Saturday, April 26, 2025
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Ghost Bites (Adcorp | AEEI | Calgro | Cashbuild | Insimbi | Octodec | Raubex | Renergen | Schroder European Real Estate)

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


Adcorp reports a sharp jump in HEPS (JSE: ADR)

Despite a tough period, earnings are up

For the six months ended August, Adcorp expects group HEPS to be between 175% and 195% higher and HEPS from continuing operations to be between 25% and 45% higher. The difference is allaboutXpert Australia, which made large losses in the comparable period and which is now disclosed as a discontinued operation. In other words, the growth of 25% to 45% represents the performance in the rest of the business.

You would never say that earnings were up if you read the announcement, as the narrative is incredibly bearish. The company focuses on how tough things have been in South African in particular, with decelerating growth in Australia as another concern. They talk about “significant pressure on gross margins” in this result, so they clearly did a great job of managing costs.

Detailed results are due on 30 October.


AEEI looks set to delist (JSE: AEE)

I really don’t think anyone will miss it

African Equity Empowerment Investments (AEEI) is a Sekunjalo-linked company that sits neatly in my basket of things I would never invest in. It looks like the company is on its way out anyway, with an offer to all shareholders other than Sekunjalo Investment Holdings to repurchase their shares for R1.15 per share. The share price was trading at 90 cents before this announcement, so that’s a nice profit for any recent shareholders.

The reason for the delisting is that AEEI is far too small to justify being listed, particularly after the unbundling of the stake in AYO Technology Solutions and the proposed sale of the 30% stake in BTSA for R290 million.

Sekunjalo currently holds 70.6% of the shares and isn’t eligible to vote on the deal. Holders of 47.27% of the remaining shares have given irrevocable undertakings to accept the offer. Holders of 75% of the shares not held by Sekunjalo need to approve the deal for it to go through.

AEEI has sufficient cash in its trust account for this offer, which is worth just under R166 million.


The market didn’t like something in the Calgro numbers (JSE: CGR)

And I’m genuinely not sure what it is!

Calgro released results for the six months to August, in which HEPS grew from 57 cents to 78.88 cents per share. Despite this, the share price fell by 7.25% to close at R4.35. If you annualise the interim performance, we are talking about a Price/Earnings multiple below 2.8x!

Aside from revenue growth of 13.5% and a consistent gross margin, a major boost to HEPS was the level of share buybacks in this period, with 22.6 million shares repurchased at an average price of R2.63 per share. In fact, the group is happy to keep debt on its balance sheet and rather use the cash for buybacks, as the share price is so far below the net asset value (NAV) per share of R11.99.

Return on equity simply isn’t high enough, so trading at a discount to NAV is to be expected. But even in that context, the discount looks high.

If you would like to engage directly with the management team, register for the Unlock the Stock event this Thursday at midday. Attendance is free! Get your name on the list here>>>


Cashbuild’s revenue is flat year-on-year (JSE: CSB)

This means that profits in the first quarter probably dropped

For the first quarter of the 2024 financial year, Cashbuild’s revenue was literally flat year-on-year. New stores contributed growth of 2% and the rest of the footprint was down 2%, so net growth was exactly zero. This is despite selling inflation of 4.3% for the period.

If we dig a little deeper, we find Cashbuild South Africa with net growth of 2% and P&L Hardware as the real headache (as usual) with revenue down 9%.

The share price is down around 22.5% this year.


Insimbi’s cash generated from operations has collapsed (JSE: ISB)

Despite this, there’s still a dividend

Insimbi is involved in sourcing, processing, beneficiating and recycling metals. The group has released results for the six months to August and they aren’t going in the right direction, with HEPS down by 6% thanks to revenue being down 4%. The HEPS decrease would’ve been worse, were it not for share buybacks during the period.

The really big move is in cash generated from operations, which fell by a whopping 95%. One of the factors is the ban on exporting recycled metals, forcing the group to supply to South African customers who demand payment terms. The company hasn’t been successful in collecting debtors on time, with R140 million received from debtors in the days after the cut-off of this period. Although the money has now been received, this is a concern for the business overall. To add to the balance sheet jitters, the group has needed to import more material than before, with payments terms that aren’t as favourable as those received from local suppliers.

Perhaps because debtors were collected a few days after the end of this period, the group has declared a dividend of 2.5 cents per share. This is 17% lower year-on-year, so the payout ratio has decreased in line with general economic concerns.


Octodec enters into leases with a related party (JSE: OCT)

The Wapnick family sits on both sides of the deal

Listed property fund Octodec has renewed several leases with City Property Administration, a company of which Jeffrey Wapnick and Sharon Wapnick are directors. The Wapnick family is considered to be a material shareholder of both companies.

Clearly, this is a related party transaction. The monthly rental amount is R943k and an independent expert is required to opine on whether the rental (and the lease in general) looks fair. BDO Corporate Finance has been appointed accordingly.


Raubex gives the market a positive surprise (JSE: RBX)

HEPS growth is strong, despite an expectation of a softer performance this year

When Raubex released results for the year ended February 2023, the company stressed to the market that the performance was attributable to non-repeating benefits like the Beitbridge Border Post Project (which was completed) and a full year contribution from Bauba Resources. There were other elements that weren’t once-off impacts, like the performance in Western Australia.

Despite the worries about whether strong results could continue, the company has grown HEPS by between 15% and 20% for the six months ended August 2023. Full results are due on 13 November.

