Challenging conditions – both of a global nature and those of SA’s own making – have severely curtailed the number of mergers and acquisitions recorded by DealMakers for the first three months of this year. However, though there is still much uncertainty (with rising interest rates and the risk of a total grid collapse a very real possibility), M&A activity has gained some momentum since the quarter close, where companies carrying strong balance sheets and having the ability to move quickly have taken advantage of opportunities and distressed situations.
Deal activity by corporates listed on one of the local exchanges declined 61% on levels reported in Q1 2022, with the aggregate value of deals at R31,72bn from 59 deals (2022: 94 deals valued at R81,82bn). The largest deal by value for the quarter, and the only BEE deal for the period, was Absa’s disposal of a 7% stake valued at R11,6bn.
The most active sectors were Real Estate (30% of the quarter’s deals) followed by the tech and energy sectors. Deal size fell typically in the R50m to R200m bracket reflecting c.30% of deals recorded for the period. SA-domiciled companies were involved in 18 cross border transactions, notably in Australia (5) and Europe (5), followed by Africa (4).
Share issues and repurchases characterised the general corporate finance activity for the quarter, with R212,59bn raised from the issue of shares and R109,54bn the value of shares repurchased. The repurchase programmes of Prosus, Naspers and Glencore account for most of this value, while the aggregate value of Richemont’s issue of A shares (conversion of depositary receipts) was R196,56bn.
In March, the International Monetary Fund cut its growth forecast for SA to just 0.1% for 2023, warning that the country risked economic stagnation unless it acted with urgency. The solution for economic reforms to tackle fiscal and structural challenges, and so boost growth, is to involve business. The longer it takes for this to be realised, the greater the risk of further deterioration in business and consumer confidence and levels of fixed investment.
DealMakers Q1 League Table – M&A activity by the top South African advisory firms (in relation to exchange-listed companies).
DealMakers Q1 League Table – General Corporate Finance activity by the top South African advisory firms (in relation to exchange-listed companies).
Following the April announcement by the Takeover Regulation Panel on its findings into the investigation into companies including African Phoenix Investments and the settlement reached, African Phoenix Investments has made a mandatory offer to all shareholders of R6.41 per share for the remaining 51.2% stake (excludes concert parties) in enX. Shareholders holding 19.6% of the total shares in issue (again excluding concert parties) have provided irrevocable undertakings not to accept the offer. The offer price reflects a discount of R0.06 (0.877%) to the 30-day volume weighted average price of the enX share prior to the announcement.
Absa has acquired a minority stake in Khula! a local agri-tech startup founded in 2016. The app’s platform connects farmers to the retail, wholesale and export markets creating an ecosystem to address challenges across the agricultural value chain.
Through its subsidiary Alexander Forbes Financial Services, Alexander Forbes has concluded a binding agreement with TSA Administration to acquire a 60% stake in the risk insurance administrator for an undisclosed sum. TSA will operate as an independently managed unit within the group and Alexander Forbes has the option to acquire the remaining 40% of TSA over a period of five years. The purchase consideration will be settled in cash.
Steinhoff International is to dispose of its 50.1% stake (an economic interest of 45% on a fully-diluted basis) in the Mattress Firm to Tempur Sealy International. Under the terms of the agreement, Tempur Sealy will acquire 100% of the equity in the Mattress Firm for an enterprise value of c. $4 billion. The consideration will consist of c.$2,7 billion in cash and 34,2 million shares in Tempur Sealy. Following the transaction, which is expected to close in the second half of 2024, Steinhoff will indirectly own c.7.5% of the combined company. The share consideration received will be subject to a three month lock up. Proceeds from the sale will be used to repay financial indebtedness.
The Futuregrowth Community Property Fund (Old Mutual) has acquired Sam Ntuli Mall for an undisclosed sum. The acquisition of the property brings the Comprop portfolio to 24 shopping centres valued in excess of R7,3 billion.
The deal announced in July 2022 between Vukile Property Fund and the City of Johannesburg (COJ) for the acquisition by Vukile of the Pan Africa Shopping Centre has been terminated. Shareholders were advised that the COJ ‘failed to review and grant the amendment to the notarial head lease and to consent to the cession and assignment of the lease to Vukile”.
