This article is intended for any company that concludes agreements which refer to annexures which are required to be attached to the agreement. It uncovers the reasoning of the Supreme Court of Appeal in its determination on the validity of an agreement which refers to annexures that are not actually attached to the agreement.
In G Phadziri & Sons (Pty) Ltd v Do Light Transport (Pty) Ltd and Another (765/2021) [2023] ZASCA 16 (20 February 2023), the Supreme Court of Appeal (SCA) held that an agreement that refers to annexures which are not attached to the agreement is still valid and enforceable, despite the missing annexures.
The appellant G Phadziri & Sons (Pty) Ltd (Phadziri) and the first respondent, Do Light Transport (Pty) Ltd (Do Light), are bus companies offering public transport services in Vhembe, Limpopo. Phadziri provided public transport services on specific routes for which it was granted licences by the second respondent, the Limpopo Department of Transport (DoT).
Phadziri subsequently became unable to provide effective and reliable public transport services for, amongst other reasons, its aging bus fleet.
Phadziri, Do Light and the DoT subsequently concluded a tripartite agreement (the Agreement) in terms of which Do Light would act as a subcontractor to Phadziri, and provide public transportation services on certain routes identified as “Vleifontein and Maila to Makhado (Louis Trichardt) in terms of the timetable as attached as annexure 1, or as amended by agreement between the Department and Do Light” (Affected Routes). Annexure 3 of the Agreement was also incorporated by reference, which contained a fare timetable for cash journey tickets to be sold to passengers on the Affected Routes.
The Agreement was implemented for eight years until a dispute arose between the parties, in terms of which Phadziri argued, amongst other things, that annexures 1 and 3 were not attached to the Agreement and that the omission resulted in the Affected Routes not being identifiable, thereby rendering the Agreement void for vagueness.
The SCA, therefore, had to determine whether the omission of the annexures rendered the agreement not capable of implementation. In arriving at its decision, the SCA considered a number of previous judicial decisions, which gave rise to the following principles:
• when interpreting a contract, the court must consider the factual matrix; its purpose; the circumstances leading up to its conclusion; and the knowledge at the time of those who negotiated and produced the contract;
• our law inclines to preserving instead of destroying a contract which the parties seriously entered into and considered capable of implementation; and
• the conduct of the parties may provide clear evidence on how reasonable business persons construed a disputed provision in a contract; however, that this must not be understood as an invitation to harvest evidence of the conduct of the parties on an indiscriminate basis.
Having regard to the aforementioned legal principles, the court held that:
• Phadziri and Do Light were competitors, and Phadziri was at risk of losing its licences due to its inability to deliver effective services. It was, therefore, to Phadziri’s benefit that the Agreement was concluded;
• Phadziri was aware of the timetable and the Affected Routes that the licences applied to, and it was conceivable that Do Light would have known of the scheduled times and the Affected Routes when it was invited by Phadziri to be appointed as a subcontractor;
• the purpose for concluding the Agreement was to provide commercial efficacy to Phadziri, and to avoid the collapse of the public road transportation services on the Affected Routes;
• there is no doubt that the parties seriously entered into the Agreement and considered the Agreement capable of implementation; and
• the evidence of how the parties conducted themselves in implementing the Agreement for eight years without a dispute is relevant to determining how they understood their obligations, despite the missing annexures, and illustrated that the parties had a meeting of minds.
The SCA held that the Agreement was not void as a result of the missing annexures.
It is important to note that, in this case, the missing annexures referred to a timetable for the Affected Routes. The SCA held that these timetables were known to both parties because Phadziri had a timetable which it used in conjunction with its licences at the time that the Agreement was concluded. The SCA held that Phadziri knew of the ‘origin and destination points and significant intermediate locations along the route’, and that its suggestion that the routes were not known because the timetable was not attached to the Agreement was contrived.
This case is distinguishable from agreements which are unrelated to licences and which include references to annexures that contain information material to the agreement between the parties. It is, therefore, important for contracting parties to ensure that any written contracts are drafted clearly, and to address any elements of vagueness in a contract as soon as these become apparent. This is to avoid any allegation from a counterparty that the agreement may be void for vagueness.
Daniel Hart is a Partner and Faheema Rahim an Associate | Fasken
This article first appeared in DealMakers, SA’s quarterly M&A publication.
Wall Street’s forecasts for Kroger’s first-quarter profit and same-store sales were surpassed due to consistent demand for basics and lowering supply chain expenses.
Refinitiv IBES statistics show that Kroger’s first quarter net sales climbed by 1.3% yearly to $45.17 billion, although they fell short of analysts’ forecasts of $45.24 billion.
The first quarter performance of Kroger Company (The) (ISIN: US5010441013) was strong due to the application of its “Leading with Fresh and Accelerating with Digital” strategy. As more consumers experience the effects of inflation and economic uncertainty, Kroger has increased its reach to customer homes by delivering fresher items at reasonable prices with tailored rewards.
The “Leading With Fresh” campaign now recognises 1,738 stores, and Kroger accelerated their Fresh Produce Initiative. This led to higher sales without fuel in some locations. By extending Alternative Farming offers to 1,094 merchants, it successfully linked more communities to locally produced fresh goods.
Due to its delivery solutions, which include Kroger Boost and Customer Fulfilment Centres, delivery sales have climbed 30% over the previous year. Kroger also developed a connected TV relationship between Disney and Kroger Precision Marketing in order to increase its digital reach. According to the group, the number of households with digital involvement increased by 13% over the previous year.
Technical
The share price has consistently trended lower and now converged with the 100-day moving average after falling 25% from its peak last year. In 2023, a rectangle pattern developed as the share price consolidated, and bears could not push it below the support level set during the consolidation period. At $43.00 and $50.50 per share, respectively, support and resistance were identified.
A Doji candle developed during the week of the company’s earnings, indicating market indecision in the wake of the earnings report at the 61.80% Fibonacci Retracement Golden Ratio. Given that positive momentum favours the move higher, the $50.50 per share level may be in play if bulls prevail in the current battle.