The share price closed 4.9% higher but remains around 7.6% down for the year, stuck in a range:


Renergen finds some support in the market (JSE: REN)

The share price closed 11.2% higher after the company finally gave a proper response over SENS

At last, Renergen issued a decent response to the extensive criticism on social media. Unlike the previous statement, this one went out over SENS. Also unlike the previous statement, it treated the concerns raised in the market as being worthy of response, particularly those by Albie Cilliers.

I won’t go through all the points here. The response deals with the leaks that have impacted production, the Linde container on site, the current production capacity, the use of paid market research and the comments made by previous owners of the asset about its viability. The announcement also deals with Trillian’s involvement when the special purpose acquisition company was listed as the entity that would eventually become Renergen. There is also commentary on the changes in shareholders of the company and the related reporting obligations.

I suggest that you read the entire thing so that you can make an informed decision about the company. You’ll find it here>>>

Based on the commentary online, the main concern relates to selling of shares by insiders. The other issue relates to the lack of direct public engagement with Albie Cilliers, with many calling for a Twitter Space (probably called an X Space now?) to settle the issues on a public forum with direct Q&A.

Perhaps that will still happen!


Schroder European Real Estate’s valuations are still dropping (JSE: SCD)

Yields continue to put European property valuations under pressure

Schroder European Real Estate has released a quarterly update on the valuation of the property portfolio. In the three months ended September, the entire portfolio moved in the wrong direction – down 1.9% on a like-for-like basis.

The office assets fell 0.9%, with rental growth in Germany providing a glimmer of hope. Industrial assets fell 2.6%, with yields putting valuations under pressure particularly in France. The retail portfolio in Germany fell by 3.6%, once again because of yield pressure.

The loan-to-value ratio has moved from 31% to 33% gross of cash, or from 23% to 24% net of cash.


Little Bites:

  • Director dealings:
    • A2 Investment Partners, related to two directors at York Timber (JSE: YRK), bought CFDs in the company with exposure of nearly R92 million.
    • The CEO of Truworths (JSE: TRU) sold shares worth R28 million to settle the tax and loan repayable by him in relation to a share incentive scheme. I usually exclude these types of sales from director dealings, but I’m including this one due to the quantum and the possibility that you may have heard about a large sale without realising it was related to share awards.
    • The CEO of Capitec (JSE: CPI) exercised the right to acquire shares worth roughly R11.3 million at the current share price. The shares were acquired on a highly discounted basis, at strike prices ranging from R705.93 to R1,175.01 (vs. the current price of R1,762)
    • A prescribed officer of Absa (JSE: ABG) has sold shares worth R8.9 million.
    • A prescribed officer of Standard Bank (JSE: SBK) sold shares worth almost R1.9 million.
    • Following the release of results, the CEO of Calgro (JSE: CGR) bought shares worth R640k.
    • Despite CEO Leon Goosen stepping down from Bell Equipment (JSE: BEL) at the end of the year, he’s purchased shares worth nearly R198k.
  • Hyprop (JSE: HYP) has released the circular related to the scrip dividend alternative, with the company hoping to effectively retail R500 million worth of equity through shareholders electing to receive shares rather than the cash dividend. The price for the reinvestment will only be released on 24 October, so I doubt shareholders will make any decisions before that announcement comes out.
  • Ellies Holdings (JSE: ELI), now languishing at 6 cents a share, has renewed its cautionary announcement. The market eagerly awaits the distribution of the circular for the Bundu Power acquisition.
  • Brikor (JSE: BIK) announced a delay to the release of the circular dealing with the offer by Nikkel Trading. An extension has been granted by the JSE until 8 November.
  • Sasfin (JSE: SFN) and aReit Prop (JSE: APO) are officially both in the naughty corner with the JSE for not releasing results on time.

Structured products: capture opportunities while managing long-term and short-term risks

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Structured products can play a foundational role in managing the long-term and short-term risks while still capturing opportunities in the market.

It is widely accepted that a well-diversified portfolio of equities, bonds and other assets is the best way to preserve and grow wealth over the longer term. Over the long term, equities have been proven to be a particularly good way to deliver inflation-beating returns, thanks to their ability to tap into the key growth themes over time.

While this approach generally works well over time, we all know that in the short term, markets can be subject to extreme fluctuations. Buy into the market at the top of the cycle and you risk losing a big portion of your initial capital in the event of a major drawdown. Buy at what you think is the bottom of the market and you sometimes end up waiting a long time for your view to be realised.

These questions are pertinent at the moment. There are exciting longer-term secular trends under way that are likely to define the expected outcome over the next few years. At the same time however, there are many short-term/cyclical dynamics at play that could disrupt this exciting outlook.

How can a financial adviser tap into these longer-term growth themes while at the same time help clients to navigate the potentially severe volatility of markets over the short term? Before answering these questions, let’s summarise the long and shorter-term themes investors are dealing with at the moment.

The longer-term trends include the following:

  • Artificial intelligence (AI), in particular generative AI and other advances in technology. We have already seen the AI theme supporting the tech sector this year. The latest buzzword is the “Magnificent Seven” (Alphabet, Amazon, Apple, Meta, Microsoft, Nvidia and Tesla), which together have a larger market cap than the stock markets of the UK, Japan, France and China combined.
  • Demographics and shifts in global wealth. Led by China, India and other Asian economies, many people have been lifted out of poverty in recent decades. While this process will continue in the coming years, it will also be complicated by the phenomenon of ageing and shrinking populations in Europe and the Far East, and China in particular. At the same time, countries in South Asia, the Middle East and Sub-Saharan Africa will continue to grow their populations. These shifts will have a number of implications for growth, investment and innovation in the coming decades.
  • Climate change, the environment, and the energy transition. Communities around the world will have to deal with the impact of climate change, while also having to make large investments in mitigating against it and moving away from fossil fuels. What will this mean for demand for commodities and new technologies and what will the costs be?

