Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
Nedbank’s operational update, reflecting strong growth in headline earnings and a warning about further interest rate increases, along with the news of Mike Brown stepping down as CEO.
An awful week for Spar shareholders, with the stock now trading at levels last seen in 2011
Hudaco’s acquisition of the Brigit group of fire protection companies, featuring a surprisingly high valuation multiple.
Tough results at Pepkor and more resilience in the share price than I expected.
Sirius Real Estate refinancing debt and showing an increase in the cost of debt that will be a feature of offshore property funds going forward.
A nasty sell-off in Tiger Brands despite a modest increase in HEPS under difficult circumstances.
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We may not have any details, but this is important
Afrimat has a long history of dealmaking and an enviable track record when it comes to capital allocation. Deals are part of the strategy here, so Afrimat issuing a bland cautionary announcement deserves a spot up here rather than in Little Bites.
The negotiations are regarding a “potential transaction” and we have no idea if Afrimat is possibly buying or selling an asset here. Time will tell.
Even big companies like BHP really botch it sometimes (JSE: BHP)
There have been major mistakes in the HR calculations in the Australian businesses
Leave days and public holidays in Australia are clearly more treacherous than the eight-legged beasts that call the country home. BHP has figured out that leave was incorrectly deducted for employees on public holidays since 2010, affecting 28,500 employees with an average of 6 leave days in total.
The cost? A whopping $280 million to fix this issue.
It seems that OZ Minerals has the same problem. This is the business that BHP acquired in 2023. I can’t help but wonder if they used the same HR system and there was a problem in it somewhere.
Either way, that’s an embarrassing and expensive problem.
Choppies launches a rights offer (JSE: CHP)
Thecapital raise isn’t for growth reasons, but rather to repair the balance sheet
Not all capital raises are created equal. Some are for growth purposes, where companies need capital to achieve their ambitions. Those are few and far between these days, though there are good examples (like Purple Group). Others are purely to fix a balance sheet, ranging from less urgent raises (like this one at Choppies) through to survival raises like the one coming at Nampak.
Choppies wants to raise P300 million (that’s Botswana pula), or roughly R430 million. The rights offer pricing is a 10% discount to the 30-day VWAP up until 31 May 2023.
Most of the raise will be used to extinguish shareholder loans from Ram Ottapathu and Farouk Ismail, as well as Shanta Retail Holdings. There is also P126 million earmarked for a reduction in bank debt.
Ottapathu and Ismail have agreed to follow their rights, so there’s effectively a roundtrip of cash here that converts their loans into equity. Commitments from major shareholders to follow their rights come to P149.8 million.
The other half of the raise is underwritten by Ivygrove Holdings (P120 million) and Export Marketing (BVI) Limited (P35 million). Each of the underwriters will receive a 1% fee for the pleasure.
Across the commitments and underwritten amounts, the raise is effectively fully spoken for. Of course, investors who want to be avoid being diluted at a 10% discount can follow their rights, which means the underwriters wouldn’t get the full allocation of shares.
Steinhoff – how many more times could I warn you? (JSE: SNH)
Down 15.6% to 27 cents a share, it is now overvalued by 27 cents
The directors of Steinhoff have been explaining that the equity is worthless for a while now. Despite this, desperate shareholders have been trying hard to make the process difficult, hoping that a miracle will somehow pop out of them.
Even before the latest capitulation in the Pepkor share price, the equity at Steinhoff wasn’t enough to cover the debt. Can you imagine how bad it looks now?
You won’t need to imagine. You can now watch it play out. After the WHOA restructuring plan was accepted by creditors and not by shareholders, an activist shareholder approached the court to appoint a restructuring expert. The court said no, referencing the WHOA confirmation hearing to be heard on 15 June.
Now, I guess there’s a chance that the court is simply deferring to that hearing, as the WHOA plan being rejected by the court would presumably lead to an expert being appointed anyway. In my opinion, there’s a far greater chance of the plan being accepted by the court and the equity holders being left with nothing.
Little Bites:
Director dealings:
The CEO of Clicks (JSE: CLS) has bought a chunky R3.5 million worth of shares in the company.
An associate of the CEO of Fairvest (JSE: FTB) has bought B ordinary shares in the company worth R983k.
Various executives at Adcorp (JSE: ADR) have bought shares collectively worth R344k.
A director of Visual Holdings (JSE: VIS) obviously wasn’t paying attention when the disclosure rules were explained, having bought numerous shares in January and only reporting it now. There’s a long list and the company decided that putting a total at the bottom wasn’t important either, but it looks like roughly R100k.
I don’t mention it each time or you’ll be reading the same thing every day, but be aware than an entity associated with directors of Ninety One (JSE: N91) buys shares in the company almost every day.
Between December and May, Southern Sun (JSE: SSU) repurchased 3.4% of its shares in issue at an average price of R4.47 per share. The current price is R4.33 as most local shares have been under pressure this year. The total capital allocated to this initiative thus far is R226 million and there is still authority in place to repurchase another 16.6% of shares that were in issue at the time the authority was granted.
Altron (JSE: AEL) is in the process of selling the ATM hardware and support business of Altron Managed Solutions to NCR Corporation. All regulatory approvals have been received, with the final condition precedent being a VAT registration for a newly-formed South African company. The finalisation date for the deal has been moved out by a month to 30 June to enable this to be concluded.
Mpact (JSE: MPT) is still having a tough time getting critical special resolutions approved at its AGM, like the financial assistance and non-executive director remuneration resolutions. I can only assume that Caxton is still voting these resolutions down. Mpact has made a plan before at subsidiary level to get around this issue but it really is difficult to justify Caxton’s behaviour in this investment, ranging from inflammatory SENS announcements through to voting down key resolutions for the company to function.
