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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

Naspers and Prosus are to unwind the complex cross-holding structure implemented (against public opinion) in 2021 which aimed at reducing the weighting of Naspers on the JSE and to reduce the discount at which the stocks trade to their respective net asset value. The structure, implemented by way of a share swap, saw Prosus issue shares to acquire c.45% of Naspers. However, reducing the discount continued to prove difficult with management launching an open-ended share repurchase programme which proved more successful. There is, however, a limit under the South African Companies Act as to the amount of Naspers shares that can be acquired. The proposed unwind will result in Naspers owing 43% of Prosus N ordinary shares with a voting interest of 72%. This will remove the limitation and enable the repurchase of shares to continue at the Naspers level – the limitation does not apply at the Prosus level.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 624,947 Investec Plc shares at an average price of 432 pence per share (LSE and BATS Europe) and 419,003 Investec Plc shares at an average price of R105.82 per share (JSE).

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

Mantengu Mining has announced its intention to buy-back up to 10 million of its listed ordinary shares through its wholly-owned subsidiary Langpan Mining. The share which was trading at R1.70 at the time of the announcement is, according to the Board, significantly below the intrinsic value of R5.55 the share is worth.

Afrimat has repurchased 2,828,790 shares at a price of R53.03 per share from Afrimat Management Services (AMS). The shares were acquired by AMS in anticipation of the issuance of Afrimat shares for partial settlement of the Glenover acquisition. The shares have been delisted from the JSE.

Despite a difficult year, PPC’s operations in South Africa and Botswana reached an optimal level of gearing allowing for the implementation of a new distribution policy. The board has, as a result, approved a distribution in the form of a share repurchase of up to R200 million.

Sanlam has repurchased 31,305,943 shares at a repurchase price of R59.71 per share for an aggregate R1,8 billion. The company has applied to the JSE for the cancellation and delisting of the treasury shares.

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. This week 412,754 shares were repurchased at an average price per share of R106.22. Since November 21 ,2022, the company has repurchased 11,903,329 shares at a cost of R1,27 billion.

This week Glencore repurchased a further 14,700,000 shares for a total consideration of £64,49 million. The share repurchases form part of the second phase of the company’s existing buy-back programme.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 19-23 June 2023, a further 2,144,444 Prosus shares were repurchased for an aggregate €140,8 million and a further 532,426 Naspers shares for a total consideration of R1,7 billion.

Two companies issued profit warnings this week: PPC and Crookes Brothers.

Four companies issued or withdrew a cautionary notice: Attacq, African Equity Empowerment Investments, Life Healthcare and Chrometco.

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

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

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

DealMakers AFRICA

Italian oil and gas major ENI has signed an agreement with Perenco, a French hydrocarbon producer, to dispose of its participation interests in several permits in the Congo. The US$300 million transaction aligns with ENI’s strategy to diversify its business portfolio and prioritise low-carbon energy resources.

Appian Capital Advisory, the investment advisor to private funds investing in mining and mining-related companies, has acquired an 89.96% interest in Rosh Pinah Zinc mine located in southern Namibia. The stake was acquired from Canadian Trevali Mining. Financial details were undisclosed. The remaining shareholding is owned by Namibian Broad-Based Empowerment groupings and an Employee Empowerment Participation Scheme.

UK-based Galileo Resources has exercised its option to enter a joint venture and be issued with a 51% interest over the Shinganda Copper-Gold Project in Zambia, after incurring direct exploration expenditure costs of US$500,000. The stake in the joint venture was earned from its partner UK mining company, Garbo Resource Solutions.

Huaxin Cement, a Chinese, Hong Kong-listed company, is to acquire the Africa-based business of InterCement in a deal which includes the assets in Mozambique and South Africa. The transaction value is estimated at US$231,6 million based on an enterprise value of $265 million.

Taifa Gas, a Tanzanian liquefied petroleum gas (LPG) company is to join forces with Zambian Delta Marimba to establish Zambia’s first LPG plant. Taifa will invest US$100 million in power generation in Zambia.

Accelerator startup Saudi-based VMS has acquired a minority stake in Cash Cows, its Egyptian counterpart as part of a strategic partnership agreement aimed at bridging the gap between the Saudi and Egyptian start up sectors and entrepreneurial ecosystem. The partnership includes the launch of a joint platform for exchanging ideas, collaboration and mutual learning. Financial details were undisclosed.

French multinational hospitality company Accor has reached an agreement with Mutris, a Moroccan investment company, to sell its 33% stake in Risma, Morocco’s publicly listed hotel operator, at a price of 130 dirhams per share. The company will, in addition, sell its Risma bonds on the market. The transaction will have no impact on current contractual agreements between Accor and Risma which remain unaffected.

ShopZetu, a Kenyan fashion e-commerce startup, has raised US$1 million in pre-seed funding to drive its expansion beyond Kenya and include more product categories on its platform. The round was led by Chui Ventures with participation from Launch Africa, Roselake Ventures and Logos Ventures.

Accra- and London-based health startup Berry Health has raised an undisclosed sum in a pre-seed round from Lightspeed and angel investors.

OH Ecosystems, a Nigerian coco processing company, has received US$12 million in investment from Norfund, the Norwegian Investment Fund for developing countries. The funds have been earmarked to revive FTN Cocoa Processors, a processing company in which OH Ecosystems has a majority stake.