In contrast, if bears prevail, the share price could decline. Long-term investors may become more interested at the support level of $43.00 per share. If downside volumes start to decline as the share price gets closer to its support level, it could be a sign that the downside momentum is waning and a turnaround is about to happen.
Fundamental
Sales for the corporation increased to $45.2 billion in the first quarter from $44.6 billion in the same period last year. When fuel purchases are not included, sales rose 3.5% over the same period the previous year. Due to its efforts to source some products closer to its distribution hubs and reduce supply chain costs, Kroger’s gross margins climbed 21 basis points to 22.3% from a drop a year earlier.
The improvement in the gross margin rate was principally brought on by the success of Kroger’s Brands, sourcing benefits, decreased supply chain expenses, and the effects of a terminated contract with Express Scripts. Increased promotional price investments have largely offset this improvement. Additionally, it profited from consumers picking its store-brand products over more pricey national brands, particularly higher-income shoppers looking for less expensive alternatives amid continuous inflation.
Given the increased levels of liquidity, Kroger’s net total debt to adjusted EBITDA ratio declined from 1.68 to 1.34 from a year earlier, showing a reasonably healthy balance sheet. There has been a $1,460M decrease in total net debt during the last four quarters. The company’s net total debt to adjusted EBITDA ratio should fall between 2.30 and 2.50 as per its guidance.
After taking into consideration the effect of Express Scripts, it is anticipated that sales without fuel will have an underlying growth of 2.5% to 3.5%. Adjusted Free Cash Flow is predicted to rise to$2.5 to $2.7 billion.
After discounting for future cash flows, a fair value of $49.00 per share was derived.
Over five years, Kroger has outperformed the S&P 500 stock market as a whole. Compared to the S&P500, Kroger saw a return of 98.02%. Despite the stock price’s positive correlation with the index and notable outperformance, the market has generally favoured it.
With an operational income per unit of sales of 3.09%, Kroger has the lowest operating income among its main rivals. It still lies within the sector range, nevertheless, and has improved since 2021, whereas the profitability of its rival declined.
Summary
Given the sector’s steady demand for vital goods, the consumer staples market is one that can often survive economic setbacks. After a year of tightening, consumers can see the light at the end of the tunnel as interest rates are about to peak following the Federal Reserve’s pause.
The medium to long-term outlook most likely shows a softer climate that encourages consumer expenditure. As the existing economic restrictive policy loosens, the share price could converge with its $49.00 per share fair value.
Sources: Kroger Company (The), Reuters, Nasdaq, TradingView, Koyfin
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Click. Pay. Move on.
Consumers love shopping online. This has become a crucial strategy for retailers both globally and in South Africa, effectively turning a traditional shopping experience into a digitally enhanced festival of convenience.
Well, almost. Have you dealt with courier companies before? “Convenience” doesn’t feature for some of them.
Enter the store footprint
This is where omnichannel retail becomes important. Nobody describes omnichannel retail better than the management team at Home Depot ($HD – see our research here) and their comment that there are “thousands of varying paths” where physical and digital assets work in harmony to deliver a great experience to customers.
Or, even more simply, this is the process where you browse online and collect in store. Alternatively, try it out in the store and order online once you’ve made your mind up.
Whatever.
Home Depot doesn’t care which route you take, as long as you buy from them.
Nobody talks about Home Depot as an eCommerce giant, yet the company is the fifth-ranked eCommerce retailer in the US. That’s the overall ranking, not the ranking just in home and building materials.
With a network of over 2,300 stores in North America that can serve as fulfilment centres for orders, it’s little wonder that omnichannel is working out well for Home Depot.
Small stores, big revenues
Back in May, we covered an excellent little company called Lovesac ($LOVE – see our research here). If you’ve ever bought a Fatsak (now called Vetsak) in South Africa, you’ve got the idea. These are premium beanbags and modular couches that are thoroughly modern and extremely comfortable, aimed at a high income consumer market.
The magic in this omnichannel strategy is high trading density – a measure of sales per square metre of trading space. You see, Lovesac has small showrooms that allow customers to at least see and touch a few examples of the products, with all the customisation decisions made using online tools. The showrooms are exactly that: showrooms. This is different to the Home Depot approach of using the retail stores as a glorified warehouse.
In fact, the “big box” approach of a Home Depot means that the retail stores usually are warehouses. They were always built to maximise in-store stockholding and sell bulk goods rather than optimise the customer experience. A showroom is the polar opposite approach to this.
Either approach can work, though a premium strategy with high margins will often carry a premium valuation.
Luxury plays in this space, too
The Magic Markets Premium library has over 80 reports in it, so there are several examples that we can use to make this point. One of them is Farfetch ($FTCH – covered here), an online luxury goods retailer.
You might recognise the name based on a deal that Farfetch concluded with local hero Richemont to take a stake in YOOX NET-A-PORTER, a very strangely named online luxury goods platform. Richemont experimented with this business and didn’t manage to get it right.
It’s not like Farfetch is exactly a gold mine, either. There isn’t much of a moat here and it’s difficult to see a path to real profitability, as is the case for so many online retailers. Farfetch has a particularly confusing business model, as there are some physical stores in the group but not many.
There are at least two lessons from Farfetch: (1) there is demand for luxury goods online and (2) omnichannel is more profitable than pure online retailing, even at this end of the market.
Safe as (ware)houses?
Have you ever wondered what this push into eCommerce and omnichannel means for the property sector?
Even with omnichannel, a shift from retail stores towards warehouse space means that property funds have been experiencing different levels of demand. An omnichannel strategy still requires retail space but the companies can get away with having less space if more sales are taking place online.
Enter Prologis ($PLD – covered here), the world’s largest owner of logistics and warehouse property. Not only is tenant demand strong, but Amazon as the largest tenant is only around 5% of annualised base rent. There are many people knocking on Prologis’ doors for warehouse space, which is good news for pricing power and income growth.