Datatec (JSE: DTC) has released a circular related to the scrip dividend alternative. The pricing will be based on the 30-day VWAP during the period ending on 3 July 2023, so we don’t know what that will be yet. As a reminder, this is an election by shareholders to receive more shares rather than a cash dividend.
Safari Investments (JSE: SAR) is changing its year end from March to June to align with its new parent company, Heriot.
Impala Platinum (Implats) has finally managed to acquire enough shares to push its shareholding in Royal Bafokeng Platinum (RBPlats) beyond 50%. The sale by the Public Investment Corporation (SOC) of its 9.26% stake in RBPlats as per the scheme terms announced in November 2021, has increased Implats’ aggregate stake to 55.46%. The company will now facilitate increased broad-based ownership at both Impala and RBPlat through its wholly-owned subsidiary Royal Bafokeng Resources. The transaction will comprise the creation of a community share ownership trust across both companies holding 4%, as well as an option to replace the RBPlat employee share ownership plan (4%) and the introduction of a strategic empowerment partner Siyanda Resources (5%) which will lead a broad-based empowerment consortium. In addition, a further 3% will be warehoused for entrepreneurs, with a focus on women and youth entrepreneurs, from the Rustenburg community.
The MultiChoice Group, Rapyd and General Catalyst have announced a joint venture aimed at developing an integrated payment platform for Africa. The joint venture will operate under a new name ‘Moment’. The JV will consolidate the US$3,5 billion in payments that the MultiChoice Group processes annually and will address the need for an accessible and reliable payment platform for many small businesses and consumers across the continent.
Agriculture company Crookes Brothers which has local operations in KZN, Mpumalanga, the Western Cape and in Eswatini, Zambia and Mozambique, is to dispose of the business Vyeboom Fruit Farm to Western Cape-based fruit farming business Witzenberg Properties. This deal includes the business names Vyeboom, Ou Werf and Dennebos. The aggregate transaction value is R200 million. The company said it had initiated processes to sell certain farming properties that were not generating returns commensurate with its targets. Funds realised would be used to reduce its financial gearing and assist in completing its other diversification projects.
Hudaco Industries has acquired Brigit, a local company offering fire protection solutions through the businesses of Brigit Fire, Brigit Systems and Portagas. The business provides an ideal fit for Hudaco which focuses on supplying quality, branded products and services which with significant value-add for the consumer. The maximum consideration is R315 million which will be funded from cash generation and existing facilities. An initial amount of R143 million will be paid with the remaining due, in cash, over the following two years.
Primeserv, via its subsidiary Primeserv Pinnacle, is to acquire Pinnacle Outsource Solutions and AJR Enterprises CC – businesses that supply temporary employment services. The R10,95 million acquisition forms part of Primeserv’s strategy to expand its footprint in the temporary services sector of the Logistics, Transportation and Distribution Centre industry.
Viterra, a Canadian grain and oilseeds marketer and handler, 50%-owned by Glencore, is said to be in talks to merge with US oilseeds processor Bunge, in a move which, according to Glencore, would unlock value from Viterra.
Delta Property Fund has disposed of the property at 5 Walnut Road, Durban to UBUD Development for a cash consideration of R46 million. The net proceeds will be utilised by the company to reduce debt and the Loan to Value by 0.2% from 58.2% and reduce vacancy levels by 0.3% from 33.9%.
Bloomberg reported earlier this week that the Public Investment Corporation may back a possible bid by investment vehicle Afrifund and Mauritius-based Axian Telecom for a 35% stake in Telkom SA. This comes a week after the state-controlled telecommunications company’s share price fell as much as 30% after the company warned it was considering writing down the value of its assets by about R13 billion.
Unlisted Companies
Pioneer Foods which was bought out and delisted by PepsiCo in 2019, is to acquire the remaining 50% stake in Future Life health products following the initial 50% acquired in 2015. The stake will be acquired for an undisclosed sum from Future Life founder Paul Saad.
Heineken Beverages of South Africa has, according to a filing by Nigerian Breweries Plc to its shareholders, offered to sell its majority interest (via Distell International) in Distell Wines & Spirits Nigeria Ltd to Nigerian Breweries. The outcome of the brewers’ decision will be communicated to shareholders in due course.
South African ISP, Level-7 Internet, has acquired connectivity service provider Fliber. With the strategic acquisition, Level-7 Internet will leverage its expertise and resources together with Fliber’s strong community support to drive further growth and deliver enhanced services to customers.
Choppies Enterprises intends to launch a partly underwritten renounceable rights offer to raise P300 million. The offer will be partly underwritten by Ivygrove and Export Marketing. The company will offer a total of 520,833,333 ordinary shares at an offer price of P0.576/R0.82368. The offer will open on 15 June 2023.
CA Sales has made an odd-lot offer to approximately 5,073 shareholders holding less than 100 CA&S ordinary shares. If the 117,861 shares are repurchased at an assumed price of R7.29 per share, the cost to the company will be c. R859,207 (excluding transfer costs).
Adcorp shareholders are to receive a special gross dividend of 91,3 cents per ordinary share in addition to a final gross dividend of 16,5 cents per ordinary share. This follows the release of the company’s audited results for the year ended 28 February 2023.
On June 30 2023, at a general meeting of the company’s shareholders, Nampak will propose a restructure of its share capital by consolidating and reducing the authorised ordinary shares by the consolidation of every 250 shares into one share, propose and increase in the authorised, unissued share capital of the company and the issue of new shares to implement a proposed rights offer to raise gross proceeds of up to R1 billion. The company will over the next two months conclude credit-approved term sheets for the refinancing package for the next five years. This, together with the group’s progress in its implementation of the restructuring plan, will determine the size of the rights offer required. The date by which credit approved term sheets for the refinancing of the group debt needs to be finalised has been extended from 15 June to 15 July 2023.