Unlisted Companies
Oakantswe Construction and Projects, a Pretoria-based, black women owned and managed electrical contracting firm, has received funding from the Abadali Equity Equivalent Investment Programme (EEIP) administered by Edge Growth. The funding will be used to enhance service delivery by reducing equipment hire costs and improving turnaround times and to establish an inhouse qualified team.
Mineworkers Investment Company through its venture capital initiative Khulisani Ventures, has announced a R25 million investment in healthcare technology company Quro Medical. The startup provides premium healthcare solutions at affordable rates such as the Hospital at Home Program, the first of its kind in Africa.
Black-owned and managed investment holding company Sithega has acquired a 62% stake in Legal Expenses Group Africa for an undisclosed sum. The remaining stake is held by Hollard. This is not the first time that Hollard and Sithega have stitched a deal together – in April 2019 Sithega acquired a controlling stake in Prescient from Hollard and anchor investors.
Afrihost, a South African Internet Service Provider, has acquire a majority stake in Home-Connect from CipherWave as consolidation of the local fibre market continues. Financial details were undisclosed.
Go Life International is to issue 475 million shares to raise cash to settle creditors. The company will issue 232,5 million shares each to Novanod and DVN Family office and a further 10 million shares to Yusuf Sooklall. Novanod and DVNFO have also agreed to provide additional funds of R3 million (R1,5 million each) as additional loan funding towards the settlement of remaining creditors amounting to c.R2,8 million.
PSG Konsult is proposing to change the company’s name to PSG Financial Services Limited. The reason given by the Board for the proposed name change is that it believes it to be a more descriptive name for the comprehensive services the company offers. Shareholders will be asked to vote on the proposition at the next annual general meeting.
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:
South32 has increased its share repurchase programme by c.$50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,093,372 shares at an aggregate cost of A$4,55 million.
Glencore this week repurchased 11,600,000 shares for a total consideration of £52,22 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 2 to 5 May 2023, a further 2,261,846 Prosus shares were repurchased for an aggregate €150,68 million and a further 337,954 Naspers shares for a total consideration of R1,07 billion.
Two companies issued profit warnings this week: Efora Energy and Quantum Foods. And one company issued or withdrew a cautionary notice: PSV.
Acasia Ventures has led a seven-figure pre-seed investment in Egyptian fintech startup, Balad. Launch Africa, Future Africa, V&R, Magic Fund, First Circle, Sunny Side and several family offices also participated in the remittance-focused, fintech’s first funding round. Founded in 2022, the company will use the investment to launch the remittance platform, develop platform technology, hire new staff, obtain licenses and complete integrations with its banking partner.
Canadian miner Fortuna Silver Mines has offered to acquire 100% of ASX-listed Chesser Resources in a share swap deal that equates to a fully diluted equity value of c.A$89 million. The addition of Chesser’s Diamba Sud Gold Mine will expand on Fortuna’s existing African footprint in Burkina Faso and Côte d’Ivoire.
Egypt’s Helpoo has received an undisclosed investment from Saudi Arabia’s Morni. The deal forms part of a planned US$10 million investment in the Egyptian market by 2030, announced last year. Helpoo is a tech-enabled service app that provides motor vehicle insurance inspections, insurance claim management and road assist services.
The Central Bank of Kenya announced that Cactus Cantina Investments, a Kenyan subsidiary of Delaware-based fintech Shara Inc, had acquired a 55.8% controlling stake in Maisha Microfinance Bank. Financial terms were not disclosed.
The UAE’s Khazna Data Centers and Egypt’s Benya Group have announced a joint venture to build Egypt’s first hyper-scale data centre at the Maadi Technology Park. The new US$250 million state-of-the-art data centre is expected to have 25 MW of IT load capacity.
MG Health has raised US$18 million from international investors. The Lesotho based cannabis cultivator plans to increase its production and scale up exports to countries such as Germany, Australia, Poland and Israel.
Orascom Investment Holding has invested in e-mobility platform, BluEV. The company manages a smart network of battery swapping stations which enables sustained urban transportation by promoting the decarbonisation of two- and three-wheel vehicles. The value of the investment was not disclosed.
In the current economic environment, and in pursuance of various commercial goals, business owners frequently sell their business interests.
The sale of shares in a business, whether to reinvest in a more profitable business, withdraw one’s interest from the business sector, or simply sell the interest to one’s best advantage, can be structured in various ways.