Kubik, an environmental technology company with operations in Kenya and Ethiopia has raised US$3,34 million in a seed investment round from investors which included Plug and Play, Bestseller Foundation, GIIG Africa and Satgana among others. The startup turns hard-to-recycle plastic waste into affordable building materials and intends to use the investment to scale production at its operations in Ethiopia.

The Namibian Business Angel Network has made an undisclosed investment in Moonsnacks, a Namibian youth-owned snack food company. The investment will be used to expand its production capacity to meet increased demand for its flagship product.

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

Does the failure to attach an annexure to your agreement render your agreement void for vagueness?

Daniel Hart and Faheema Rahim
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Does the failure to attach an annexure to your agreement render your agreement void for vagueness?

This article is intended for any company that concludes agreements which refer to annexures which are required to be attached to the agreement. It uncovers the reasoning of the Supreme Court of Appeal in its determination on the validity of an agreement which refers to annexures that are not actually attached to the agreement.

In G Phadziri & Sons (Pty) Ltd v Do Light Transport (Pty) Ltd and Another (765/2021) [2023] ZASCA 16 (20 February 2023), the Supreme Court of Appeal (SCA) held that an agreement that refers to annexures which are not attached to the agreement is still valid and enforceable, despite the missing annexures.

The appellant G Phadziri & Sons (Pty) Ltd (Phadziri) and the first respondent, Do Light Transport (Pty) Ltd (Do Light), are bus companies offering public transport services in Vhembe, Limpopo. Phadziri provided public transport services on specific routes for which it was granted licences by the second respondent, the Limpopo Department of Transport (DoT).

Phadziri subsequently became unable to provide effective and reliable public transport services for, amongst other reasons, its aging bus fleet.

Phadziri, Do Light and the DoT subsequently concluded a tripartite agreement (the Agreement) in terms of which Do Light would act as a subcontractor to Phadziri, and provide public transportation services on certain routes identified as “Vleifontein and Maila to Makhado (Louis Trichardt) in terms of the timetable as attached as annexure 1, or as amended by agreement between the Department and Do Light” (Affected Routes). Annexure 3 of the Agreement was also incorporated by reference, which contained a fare timetable for cash journey tickets to be sold to passengers on the Affected Routes.

The Agreement was implemented for eight years until a dispute arose between the parties, in terms of which Phadziri argued, amongst other things, that annexures 1 and 3 were not attached to the Agreement and that the omission resulted in the Affected Routes not being identifiable, thereby rendering the Agreement void for vagueness.

The SCA, therefore, had to determine whether the omission of the annexures rendered the agreement not capable of implementation. In arriving at its decision, the SCA considered a number of previous judicial decisions, which gave rise to the following principles:

• when interpreting a contract, the court must consider the factual matrix; its purpose; the circumstances leading up to its conclusion; and the knowledge at the time of those who negotiated and produced the contract;

• our law inclines to preserving instead of destroying a contract which the parties seriously entered into and considered capable of implementation; and

• the conduct of the parties may provide clear evidence on how reasonable business persons construed a disputed provision in a contract; however, that this must not be understood as an invitation to harvest evidence of the conduct of the parties on an indiscriminate basis.

Having regard to the aforementioned legal principles, the court held that:

• Phadziri and Do Light were competitors, and Phadziri was at risk of losing its licences due to its inability to deliver effective services. It was, therefore, to Phadziri’s benefit that the Agreement was concluded;

• Phadziri was aware of the timetable and the Affected Routes that the licences applied to, and it was conceivable that Do Light would have known of the scheduled times and the Affected Routes when it was invited by Phadziri to be appointed as a subcontractor;

• the purpose for concluding the Agreement was to provide commercial efficacy to Phadziri, and to avoid the collapse of the public road transportation services on the Affected Routes;

• there is no doubt that the parties seriously entered into the Agreement and considered the Agreement capable of implementation; and

• the evidence of how the parties conducted themselves in implementing the Agreement for eight years without a dispute is relevant to determining how they understood their obligations, despite the missing annexures, and illustrated that the parties had a meeting of minds.

The SCA held that the Agreement was not void as a result of the missing annexures.

It is important to note that, in this case, the missing annexures referred to a timetable for the Affected Routes. The SCA held that these timetables were known to both parties because Phadziri had a timetable which it used in conjunction with its licences at the time that the Agreement was concluded. The SCA held that Phadziri knew of the ‘origin and destination points and significant intermediate locations along the route’, and that its suggestion that the routes were not known because the timetable was not attached to the Agreement was contrived.

This case is distinguishable from agreements which are unrelated to licences and which include references to annexures that contain information material to the agreement between the parties. It is, therefore, important for contracting parties to ensure that any written contracts are drafted clearly, and to address any elements of vagueness in a contract as soon as these become apparent. This is to avoid any allegation from a counterparty that the agreement may be void for vagueness.

Daniel Hart is a Partner and Faheema Rahim an Associate | Fasken

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

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

Approaching The Market With A Fresh Market Strategy, Will Kroger Company Reel In Investors?

Trive South Africa
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Approaching The Market With A Fresh Market Strategy, Will Kroger Company Reel In Investors?


Wall Street’s forecasts for Kroger’s first-quarter profit and same-store sales were surpassed due to consistent demand for basics and lowering supply chain expenses.