Kibo Energy is to issue 48,000,000 in respect of a warrant exercise notice received. The shares will be issued at a price of £0.001 with an aggregate value of £48,000.
The Mediclinic and Bidco deal, first announced in August 2022, has become effective. Mediclinic is expected to delist from the JSE and the NSX from commencement of trade on 7 June 2023.
Tradehold has received confirmation that the special resolution for the change of name of the company to Collins Property Group Ltd. The company will trade on the JSE under its new name from 13 June 2023 under the share code ‘CPP’.
Barloworld and Astral Foods have taken secondary listings on A2X with effect from 7 June 2023. These companies with market capitalisations of c.R16 billion and R6,1 billion respectively, will retain their listings on the JSE. These listings will bring the number of instruments listed on A2X to 134 with a combined market capitalisation of over R9 trillion.
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:
Over the period 2 December 2022 to 31 May 2023, Southern Sun has repurchased 50,604,422 shares at an average price of R4.47 per share for an aggregate R226,31 million. The repurchased shares represent 3.4% of the company’s issued share capital. A further 16.6% may be repurchased in terms of the General Authority granted by shareholders in September 2022.
Lewis has repurchased a further 2,801,999 shares, representing 4.8% of the issued share capital of the company at the beginning of the share repurchase programme. The shares were acquired for an aggregate R114,14 million.
The Old Mutual Board believes that the Old Mutual share price is trading at a discount to its intrinsic value and believes that a share repurchase programme will deliver longer term incremental value to shareholders. The Group has commenced a Repurchase Programme of R1,5 billion and will continue to repurchase the company shares until the maximum amount is reached.
South32, this week, repurchased a further 1,043,510 shares at an aggregate cost of A$4,10 million.
This week Glencore repurchased a further 12,330,000 shares for a total consideration of £51,78 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 22 to 26 May 2023, a further 2,313,758 Prosus shares were repurchased for an aggregate €151,98 million and a further 514,577 Naspers shares for a total consideration of R1,64 billion.
Seven companies issued profit warnings this week: Mahube Infrastructure, Buka Investments, Brikor, Trustco, Huge Group, Capital Appreciation and Spar.
Three companies issued or withdrew a cautionary notice: Choppies Enterprises, Primeserv and Afrimat.
Nigerian Breweries Plc has advised shareholders that it is considering a proposal by Heineken Beverages of South Africa that it acquire Heineken Beverages’ majority interest (via Distell International) in Distell Wines & Spirits Nigeria Ltd. The outcome of the brewer’s decision will be communicated to shareholders in due course.
Bestfly, an Angolan multinational aviation group, has acquired Austrian aircraft asset management company MS Aviation as part of its broader European expansion drive. Financial details of the transaction were not disclosed.
Egyptian developer Tatweer Misr and Naif Alrajhi Investment, a Saudi Arabian company, are to form a joint venture. The JV will focus on construction and real estate investment with an emphasis on the development of residential, commercial, educational, entertainment and hospitality projects in Saudi Arabia. The intention is to expand into Egypt. Financial details were undisclosed.
The acquisition of KEL Chemicals, a manufacturer of phosphate fertilizers, water treatment products and sulfuric acid-based industrial chemicals, has been unconditionally approved by the Competition Authority of Kenya.
In a further filing, the Competition Authority of Kenya has given Abland Diversified Holdings unconditional approval to acquire the remaining 50% stake in Buffalo Mall Naivasha.
Oryx Properties, a Namibian, NSX-listed property fund is to undertake a renounceable rights issue to raise N$379,6 million. The issue is in respect of 32,698,877 rights issue units in the ratio of one rights issue unit for every 2,5 linked units held.
PrestaFreedom, a Morocco-based home services marketplace, has raised US$1,1 million from Casablanca-based Azur Innovation Fund. PrestaFreedom intends to use the investment from the venture capital fund in its logistics and technology development with the aim of accelerating growth and scaling its footprint to a number of African markets.
Moroccan healthtech startup DataPathology was also the recipient of an investment from the Azur Innovation Fund, raising US$1m in its second seed round of funding. The investment will be used to recruit talent to support its growth trajectory.
South African listed property struggled last year and ended 2022 as the worst performing sector on the JSE, delivering a negative total return of circa 2%. This was largely due to rapidly rising inflation (exacerbated by the Russia-Ukraine war), followed by interest rate increases by the South African Reserve Bank and international central banks, aimed at curbing inflation.
Europe’s reliance on Russia for gas led to an energy crunch during the Northern hemisphere winter months, which caused heightened concern for global investors regarding the ability of companies to withstand escalating energy costs and economic pressure. Geographically, South African listed property was shielded from direct war exposure, but nevertheless suffered from the broad-brush effects of the resulting capital reallocations.
Higher interest rates caused concern for investors in respect of property valuations, especially those properties that were already valued at lower than industry average discount rates/yields. Any expansion in these yields due to higher interest rates, which are not offset by increasing net income, result in a depressed valuation of the underlying properties. Companies with higher loan-to-value (LTV) ratios have been dealt a particularly hard blow, as investors expected these LTVs to increase off the back of reduced property valuations, combined with higher interest on loans. As a result, investors have priced in significant additional risk, which has led to the sell-off of listed property stocks.
A major difference between South African property companies and developed market global property companies is that South African businesses are accustomed to operating in a low growth environment, with elevated inflation levels and high interest rates, whereas many developed market global peers have traditionally benefited from higher economic growth, low inflation and very low interest rates. While significant economic growth in the South African economy appears a distant mirage at present, local property companies could benefit from the expected peaking of inflation and subsequent slow-down in interest rate hikes.