Over the shorter term, we see the following issues in play:

  • A potential peak in global interest rates, most notably in the US. While the US has guided for a peak in rates later this year, it recently told markets that it expects rates to come down more slowly next year. This has serious implications for bond yields, which in turn has implications for technology shares, which are geared towards changes in bond yields. It also has implications for indebted governments, businesses, and households, all of whom will want some relief from the costs of servicing their debt.
  • A sluggish recovery in China. The rebound expected after the lifting of Covid-19 restrictions earlier this year has not yet materialised. Business and consumer confidence remains low, while there are concerns about the health of the highly indebted property sector. It remains unclear how much the Chinese government will intervene to support a recovery.
  • A tighter oil market as a result of major producers Saudi Arabia and Russia committing to reduce production this year. This has seen benchmark oil prices rise by about 30% between mid-June and late September.

Equity investors will continue to try to tap into these key long-term trends to create value for investors. However, as we highlight above, short, and medium-term effects can have a major impact on the value of investments. Market drawdowns can set back your ambitious investment plans and it can take years to recover the value that is lost. For example, it took over 17 years for the Nasdaq to recover to the level it was at before the tech crash of 2000. While a few lucky investors would have been able to call the bottom for the Nasdaq after the crash, many others would have bought at close to the top and seen a significant destruction of their capital.

It’s here where a financial adviser can access some of the investment technology that’s available out there to manage risk and to participate in some of the long-term themes – notably through structured products.

Structured products are typically designed with exactly these requirements in mind. Investors will get exposure to an underlying asset or index, while also enjoying a degree of capital protection over the life of the product.

The upside is often geared – where investors get a multiple of the growth in the index, up to a certain level – while many structured products provide 100% protection of the initial capital.

Each product will have its own features, but, given the broad parameters above, they can be a powerful tool in any financial planning armoury. Whether as means of investing in the market, without having to worry about the minutiae of stock selection, or as a tactical tool to be used as part of a balanced portfolio to mitigate risk, structured products have a key role to play in building a robust portfolio in exciting, but volatile, markets.

An example of a Structured Product offering is Optimal Investment Growth Basket Limited (“Optimal”). Investec Corporate and Institution Banking, a division of Investec Bank Limited is the South African promoter of Optimal.  The investment offers 100% capital protection in US dollars (USD) at maturity (subject to credit risk), and it provides 150% geared exposure to world equity markets up to a maximum return of 60% over the term of approximately 5 years (equivalent to a maximum of 9.8% p.a. in USD).

Learn more here or listen to Episode 22 of Ghost Stories in which Japie Lubbe of Investec Structured Products spoke to The Finance Ghost about this opportunity:

Applications close 24 November 2023.

Disclaimer: https://www.investec.com/en_za/legal/structured-products-disclaimer.html

Ghost Bites (African Bank and Sasfin | Deneb | Renergen)

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


African Bank acquires major businesses from Sasfin (JSE: SFN)

The African Bank story is becoming increasingly interesting – but why are they paying so much?

If you cast your mind back nearly a decade, you’ll remember the failure of African Bank. For the sake of stability in the local financial services ecosystem, the regulator stepped in and so did the other banks. It’s taken a number of years to get to this point, but African Bank is firmly on a growth path and is making acquisitions. Hopefully, we will see it return to the listed market once more!

The acquisition of Grindrod Bank was recently concluded, giving African Bank a presence in the business banking industry. To further that ambition, the company will now acquire the Capital Equipment Finance and Commercial Property Finance businesses from Sasfin. This is a substantial transaction, worth around R3.26 billion.

The employees involved in these businesses will also be transferred, so African Bank is scaling its operations here rather than just buying some loan books.

Considering that Sasfin generates a poor return on equity and trades at a discounted valuation as a result, it’s a good deal for Sasfin shareholders that the price for the books is at a premium to the net asset value. The Capital Equipment Finance book includes goodwill of R100 million in the price. The Commercial Property Finance business includes an “agterskot” related to profits.

And to sweeten the deal even further for Sasfin shareholders, the vast majority of the purchase price is payable immediately.

After this deal, Sasfin will be focused on its Wealth, Rental Finance and Banking business.

I’m not sure what African Bank’s plans are for these businesses, but they will need to achieve far better profitability than Sasfin could manage. In Capital Equipment Finance, the net assets were valued at R2.29 billion at 31 December 2022 and the profits for the six months ended December 2022 were just R35 million. In Commercial Property Finance, despite shares and claims worth R787 million at the end of December 2022, the loss after tax was R1 million.

This is a Category 1 transaction that requires shareholder approval. The 40% leap in the Sasfin share price on Friday tells you what the market thought of this deal, so I’m quite sure it will go through.

As for African Bank, I fear they have overpaid.

As a final comment, Sasfin’s results for the year ended June 2023 have been delayed further, as the audit still hasn’t been concluded. Results are expected by the end of this month. One wonders what the delay has been.


Deneb offloads a couple of properties (JSE: DNB)

The proceeds will be used to reduce debt

Deneb has agreed to sell two properties in KZN for R65 million. Deneb’s market cap is under R1 billion, so that’s a decent unlock of cash. The proceeds will be used to settle debt.