Refinitiv IBES statistics show that Kroger’s first quarter net sales climbed by 1.3% yearly to $45.17 billion, although they fell short of analysts’ forecasts of $45.24 billion.

The first quarter performance of Kroger Company (The) (ISIN: US5010441013) was strong due to the application of its “Leading with Fresh and Accelerating with Digital” strategy. As more consumers experience the effects of inflation and economic uncertainty, Kroger has increased its reach to customer homes by delivering fresher items at reasonable prices with tailored rewards.

The “Leading With Fresh” campaign now recognises 1,738 stores, and Kroger accelerated their Fresh Produce Initiative. This led to higher sales without fuel in some locations. By extending Alternative Farming offers to 1,094 merchants, it successfully linked more communities to locally produced fresh goods.

Due to its delivery solutions, which include Kroger Boost and Customer Fulfilment Centres, delivery sales have climbed 30% over the previous year. Kroger also developed a connected TV relationship between Disney and Kroger Precision Marketing in order to increase its digital reach. According to the group, the number of households with digital involvement increased by 13% over the previous year.

Technical

  • The share price has consistently trended lower and now converged with the 100-day moving average after falling 25% from its peak last year. In 2023, a rectangle pattern developed as the share price consolidated, and bears could not push it below the support level set during the consolidation period. At $43.00 and $50.50 per share, respectively, support and resistance were identified.
  • A Doji candle developed during the week of the company’s earnings, indicating market indecision in the wake of the earnings report at the 61.80% Fibonacci Retracement Golden Ratio. Given that positive momentum favours the move higher, the $50.50 per share level may be in play if bulls prevail in the current battle.
  • In contrast, if bears prevail, the share price could decline. Long-term investors may become more interested at the support level of $43.00 per share. If downside volumes start to decline as the share price gets closer to its support level, it could be a sign that the downside momentum is waning and a turnaround is about to happen.

Fundamental

  • Sales for the corporation increased to $45.2 billion in the first quarter from $44.6 billion in the same period last year. When fuel purchases are not included, sales rose 3.5% over the same period the previous year. Due to its efforts to source some products closer to its distribution hubs and reduce supply chain costs, Kroger’s gross margins climbed 21 basis points to 22.3% from a drop a year earlier.
  • The improvement in the gross margin rate was principally brought on by the success of Kroger’s Brands, sourcing benefits, decreased supply chain expenses, and the effects of a terminated contract with Express Scripts. Increased promotional price investments have largely offset this improvement. Additionally, it profited from consumers picking its store-brand products over more pricey national brands, particularly higher-income shoppers looking for less expensive alternatives amid continuous inflation.
  • Given the increased levels of liquidity, Kroger’s net total debt to adjusted EBITDA ratio declined from 1.68 to 1.34 from a year earlier, showing a reasonably healthy balance sheet. There has been a $1,460M decrease in total net debt during the last four quarters. The company’s net total debt to adjusted EBITDA ratio should fall between 2.30 and 2.50 as per its guidance.
  • After taking into consideration the effect of Express Scripts, it is anticipated that sales without fuel will have an underlying growth of 2.5% to 3.5%. Adjusted Free Cash Flow is predicted to rise to$2.5 to $2.7 billion.
  • After discounting for future cash flows, a fair value of $49.00 per share was derived.
  • Over five years, Kroger has outperformed the S&P 500 stock market as a whole. Compared to the S&P500, Kroger saw a return of 98.02%. Despite the stock price’s positive correlation with the index and notable outperformance, the market has generally favoured it.
  • With an operational income per unit of sales of 3.09%, Kroger has the lowest operating income among its main rivals. It still lies within the sector range, nevertheless, and has improved since 2021, whereas the profitability of its rival declined.

Summary

Given the sector’s steady demand for vital goods, the consumer staples market is one that can often survive economic setbacks. After a year of tightening, consumers can see the light at the end of the tunnel as interest rates are about to peak following the Federal Reserve’s pause.

The medium to long-term outlook most likely shows a softer climate that encourages consumer expenditure. As the existing economic restrictive policy loosens, the share price could converge with its $49.00 per share fair value.

Sources: Kroger Company (The), Reuters, Nasdaq, TradingView, Koyfin

Ghost Global: The Power of Omnichannel

The Finance Ghost
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Ghost Global: The Power of Omnichannel

Ghost Global is brought to you in collaboration with Magic Markets Premium. For detailed weekly research into global stocks and a library with over 80 reports, subscribe here for just R99/month.

Click. Pay. Move on.

Consumers love shopping online. This has become a crucial strategy for retailers both globally and in South Africa, effectively turning a traditional shopping experience into a digitally enhanced festival of convenience.

Well, almost. Have you dealt with courier companies before? “Convenience” doesn’t feature for some of them.

Enter the store footprint

This is where omnichannel retail becomes important. Nobody describes omnichannel retail better than the management team at Home Depot ($HD – see our research here) and their comment that there are “thousands of varying paths” where physical and digital assets work in harmony to deliver a great experience to customers.

Or, even more simply, this is the process where you browse online and collect in store. Alternatively, try it out in the store and order online once you’ve made your mind up.

Whatever.

Home Depot doesn’t care which route you take, as long as you buy from them.

Nobody talks about Home Depot as an eCommerce giant, yet the company is the fifth-ranked eCommerce retailer in the US. That’s the overall ranking, not the ranking just in home and building materials.