The three key performance metrics for listed property investors are total return, total return and total return (much like location). Investors usually gauge total return from expected increases in the property stock’s net asset value (NAV) and/or dividend yield/income. Many locally listed property companies trade at deep discounts to their underlying NAV, which may seem like a bargain to investors at face value, but which could also result in a value-trap scenario. When hunting for bargain property stocks in the market, the value trap is unlike a bear trap in that the gap between price and value does not always close (or may take a very long time to close), which poses risk for these value investors.
Due to ongoing loadshedding, many South African property businesses are allocating capital investment to alternative energy solutions, like solar, to ensure that their operations are better equipped for disruptions and to keep tenants incentivised to stay locked into medium-to-long term rental agreements.
Many South African property stocks that pay high dividend yields are compared directly to “risk-free” government bonds and/or risk-adjusted corporate bonds. But in the current high interest rate environment, it is anything but plain sailing for these listed property stocks that compete with bonds for capital in the market, and potentially also with safer bets, such as cash investments. Earnings growth will be key for South African property stocks to continue growing their dividends, and hopefully their NAV too. In the absence of earnings growth, investors may opt to be risk averse and stick with bonds and cash investments at the peak of the interest rate cycle.
Portfolio managers and analysts often regard certain Real Estate Investment Trust (REIT) sectors as resilient investment vehicles during times of recession, which can outperform general equities during high-inflationary periods. Experts note that REITs also outperform when bond yields continue to increase, and especially when a slow-down or pause in interest rate hikes are imminent. Whatever the environment, listed property companies benefit from having a strong balance sheet. A South African REIT is obliged to pay out at least 75% of its earnings to shareholders as dividends on an annual basis and, given that REITs receive the benefit of only being taxed on the portion of earnings that do not get distributed to shareholders as dividends, this translates into a larger pool of capital that can be allocated to dividends for shareholders, which can, in the right circumstances, provide good income opportunities for investors.
When considering capital allocation and, more specifically, returning capital to shareholders, several strategies are available to listed property companies, ranging from paying cash dividends to share buy-backs and scrip dividends. Listed companies typically consider share buy-backs in the open market where they believe that their share price is undervalued. In terms of the JSE Listings Requirements, a listed company may not buy back its own shares in terms of a general repurchase authority at a price greater than 10% above its trailing five-day volume weighted average price, which provides protection to shareholders from a capital allocation perspective.
Strategic share buy-backs, followed by the cancelling of the repurchased shares, could attribute tangible value on a per share basis to shareholders, especially where earnings grow. Scrip dividends are usually offered to shareholders as a mechanism to preserve cash reserves for the company and/or to provide shareholders with an opportunity to receive additional shares on a pro-rata basis relative to their current shareholding, without incurring transaction costs that would ordinarily need to be spent in buying shares on the open market. Scrip dividends are, however, not viewed favourably by shareholders if implemented when the share price of a listed property company trades at a substantial discount to its NAV, as issuing cheap equity is not value accretive.
Depending on how the remainder of 2023 unfolds from an inflation and interest rate perspective, the result is expected to drive and/or change investor risk appetite in the markets, which could benefit well-positioned JSE-listed property companies.
Calvin Craig is a Corporate Financier | PSG Capital.
This article first appeared in DealMakers, SA’s quarterly M&A publication
In this inaugural issue of our Corporate Law Digest, we look at significant events that have taken place in Kenya’s business environment over the last quarter, to provide you with a glimpse into the country’s transforming M&A market. We find that despite growing concerns about the devaluation of the Kenyan Shilling, the increasing cost of living, unemployment and civil unrest, investors seem undeterred: banking, fintech and alternative fuel sources feature prominently in a market that is diverse, flush with entrepreneurs, and backed by its new government. Kenya is open for business, and with an election well behind it, ready to flourish.
Recent M&A Trends in Kenya
In recent years, the M&A space in Kenya has been punctuated by transactions in the financial industry, specifically where investors are looking to expand or diversify their portfolios. Two key deals of note in Q1 are those of Equity Bank (Kenya) Limited (EBKL), the largest financial services institution in the region, which purchased certain assets and liabilities of a local “troubled” Spire Bank, and the acquisition of 55.8% of Maisha Microfinance Bank by Cactus Cantina Investments Limited, a sister company of lending app Shara, which is currently awaiting Central Bank approval. On completion of the EBKL transaction, loan customers and customers holding deposits in Spire Bank become EBKL customers, significantly expanding EBKL’s asset portfolio and customer base. With respect to Maisha, customers of the lending app Shara will be able not only to borrow more, but save with the lender.
Within the fintech space, there has been a continuing upsurge of activity. According to a Fintech Global study published in February 2023, Kenya’s fintech deal activity increased by 14% from 2021 to a total of US$158 million. The largest Kenyan fintech deal in 2022 raised $75 million for M-Kopa, a linked asset finance platform. This is nothing to sniff at.
Impact investment funds, as well as green energy companies, have equally been hot targets in Kenya. BlackRock Alternatives, a climate-focused fund, is set to acquire a stake in Lake Turkana wind park, Africa’s largest wind turbine complex. Furthermore, Australian hydrogen project developer Fortescue Future Industries plans to build a 300 MW green ammonia and fertiliser plant in Kenya, the country’s first project involving green ammonia production. This is not to forget that in late 2022, New Forest launched the Africa Forestry Impact Platform (AFIP), a partnership between British International Investment (BII), Norfund and Finnfund with the goal of helping to transform the forestry sector in sub-Saharan Africa. Green investments seem destined to take pride of place in M&A deals in the near future.
SMEs in Kenya
A report issued by the Central Bank of Kenya indicated that SMEs constitute 98% of all businesses in Kenya, contributing 3% to GDP. A survey by the Kenya National Bureau of Statistics released in 2018 indicated that approximately 400,000 micro, small and medium enterprises do not make it past the second year, while very few reach their fifth year. In this respect, SMEs have generated a lot of local and international interest in their quest to capital raise. Government support has not lagged far behind with initiatives such as the Start-Up Bill 2021, proposing to provide a legislative framework that fosters a culture of innovative thinking and entrepreneurship.
