catch rates and days at sea. The impact of high fuel prices won’t help here either. As a mitigating factor, the weak rand supported export pricing.

Looking at the balance sheet, Oceana took the proceeds of R370 million after tax from the sale of the cold storage business and put them towards settling term debt in South Africa of R550 million. Term debt in the US was successfully refinanced.

Capital expenditure jumped from R154 million to R380 million, with investment in vessels and production facilities after fishing rights were renewed for 15 years. R50 million of a committed R115 million has been spent on the canned meat facility in the St Helena Bay region.

Detailed results are due on 27 November.

A new chapter begins for Prosus and Naspers (JSE: PRX | JSE: NPN)

Bob the Empire Builder is on his way out

With the capitalisation issue to undo the ridiculous cross-holding now complete, Prosus no longer holds any Naspers N ordinary shares. With that deal completed, the share buyback programme has now resumed.

That’s not the biggest news that the company released on Monday. No, that honour definitely goes to the “mutual agreement” that will see CEO Bob van Dijk step down as CEO. He will remain as consultant to the group until September 2024, although it’s hard to imagine why based on his track record.

Having been CEO of Naspers since 2014 and of Prosus since it listed in 2019, Bob earned an absolutely eyewatering amount of money while presiding over perhaps the most convoluted corporate structure in South African history.

His successor on an interim basis is Ervin Tu, the Chief Investment Officer at Naspers. Tu is an ex-Goldman Sachs and Softbank dealmaker and is based in San Francisco, so you can be sure that he loves a good revenue multiple when buying businesses.

Will it simply be more of the same for the company? Time will tell.

Volumes under pressure at RFG Holdings (JSE: RFG)

This is example number 593 of consumers cutting back

For the 11 months to the end of August, RFG grew revenue by 10%. Price inflation was 13.5%, so volumes were down. There were also forex movements and mix changes (as well as the acquisition of Today), so the group helps us out by confirming that volumes actually fell by a substantial 7.7%. The good news is that the first half of the year was a decline of 8%, so the second half has improved to a decrease in volumes of 6%.

Canned fruit and vegetables are under particular pressure based on consumer demand. The pie category is doing well thanks to the Today business. Overall, regional revenue is up 11% for the period with huge inflation of 16.4% and volumes down 6%.

In the international segment, revenue grew 6.7% but volumes fell 12.9% as the world normalised after the Greek peach crop failure in 2021. Operational pressures at the Cape Town port are a serious concern, with shipping lines bypassing the port in some cases due to waiting times.

And of course, against this backdrop of lower volumes, there is still load shedding to contend with.

Results for the year ending September will be released on 22 November.

Zeder sells most of Capspan to Agrarius (JSE: ZED)

The pome farming unit isn’t part of the deal

Zeder has been talking about a value unlock for as long as I can remember. The disposal of the 92.98% stake in Capespan is part of that strategy, even though Zeder is hanging onto the pome farming unit and will put in place a deal with Capespan for marketing and distribution of the related crops.

The minority shareholders in Capespan are also selling, so the buyer is getting 100% of Capespan. Speaking of the buyer, you’ve likely never heard of Agrarius Sustainability Engineered, a JSE-listed special purpose investment vehicle with a R10 billion Shariah-compliant note program. Managed by 27four Investment Managers, this is a good example of how the JSE offers various different listing structures.

Zeder’s interest in Capespan was valued at R1.046 billion as at February 2023. The disposal value is only R511 million but Zeder is quick to point out that this is in line with the previously reported value excluding the pome unit that is being retained. Zeder plans to distribute the proceeds to shareholders once the cash is received, with an effective date for the disposal expected to be in January 2024.

Little Bites:

  • Director dealings:
    • Three directors of property fund MAS (JSE: MSP) collectively bought shares worth R3.66 million.
    • The CEO of African Rainbow Minerals (JSE: ARM) bought shares worth R3.1 million.
    • The spouse of a co-founder of Mr Price Group (JSE: MRP) bought shares in the company worth R924k.
    • Brimstone (JSE: BRT) co-founder Fred Robertson bought N ordinary shares in the company worth around R112k.
  • Quilter (JSE: QLT) is making an odd-lot offer. It’s an unusual one, as the threshold for the offer is a holding of 200 shares rather than 100 shares. The company is offering a 5% premium to the market price to be calculated based on the 5-day VWAP until 20 October, but don’t get too excited. There’s another unusual twist in the tale, with the offer only being eligible to shareholders who held fewer than 200 shares on 28 April 2023 and who will still hold those shares on 10 November 2023. Based on how I read this offer, opportunistic plays to buy up 199 shares and lock in some beer money won’t work.
  • The mandatory offer by African Phoenix and concert parties to shareholders in enX Group (JSE: ENX) at a price of R6.41 per share was unlikely to be a showstopper when the current share price is R8.10. Indeed, only holders of 0.27% of the issued shares were happy to accept that price, taking the offerors to a collective holding of 49.07% in the company. It’s a very thinly traded stock, which must be why some people were happy to take the liquidity opportunity and move on.