With a network of over 2,300 stores in North America that can serve as fulfilment centres for orders, it’s little wonder that omnichannel is working out well for Home Depot.

Small stores, big revenues

Back in May, we covered an excellent little company called Lovesac ($LOVE – see our research here). If you’ve ever bought a Fatsak (now called Vetsak) in South Africa, you’ve got the idea. These are premium beanbags and modular couches that are thoroughly modern and extremely comfortable, aimed at a high income consumer market.

The magic in this omnichannel strategy is high trading density – a measure of sales per square metre of trading space. You see, Lovesac has small showrooms that allow customers to at least see and touch a few examples of the products, with all the customisation decisions made using online tools. The showrooms are exactly that: showrooms. This is different to the Home Depot approach of using the retail stores as a glorified warehouse.

In fact, the “big box” approach of a Home Depot means that the retail stores usually are warehouses. They were always built to maximise in-store stockholding and sell bulk goods rather than optimise the customer experience. A showroom is the polar opposite approach to this.

Either approach can work, though a premium strategy with high margins will often carry a premium valuation.

Luxury plays in this space, too

The Magic Markets Premium library has over 80 reports in it, so there are several examples that we can use to make this point. One of them is Farfetch ($FTCH – covered here), an online luxury goods retailer.

You might recognise the name based on a deal that Farfetch concluded with local hero Richemont to take a stake in YOOX NET-A-PORTER, a very strangely named online luxury goods platform. Richemont experimented with this business and didn’t manage to get it right.

It’s not like Farfetch is exactly a gold mine, either. There isn’t much of a moat here and it’s difficult to see a path to real profitability, as is the case for so many online retailers. Farfetch has a particularly confusing business model, as there are some physical stores in the group but not many.

There are at least two lessons from Farfetch: (1) there is demand for luxury goods online and (2) omnichannel is more profitable than pure online retailing, even at this end of the market.

Safe as (ware)houses?

Have you ever wondered what this push into eCommerce and omnichannel means for the property sector?

Even with omnichannel, a shift from retail stores towards warehouse space means that property funds have been experiencing different levels of demand. An omnichannel strategy still requires retail space but the companies can get away with having less space if more sales are taking place online.

Enter Prologis ($PLD – covered here), the world’s largest owner of logistics and warehouse property. Not only is tenant demand strong, but Amazon as the largest tenant is only around 5% of annualised base rent. There are many people knocking on Prologis’ doors for warehouse space, which is good news for pricing power and income growth.

With well over 80 research reports on global stocks available in the library, a subscription to Magic Markets Premium for just R99/month gives you access to an exceptional knowledge base that has been built since we launched in 2021. There is no minimum monthly commitment and you can choose to access the reports in written or podcast format, or both of course – in true omnichannel fashion!

Ghost Bites (Advanced Health | Pick n Pay | Schroder European REIT | Stefanutti Stocks)

The Finance Ghost
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Ghost Bites (Advanced Health | Pick n Pay | Schroder European REIT | Stefanutti Stocks)

Advanced Health shareholders are celebrating (JSE: AVL)

Another small listing is on its way out

When you see a share price move 87.5% higher in a single day, it usually means that a buyout offer has come in. This is the case at Advanced Health, where the controlling family is tired of operating in the listed space.

It’s not as though they didn’t try, either. The company listed back in 2014 and failed to attract sufficient institutional investor interest to justify the listing. This problem is pervasive across JSE-listed small- and even mid-caps.

Because the share price then tends to trade at a significant discount to what it is worth, it also becomes very difficult for a company to raise capital.

Under the proposed scheme of arrangement, shareholders other than the controlling family will be able to receive 80 cents per share if all goes ahead. The controlling family owns 71% of the shares in issue and irrevocable undertakings in favour of the deal have been received by shareholders of 6.6% of the company’s shares.

If you express those irrevocable undertakings as a percentage of the shares eligible to vote on the deal, it comes to 22.9% of the total. There’s still a long way to go to get to the approval percentage required for a scheme.

The share price was 40 cents before the deal announcement, closing at 75 cents as it moved close to the price under the scheme.

BDO has been appointed to act as independent expert in providing a fair and reasonable opinion to the independent board. The recommendation by the independent board will be included in the circular issued to shareholders.

Pick n Pay acquires a meat processing business (JSE: PIK)

This is a rare move further up the value chain for a grocery retailer

Now this is interesting. Really interesting, actually. As part of the Ekuseni strategy at Pick n Pay that is basically an attempt to improve the fortunes of the core Pick n Pay grocery business, the group is acquiring the Tomis group of companies for R340 million.

That’s not the biggest deal around by any means, so this update is more about Pick n Pay’s strategic thinking rather than something that will immediately move the dial.

By owning this large feedlot, abattoir and meat packaging plant near Wellington, Pick n Pay will have more control over its red meat value chain and offer to customers. This could make the group more competitive on price, while ensuring more regular supply. And of course, as Pick n Pay includes a substantial franchise component in the group, there is the opportunity to supply franchisees and pick up a greater share of the economic profit pool.

No disclosure has been made on the profitability of the Tomis business, so we don’t know what multiple has been paid. The criticism I have is that that price is heavily front-loaded, with R323 million payable upfront and R17 million payable after three years. That earn-out (assuming it even comes with any conditions) is barely worth bothering with.