In March 2023, the African Development Bank Group approved a $30 million Trade & SME Finance Facility for Family Bank Limited (FBL) in Kenya, aimed at boosting intra-Africa trade, promoting regional integration, and reducing the trade and SME finance gap in the country. The facility aims to provide a trade finance line of credit, a transaction guarantee, and a targeted line of credit to support short- and medium-term financing for SMEs in the health, renewable energy, and agriculture sectors, including women-owned businesses.
So while SMEs have room to grow, it is also important to note that in March 2023, a new report commissioned by Kenyatta University shows that debt funding is the most popular method of raising capital among micro, small and medium enterprises (MSMEs) in Kenya, with 42% preference, compared to grants and equity financing at 36% and 22%, respectively. Investors should take note: entrepreneurs are not likely to be willing to let go of control, especially when they are confident that a debt instrument may help them to scale.
Looking ahead 2023
Kenyan firms are increasingly turning to cleaner energy sources to reduce carbon emissions. This has seen a significant rise in the businesses entering the Kenyan market-focused on clean energy and e-mobility. We are seeing start-ups like Ecobodda Inc, Africa’s first electric motorbike taxi, providing battery-swapping charging technology for electric motorcycles. Roam Rapid and BasiGo, are also cementing their position in the electric vehicle industry by providing electric bus solutions to the Kenyan market. Large companies and state corporations such as KENGEN are also dipping their toes in the industry by installing electric vehicle charging infrastructure at some of their petrol stations and by proposing a special tariff for electric vehicles.
Earlier in March 2023, the European Investment Bank (EIB) mobilised $1,9 million in grants to support green hydrogen in Kenya, and the European Union, together with the UK government, is investing Ksh13,5 billion ($108 million) in the Menengai geothermal project in Nakuru County, Kenya, which will provide cheap, clean and reliable energy to over 700,000 Kenyans.
We look forward to sharing further positive developments that further cement Kenya’s position as a regional M&A market leader.
Njeri Wagacha is a Partner and Rizichi Kashero-Ondego a Senior Associate at CDH Kenya.
This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.
Significant investment has already been secured from individual and corporate investors looking to claim their SARS-approved 125% Section 12BA tax deduction in this tax year.
Twelve B is the first private equity fund that entitles taxpayers, including individuals, trusts, companies and pension funds, to invest in a portfolio of renewable energy-producing assets and benefit from the Section 12BA tax incentive.
Twelve B Green Energy Fund marks another milestone for Grovest, the pioneers of Section 12J, and the largest small cap fund administrator in South Africa, with over R3.5 billion in assets under administration.
During the extensive pre-launch period, the Twelve B team focused on sourcing viable projects as well as establishing strategic partnerships with EPC (Engineering, Procurement, and Construction) and O+M (Operations and Maintenance) entities. This meticulous preparation ensured that when Fund I opened for investment, they were well-prepared to deploy capital as and when it was raised.
Current status of the Fund
Twelve B Green Energy Fund currently has a pipeline of over R300 million of solar projects at various stages. Jeff Miller, Twelve B’s CEO and Co-Founder anticipates the average investment across the various projects to be between R8 million and R12 million, resulting in a diversified portfolio of around 25 projects in Fund I’s R200 million portfolio.
In April 2023, the Fund’s first two projects were approved by the Investment Committee and construction has since commenced. They are on track to become energy-generating in July of this year. The profits of the partnership which have been generated from the sale of electricity, net of costs, will be distributed to investors bi-annually, and current investors can expect their first income distribution in September this year.
The first project approved is a sectional title complex situated in Dunkeld, Johannesburg. The solar system will have a peak power capacity of 175 kilowatts and the energy storage system will have a capacity of 300 kilowatt-hours.
The second project is a commercial business in Sandton, and the solar system will have a peak power capacity of 201.7 kilowatts and the energy storage system will have a capacity of 500 kilowatt-hours.
Although the ability of a fund to reach final close may be a key consideration for an investor, fund success is ultimately determined by its ability to deliver consistent and attractive returns (i.e. deploying capital into projects that have the potential to generate cash flows). Therefore, investors should carefully evaluate the capability and project pipeline of the Fund Manager before committing their capital.
Miller emphasises the crucial nature of conducting comprehensive due diligence on all projects to manage risk, evaluate project viability, remain compliant, promote transparency and accountability, as to ensure that the projects are aligned with the Fund’s Investment Mandate.
Furthermore, each project is bound by 20-year Power Purchase Agreements (“PPA’s”) which sets out the amount of electricity to be supplied, the initial pricing and the annual escalations.
Twelve B Green Energy Fund’s strategic alliance
The Fund has a strategic alliance with Hooray Power– the pioneers of large battery storage systems in sectional title complexes. The Fund has the right of first refusal on all projects introduced by Hooray Power.
Hooray Power’s sophisticated load management software manages power via solar, battery and the grid which provides an always-on power solution for their clients.
They have a 4-year proven track record and are the longest operator of these actively-managed battery systems in South Africa.
According to Miller, the Fund’s secret sauce and differentiating factor within the market is their relationship with Hooray Power, who sources all projects and handles all EPC and O+M of each approved project. This relationship is unique to the Twelve B Green Energy Fund and to the investment opportunity.
Miller is of the view that deployment and execution of the funds into energy producing assets is key, and has unwavering confidence that Twelve B Green Energy Fund will raise and deploy R200 million before the end of the February 2024 tax year.