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Advanced Health shareholders are celebrating (JSE: AVL)
Another small listing is on its way out
When you see a share price move 87.5% higher in a single day, it usually means that a buyout offer has come in. This is the case at Advanced Health, where the controlling family is tired of operating in the listed space.
It’s not as though they didn’t try, either. The company listed back in 2014 and failed to attract sufficient institutional investor interest to justify the listing. This problem is pervasive across JSE-listed small- and even mid-caps.
Because the share price then tends to trade at a significant discount to what it is worth, it also becomes very difficult for a company to raise capital.
Under the proposed scheme of arrangement, shareholders other than the controlling family will be able to receive 80 cents per share if all goes ahead. The controlling family owns 71% of the shares in issue and irrevocable undertakings in favour of the deal have been received by shareholders of 6.6% of the company’s shares.
If you express those irrevocable undertakings as a percentage of the shares eligible to vote on the deal, it comes to 22.9% of the total. There’s still a long way to go to get to the approval percentage required for a scheme.
The share price was 40 cents before the deal announcement, closing at 75 cents as it moved close to the price under the scheme.
BDO has been appointed to act as independent expert in providing a fair and reasonable opinion to the independent board. The recommendation by the independent board will be included in the circular issued to shareholders.
Pick n Pay acquires a meat processing business (JSE: PIK)
This is a rare move further up the value chain for a grocery retailer
Now this is interesting. Really interesting, actually. As part of the Ekuseni strategy at Pick n Pay that is basically an attempt to improve the fortunes of the core Pick n Pay grocery business, the group is acquiring the Tomis group of companies for R340 million.
That’s not the biggest deal around by any means, so this update is more about Pick n Pay’s strategic thinking rather than something that will immediately move the dial.
By owning this large feedlot, abattoir and meat packaging plant near Wellington, Pick n Pay will have more control over its red meat value chain and offer to customers. This could make the group more competitive on price, while ensuring more regular supply. And of course, as Pick n Pay includes a substantial franchise component in the group, there is the opportunity to supply franchisees and pick up a greater share of the economic profit pool.
No disclosure has been made on the profitability of the Tomis business, so we don’t know what multiple has been paid. The criticism I have is that that price is heavily front-loaded, with R323 million payable upfront and R17 million payable after three years. That earn-out (assuming it even comes with any conditions) is barely worth bothering with.
Schroder European REIT releases interim results (JSE: SCD)
Property valuations are still under pressure
Schroder European REIT (JSE: SCD) is an incredibly useful example of why property funds aren’t always great inflation hedges. You see, it doesn’t help much if you earn a dividend on one hand but suffer a devaluation in property prices on the other, unless you’re an extremely long-term holder and all you care about is cash.
The net asset value total return of -4.7% is a direct result of decreases in property valuations because of higher rates in the market, which means the yield on which the properties are values is higher.
So even though underlying earnings were 50% higher, there was an IFRS loss because of downward revaluations.
The group remains in good shape though, with a strong balance sheet and a loan-to-value ratio of 32% gross of cash and 23% net of cash. The average cost of debt is 2.5%.
The company has announced its second interim dividend for the year ending 30 September 2023 of 1.85 euro cents per share. Unfortunately, higher rates are putting pressure and the company will see its quarterly dividend drop by roughly 20% in the next quarter.
Even caring only about cash doesn’t work in this environment.
Stefanutti Stocks on the right side of a settlement (JSE: SSK)
With a market cap of just R235 million, R30 million plus interest is material
They didn’t make much of an effort to highlight this fact, but Stefanutti Stocks (JSE: SSK) has settled with the client regarding the contract mining project termination.
Stefanutti Stocks will receive R20 million by February 2024 and a further R10 million by April 2024, with interest calculated from June 2023.
Although the share price closed 15% higher, that trade took place before the announcement and is more a reflection of the bid-offer spread than the market response to this news.
OUTsurance Group (JSE: OUT) previously held 89.73% in OUTsurance Holdings, with the rest held by management and directors. The listed company is trying to increase its stake through issuing shares to those minority shareholders in OUTsurance Holdings, effectively flipping them to the top. One of the directors followed this process and received R20.2 million worth of listed shares, taking OUTsurance Group’s stake from 89.73% to 89.77%. This is technically a director dealings announcement, but the circumstances are different and so I included it here.
Montauk Renewables (JSE: MKR) has announced a renewable natural gas landfill project in Orange County in the US. They already have one project in the region. The targeted commission date is 2026, with expected capital investment of between $85 million and $95 million.
Impala Platinum (JSE: IMP) must be running out of patience by now. The compliance certificate from the Takeover Regulation Panel for the Royal Bafokeng Platinum (JSE: RBP) deal is still outstanding, so the longstop date has been extended once more to Friday, 28 July.
The business rescue practitioners at Rebosis (JSE: REA | JSE: REB) have extended the deadline for binding offers under the Public Sales Process to 17 July 2023.
If by some unlikely outcome you are a shareholder in Deutsche Konsum REIT (JSE: DKR), be aware that a dividend of 12 euro cents per share has been proposed by the board. There is literally never any trade in this stock on the local market.
Empowering the next generation through bursaries and graduate programmes
ITHUBA evolved from a start-up to a stand-out company in only eight years. Recognised as the Top performing Operator in Africa, ITHUBA stands as a shining example of gaming excellence.
In less than a decade since being awarded the licence as the Operator of the National Lottery in June 2015, ITHUBA has successfully built a brand and achieved in each sphere of its business by enhancing the public’s perception of the National Lottery, improving the UX by launching the LOTTO digital platform to reach a much wider audience than ever before.
Embracing the actual value of a National Lottery, ITHUBA changes the lives of citizens through winnings and contributions. In South Africa, it raises funds for the National Lotteries Commission by generating revenue. This revenue directly impacts and affects positive changes throughout South Africa.