Schroder European REIT releases interim results (JSE: SCD)

Property valuations are still under pressure

Schroder European REIT (JSE: SCD) is an incredibly useful example of why property funds aren’t always great inflation hedges. You see, it doesn’t help much if you earn a dividend on one hand but suffer a devaluation in property prices on the other, unless you’re an extremely long-term holder and all you care about is cash.

The net asset value total return of -4.7% is a direct result of decreases in property valuations because of higher rates in the market, which means the yield on which the properties are values is higher.

So even though underlying earnings were 50% higher, there was an IFRS loss because of downward revaluations.

The group remains in good shape though, with a strong balance sheet and a loan-to-value ratio of 32% gross of cash and 23% net of cash. The average cost of debt is 2.5%.

The company has announced its second interim dividend for the year ending 30 September 2023 of 1.85 euro cents per share. Unfortunately, higher rates are putting pressure and the company will see its quarterly dividend drop by roughly 20% in the next quarter.

Even caring only about cash doesn’t work in this environment.

Stefanutti Stocks on the right side of a settlement (JSE: SSK)

With a market cap of just R235 million, R30 million plus interest is material

They didn’t make much of an effort to highlight this fact, but Stefanutti Stocks (JSE: SSK) has settled with the client regarding the contract mining project termination.

Stefanutti Stocks will receive R20 million by February 2024 and a further R10 million by April 2024, with interest calculated from June 2023.

Although the share price closed 15% higher, that trade took place before the announcement and is more a reflection of the bid-offer spread than the market response to this news.

Little Bites:

  • OUTsurance Group (JSE: OUT) previously held 89.73% in OUTsurance Holdings, with the rest held by management and directors. The listed company is trying to increase its stake through issuing shares to those minority shareholders in OUTsurance Holdings, effectively flipping them to the top. One of the directors followed this process and received R20.2 million worth of listed shares, taking OUTsurance Group’s stake from 89.73% to 89.77%. This is technically a director dealings announcement, but the circumstances are different and so I included it here.
  • Montauk Renewables (JSE: MKR) has announced a renewable natural gas landfill project in Orange County in the US. They already have one project in the region. The targeted commission date is 2026, with expected capital investment of between $85 million and $95 million.
  • Impala Platinum (JSE: IMP) must be running out of patience by now. The compliance certificate from the Takeover Regulation Panel for the Royal Bafokeng Platinum (JSE: RBP) deal is still outstanding, so the longstop date has been extended once more to Friday, 28 July.
  • The business rescue practitioners at Rebosis (JSE: REA | JSE: REB) have extended the deadline for binding offers under the Public Sales Process to 17 July 2023.
  • If by some unlikely outcome you are a shareholder in Deutsche Konsum REIT (JSE: DKR), be aware that a dividend of 12 euro cents per share has been proposed by the board. There is literally never any trade in this stock on the local market.

Transforming Lives: ITHUBA Invests In a Brighter Future for South Africa Through Education

Sponsored Content
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Transforming Lives: ITHUBA Invests In a Brighter Future for South Africa Through Education

Empowering the next generation through bursaries and graduate programmes

ITHUBA evolved from a start-up to a stand-out company in only eight years. Recognised as the Top performing Operator in Africa, ITHUBA stands as a shining example of gaming excellence.

In less than a decade since being awarded the licence as the Operator of the National Lottery in June 2015, ITHUBA has successfully built a brand and achieved in each sphere of its business by enhancing the public’s perception of the National Lottery, improving the UX by launching the LOTTO digital platform to reach a much wider audience than ever before. 

Embracing the actual value of a National Lottery, ITHUBA changes the lives of citizens through winnings and contributions. In South Africa, it raises funds for the National Lotteries Commission by generating revenue. This revenue directly impacts and affects positive changes throughout South Africa.

Cognisant of the value made towards an improved society, Ubuntu is one of the critical values that has driven ITHUBA, and true to form, its commitment to being a community-oriented company is tangible. It has brought the National Lottery brand closer to its communities, solidifying its position as the Operator that goes above. ITHUBA has demonstrated an unwavering commitment to excellence, exceeding expectations and surpassing their assigned responsibilities.

Social responsibility is one of the founding pillars of ITHUBA’s business operations.

One of ITHUBA’S achievements, closest to CEO Charmaine Mabuza’s heart, is the award ITHUBA received for the Top Empowered Company in the Socio-Economic Development category, awarded at the Top Empowerment Awards in 2022. 

Mabuza has said that although each programme is of equal importance, the ITHUBA Scholarship Foundation, aimed at providing tertiary education for matriculants from underprivileged backgrounds, is very close to her heart.

“The ITHUBA Scholarship programme offers students tuition fees, mental health services through ICAS, mentorship and coaching throughout their studies”. 

This programme is the cornerstone of the ITHUBA CSI portfolio, with the longest-standing history and impressive reach. The programme covers tuition and study materials, accommodation, meal and personal care allowances, mentorship, counselling and intervention programmes for its beneficiaries.

This initiative has transformed countless lives and has seen its beneficiaries qualify as Doctors, Lawyers, Engineers, and IT Specialists, to name a few fields.

To date, the ITHUBA Scholarship Foundation has seen over 300 beneficiaries graduate. 

In the past, ITHUBA ran a Graduate Programme, which was a youth employment initiative placing graduates from Marketing, Accounting and ICT sectors in positions across various departments in ITHUBA for a 12-month internship programme.