The risk profile of the Fund is low to moderate, and there is currently no gearing within the portfolio. That said, the Fund Mandate does allow gearing which may be considered in the future.
Fund I is still open for investment and the positive market response confirms that investors within the current market climate have an appetite for a moderate risk, tax incentivised investment.
Twelve B Green Energy Fund invites savvy investors wanting to decrease their tax obligation and achieve superior returns, to invest today and add to a greener, more sustainable future for South Africa.
Twelve B Fund Managers Proprietary Limited (Registration No. 2022/832884/07) is an approved juristic representative of Black Mountain Investment Management Proprietary Limited (Registration No. 2018/230022/07) an authorised Financial Services Provider under the FAIS Act (FSP No 49908).
Afine’s profits are in line with the pre-listing forecast (JSE: ANI)
Year-on-year comparability is limited due to restructuring activities
Afine Investments is a REIT that owns a portfolio of fuel filling stations. The numbers for the year ended February 2023 reflect some big year-on-year moves, but the company is reminding investors that comparability on that basis is limited.
Instead, the focus is on the results vs. the forecasts made in the pre-listing statement. On that basis, distributable profits are actually slightly higher (6.5%) than the forecast levels and HEPS is in line with the forecast.
The total dividend per share for the year was 43.83 cents. The current share price is R4.49 but the bid-offer spread is absolutely huge, so good luck getting a trade through.
At Capital Appreciation, growth comes at a cost (JSE: CTA)
Strong revenue growth has been offset by expense growth and a large credit loss provision
In a trading statement for the year ended March 2023, Capital Appreciation noted an impressive 19% growth rate in revenue. That’s largely where the good news ends for investors, as there has been a significant increase in expenses and there’s a nasty credit loss provision as well.
The expenses relate to the core business, so let’s start there. The rate of growth in expenses isn’t disclosed in this announcement but we know that HEPS is between -2% and -1% lower than the prior year, which means between 13.13 cents and 13.27 cents.
That HEPS number excludes the credit loss provision for the GovChat associate of R70.8 million. If we take that into account by looking at EPS, there’s a drop of between -45.5% and -44%.
The share price closed 6.3% lower at R1.48, which implies a Price/Earnings multiple of roughly 11.2x. Detailed results are expected on 6th June and I’m sure that investors will take a detailed look at the expense growth and how it supports future growth.
Copper 360 was classic IPO silliness by punters (JSE: CPR)
As I joked at the time of the listing, the ticker CPR might indicate what some people will need!
It certainly isn’t the company’s fault that investors love throwing money away shortly after an IPO. This is a story as old as time, which is precisely why I avoid IPOs as a rule (just look at Zeda as another example). Here’s the Copper 360 chart:
The company has released results for the year ended February 2023 and has also given an operational update.
Growth is rapid, with tons milled up by 296% and copper sales up by 191% The average copper price received fell by 5.4% measured in rand. I must highlight that there was only five months of focused trading in this period, so I’m not sure that the growth rates are all that useful.
With the group very much in the early stages of its life, the revenue increase of 175% was overpowered by a 279% increase in operating expenses. This drove a swing from an operating profit of R9.8 million to an operating loss of R78.5 million. That’s the number that I would keep in mind.
I would also take note of management’s commentary around a decrease of 36% in the delivered copper grade, a direct result of lower grade stockpiles of ore that necessitated the acquisition of a R30 million crushing plant. The company still believes that the forecast copper production for FY24 that was noted in the pre-listing statement can be achieved.
Fairvest: it matters which class of shares you own (JSE: FTA JSE: FTB)
The A shares are smiling – the B shares not so much
In property funds with two classes of shares, you really need to do your homework. These legacy structures were put in a place during a time when institutional investors demanded a mix of safer and riskier structures. The theory is that one class is more defensive than the other, but then offers less upside as well.
At Fairvest, the results for the six months to March 2023 reflect a drop in net asset value (NAV) per share for both share classes. The dividend for the A shares is 5% higher and for the B shares is 2% lower.
The loan-to-value sits at 38.4%.
In addition to its portfolio of 137 properties, Fairvest holds 60.9% in Indluplace and 5.1% in Dipula Income Fund. Remember, Indluplace is currently under offer from SA Corporate Real Estate.
The market is sending a Huge message about valuation (JSE: HUG)
Some of these investment assumptions are breathtaking
Despite the obvious economic pressure we find ourselves in, Huge Group somehow managed to increase the net asset value (NAV) per share by 5.3%. It now sits at R9.4385 per share, with the share price at R2.74. This discount to NAV is gigantic even by investment holding company standards, so something isn’t adding up.
I decided to go digging into the way in which the assets have been valued. It’s not hard to see why the market puts more faith in Eskom’s promises than this valuation.
Let’s start with the R571.9 million valuation on the Huge Connect preference shares. With the total unlisted portfolio apparently worth R1.46 billion, this is a very big contributor. I therefore find it remarkable that the valuation yield is 10.85% at a time when the South African 10-year bond yields are over 11%.
Is Huge less risky than the government of the country in which it operates? Do me a favour.
We then arrive at Huge TNS, valued at R641 million. The weighted average cost of capital applied here is 16.81%, with meaty revenue growth of 10.13% in the model. This division is the combination of Huge Networks and Huge Telecom, with the Telecom side of the business having historically struggled. Personally, that discount rate feels too low for me.
The share price is down 27% in the past year. Against that backdrop, I cannot see how any valuation increase of 5.3% in the NAV per share could hope to be taken seriously.
The bun fight between Northam Platinum and Impala Platinum is setting interesting precedent
If you have deal fatigue regarding the battle for control of Royal Bafokeng Platinum (JSE: RBP), can you imagine how the parties and advisors involved must feel?