In the last audited financial statements of the company, the properties were valued at R65.6 million. The profit after tax attributable to the properties was R3.7 million. I will never understand why people buy (or hold) properties on a yield this low, but perhaps the buyer has strategic reasons for wanting the properties.

This is a Category 2 deal, so Deneb shareholders won’t be asked for their opinion on it. If they were, I’m quite sure I know what it would be: get these low-yielding assets off of the balance sheet!


Renergen responds to Albie Cilliers – but not over SENS (JSE: REN)

The share price has tanked 47% in the last month

Things seem to be going from bad to worse for Renergen. Albie Cilliers is well known on Twitter for being like a dog with a bone. In this case, Renergen seems to be a particularly delicious bone covered in delicious marinade, with many questions being asked about the company.

In an ill-advised move, Renergen’s initial response was to release an announcement on SENS that tried to play the man rather than the ball. The market didn’t like that. The company finally made a more significant statement responding to some of the concerns that have been raised, yet for some reason it wasn’t released over SENS. Again, this is weird.

At this stage, the statement only deals with comments made around whether Tetra4 (the local subsidiary) has a lawful and valid production right, as well as the links made to state capture by Albie pointing out that Trillian Capital et al were involved in the original listing.

In summary:

  • Tetra4’s production right is based on the extraction of natural gas, the process of which is impossible without extracting the helium as well. The company believes that this principle has been supported by a South African Supreme Court of Appeal judgement. I must say, it’s not ideal that this sounds like an argument based on a technicality rather than a piece of paper that says expressly says “helium” on it.
  • The advisors who were subsequently found to be involved in State Capture were only involved in the early stages of the special purpose acquisition company (SPAC) that would later become Renergen as we know it today. Renergen has expressly denied any involvement or link to State Capture. This doesn’t surprise me at all, as I must be honest that the attempt to draw a link here sounded tenuous at best. A dodgy advisor doesn’t only do dodgy work and hindsight is always perfect.

A lot of noise has been created around Renergen and the huge problem for the company is that there is much capital still to be raised, so the share price needs to stay at elevated levels for the strategy to work out as planned.

I think we will still see many arguments flying up and down on this topic.

The full text of the statement can be found at this link.


Little Bites:

  • Director dealings:
    • Here’s a very big one: Dr Christo Wiese has sold shares worth R938 million in Shoprite (JSE: SHP)! That’s not a great signal about the valuation. It also raises questions about the plans for that capital.
    • And another big one: associates of Johan van Zyl have sold shares in Sanlam (JSE: SLM) worth R68.5 million.
    • Predictably, Des de Beer has bought another R4 million worth of shares in Lighthouse Properties (JSE: LTE)
    • An associate of the CFO of Mpact (JSE: MPT) sold shares worth R410k and a director of the group’s major operating subsidiary sold shares worth R617k.
    • A non-executive director of Discovery (JSE: DSY) has sold shares worth R348k.
    • The company secretary of AfroCentric (JSE: ACT) has disposed of shares worth R32k.
  • The Foschini Group (JSE: TFG) announced that CFO Bongiwe Ntuli has resigned to pursue other interests. I remain very bearish on this story and the extent of the debt at TFG at this stage in the cycle. On an interim basis, Anthony Thunstrom will be both the CEO and CFO of the company. That’s another red flag – is there nobody in the finance team capable of filling the role on an interim basis? Where is the succession planning?

Ghost Bites (CMH | Karooooo | Kore Potash)

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


The new car market is finally cracking (JSE: CMH)

This had to happen eventually

I’ve been shaking my head a few times in the past couple of years, not least of all at the state of the new car market in South Africa. With runaway inflation and new car prices that will make your eyes bleed while reading them, I couldn’t understand how so many South Africans can afford a new car.

Sooner or later, this little bubble needed to pop. I don’t think it’s popped yet, but signs of stress are there.

In the six months ended August, Combined Motor Holdings (CMH) reported a drop in HEPS of 12.9%. The dividend is 13.1% lower. We need to dig deeper to understand what is going on, but that certainly sets the scene.

Predictably, motor retail is where the real pressure sits. Global manufacturers are suddenly flooded with stock as supply chains played catch-up at the same time that demand fell away. This pressure flows down into the dealer network, with a requirement to push volumes. This can only mean one thing: great deals on new cars, which directly hits margin.

There isn’t exactly much margin to start with. In the comparable period, operating margin was 3.5%. Although revenue is up 7.2%, operating profit is down 25%. This means that operating margin is now just 2.45%. Ouch.

What isn’t helping is a weaker used car market, as well as the impact of lower mileage on service costs. Aside from hybrid working arrangements, a much higher fuel cost also incentivises less driving, with a direct impact on workshop revenue.

As a final point on the motor retail business, this operating profit number is before finance costs. With much higher interest rates, those costs have ballooned from R39.7 million to R72.2 million. Profit before tax has thus more than halved, dropping from R157.8 million to R77 million.

The car hire business has a much better story to tell, with profits up 12%. Revenue increased by 21% though, so you can immediately see that there is margin pressure, not least of all in terms of the cost of holding the cars. Interestingly, car hire is now making much higher profits than motor rental, with profit before tax of R137.3 million in this period.

To show you just how different the margins are, car hire is more profitable than motor retail in absolute terms, despite having revenue of R447 million vs. a whopping R6.1 billion in motor retail!

The financial services segment also helped offset some of the pain, growing profit from R30.5 million to R34 million.