Cognisant of the value made towards an improved society, Ubuntu is one of the critical values that has driven ITHUBA, and true to form, its commitment to being a community-oriented company is tangible. It has brought the National Lottery brand closer to its communities, solidifying its position as the Operator that goes above. ITHUBA has demonstrated an unwavering commitment to excellence, exceeding expectations and surpassing their assigned responsibilities.
Social responsibility is one of the founding pillars of ITHUBA’s business operations.
One of ITHUBA’S achievements, closest to CEO Charmaine Mabuza’s heart, is the award ITHUBA received for the Top Empowered Company in the Socio-Economic Development category, awarded at the Top Empowerment Awards in 2022.
Mabuza has said that although each programme is of equal importance, the ITHUBA Scholarship Foundation, aimed at providing tertiary education for matriculants from underprivileged backgrounds, is very close to her heart.
“The ITHUBA Scholarship programme offers students tuition fees, mental health services through ICAS, mentorship and coaching throughout their studies”.
This programme is the cornerstone of the ITHUBA CSI portfolio, with the longest-standing history and impressive reach. The programme covers tuition and study materials, accommodation, meal and personal care allowances, mentorship, counselling and intervention programmes for its beneficiaries.
This initiative has transformed countless lives and has seen its beneficiaries qualify as Doctors, Lawyers, Engineers, and IT Specialists, to name a few fields.
To date, the ITHUBA Scholarship Foundation has seen over 300 beneficiaries graduate.
In the past, ITHUBA ran a Graduate Programme, which was a youth employment initiative placing graduates from Marketing, Accounting and ICT sectors in positions across various departments in ITHUBA for a 12-month internship programme.
While only some of these graduates came across from the ITHUBA Scholarship Foundation, every graduate benefitted immeasurably, gaining invaluable experience at Africa’s leading lottery operator.
Phathiswa Myeni is a proud Graduate of the ITHUBA Scholarship programme – through the foundation, she has been able to pursue her passion by attaining a degree in Finance and has secured a job in Consulting. Phatiswa says that without the help of the foundation, she would have never been able to follow her dreams.
She says, “Most importantly, the Foundation has taught me that through hard work and perseverance through challenging times, I can be what I want to be, as long as I have my head in the right place.”
Driven by their belief that true relief comes through empowerment, ITHUBA’s approach to its education-based CSI initiatives is rooted in sustainability, believing that through education, we uplift and provide long-term solutions for the communities we aim to help. South Africa can only enjoy true transformation if we can all revel in the splendour of opportunity.
ITHUBA stands for equality through opportunity.
ITHUBA has spent the last eight years striving to achieve excellence in each business arena, and its social responsibility portfolio is undoubtedly worthy of celebration.
ITHUBA. Empowering dreams, one story at a time, because every South African deserves a story worth celebrating.
Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.
This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.
In this twentieth edition of Unlock the Stock, Attacq and Tharisa both returned to the platform to update investors on recent performance and the way forward..
As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:
Exxaro confirms the extent of the challenges this year (JSE: EXX)
A pre-close update shows significant drops in key metrics
Exxaro has released a pre-close update dealing with the six months ending June 2023. This period has seen a vast decline in export coal prices, coming in at roughly $127 per tonne vs. $265 per tonne in the comparable period. At least iron ore fines prices are up from $101 to $117 per dry metric tonne.
Coal production and sales volumes are down by 4% and 7% respectively. Demand from Eskom has been lower (-6%) and there have been logistical constraints at Transnet (exports -6%), so Exxaro is being let down by government on all fronts.
At least capital expenditure is 8% lower in the coal business, after several key projects reached completion last year. With a substantial net cash balance, the Exxaro balance sheet is more than capable of withstanding some short-term pressure.
Hyprop is recovering most of its load shedding costs (JSE: HYP)
The local retail portfolio looks pretty good to me
Hyprop is one of the few property funds that I hold shares in. With a strong tilt towards the local malls that remain relevant in an eCommerce world and especially a load shedding world, I’m not surprised to see decent metrics in the South African portfolio.
For the five months to May, trading density (sales per square metre) increased by 8.59% year-on-year, with footcount up by 3.46%. The difference is quite simply explained by inflation.
Tenant demand is good, with low vacancy rates and rent reversions in the 11 months to May of 10.1% (unfortunately down from 12.8% in the interim period). Load shedding and general SA jitters have an impact on rentals that can be charged.
Still, Hyprop has done a great job of shielding tenants from load shedding and has recovered 86% of the R55.3 million spent on load shedding. The group is rolling out solar PV projects at many of its malls.
In Eastern Europe, trading density is up by 18.74% for the five months and footcount grew by 13.80%. Things really are going well for retail property owners in that part of the world.
The portfolio in Ghana and Nigeria is ok in local currency, but expressing it in dollars tells a different story. To be fair, it’s not like the South African portfolio looks great in dollars either. The major focus is on replacing Game leases in the Ghanaian malls.
Hyprop’s loan-to-value sits at an acceptable 37.2% and there is no shortage of demand from lenders for bond auctions and debt raises.
The share price is down 10.7% this year as market sentiment has turned against the property sector and the impact of higher interest rates is being priced in.
Merafe announces a drop in ferrochrome prices (JSE: MRF)
The share price is now down 20% this year
Each quarter, Merafe announces the European benchmark ferrochrome price. This is forward looking, as the price is settled for the next quarter.
Merafe’s share price fell by a further 3.7% based on the news that the ferrochrome price will drop by 12.2% in the coming quarter vs. the quarter that just ended.
Murray & Roberts a step closer to getting RUC back (JSE: MUR)
It’s all very technical from a legal perspective, but Murray & Roberts is trying its best here
If you’ve been following Murray & Roberts recently, you’ll know that the Australian business is in administration. Clough is the real problem, as RUC Cementation Mining Contractors (or just RUC for short) is a decent business that the group wants to hang onto.