Northam Platinum (JSE: NPH) eventually walked away from the deal, citing a drop in PGM prices. This left Impala Platinum as the only horse in the race to get control of Royal Bafokeng. This has finally happened thanks to the PIC selling its 9.26% stake in Royal Bafokeng Platinum to Impala Platinum.
After the latest trades, Impala Platinum holds 55.46% in Royal Bafokeng Platinum – a controlling stake. This triggers the public interest and related conditions of the approval by competition authorities, which inevitably means a requirement to execute B-BBEE ownership transactions. This will include community and staff trusts as well as the introduction of an empowerment consortium.
Black retail investors get shut out as usual, although Royal Bafokeng Platinum does have a history of being highly focused on regional empowerment rather than broader, national empowerment. This is a more reasonable outcome than when Absa didn’t do a retail B-BBEE deal, for example.
Although Northam Platinum pulled out of the deal, they remained a thorn in the side of Impala Platinum, as the offer requires a compliance certificate from the Takeover Regulation Panel (TRP). To get that certificate, certain complaints made by Northam Platinum needed to be resolved.
To this end, Impala Platinum has elected to formerly withdrawn certain statements made by executives to the media and in results presentations over the course of the offer. The comments vary, with references made to the market dynamics of the deal, the appetite for time extensions and comments on the Competition Commission approval.
The official line is that Impala Platinum has withdrawn the statements and advised the public to ignore them in consideration of the offer. This is not an admission that the statements were false or misleading. We will now wait and see how long the Compliance Certificate takes to come through. The longstop date for the offer has been extended once again to 28 June, so that’s the (very loose) deadline that Impala Platinum has set to meet this condition.
Mahube Infrastructure needs more wind, please (JSE: MHB)
A feel-good asset isn’t always a good asset
Mahube Infrastructure has investments in solar PV and wind farm projects. We would all love these to be slam-dunk winners, but sadly life is never so easy.
For the year ended February 2023, the revenue was actually negative R14.1 million. I don’t think I’ve ever seen negative revenue before and I didn’t have time to dig into the financials on this. They note positive dividend income of R18 million and then a negative change in the fair value of the assets, which decreased revenue by R33.1 million.
Perhaps someone who is more up to date than me on IFRS can explain why the change in fair value is recognised as revenue.
Either way, the worrying bit isn’t just the change in macroeconomic inputs that has affected the valuation. No, I would be more worried about the comment that the wind IPP industry across the country is experiencing lower winds than expected. This certainly highlights the risks inherent in such projects.
The tangible net asset value has dropped from R11.21 last year to R9.91 in this period. There is no final dividend after an interim dividend of 45 cents was declared earlier this year.
Nampak prepares for its rights offer (JSE: NPK)
A share consolidation is necessary to escape penny stock territory
After the monumental destruction of shareholder value at Nampak, the share is now trading at 73 cents (down another 4% for the day). This isn’t great for a rights offer that is clearly going to be priced at a discount, with Nampak worried about setting the rights offer price at a “practical level” – that says a lot about what is coming.
In preparation for the R1 billion capital raise that is desperately needed to save the balance sheet, Nampak is proposing a share consolidation that turns every 250 shares into 1 share. In other words, the price should be 250 times higher after this as there will be fewer actual shares in issue.
Some cash will change hands, as fractional entitlements (i.e. where you own fewer than 250 shares) will be cash settled at a 10% discount to the VWAP of the first day of trading.
The slide in Nampak’s value has been extraordinary and I wouldn’t be surprised to see more pain before this rights offer is concluded.
Sirius reports strong growth in its distribution (JSE: SRE)
The benefit of low funding costs was still in these numbers
Sirius Real Estate has given the market guidance on the total expected dividend for the year ended March 2023. The increase is between 26.2% and 31.4%, which is obviously a good outcome for shareholders.
After the recent announcement around the refinancing of debt and the increase in funding cost as rates have gone through the roof in the past year, I would caution that this growth probably isn’t sustainable.
Spar is the latest retail casualty, tanking 15% (JSE: SPP)
The South African retail apocalypse continues
The local retail industry is being smashed by load shedding. I was bearish on this sector coming into 2023 and had written on that view a few times. I wanted to be wrong, but sadly I wasn’t.
Spar has guided a decrease in HEPS of between -35% and -25% for the six months ended March 2023. This horrific outcome isn’t from a lack of turnover growth, but rather from huge jumps in operation expenses.
Spar is a wholesaler, so fuel and distribution cost pressures sit squarely in this group. There was also substantial investment in IT, so that didn’t help matters against this economic backdrop, as I don’t think I’ve ever seen a SAP implementation that hasn’t been accompanied by major inventory issues and implementation challenges. Even the European operations weren’t immune from the cost pressures.
And of course, the environment with higher interest rates is driving an increase in net finance costs.
If we dig deeper, Spar’s wholesale grocery business grew turnover by 7.9%. TOPS, usually a strong performer, suffered a 1.9% drop in sales vs. a high base period when South Africans were unleashed to behave wildly after lockdowns. Build it reported further declines, down 3.8%.
Looking abroad, BWG Group in Ireland and South West England reported 8.8% turnover growth measured in euros. SPAR Switzerland fell by 4.3% in local currency thanks to volume declines. Turnover in Poland was up 4.9% in local currency despite contracts being terminated with 58 retailers in July 2022.
The pharmacy business is tiny but was actually the highlight, with sales up 20%.
The group reckons that the retailers spent over R700 million on diesel in this period. At wholesale level, diesel costs “more than tripled” and pressure in the retail stores obviously flowed to the top, as Spar doesn’t have a business without its franchisees doing well.
Much like the entire sector right now, I continue to avoid this one.
Tongaat Hulett has published the business rescue plan (JSE: TON)
It looks like a JSE delisting is likely
If you would like to see what a business rescue plan looks like, you’ll find the plan for the group holding company at this link.