The prospects section of the announcement doesn’t do much to inspire confidence, with no obvious improvements to operating conditions going forward. The company believes that manufacturers will take at least 6 months to balance inventory levels, so the pressure to push volumes isn’t going away.

Severe discounting isn’t good for the rental business either, as retired vehicle values (i.e. when they are sold at the end of their life as rentals) are under pressure. Encouraging signs for the upcoming summer tourist season are useful, but the entire business is clearly facing pressure at this point in the cycle.


Karooooo has remembered what it should be focusing on (JSE: KRO)

And guess what? The core business is doing well!

Karooooo (the owner of Cartrack) has released results for the second quarter. At its core, this business is all about selling subscriptions for fleet management, which means recurring income that should grow by double digits for a long time to come.

But for a while, I was worried that the company had lost its way.

After all, why on earth would you sell the market a growth story about global fleet management and then invest in building a local used car chain called Carzuka? Thankfully, they are taking the bazooka to Carzuka and getting out. It was a silly idea, but I’ll give them credit for giving up before destroying too much value. This is why investing in a founder-led company can be safer than one with professional managers who might be willing to roll the dice with Other People’s Money for far longer.

With Cartrack subscribers up 15% and total revenue up 17% on a constant currency basis (or 21% in ZAR), things are looking up for the business. Importantly, cash generated from operations grew by 26%. Although the revenue is recurring in nature and good for cash flow, the challenge is that the cost of devices fitted to vehicles can be a real drag on cash flow. It’s a bit like cellphone companies, which must buy the handsets up-front and recoup the cost over the period of a contract.

Group earnings per share grew by 14%.

To give some context to the core business vs. the rest, Cartrack reported adjusted EBITDA of R417 million for this quarter and Carzuka lost R12 million. Karooooo Logistics (which includes acquired group Picup) reported adjusted EBITDA of R8.1 million.

If you ever wondered what a range bound share price looks like, wonder no more:


Kore Potash’s quarterly report doesn’t have new news (JSE: KP2)

But if you want to get up to speed on the company, this is the way to do it

Kore Potash has released its quarterly report for the three months ended September. If you know nothing about the company, it’s a really good summary of the key focus areas. If you’ve been following the story, there doesn’t seem to be anything new.

Long story short, the company is fully focused on the Engineering, Procurement and Construction (EPC) contract for the construction of Kola. SEPCO Electric Power Corporation is the counterparty. SEPCO’s parent company, PowerChina, is required to provide typical guarantees for a contract of this nature.

In working towards this, PowerChina has subcontracted five technical groups for additional design and engineering work, as they need to be very sure about what they are committing to. This will cost over $10 million, with Kore Potash’s contribution capped at $5 million. An initial payment of $1 million has been made and the rest is contingent on further fund raises by the company and SEPCO delivering an EPC contract.

Moving on from the operations to the balance sheet, the Summit Consortium signed a memorandum of understanding all the way back in April 2021 to provide a debt and royalty financing proposal to Kore Potash. The commitment remains, with the company expecting to provide a financing proposal for the full construction cost within six weeks of EPC terms being finalised.

To add to all these moving parts, the company seems to enjoy the support of the Minister of Mines in the Republic of Congo – at least for now. That relationship hasn’t always been smooth sailing, so investors are always keeping an eye on this.

The company has $1.1 million in cash as at the end of September, which shows just how important the recent capital raise of $0.8 million was.


Little Bites:

  • Director dealings:
    • A director of ADvTECH (JSE: ADH) has sold shares worth R3m.
    • Des de Beer has bought shares in Lighthouse Properties (JSE: LTE) worth R1.2m.
  • PSG Financial Services (JSE: KST) has announced the appointment of Edward Gibbens as CEO of PSG Distribution. He has 30 years of experience at Santam and will join from April 2024 to replace out the outgoing CEO of the division who is retiring.
  • Discovery (JSE: DSY) also has some executive leadership changes to announce, with Dr Ronald Whelan taking over as CEO of Discovery Health (he is the current deputy CEO) and Nonkululeko Pitje appointed as CEO of Discovery Corporate & Employee Benefits, a new business unit that puts group risk, umbrella funds, HealthyCompany and whatever the “Strategic Client Solutions Hub” is into a single unit.
  • Anglo American (JSE: AGL) has appointed Matt Walker as CEO of the Marketing business, which is the primary interface with industrial customers. He replaces Peter Whitcutt who is stepping down after 33 years of service.

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

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Exchange-Listed Companies

MiX Telematics and US-based Powerfleet have announced their intention to combine their businesses. MiX shareholders will be offered 0.12762 new Powerfleet shares for every 1 MiX share held. Following implementation of the deal, Mix shares will be delisted from the JSE and the MiX American Depository Shares will be delisted from the NYSE. Powerfleet will take a secondary inward listing on the JSE, retaining its primary listing on Nasdaq.

Following the September announcement that Nikkel Trading 392 has made a mandatory offer to Brikor shareholders to acquire their shares at 17 cents per share, the company announced this week that Nikkel had acquired additional shares in Brikor, taking its effective shareholding from 64.11% to 68.01%.

The Competition Tribunal has prohibited Sasol’s proposed sale of its sodium cyanide business to Czech Republic’s Draslovka. The deal was originally announced in July 2021. In November of 2021 the Competition Commission prohibited the merger on grounds that, amongst others, it would likely result in a substantial prevention or lessening of competition due to post-merger price increases which would be detrimental to customers ie gold mining firms. A number of mining firms had been granted leave to participate in the Tribunal proceedings following their applications for intervention.