This requires a lot of fancy legal footwork, as well as negotiations with creditors.
If they get it right, then Murray & Roberts will re-establish the full scale of its multinational mining platform.
The art of distraction: a lesson by Naspers / Prosus (JSE: NPN | JSE: PRX)
When releasing terrible results, how do you soften the blow for shareholders?
In news that would be hilariously funny if it wasn’t also so obnoxious, Naspers and Prosus have announced that the cross-holding structure will be unwound. Yes, this is exactly the same structure that asset managers begged the management team not to implement in the first place.
Being an advisor to this group truly is the holy grail of professional services. You get paid twice, basically for crossing the road and then retracing your steps. Of course, the management team dresses this up by saying that the deal will enable the repurchase programme to continue, with the removal of complexity (which they caused against everyone’s advice) as only the secondary reason.
Here’s my favourite paragraph from Prosus, where they act all surprised that everyone hated it:
Moving on to the results, the operating loss for the year ended March 2023 has worsened from -$950 million to -$1,338 million. HEPS dropped from 201 US cents to 46 US cents. A lower contribution from Tencent is part of this.
The eCommerce platform is only targeted to be profitable during FY25. Someone needs to do a return on capital calculation to see how long it will take to recoup the losses and then actually reward shareholders. With total losses in just the last two years of $2.7 billion, I think it’s going to take a while.
Food Delivery is growing revenue, with Prosus acquiring the remaining 33.3% stake in iFood from Just Eat Takeaway in November 2022 for a cool €1.5 billion, plus contingent consideration of €300 million. The group says that “profitability improved meaningfully” but that’s rather disingenuous. They should rather say that losses have reduced, as this segment moved from a trading loss of $724 million to $649 million.
The group deployed “only” another €1 billion this year into various other opportunities, noting a sharp rise in the cost of capital. You see, the smart thing to do is wait for the cost of capital to be higher and then deploy capital when assets are cheap. Anyway.
In Naspers specifically, you have to click through to the annual report to get any information on Takealot. The thing still doesn’t make a profit, with revenue up by just 12% and losses of $22 million. If Takealot couldn’t make a profit in the past couple of years, what’s going to happen if Amazon really enters this market?
So, with all said and done, how is it possible that the share price performance over the past year has been strong?
This has nothing whatsoever to do with the underlying portfolio and everything to do with the decision to sell down the Tencent stake and buy back shares. It’s a very short-term win in my view, as the discount may be reducing but the Tencent asset is probably the only thing in the group truly worth owning.
Sephaku releases full year financials (JSE: SEP)
We now have the details behind the recent earnings guidance
Sephaku Holdings’ full year numbers reflect a tale of two businesses.
At group level, net profit after tax fell from R45 million to R26 million. Normalised HEPS fell from 17.67 cents to 10.53 cents, so that clearly isn’t good.
As we drill down, we find that Metier delivered an increase in EBITDA from R78 million to R98 million. Profit after tax increased from R30 million to R43 million. This means that the problems are in SepCem, the local business, which is in line with the guidance released before these earnings came out. Indeed, profit has swung horribly from net profit of R82 million to a net loss of R4 million.
Little Bites:
Director dealings:
I don’t have the full background details to this, but R200 million worth of shares in African Rainbow Capital Investments (JSE: AIL) was sold by ARC Fund to Patrice Motsepe’s family investment vehicle at R6.80 per share (above the current market price of R6.40).
A senior executive of Nedbank (JSE: NED) has sold shares worth R6.8 million.
Des de Beer has bought another R1.08 million worth of shares in Lighthouse (JSE: LTE)
Cognition Holdings (JSE: CGN) is going to camp in the Caxton and CTP (JSE: CAT) head office, so the company can sell its head office for R11.875 million. That’s below the net asset value of the property subsidiary, which was R14.5 million as at 30 June 2022.
Attacq (JSE: ATT) has renewed the cautionary announcement related to the proposed acquisition of 30% of the Waterfall portfolio by the Government Employees Pension Fund. Final legal agreements have not yet been concluded.
Vukile Property Fund’s (JSE: VKE) B-BBEE partner, Encha Properties, has sold just over 3.5 million of the 5.5 – 6.5 million shares that the company intends to dispose of as part of loan arrangements with Investec.
The Competition Tribunal has approved the transaction to internalise the Investec Property Fund (JSE: IPF) ManCo without any conditions. Shareholders will now watch significant value be transferred to the management team, which is exactly what they voted in favour of.
NEPI Rockcastle (JSE: NRP) continues to cleverly play the green financing game, updating its Green Financing Framework with more stringent eligibility requirements. This strengthens its commitment to sustainability, which is the warm-and-fuzzy way of saying that the company intends to continue tapping into cheaper green finance.
If the AngloGold (JSE: ANG) sign-on bonuses for executives are anything to go by, then a career in mining is a very good alternative to European football. There are execs banking awards of over R18 million just for joining the company!
Eastern Platinum (JSE: EPS) has retained the services of an investor relations and communications firm based in Canada. There’s a base monthly fee and stock options that vest in 90 days, which I found rather interesting. They carry a term of five years.
Amid the rollercoaster ride of uncertainty in the equity market, is PepsiCo, Inc (NASDAQ: PEP) a refreshing oasis?
Like the effervescence in its legendary cola, PepsiCo has a dividend track record that shines brightly and entices investors looking for resilience in this environment. Management has managed to blend a tantalizing range of products with a dividend growth that never seems to lose its fizz.
PepsiCo’s performance in the first quarter of its 2023 fiscal year spoke volumes.
The company showcased its robustness with earnings per share (EPS) of $1.40 and revenue hitting an impressive $17.84 billion. Notably, revenue increased by 10.2% compared to last year’s quarter, driven by 14.3% organic growth.
This growth provided a strong foundation for the year ahead, prompting management to upgrade their full-year organic revenue growth projection from 6% to an impressive 8%. Furthermore, the EPS growth forecast received a boost, up from 8% to a solid 9%.