From a tax perspective, the capital gains tax consequences arising from the disposal of a business interest (i.e., the disposal of shares) become relevant. Several variations of sale agreements can be entered into with the consideration being received by the seller at different stages of the transaction, depending on its nature and content. This article will focus specifically on the tax consequences that will be incurred depending on the timing of the receipt of the consideration.
Receipt of proceeds on the date of sale
From a tax perspective, the disposal of a business interest will typically be deemed to take place once all the suspensive conditions have been lifted. Therefore, where a business interest is sold and the seller receives the full proceeds (the consideration) in the same year, capital gains tax will be payable in the year of assessment in which the asset is disposed of.
In considering the amount of tax to be paid, the identity of the holder of the shares should be considered. The sale of capital assets by a company attracts capital gains tax at an effective rate of 21.6%, which is slightly higher than the effective rate of 18% applicable to individuals but lower than the effective rate of 36% pertaining to trusts. Typically, however, in the context of a trust, the capital gain can be distributed to the beneficiaries of the trust and, therefore, taxed at the marginal tax rates of those beneficiaries, which in the case of natural persons will, again, be 18%.
Receipt of proceeds over time
The sale of shares that is subject to a suspensive condition can only be said to be disposed of once the underlying conditions are all met. Where all the conditions are met in year one but the consideration is payable in annual instalments over a period of, for example, four years, tax will remain payable on the full amount in year one. This is so because the suspensive conditions underlying the agreement would have been met and, therefore, irrespective of when the consideration for such disposal is received, the full tax amount will be due in the first year of assessment.
The receipt of consideration in instalments over time does not suspend the capital gains tax consequences where all the underlying conditions of the agreement are met. Accordingly, because the tax is triggered on the entire proceeds in the first year, it could potentially lead to cashflow problems for the seller while the balance of the proceeds remain outstanding.
On the contrary, where a portion of the proceeds of the transaction is subject to a suspensive condition which will be fulfilled over time, the capital gains tax will likely become payable in differing parts. For illustrative purposes, let’s assume that some conditions are required to be met in year one, after which 70% of the consideration is payable, with the remaining 30% to be paid in year two, upon fulfilment of further conditions. In this scenario, capital gains tax will be payable on 70% of the consideration upon fulfilment of the stipulated conditions for year one, with capital gains tax being payable on the remainder in year two, provided that the remaining conditions are met. In this scenario, typically, the cashflows and the tax liability will be aligned.
Receipt of proceeds: initial and contingent consideration
Where the sale of shares is subject, in part, to an earn-out-clause, the capital gains tax consequences could be spread over multiple years of assessment. In such instances, a portion of the proceeds will be fixed, with the remainder portion being subject to variable metrics.
Should the fixed consideration received in year one be less than the base cost of the shares, a capital loss will be realised; however, the remainder portion of the proceeds does not accrue to the taxpayer in the same year of assessment. Accordingly, the capital loss determined must be disregarded and can only be taken into account in future years of assessment, once a capital gain is realised on the disposal of the asset as a whole. If, after all the proceeds have been settled, no capital gain is realised, then the capital loss can be utilised in the same year of assessment against other capital gains.
As is demonstrated by the above examples, there is often a mismatch between commercial and tax considerations underlying transactions. Often, there is a general misunderstanding that the payment of the tax will coincide with the receipt of the sale proceeds. This is not always the case and, therefore, care needs to be taken in the conclusion of sale transactions to ensure that there is no mismatch between the tax payment and the receipt of the cash proceeds. Alternatively, where such a mismatch cannot be avoided commercially, planning for the cashflow to settle the tax liability timeously will be extremely important.
Angelique Stronkhorst is a Consultant and Bobby Wessels a Manager in Corporate and International Tax | AJM.
This article first appeared in DealMakers, SA’s quarterly M&A publication DealMakers is SA’s M&A publication www.dealmakerssouthafrica.com
Nine months into the financial year, Harmony is on track to meet full year guidance
In the latest quarterly result, Harmony focuses on the year-to-date numbers as there are now three quarters out of the way. Although gold revenue is only partially in the company’s control, it increased by 11% year-on-year. A 13% increase in the average gold price was the magic here, with a 2% increase in production if we allow for the closure of Bambanani at the end of FY22.
With only an 8% increase in group all-in sustaining costs (AISC), group operating free cash flow increased magnificently by 49%. This biggest driver was a 94% increase in South African underground operating free cash flow that enjoyed higher recovered grades.
Net debt to EBITDA has improved to 0.5x from 0.6x at the end of the prior quarter.