Futuregrowth Asset Management (Old Mutual) and Galloprovincialis have invested in logistics software platform Tripplo. The US$1,8m equity investment closes out the firm’s seed funding extension round.

Unlisted Companies

Private equity firm Harith General Partners has agreed to acquire a 46% stake in Mergence Investment Managers. Shandura, a wholly-women owned firm, will also acquire a 5% stake as part of the deal. Financial terms were not disclosed.

Adenia Partners has completed a majority investment in Enfin Energy Finance, a rooftop solar financing company for commercial and industrial clients. This is its first investment from the Adenia V fund. Financial terms of the investment were not disclosed.

Textile manufacturing group Ivili Group has secured a US$5m investment from gender focused investment fund Alitheia IDF. The Ivili Group is comprised of Ivili Loboya, a wool and cashmere processing facility in Butterworth in the Eastern Cape and Ivilitex, a garment manufacturing factory in Cape Town.

AI-driven customer service solutions startup, Cue, has raised US$500,000. The company did not disclose who the investors were but stated that the funding will be used to accelerate their product offering following rapid growth in the UK over the last year.

Ecentric Payments Solutions has acquired fellow fintech operator, Thumbzup. Financial terms were not disclosed. The Thumbzup IP, devices and technology will be fully integrated into Ecentric operations.

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

Weekly corporate finance activity by SA exchange-listed companies

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Steinhoff International (in liquidation) shares will officially be delisted from the JSE on Monday 16 October 2023. The company has a primary listing on the Frankfurt Stock Exchange and a secondary listing on the JSE.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 2 – 6 October 2023, a further 4,088,088 Prosus shares were repurchased for an aggregate €109,8 million and a further 291,933 Naspers shares for a total consideration of R882,96 million.

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.

Gemfields has repurchased an additional 2,940,722 ordinary shares. The repurchased shares will be held as treasury shares.

South32 continued with its programme of repurchasing shares in the open market. This week a further 552,037 shares were acquired at an aggregate cost of A$1,9 million.

One company issued a profit warning this week: Famous Brands

Three companies issued or withdrew a cautionary notice: Tongaat Hulett, Trematon Capital Investments and Salungano Group

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

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

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Mediterrania Capital IV Fund , the International Finance Corporation, and FMO are investing €57m in Morocco’s Cash Plus. The equity investment will enable Cash Plus to expand its fintech-driven branch network within Morocco as well as enhance its product offering, with a focus on developing its M-Wallet application. Mediterrania Capital IV Fund is investing €30m, IFC is providing €10m and FMO is supplying the remaining €17m.

ARM-Harith Infrastructure Fund is investing US$18,7m into Elektron Power Infracom (EPI). The financing is made up of equity, shareholder loans and loan notes. EPI is a Mauritius incorporated decentralised energy platform dedicated to the delivery of hybrid energy solutions across West Africa, with existing assets in Nigeria.

Tlou Energy, listed on the Australian Securities Exchange, the UK’s AIM and the Botswana Stock Exchange, has raised A$678,977 through the placing of 19,399,332 new shares with Australian and UK investors. The funds will be used to developing the Lesedi project in Botswana.

Egyptian insurtech Amenli has raised US$1m in equity funding from Alter Global and Digital Venture Partners. This is Alter Global’s second investment in Egypt. The funding will allow the startup to introduce new products for existing and new customers.

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

OFAC risks in Mergers and Acquisitions

Overview of OFAC aims and processes

As the war in Ukraine rages on, the Office of Foreign Asset Control (OFAC) of the United States (US) has imposed increasing sanctions on global individuals and entities. In a bid to avoid the increasingly aggressive enforcement activity of OFAC and the Bureau of Industry and Security (BIS), Russian and Belarussian entities have utilised intermediaries and various company structures to evade sanctions. This has led to further designations of entities across Europe, Africa and Asia.

Provided the increasingly wide net of sanctioned intermediaries, mergers and acquisitions (M&A) transactions require careful consideration by both seller and purchaser. This article considers the OFAC guidance and enforcement actions in the M&A context and outlines a South African (SA) perspective to mitigate OFAC risks.

Impact of OFAC listings

OFAC is mandated to enforce sanctions in order to protect US foreign policy and national security goals. It does so by identifying entities which may be engaging in activities subject to sanctions, based on US intelligence. Following an investigation into an entity’s activities, and necessary reviews by other government departments, OFAC publishes an entity’s details on the Specially Designated Nationals and Blocked Persons (SDN) List.

The consequences of being added to the SDN List (a Listed Entity) are significant, since a US person or entity cannot transact with a Listed Entity. If any goods are possessed by a Listed Entity in US territories, those goods must be blocked and reported to OFAC. As a result, OFAC listings have all US accounts and properties of Listed Entities blocked, along with most financial institutions, which block Listed Entities from accessing any US dollar (USD) denominated accounts or their accounts entirely, whether or not in the US. Further, USD transactions either by or for the benefit of Listed Entities are likely to be blocked by any bank, whether the bank is situated in the US or internationally.

Framework for OFAC Compliance Commitments (Framework)

In the regulation of M&A transactions, OFAC has published a framework in which it strongly suggests a risk-based approach to ensure sanction compliance throughout any M&A process. The framework encourages the engagement of a due diligence process to ensure that sanction-related issues are identified, escalated to the relevant authorities, and addressed before the closing of any transaction. Following closing, the framework also suggests additional post-closing risk assessments. These additional risk assessment processes need to be included in the due diligence process.