These impressive results demonstrate PepsiCo’s ability to navigate challenging market conditions, leveraging its substantial pricing power and strategic positioning within the industry.
Technical
The bulls gained support in the first week of June to begin the retracement from the swing low at $179.47, where they have moved towards the 38.2% Fibonacci retracement at $186.03 on the 1D chart.
With the momentum currently in the bulls’ favour, a break above the 50-day moving average of $187.08 could indicate further immediate positive momentum, which might encourage the bulls to extend the retracement towards the Fibonacci midpoint at $188.10 and the golden ratio at $190.17. The rise may continue in the direction of the channel resistance at $196.70 if the bulls capitalize on the momentum to break above the $193.12 level. From there, the estimated fair value of $208.08 is in sight, offering a possible upside of 12.5% from the existing levels.
The bullish investor could, however, also hold out for more enticing entry positions that might become open if the market rejects the golden ratio. In such a scenario, lower support between $182.61 and $177.30 could be crucial as the market might find support there.
Fundamental
PepsiCo finds its place within the consumer staples sector, renowned for its resilience against the ups and downs of the macroeconomic cycle. Among the numerous factors that make PepsiCo an enticing choice for investors during periods of high inflation is its adeptness at transferring increasing input costs to the end consumer. In the most recent quarter, inflationary pressures were especially intense, compelling the company to raise its average prices by 16%.
Surprisingly, this move only led to a modest 2% decline in organic volume, thanks to PepsiCo’s robust brand presence and its inherent ability to command favourable pricing. Consequently, the company successfully maintained an attractive gross margin of 55.2%, reflecting its impressive capacity to weather inflationary challenges while preserving profitability.
However, while the insulation against negative shifts in the economic cycle has its advantages, it also comes with an opportunity cost of potentially missing out on market upturns. This trade-off is evident when comparing the price return of the consumer staples sector, as depicted in the graph below. Over a 10-year period, the consumer staples sector shows a price return of 83.5%, which falls short of the S&P 500’s impressive return of 170.9%. However, it is worth noting that the consumer staples sector generally experiences lower volatility.
Both PepsiCo (126.5%) and Coca-Cola (52.9%) significantly underperformed the broader market. However, PepsiCo managed to generate a respectable return that surpasses that of the consumer staples sector. It is essential to consider that the top half of the graph primarily reflects price returns.
When factoring in total returns, including dividends, PepsiCo emerges as an outperformer. Over the course of ten years, PepsiCo exhibits a total return of 201.8%, surpassing that of the S&P 500. This highlights the significance of PepsiCo’s robust dividend payments, which contribute to the overall returns enjoyed by its shareholders.
Illustrated in the graph below, PepsiCo showcases its financial strength through a considerable 2.54% dividend yield and an impressive track record of 51 consecutive annual dividend increases. This translates to a dividend per share (DPS) payout of $1.15, with a payout ratio of 69%.
In contrast, Coca-Cola operates with a relatively higher payout ratio of 80%, partially influenced by its lower earnings per share (EPS). Coca-Cola’s dividend payout stands at $0.44 per share, accompanied by a dividend yield of 2.18%. These figures highlight PepsiCo’s robust dividend performance when compared to its primary competitor, underscoring its position as a dividend powerhouse.
However, certain concerns emerge when evaluating the long-term sustainability of these dividends. The first issue is exemplified in the graph below, shedding light on the company’s relatively modest cash reserves and its limited generation of cash from operations, particularly when compared to its long-term debt obligations. However, this is not an immediate cause for alarm, as PepsiCo maintains a well-structured debt schedule with only $5.95 billion of its long-term debt maturing in 2024, which its available cash can comfortably cover.
Nonetheless, a more prolonged concern arises regarding the company’s ability to consistently increase its dividends, as it may be required to allocate a portion of its future generated cash towards reducing its debt burden. This raises questions about the company’s capacity to sustainably grow dividends in the long run, which is what makes it an attractive investment opportunity to start with.
In addition to its significant debt burden, the company exhibits meagre free cash flow levels, with multiple quarters experiencing negative cash flow over the past five years. As depicted in the graph below, the company’s free cash flows have been inconsistent, lacking steady growth. Recent quarters have seen increased capital expenditures due to investments in supply chain enhancements, manufacturing capacity, and leveraging IT for growth opportunities.
However, investors would ideally expect this increased spending to translate into a consistent generation of free cash flow, which can be distributed to shareholders. Until that occurs, the company’s appealing dividend payments are primarily funded by its debt position. Although this is not an immediate cause for concern, as mentioned earlier, it is not sustainable in the long term unless the company can achieve consistent free cash flow expansion.
Summary
PepsiCo has solidified its position as a profitable and secure investment option, shielding investors from the inherent volatility of the stock market. While their enticing dividend payouts contribute to impressive overall returns, it is important for investors to monitor the sustainability of these dividends. The company carries a significant debt burden and has limited free cash flows available to support the enticing dividend payments.
However, there is potential for improvement in the future, as PepsiCo is making considerable capital investments in growth initiatives. If these investments lead to a recovery in free cash flows and consistent growth, concerns regarding the debt position may be alleviated. In such a scenario, there is a potential upside of 12.5% if the share price reaches the estimated fair value of $208.
Sources: Koyfin, Tradingview, Reuters, Yahoo Finance, PepsiCo, Inc.
Crookes Brothers is heavily loss-making (JSE: CKS)
Primary agriculture doesn’t always grow, sadly
There’s no business quite like show business. Farming is a close second.
Crookes Brothers enjoys far more liquidity on its farms than in its share price. Even a really tough trading statement couldn’t cause any afternoon trade, with no shares changing hands despite an announcement being released.
During a very difficult period in the year ended March 2023, the headline loss per share came in at a rather revolting 708.80 cents. For reference, the prior period saw positive HEPS of 229.60 cents.