The Slow Simunye: Are the Benchmarks Finally Becoming One?

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The Slow Simunye: Are the Benchmarks Finally Becoming One?

By Nico Katzke, Head of Portfolio Solutions at Satrix*

This short article describes the coming index harmonisation for the FTSE/JSE SWIX (Shareholder Weighted Index) and ALSI (All Share Index) methodologies in March 2024. We will discuss the what, the why and the when – while stressing that having a harmonised benchmark index matters for the integrity of our asset management industry.

The What …

Harmonising the SWIX and ALSI methodologies to have a single representative benchmark index is not a new topic. In fact, over the past few years there’s been much talk about the need for it, with the JSE initiating multiple public discourses on how to make this a reality. In the past, the differences between the SWIX and ALSI methodologies have been significant, making harmonisation a potentially disruptive exercise.

Following the natural alignment between the indices in the past few years, the time is now right for harmonisation to occur, given that there are only a few, somewhat arbitrary, remaining differences between the SWIX and ALSI indices.

Note that for the remainder, we will refer only to the SWIX and not the Capped SWIX as these are virtually equivalent currently following Naspers’ reduced index weight.

The Why …

While both the SWIX and ALSI index methodologies consider exactly the same constituents, the free floats for some companies differ. Notably, SA companies that moved their primary listings offshore before October 2011 (called grandfathered companies) are included at their full global float for the ALSI weight calculation1. The SWIX was introduced in 2004 to offer an alternative benchmark that considers only the locally available float on STRATE, thereby down-weighting the grandfathered companies. But corporate actions in recent quarters have meant that most of the float differences, notably for CFR (Richemont), BHG (BHP Group), ANH (AB InBev), OML (Old Mutual), HAR (Harmony Gold) and GFI (Gold Fields) to name a few, have converged.

The process of index harmonisation is thus less disruptive today than it would have been in the past. Consider, for example, the companies that had different SWIX and ALSI floats from just a year ago compared to the most recent rebalance in June 2023 (shaded floats in the June 2023 chart mean they are currently aligned):

Source: Satrix. Data: FTSE/JSE – 30 June 2022
Source: Satrix. Data: FTSE/JSE – 30 June 2023

1 Index weights are determined by multiplying shares in issue (SSI) with price and the ALSI or SWIX float factor.

From this, the only meaningful differences currently remaining between the two methodologies are for AGL (Anglo American), INP (Investec Plc) and MNP (Mondi), (with the underweights funding the few remaining grandfathered over-weights):

Source: Satrix. Data: FTSE/JSE – 31 August 2023

The When …

At the March 2024 rebalance, the JSE intends doing away with the ALSI methodology to align the benchmark indices to the SWIX methodology (using companies’ available local float as reflected on STRATE). The new indices will be called All-Share indices, which means all the current SWIX alternatives fall away and the ALSI effectively becomes the SWIX.

Importance

Having a single domestic equity market index is important for several reasons.

  • First, having multiple benchmark indices creates confusion for investors looking to compare the performance of their managers to an investable alternative. Having a single index will make broad performance comparisons simpler, with more transparency in terms of the value added by active differentiation. Ideally, a benchmark choice should not be a strategic decision.
  • Second, various managers have begun to benchmark their funds to peer averages. Given that the past two decades have seen the majority of active funds underperform both the ALSI and SWIX index alternatives, a comparison to active manager peers overstates aggregate performance relative to an investable index alternative. By the end of 2022 more than 20% of assets managed actively were done using the industry median as a stated benchmark (Morningstar). Having a single benchmark index should make peer-relative comparisons harder to motivate, as well as making it easier to know what a relevant and investable market performance would have been.

Conclusion

The performance differences between the SWIX and the ALSI indices have been significant in recent years. We’ve shown in the past that the choice between which index to track is a key strategic decision, with the realised tracking error of the SWIX being as high as the median active manager’s, relative to the ALSI.

Up to the end of June 2023, the one-year return difference between the ALSI and the SWIX was more than 7%, with the difference almost entirely explained by the ALSI’s comparative overweight to one company, Richemont. This meant that active managers with the SWIX as a benchmark would have performed significantly better on a relative basis simply because of one company’s return – an unfortunate function of our index methodology differences.

As the indices have begun to converge following corporate actions in recent years, index harmonisation is now finally achievable with limited disruption. From March 2024, we will finally have a single representative benchmark index for our local equity market. The benefits of this transparency and simplicity cannot be overstated.

*Satrix, a division of Sanlam Investment Management

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Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision. Satrix Managers is a registered Manager in terms of the Collective Investment Schemes Control Act, 2002.

While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSPs, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

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