South African perspective

While the OFAC machine continues to churn on, it is important to understand that not all is doom and gloom. The fundamental point to understand is that an OFAC listing of a South African entity or individual has no impact or force under South African law. The entering into M&A transactions by South African entities with foreign entities that are listed on OFAC is not itself illegal under South African law.

Given that non-US persons or entities are free to transact with OFAC-listed entities, the risks can be mitigated in various ways to ensure that a transaction reaches completion.

Risk Mitigation in the M&A Process

It is important for the purchaser to conduct thorough due diligence, which includes an OFAC risk assessment analysis of a target company (the Target). The purchaser should also be well informed of the business of the Target and the regions where the Target conducts its operations and trade, as OFAC has imposed sanctions on various countries, government agencies and companies. A further measure to mitigate OFAC risks is to perform a deep dive into the existing ownership of the Target, as well as screening the Target’s shareholders and directors against the OFAC database. Provided that the Listed Entity will not be able to hold USD-denominated accounts, transactions will need to be in South African Rands or an alternative currency.

A prudent approach to contractual representations would include specific warranties and indemnities to negate the effect of potentially acquiring an OFAC-listed company. While this may not completely mitigate OFAC risks, it does signify that the purchaser has made an effort to conduct the appropriate due diligence and act in good faith.

As an additional measure, the parties may agree that the proceeds from the M&A transaction involving a Listed Entity can be ring-fenced and placed in escrow pending the Listed Entity’s removal from the SDN List. A further way to mitigate the risk is to request the US Department of Treasury to grant a specific license to proceed with the distribution of proceeds from the M&A transaction with a Listed Entity.

Conclusion

While an OFAC listing does pose a challenge to an M&A transaction, there are many ways to safeguard and mitigate the risks that are associated with it. However, due to the regulations and complexity of OFAC, removal from the SDN List and certain transactions with Listed Entities can be complex. This article does not purport to exhaustively address these issues. A very limited number of predominantly Washington-based attorneys, acting under general approval by the US Treasury, are best placed to assist clients on OFAC.

Brandon Irsigler is a Partner, Noushaad Omarjee a Senior Associate and Davin Olen a Legal Professional Assistant | Dentons South Africa.

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

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

Navigating growth: assessing the potential of private equity investments in Southern African markets

Private equity is alive and well in Southern Africa. Activity in the private equity industry has grown sturdily over the past two decades, but not without challenges and risks in specific jurisdictions and sectors.

There have recently been trends to drive growth in the Southern African region which include, among others, portfolio diversification, legislative reform and environmental, social and governance (ESG) targets, and despite the challenges and numerous crises over the last couple of years, the region has proven resilient in most markets.

There is a heightened awareness of portfolio diversification, and local limited partnerships are looking to further understand private equity as an asset class as the industry grows. Among others across South Africa’s private equity market, one of the notable trends is acquiring and subsequently delisting struggling companies from the Johannesburg Stock Exchange (JSE). There have been a number of delistings from the JSE in the past 18 months, averaging about 25 delistings a year. These go-private transactions present further opportunities for the achievement of ESG targets that are not easily accessible for investors through listed or other structures.

There is a growing focus among private equity investors on green, low-carbon, and sustainable initiatives across Africa, and the 2022 SAVCA Report found that ESG risks and opportunities are more strongly considered by private equity firms in Southern Africa than globally, as a result of strong influence by development financial institutions. A significant number of private equity firms in Southern Africa consider and recognise the importance of ESG factors when making investment decisions.

From a pension funds perspective, recent trends include increased private equity asset allocation by adopting the ceiling amendments. For instance, South Africa and Zimbabwe have increased the maximum exposure limit in private equity from 10% to 15%, while Zambia revised its threshold for the private equity asset class from 5% to 15%. Although this development alone may not necessarily translate into increased pension fund appetite for private equity, what could contribute to growth is assisting governments with the necessary experience in private equity to allow pension funds to diversify into private equity, and creating investment opportunities for private equity.

Some sectors have seen more growth than others. The growing sectors in the Southern African region include energy, fintech (as portfolio companies have increased their presence due to a highly tech-literate population), and e-commerce, as the general adoption of digital technologies increases. Healthcare, financial services and insurance are stronger in some parts of Southern Africa than others.

The challenges and risks associated with investing in the region include political instability and a lack of trust in government in countries such as Eswatini, South Africa and Zimbabwe, though the perceived political risk in Africa is greater than the reality. Other challenges include small markets with limited investment opportunities, such as Botswana and Mozambique.

In some markets, these challenges and risks are being well managed. For instance, according to Deloitte’s Private Equity Review 2022, 41% of private equity firms in South Africa have prioritised risk management in portfolio companies.

The Southern African markets offer exciting opportunities for investors, and a recent AVCA survey showed that limited partnerships see opportunism in the private equity market in Africa for the medium-to long-term.

Thandiwe Nhlapho is an Associate and and Roxanna Valayathum a Director in Corporate & Commercial | CDH

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

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

Ghost Bites (Jubilee Metals | Markus Jooste | PSG Financial Services | Redefine | Rex Trueform)

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


Jubilee reports record production figures (JSE: JBL)

But revenue could only increase by 1%

Jubilee Metals dropped 15% on Wednesday after releasing results for the year ended June 2023. The company is dealing with commodity price decreases and infrastructure challenges in its markets, an uncomfortable combination.