For reference, the share price is R32.
Fortress: life after REIT (JSE: FFA)
With a share price up 20% this year, life isn’t so bad after losing REIT status
Capital flexibility really isn’t a bad thing in this environment. After losing REIT status, Fortress doesn’t have to meet the onerous distribution requirements any longer. This means the fund isn’t on the same treadmill as the REITs on the JSE that are constantly having to generate and distribute earnings.
The company has been very busy with property sales, with disposals of R1.2 billion and the recycling of capital into new logistics opportunities.
The vacancy rate in the logistics portfolio is just 1.2%. Perhaps even more impressively, the local retail portfolio has a record low vacancy rate of 2.0%.
The initial yields on the warehouse developments aren’t going to set your pants on fire. They seem to be between 8.5% and 9.0%. In the Central and Eastern Europe portfolio, the yield on new properties is between 6.8% and 7.4%.
Pick n Pay walked away from joint ownership of a new warehouse with Fortress, electing to pay a higher rental instead of owning part of the property. Although a retailer should certainly have better uses for the capital than owning a warehouse, I do wonder about these rental yields in an environment where the prime interest rate is now 11.75%.
Speaking of retailers, Fortress is buying the old Pick n Pay warehouse for R500 million plus a spend of R65 million on the property. A portion of it will be sold to Dis-Chem for R492 million (with thanks to @jacojanscholtzon Twitter for correcting my misread of the SENS here).
In the Industrial portfolio, vacancies increased from 4.5% in December 2022 to 7.2% in May 2023. The Office portfolio is less than 4% of total assets and has seen vacancies go in the right direction, though they remain high at 20.7%.
As a reminder, Fortress owns a meaty 23.9% stake in NEPI Rockcastle (JSE: NRP), a property fund that seems to enjoy a good reputation among local investors.
The loan-to-value ratio at Fortress is 37.3%.
Distributable earnings guidance for the year ended June 2023 has been increased from R1.66 billion to R1.74 billion.
Invicta beat all the odds this year (JSE: IVT)
The group shrugged off geopolitics and other challenges in 2023
In the year ended March 2023, which has hardly been an easy time in the world, Invicta grew revenue by 8.1% and HEPS by 47.9%. The dividend per share is 11.1% higher. This is a proper performance.
The disparity between HEPS and dividend growth becomes even more interesting if you look at operating profit growth, which was only 7%. The trick here is that the share of profits from joint venture Kian Ann is accounted for below operating profit and this metric was up by a lovely 50%.
An important feature of this result is that the entire group did well. Return on net operating assets was solid across every division.
Looking ahead, the group is investing in China. BMG China is off to a slow start but Invicta remains optimistic there, having taken a 40% share in an industrial consumable parts business in China for R45 million. The group is also developing energy conversion technologies in China, adding another layer of diversification.
The share price closed 3.6% higher as the market applauded a set of results where the only blemish was perhaps in cash conversion, specifically due to working capital differences vs. the prior year.
Mantengu Mining is buying back its shares (JSE: MTU)
The current share price is way below the board’s opinion on intrinsic value
When a share is trading below what the directors think it is worth, share buybacks are a good way to allocate capital on behalf of shareholders. The company is literally investing in itself, mopping up shares at a good price and leaving the remaining shareholders in a better position than before.
That’s the theory, anyway.
Share buyback discipline is sorely lacking in many companies. I was impressed to see Mantengu Mining announce a share buyback programme, particularly as this says something about management’s view on future cash flows from Langpan Mining.
The current share price is R1.70 and the board believes that the intrinsic value is R5.55 per share. That’s a big gap that certainly justifies a buyback programme.
The market cap is only R260 million, so getting enough stock to make a meaningful difference isn’t going to be the easiest. Still, those looking for exit liquidity at this price will likely find the company itself on the other side of the trade!
Nedbank is keeping the market well informed (JSE: NED)
The four-month update has been supplemented by a pre-close update
It’s always good to see listed companies giving more information than the minimum required. In this case, Nedbank is really going above and beyond. The ink was barely dry on the update dealing with the four months to April before Nedbank released a further update with news on May and the expectations for the rest of the year.
Nedbank expects GDP growth for the full year of 0.1%, which is at least on the right side of zero. A further 25 basis points increase in the prime rate is expected this year.
The good news is that the guidance given in the previous update remains correct. This means growth in net interest income above mid-teens, with net interest margin above the 410 basis points in the comparable period last year.
The group credit loss ratio is expected to be above 100 basis points, which means it is higher than the target range. As we’ve seen in other banks, the retail and business banking credit loss ratio is worse than in the corporate and investment banking side of the group.
Non-interest revenue is key to driving a higher return on equity and this metric grew by high single digits to the end of May, with full-year guidance of mid-single digit growth.
Expenses are up by high single digits, with mid-to-upper single digit growth expected for the full year.
Despite the growth in income being higher than expenses, as well as the solid growth in associate income from the African investment, headline earnings growth will be “muted” for the first half of the year with a better performance expected in the second half of the year.
The good news is that the share repurchase programme has been executed at a price below book value, which the group notes is accretive to return on equity and diluted HEPS.
PPC releases detailed annual results (JSE: PPC)
These won’t come as a surprise, after the last detailed update
If you remember nothing else about PPC, remember that the businesses on the rest of the continent are showing a happier trajectory than South Africa. This is despite the weak rand making cement imports less competitive than usual. Also remember that the bulk of PPC’s business is local, so “trajectory” and “paying the bills” are two different things.
The reality is that in a slow growth environment with insufficient investment in infrastructure, capacity in PPC’s local business goes to waste. Any uptick in demand would do wonderful things for the PPC business, as an industrials group improving its capacity utilisation is where the true magic of operating leverage becomes visible.
For now, the “SA obligor” results (i.e. South Africa and Botswana) reflect revenue growth of 1% and a drop in EBITDA margin from 11.8% to 8.7%. Despite this, net debt improved by R263 million. The SA obligor group is still profitable, but less profitable than it could be.