In summary, the business rescue practitioners are looking for strategic equity partners for the business and it looks likely that a delisting from the JSE will take place. The plan notes that if the company was liquidated, unsecured creditors would receive nothing. Shareholders would therefore also receive nothing.
In case you’re wondering how that happens, BDO has estimated the assets to have a gross realisable value of R5.1 billion. Secured creditors have claims of R7.3 billion and unsecured creditors had another R1.7 billion excluding inter-company loans.
With 2,500 direct employees and 23,000 indirect jobs depending on this group, the reality is that saving Tongaat Hulett is a social imperative. The effect on the local sugar industry would be horrific if this group was not able to continue in some form or another.
To achieve that, a strategic equity investors will need to buy the assets of the group out of business rescue, with the creditors being dealt with through this process. Expressions of interest have been requested from eight bidders, so there is interest in the asset. It just won’t help existing shareholders who have essentially been wiped out.
Little Bites:
Director dealings:
Two directors of Calgro M3 (JSE: CGR) bought shares worth R436k.
MTN (JSE: MTN) is holding a capital markets day over two days this week (so the name is a bit odd, but it’s an industry standard). There are a large number of materials, including several podcasts, available at this link for those interested.
In a very interesting move, Serialong Financial Investments is being required to deliver nil paid letters to Glen Anil Development Corporation even on the Purple Group (JSE: PPH) shares that Glen Anil only has the option to acquire. The argument is that the rights were attached to the shares at the time of the original option agreement, even though the rights offer hadn’t been announced at that stage. I really can’t see why Glen Anil would exercise the options then, as the rights offer lets them mop up a large number of shares at a vastly lower price than the strike price in the option agreement. This is painful for Serialong.
Renergen (JSE: REN) has released its financials for the year ended February. With the group very much in the early stages of production, I don’t pay much attention to the headline loss per share of 19.89 cents. The current share price is being driven by a multitude of factors and I don’t think last year’s results feature highly on the list.
RH Bophelo (JSE: RHB) is a healthcare investment entity that focuses on net asset value as its leading metric. In the year ended February 2023, this has decreased by 3.5% overall and 3.6% on a per share basis. Cash is up from R8 million to R152 million but borrowings have increased from nil to R102.5 million and I’m not sure this is the right environment for borrowing money. There was no dividend in this period, unlike in the last period.
Metals business Insimbi Industrial Holdings (JSE: ISB) announced results for the year ended February 2023. A drop in revenue of 5% drove a decrease in operating profit of 3%. At net profit level, there was a 2% increase and at HEPS level, there was growth of 12%. The metric to keep an eye on is cash from operating activities, down 30%.
Trustco (JSE: TTO) released results for the six months ended February 2023, reflecting a drop in NAV per share of 10.6% that the company largely attributes to the resources portfolio and associated dilution in underlying assets.
Brikor (JSE: BIK) released results for the year ended February, showing a 14.3% increase in revenue but a collapse in HEPS to a loss-making position of -0.1 cents per share. The coal segment was loss-making for the year but showed improvement towards the end of the period, while the brick segment performed very well overall.
The most useful thing about the release of financial results by Buka Investments (JSE: ILE) is that at least I now know how to find the corporate website. The company is a “suspended shell” on the JSE that had no assets at the end of February other than some cash. The initial plan was to acquire a shoes business, but that was stopped for various reasons (even though the website seems to imply otherwise). The idea is now to acquire fashion businesses. After burning through R1.9 million in FY23 just to be a listed company, they better get on with it.
The scheme of arrangement to delist Industrials REIT (JSE: MLI) was approved by shareholders, with the delisting date on the JSE anticipated to be 27 June.
In case you’re wondering, the acquisition of Bundu Power by Ellies Holdings (JSE: ELI) is still intended to go ahead. The publication date of the circular has been extended to no later than 31 July.
Metair (JSE: MTA) has announced that the current interim CEO and interim CFO have both been appointed to the roles permanently, which is good news for investors in terms of stability.
Lewis Group (JSE: LEW) has repurchased a further 4.8% of issued shares during May, with a value of R114 million. Another 2.2% of shares outstanding can be repurchased under the existing authority from shareholders, calculated with reference to the number of shares that were in issue at the time the authority was granted.
Shareholders of Tradehold (JSE: TDH) have approved the change of name to Collins Property Group Limited. It will be made effective during June.
In other renaming news, Tsogo Sun Gaming (JSE: TSG) shareholders have approved the change of name to Tsogo Sun Limited. It will be interesting to see how the strategy develops in this group.
Delta Property Fund (JSE: DLT) has delayed the publishing of results from 31 May to 12 June.
Acsion (JSE: ACS) is another company with delayed results, expected to be released on 15 June.
In this episode of Ghost Stories, Duma Mxenge (Business Development Manager at Satrix) joins the platform for the first time for a great discussion around ETFs, trends around this type of investment and the way that investors understand the products and use them.
More specifically, we discussed:
Some of the generational trends coming through in the attitude to investing and particularly ETFs, including fees.
The impact of fees in a wealth creation journey.
Whether investors tend to have a good understanding of the underlying indices tracked by ETFs
The approach to using ETFs and whether investors see this as a “playing safe” approach or a more active investment decision.
A discussion around ETFs as the core underpin in a portfolio, leaving space for more speculative opportunities in single stocks.
The value of local ETFs that track global indices vs. moving cash into foreign currency and incurring forex costs.
The benefit of ETFs in the context of rebalancing of a portfolio of single stocks.
Whether retail investors can do it all themselves vs. using financial advisors as part of the journey.
The SatrixNOW platform and how it helps investors navigate this process.
For more from the Satrix – Ghost Mail partnership, visit this link to find various podcasts and articles.
Disclosure Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this podcast (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information.
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