Despite this, there were record production figures across the PGM, chrome and copper operations. There were various technical breakthroughs in the operations. As the PGM prices fell away though (down 22% in US dollars), revenue from operations could only increase by 1%. Chrome saved the day here, albeit barely.

Gross profit fell because of inflationary pressures on costs and the need for back-up power systems. EBITDA fell nearly 40% in dollars!

Headline earnings from continuing operations is reported in pence and fell by roughly 35%. Probably the only good news here is that the balance sheet looks reasonable and the group was profitable despite tough conditions.

Those silver linings weren’t enough to save the share price, though.


Markus Jooste gets a R15 million fine from the JSE

This is barely a drop in the ocean for him, sadly

Back in January 2023, the JSE announced two public censures against Markus Jooste, both of which would carry the maximum permissible fine of R7.5 million each. Further to this, he would be disqualified from being a director or officer of a listed company for 20 years. I’m personally hoping that he will still be in jail by then, but I’m probably too optimistic.

Of course, he disagreed with this outcome and applied to the Financial Services Tribunal for a suspension and reconsideration. The wheels of justice slowly turned and eventually the Tribunal dismissed the reconsideration application on 10 October, so the censures and related penalties are enforceable.

This number is literally pocket change for him, but it was the maximum permissible amount. I’m not sure if it gets recognised as revenue for the JSE or if it is ring-fenced for a greater purpose. I hope it’s the latter.


It’s hard to find fault in PSG’s results (JSE: KST)

Dividend growth of 23% says it all, really

PSG Financial Services (previously PSG Konsult) has released results for the six months to August. They are strong to say the least, with return on equity of 22.5% (that’s better than local banks and up from 19.8% in the comparable period) and growth in recurring HEPS of 21% (that’s better than just about everything). The dividend per share increased by 23%, rounding off the excellent numbers.

It says a lot that assets under management grew by 19% in this period, with PSG’s powerful local distribution really coming to the fore here. PSG Insure increased gross written premium by 12%, another strong performance.

As a sign of the times, performance fees were 2.5% of headline earnings, down from 3.7% in the comparable period.

Although there were some major risk events in the insurance business, like the Boksburg earthquake (I swear I missed that one in the chaos of the past year) and the Western Cape storms, the reinsurance program did its job by protecting underwriting results against these events.

Technology and infrastructure spend increased by 12% (and they expense everything rather than capitalise the costs) and fixed remuneration also grew 12%. This is below core income growth of 15%, hence why recurring HEPS did so well.

And as a final tick in the box, all three underlying divisions posted strong growth in recurring headline earnings. PSG Wealth is the largest (65% of headline earnings) and grew by 18%. PSG Asset Management is almost 21% of headline earnings and grew 23%. PSG Insure is the smallest segment and also had the slowest growth, but was still up 12%.

This is a great reminder that there are high quality companies on the local market.


Redefine won the arbitration in Poland (JSE: RED)

Metro’s claims have been dismissed

When Redefine announced interim results for the six months to February, the company noted that a request for arbitration had been filed by Metro Properties against 11 Polish companies owned by M1 Group (which in turn is 50% owned by the Redefine Group). The claim was to reduce the rental payable by Metro under the lease agreements.

The International Court of Arbitration dismissed Metro’s claims against the M1 joint venture and this award is final and binding on all parties. That’s good news for Redefine.


Rex Trueform flags a significant jump in earnings (JSE: RTO)

Detailed results are due later this week

You might recognise Rex Trueform based on the recent news of the acquisition of a streaming group that has particular specialisation in school sports. There’s obviously a lot more to the group than that, with other recent acquisitive activity being focused on properties as well.

For the year ended June 2023, HEPS increased by 52.2% to 399.4 cents. Annoyingly, the company released a trading statement in the morning and results in the afternoon. Somebody there needs a tough talk about how a trading statement is meant to go out a lot earlier.

The increase in HEPS was supported by revenue growth of 35.1% and operating profit growth of 61.0%. Expenses were up 28.2%, thankfully well below revenue growth.

Gross profit margin actually declined from 54.7% to 49.3% and yet they still managed to increase operating profit margin. When you dig into the numbers, it’s because of a big spike in media and broadcasting income that sits below the gross profit line. In other words, that gross margin pressure doesn’t apply to all the revenue.

And in case you’re wondering, given the recent activity around properties in the group, property revenue is 7.8% of group revenue. Media and broadcasting significantly higher at 14% and looks set to be a focus area based on the recently announced deal.

Related listed group African and Overseas Enterprises (JSE: AOO) reported HEPS growth of 78.2%. The company consolidates Rex Trueform as this is the holding company, so the underlying results are much the same.


Little Bites:

  • Director dealings:
    • A director of Sabvest Capital (JSE: SBP) sold shares worth R641k. The sale was by Lindiwe Mthimunye, not Chris Seabrooke, in case you’re wondering.
    • In a surprise to absolutely nobody, Des de Beer bought shares worth R116k in Lighthouse Properties (JSE: LTE).
  • Anglo American (JSE: AGL) is pushing the ESG angle hard at the moment. This is leading to SENS announcements that actually say very little of relevance to investors. This isn’t because environmental stuff isn’t important, but rather because this is the kind of thing that is effectively business as usual and that belongs in the normal reporting cycle. The latest example is Anglo American and Mitsubishi Materials collaborating on a responsible copper value chain. Well yes, I should hope it’s responsible!
  • Northam Platinum (JSE: NPH) announced that GCR Ratings reaffirmed the long-term and short-term credit ratings, with the outlook maintained as stable.
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