Hyperinflation significantly impacts the reported results in Zimbabwe, but the important point is that the dividend has increased from R91 million to R147 million. The Rwanda business paid an inaugural dividend of R79 million to the group.
Perhaps the most interesting thing is that debt levels in the SA obligor group are considered to be at an optimal level of gearing. Instead of using dividends from the other African businesses to reduce debt, PPC is able to return cash to shareholders. This takes the form of a share repurchase of R200 million that has been approved by the board.
Primeserv expects a solid jump in earnings (JSE: PMV)
The share price closed 13% higher, but watch that bid-offer spread
In a trading statement dealing with the year ended March, Primeserv’s HEPS is expected to increase by between 24% and 32%. Results will be out on Thursday, so that will give us full details.
Although the share price closed 13% higher, that was purely because the bid-offer spread is enormous. There are many offers in the market at R1.30, which is where the bid finally hit based on this trading statement.
You always have to be careful when interpreting major daily moves in illiquid companies.
RECM & Calibre (RAC) can attribute 95.7% of its asset exposure to its 58.8% stake in alternative gaming group Goldrush. Before you get throwbacks to Dodgeball, we aren’t talking about that kind of alternative gaming.
Goldrush operates electronic bingo terminals, limited pay-out machines, sports betting shops and online betting businesses. Three of the four lines of business are significantly affected by load shedding. Shopping at Mr Price by torchlight is one thing, but there really is no way to play an electronic game without electricity.
The problem in this period was the move from stage 4 to stage 6 load shedding. Frankly, no business in South African can withstand stage 6 for an extended period.
Despite the challenges, Goldrush grew revenue by 18% and EBITDA by 2% without the effect of IFRS 16, an accounting standard that is perhaps final proof that accountants need to get out more and spend time in real businesses before setting standards. EBITDA would’ve been up by 9% if not for a once-off gain on settlement of a finance arrangement in the prior year.
RAC is structured as an investment holding company. The investment in Goldrush is valued at 7x EBITDA. The equity value of Goldrush has increased by 6% over the past year, with a total return of 9% including the dividend. At RAC level, the net asset value per share grew by 7.3% including the impact of Astoria (JSE: ARA) shares that were unbundled to shareholders.
But perhaps the most interesting part of this announcement is buried right at the bottom:
Simply, this means that the management fees will now be calculated with reference to the market cap (what the market says the business is worth), rather than the director’s valuation of the underlying company. That’s a significant step for an investment holding company to take, building more alignment between management and shareholders.
Renergen hits the milestones (JSE: REN)
The US congressional notification process is complete
After the major US debt package was recently announced, there were a couple of key conditions that need to be met. One was a US congressional notification, which is now complete. The other relates to a large equity capital raise, which is where the focus will now sit.
In a quarterly review, Renergen highlighted the debt funding as the biggest step forward this quarter. There was other good news too, like a contract to supply LNG to Timelink Cargo.
It wasn’t all smooth sailing, with a leak detected in the helium circuit that requires an off-site repair. Although these are hopefully teething problems, it’s a reminder that the production process isn’t simple.
In case you’re wondering, a drilling programme is still underway. The colourful names continue, with the Morpheus well as the recent focus.
Revenue from customers in this quarter was R14 million and administrative and corporate costs were nearly R20 million.
Little Bites:
Director dealings:
Des de Beer is back in action with Lighthouse (JSE: LTE), this time buying R12.9 million worth of shares.
A non-executive director of Stadio (JSE: SDO) has bought shares worth R180k.
If you hold fewer than 100 shares in CA&S Holdings (JSE: CAA), then you need to be aware that the odd-lot offer was approved by shareholders. This is being structured as a dividend, so there is dividends withholding tax on the amount paid to shareholders under the offer. This is particularly important for individual shareholders, as the price is R7.06 before tax and R5.65 net of tax. You can elect not to sell, but you need to specifically make that election. If you do nothing and you hold them in your own name, you could be worse off than if you just sold the shares on the open market.
Castleview Property Fund (JSE: CVW) is selling the Makhaza Shopping Centre in Khayelitsha to a related party for R140 million. This is above the valuation in the March 2023 books of R136 million. Despite being to a related party, the sale is so small as a percentage of the market cap that no shareholder approval is required.
With the Impala Platinum (JSE: IMP) corporate action still underway, Royal Bafokeng Platinum (JSE: RBP) has extended the appointment of its interim CFO. There are still a couple of conditions precedent to be met, with the Takeover Regulation Panel as the major remaining hurdle.
AngloGold Ashanti (JSE: ANG) is trying quite hard to move the narrative away from the horrible quarterly update that came out last week. The company announced a deal for a large wind and solar renewable energy project at the Tropicana Gold Mine in Australia. A third party, Pacific Energy, will construct the project under a 10-year power purchase agreement. It will be integrated into the existing gas-fired facility at the mine. This will be the largest off-grid gas-wind-solar project with battery backup in the Australian resources sector.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover these important stories on the local market:
Afrimat is acquiring Lafarge South Africa, a deal announcement that came against a backdrop of disappointing recent performance across the local cement industry.
AngloGold is a perfect example of why I think gold stocks are for trading rather than investing.
Harmony Gold is trying to wave the flag for the sector, though the move into copper says something about gold mining in general.
Growthpoint gave the market an honest assessment of near-term performance in this interest rate cycle and the share price took a knock as a result.
Mr Price released a poor set of numbers, raising questions around whether they have lost focus on the core business in a busy period of M&A.
FirstRand and Standard Bank are both rewarding shareholders, with surprisingly different pros and cons in the recent numbers.
Steinhoff has released possibly its final report as a listed company.
The Ghost Wrap podcast is proudly brought to you by Mazars, a leading international audit, tax and advisory firm with a national footprint within South Africa. Visit the Mazars website for more information.
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