While only some of these graduates came across from the ITHUBA Scholarship Foundation, every graduate benefitted immeasurably, gaining invaluable experience at Africa’s leading lottery operator. 

Phathiswa Myeni is a proud Graduate of the ITHUBA Scholarship programme – through the foundation, she has been able to pursue her passion by attaining a degree in Finance and has secured a job in Consulting. Phatiswa says that without the help of the foundation, she would have never been able to follow her dreams.

She says, “Most importantly, the Foundation has taught me that through hard work and perseverance through challenging times, I can be what I want to be, as long as I have my head in the right place.”

Driven by their belief that true relief comes through empowerment, ITHUBA’s approach to its education-based CSI initiatives is rooted in sustainability, believing that through education, we uplift and provide long-term solutions for the communities we aim to help. South Africa can only enjoy true transformation if we can all revel in the splendour of opportunity. 

ITHUBA stands for equality through opportunity.  

ITHUBA has spent the last eight years striving to achieve excellence in each business arena, and its social responsibility portfolio is undoubtedly worthy of celebration. 

ITHUBA. Empowering dreams, one story at a time, because every South African deserves a story worth celebrating.

Unlock the Stock: Attacq and Tharisa

The Finance Ghost
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Unlock the Stock: Attacq and Tharisa

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 this twentieth edition of Unlock the Stock, Attacq and Tharisa both returned to the platform to update investors on 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 (Exxaro | Hyprop | Merafe | Murray & Roberts | Naspers + Prosus | Sephaku)

The Finance Ghost
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Ghost Bites (Exxaro | Hyprop | Merafe | Murray & Roberts | Naspers + Prosus | Sephaku)

Exxaro confirms the extent of the challenges this year (JSE: EXX)

A pre-close update shows significant drops in key metrics

Exxaro has released a pre-close update dealing with the six months ending June 2023. This period has seen a vast decline in export coal prices, coming in at roughly $127 per tonne vs. $265 per tonne in the comparable period. At least iron ore fines prices are up from $101 to $117 per dry metric tonne.

Coal production and sales volumes are down by 4% and 7% respectively. Demand from Eskom has been lower (-6%) and there have been logistical constraints at Transnet (exports -6%), so Exxaro is being let down by government on all fronts.

At least capital expenditure is 8% lower in the coal business, after several key projects reached completion last year. With a substantial net cash balance, the Exxaro balance sheet is more than capable of withstanding some short-term pressure.

Hyprop is recovering most of its load shedding costs (JSE: HYP)

The local retail portfolio looks pretty good to me

Hyprop is one of the few property funds that I hold shares in. With a strong tilt towards the local malls that remain relevant in an eCommerce world and especially a load shedding world, I’m not surprised to see decent metrics in the South African portfolio.

For the five months to May, trading density (sales per square metre) increased by 8.59% year-on-year, with footcount up by 3.46%. The difference is quite simply explained by inflation.

Tenant demand is good, with low vacancy rates and rent reversions in the 11 months to May of 10.1% (unfortunately down from 12.8% in the interim period). Load shedding and general SA jitters have an impact on rentals that can be charged.

Still, Hyprop has done a great job of shielding tenants from load shedding and has recovered 86% of the R55.3 million spent on load shedding. The group is rolling out solar PV projects at many of its malls.

In Eastern Europe, trading density is up by 18.74% for the five months and footcount grew by 13.80%. Things really are going well for retail property owners in that part of the world.

The portfolio in Ghana and Nigeria is ok in local currency, but expressing it in dollars tells a different story. To be fair, it’s not like the South African portfolio looks great in dollars either. The major focus is on replacing Game leases in the Ghanaian malls.

Hyprop’s loan-to-value sits at an acceptable 37.2% and there is no shortage of demand from lenders for bond auctions and debt raises.

The share price is down 10.7% this year as market sentiment has turned against the property sector and the impact of higher interest rates is being priced in.

Merafe announces a drop in ferrochrome prices (JSE: MRF)

The share price is now down 20% this year

Each quarter, Merafe announces the European benchmark ferrochrome price. This is forward looking, as the price is settled for the next quarter.

Merafe’s share price fell by a further 3.7% based on the news that the ferrochrome price will drop by 12.2% in the coming quarter vs. the quarter that just ended.

Murray & Roberts a step closer to getting RUC back (JSE: MUR)

It’s all very technical from a legal perspective, but Murray & Roberts is trying its best here

If you’ve been following Murray & Roberts recently, you’ll know that the Australian business is in administration. Clough is the real problem, as RUC Cementation Mining Contractors (or just RUC for short) is a decent business that the group wants to hang onto.

This requires a lot of fancy legal footwork, as well as negotiations with creditors.

If they get it right, then Murray & Roberts will re-establish the full scale of its multinational mining platform.

The art of distraction: a lesson by Naspers / Prosus (JSE: NPN | JSE: PRX)

When releasing terrible results, how do you soften the blow for shareholders?

In news that would be hilariously funny if it wasn’t also so obnoxious, Naspers and Prosus have announced that the cross-holding structure will be unwound. Yes, this is exactly the same structure that asset managers begged the management team not to implement in the first place.

Being an advisor to this group truly is the holy grail of professional services. You get paid twice, basically for crossing the road and then retracing your steps. Of course, the management team dresses this up by saying that the deal will enable the repurchase programme to continue, with the removal of complexity (which they caused against everyone’s advice) as only the secondary reason.

Here’s my favourite paragraph from Prosus, where they act all surprised that everyone hated it:

Moving on to the results, the operating loss for the year ended March 2023 has worsened from -$950 million to -$1,338 million. HEPS dropped from 201 US cents to 46 US cents. A lower contribution from Tencent is part of this.

The eCommerce platform is only targeted to be profitable during FY25. Someone needs to do a return on capital calculation to see how long it will take to recoup the losses and then actually reward shareholders. With total losses in just the last two years of $2.7 billion, I think it’s going to take a while.

Food Delivery is growing revenue, with Prosus acquiring the remaining 33.3% stake in iFood from Just Eat Takeaway in November 2022 for a cool €1.5 billion, plus contingent consideration of €300 million. The group says that “profitability improved meaningfully” but that’s rather disingenuous. They should rather say that losses have reduced, as this segment moved from a trading loss of $724 million to $649 million.

The group deployed “only” another €1 billion this year into various other opportunities, noting a sharp rise in the cost of capital. You see, the smart thing to do is wait for the cost of capital to be higher and then deploy capital when assets are cheap. Anyway.

In Naspers specifically, you have to click through to the annual report to get any information on Takealot. The thing still doesn’t make a profit, with revenue up by just 12% and losses of $22 million. If Takealot couldn’t make a profit in the past couple of years, what’s going to happen if Amazon really enters this market?

So, with all said and done, how is it possible that the share price performance over the past year has been strong?

This has nothing whatsoever to do with the underlying portfolio and everything to do with the decision to sell down the Tencent stake and buy back shares. It’s a very short-term win in my view, as the discount may be reducing but the Tencent asset is probably the only thing in the group truly worth owning.

Sephaku releases full year financials (JSE: SEP)

We now have the details behind the recent earnings guidance

Sephaku Holdings’ full year numbers reflect a tale of two businesses.

At group level, net profit after tax fell from R45 million to R26 million. Normalised HEPS fell from 17.67 cents to 10.53 cents, so that clearly isn’t good.

As we drill down, we find that Metier delivered an increase in EBITDA from R78 million to R98 million. Profit after tax increased from R30 million to R43 million. This means that the problems are in SepCem, the local business, which is in line with the guidance released before these earnings came out. Indeed, profit has swung horribly from net profit of R82 million to a net loss of R4 million.

Little Bites:

  • Director dealings:
    • I don’t have the full background details to this, but R200 million worth of shares in African Rainbow Capital Investments (JSE: AIL) was sold by ARC Fund to Patrice Motsepe’s family investment vehicle at R6.80 per share (above the current market price of R6.40).
    • A senior executive of Nedbank (JSE: NED) has sold shares worth R6.8 million.
    • Des de Beer has bought another R1.08 million worth of shares in Lighthouse (JSE: LTE)
  • Cognition Holdings (JSE: CGN) is going to camp in the Caxton and CTP (JSE: CAT) head office, so the company can sell its head office for R11.875 million. That’s below the net asset value of the property subsidiary, which was R14.5 million as at 30 June 2022.
  • Attacq (JSE: ATT) has renewed the cautionary announcement related to the proposed acquisition of 30% of the Waterfall portfolio by the Government Employees Pension Fund. Final legal agreements have not yet been concluded.
  • Vukile Property Fund’s (JSE: VKE) B-BBEE partner, Encha Properties, has sold just over 3.5 million of the 5.5 – 6.5 million shares that the company intends to dispose of as part of loan arrangements with Investec.
  • The Competition Tribunal has approved the transaction to internalise the Investec Property Fund (JSE: IPF) ManCo without any conditions. Shareholders will now watch significant value be transferred to the management team, which is exactly what they voted in favour of.
  • NEPI Rockcastle (JSE: NRP) continues to cleverly play the green financing game, updating its Green Financing Framework with more stringent eligibility requirements. This strengthens its commitment to sustainability, which is the warm-and-fuzzy way of saying that the company intends to continue tapping into cheaper green finance.
  • If the AngloGold (JSE: ANG) sign-on bonuses for executives are anything to go by, then a career in mining is a very good alternative to European football. There are execs banking awards of over R18 million just for joining the company!
  • Eastern Platinum (JSE: EPS) has retained the services of an investor relations and communications firm based in Canada. There’s a base monthly fee and stock options that vest in 90 days, which I found rather interesting. They carry a term of five years.

PepsiCo: Quenching the Thirst for Stability in the Equity Market

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PepsiCo: Quenching the Thirst for Stability in the Equity Market

Amid the rollercoaster ride of uncertainty in the equity market, is PepsiCo, Inc (NASDAQ: PEP) a refreshing oasis?

Like the effervescence in its legendary cola, PepsiCo has a dividend track record that shines brightly and entices investors looking for resilience in this environment. Management has managed to blend a tantalizing range of products with a dividend growth that never seems to lose its fizz.

PepsiCo’s performance in the first quarter of its 2023 fiscal year spoke volumes.

The company showcased its robustness with earnings per share (EPS) of $1.40 and revenue hitting an impressive $17.84 billion. Notably, revenue increased by 10.2% compared to last year’s quarter, driven by 14.3% organic growth.

This growth provided a strong foundation for the year ahead, prompting management to upgrade their full-year organic revenue growth projection from 6% to an impressive 8%. Furthermore, the EPS growth forecast received a boost, up from 8% to a solid 9%.

These impressive results demonstrate PepsiCo’s ability to navigate challenging market conditions, leveraging its substantial pricing power and strategic positioning within the industry.

Technical

  • The bulls gained support in the first week of June to begin the retracement from the swing low at $179.47, where they have moved towards the 38.2% Fibonacci retracement at $186.03 on the 1D chart.
  • With the momentum currently in the bulls’ favour, a break above the 50-day moving average of $187.08 could indicate further immediate positive momentum, which might encourage the bulls to extend the retracement towards the Fibonacci midpoint at $188.10 and the golden ratio at $190.17. The rise may continue in the direction of the channel resistance at $196.70 if the bulls capitalize on the momentum to break above the $193.12 level. From there, the estimated fair value of $208.08 is in sight, offering a possible upside of 12.5% from the existing levels.
  • The bullish investor could, however, also hold out for more enticing entry positions that might become open if the market rejects the golden ratio. In such a scenario, lower support between $182.61 and $177.30 could be crucial as the market might find support there.

Fundamental

  • PepsiCo finds its place within the consumer staples sector, renowned for its resilience against the ups and downs of the macroeconomic cycle. Among the numerous factors that make PepsiCo an enticing choice for investors during periods of high inflation is its adeptness at transferring increasing input costs to the end consumer. In the most recent quarter, inflationary pressures were especially intense, compelling the company to raise its average prices by 16%.

    Surprisingly, this move only led to a modest 2% decline in organic volume, thanks to PepsiCo’s robust brand presence and its inherent ability to command favourable pricing. Consequently, the company successfully maintained an attractive gross margin of 55.2%, reflecting its impressive capacity to weather inflationary challenges while preserving profitability.
  • However, while the insulation against negative shifts in the economic cycle has its advantages, it also comes with an opportunity cost of potentially missing out on market upturns. This trade-off is evident when comparing the price return of the consumer staples sector, as depicted in the graph below. Over a 10-year period, the consumer staples sector shows a price return of 83.5%, which falls short of the S&P 500’s impressive return of 170.9%. However, it is worth noting that the consumer staples sector generally experiences lower volatility.
  • Both PepsiCo (126.5%) and Coca-Cola (52.9%) significantly underperformed the broader market. However, PepsiCo managed to generate a respectable return that surpasses that of the consumer staples sector. It is essential to consider that the top half of the graph primarily reflects price returns.

    When factoring in total returns, including dividends, PepsiCo emerges as an outperformer. Over the course of ten years, PepsiCo exhibits a total return of 201.8%, surpassing that of the S&P 500. This highlights the significance of PepsiCo’s robust dividend payments, which contribute to the overall returns enjoyed by its shareholders.
  • Illustrated in the graph below, PepsiCo showcases its financial strength through a considerable 2.54% dividend yield and an impressive track record of 51 consecutive annual dividend increases. This translates to a dividend per share (DPS) payout of $1.15, with a payout ratio of 69%.

    In contrast, Coca-Cola operates with a relatively higher payout ratio of 80%, partially influenced by its lower earnings per share (EPS). Coca-Cola’s dividend payout stands at $0.44 per share, accompanied by a dividend yield of 2.18%. These figures highlight PepsiCo’s robust dividend performance when compared to its primary competitor, underscoring its position as a dividend powerhouse.
  • However, certain concerns emerge when evaluating the long-term sustainability of these dividends. The first issue is exemplified in the graph below, shedding light on the company’s relatively modest cash reserves and its limited generation of cash from operations, particularly when compared to its long-term debt obligations. However, this is not an immediate cause for alarm, as PepsiCo maintains a well-structured debt schedule with only $5.95 billion of its long-term debt maturing in 2024, which its available cash can comfortably cover.

    Nonetheless, a more prolonged concern arises regarding the company’s ability to consistently increase its dividends, as it may be required to allocate a portion of its future generated cash towards reducing its debt burden. This raises questions about the company’s capacity to sustainably grow dividends in the long run, which is what makes it an attractive investment opportunity to start with.
  • In addition to its significant debt burden, the company exhibits meagre free cash flow levels, with multiple quarters experiencing negative cash flow over the past five years. As depicted in the graph below, the company’s free cash flows have been inconsistent, lacking steady growth. Recent quarters have seen increased capital expenditures due to investments in supply chain enhancements, manufacturing capacity, and leveraging IT for growth opportunities.

    However, investors would ideally expect this increased spending to translate into a consistent generation of free cash flow, which can be distributed to shareholders. Until that occurs, the company’s appealing dividend payments are primarily funded by its debt position. Although this is not an immediate cause for concern, as mentioned earlier, it is not sustainable in the long term unless the company can achieve consistent free cash flow expansion.

Summary

PepsiCo has solidified its position as a profitable and secure investment option, shielding investors from the inherent volatility of the stock market. While their enticing dividend payouts contribute to impressive overall returns, it is important for investors to monitor the sustainability of these dividends. The company carries a significant debt burden and has limited free cash flows available to support the enticing dividend payments.

However, there is potential for improvement in the future, as PepsiCo is making considerable capital investments in growth initiatives. If these investments lead to a recovery in free cash flows and consistent growth, concerns regarding the debt position may be alleviated. In such a scenario, there is a potential upside of 12.5% if the share price reaches the estimated fair value of $208.

Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, PepsiCo, Inc.

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