The company is on track to meet FY23 production, cost and grade guidance.
When looking at Harmony, don’t forget that the company has strategically decided to increase exposure to copper. One wonders if the name Harmony Gold will be changed at some point in future.
Lesaka Technologies is still loss-making (JSE: LSK)
There’s a long way to go here, as profits aren’t sufficient to cover finance costs
Lesaka is in the process of a turnaround, which included the recent acquisition of the Connect Group. Although such a large acquisition obviously did wonderful things for revenue, the reality is that there is still an attributable net loss. In fact, it is bigger in the latest quarter ($5.8 million) that it was a year ago ($3.3 million).
If you make several adjustments, including casually ignoring the net interest expense, you’ll arrive at a positive operating income number. In other words, the group doesn’t have sufficient profits to cover the debt on the balance sheet after the acquisition of Connect Group.
With a market cap of R3.5 billion, the market seems to still believe in the long-term story of taking FinTech services to mass market consumers.
A little ray of sunshine (JSE: SSU)
Southern Sun released solid numbers and fell 1.8% anyway in the market sell-off
Nothing with substantial exposure to South Africa was spared on Wednesday. As commentators on Twitter lamented the volumes on the market, South African equities were wiped out amid concerns about our country. It’s hard to argue at this point.
Southern Sun tried its best to cast some light on a dark day, releasing numbers that reflect a strong return to profitability. There is noise in the numbers (a separation payment this year from Tsogo Sun Gaming and an insurance payout in the prior year), so adjusted HEPS is probably the most sensible measure here. For the year ended March, that metric has increased to between 27.0 and 32.0 cents vs. the prior period headline loss of 8.0 cents.
Obviously, this was driven by improved conditions in the travel industry. It’s also exciting to note that demand for conferencing and events has increased. The one exception is Sandton, which is performing below pre-Covid levels as companies adopted a hybrid working culture during the pandemic and have stuck with it.
Net debt is down at R1.3 billion. For reference, the group market cap is R6.6 billion.
The share price has fully recovered to pre-Covid levels, though it does seem to be running out of steam:
TFG lost R1.5 billion in turnover this year to Eskom (JSE: TFG)
Where else could the R200 million in power backup capex have been spent?
The Foschini Group (TFG) achieved retail turnover growth of 14.3% in the fourth quarter of 2023. It’s important to understand where the group makes its money, so here’s a snippet with TFG Africa optimistically highlighted in yellow as a symbol of my desire for electricity:
As we dig into the South African numbers, turnover growth was 6.0% excluding Tapestry Home Brands, which reflects a likely drop in volumes based on where inflation has been. So, it makes sense to see such high revenue growth at group level when you take the major acquisition into account, as South Africa was up 15.6% without that adjustment.
That’s still an impressive number when you consider the substantial impact of load shedding, something that is only getting worse. Significant power cuts over the festive period led to markdowns of inventory as sales didn’t meet expectations, so gross margins fell 2.1% in TFG Africa for the full year compared to the prior year.
Good news in my view is the split between cash and credit sales growth, with the former up 17.8% in TFG Africa and the latter only up by 9.6%.
At first blush, it looks like TFG London performed poorly with a turnover decline of 5.2% in the fourth quarter. The group expected this, as a strategic decision has been made to make the business smaller and more profitable. The profits are what actually count.
TFG Australia managed 6.7% growth in local currency in the fourth quarter.
I was quite pleased to see online retail turnover increasing its contribution to group turnover. I firmly believe that many of the consumer habits created during the pandemic will stick around, so this supports my thesis. Online sales contributed 10.8% to group turnover vs. 10.5% a year ago. The country-level contribution still varies wildly, with TFG Africa at 3.5%, TFG London at 49.6% and TFG Australia at 6.4%.
TFG loves a good bolt-on acquisition and the latest example is the acquisition of Street Fever, a group operating through the Sneaker Factory brand. All conditions have been met and the deal has closed.
The group is treating 2024 as a year of “consolidation and focusing on improving operating leverage” – in other words, taking a defensive approach in response to local operating conditions. There is also a high base effect in both offshore businesses, with sales down year-on-year in April in both London and Australia.
The share price is down 14.6% this year, reflecting the broader problems in our economy.
The only transaction in Transaction Capital was the sell button (JSE: TCP)
A 35% drop in the share price says as much about SA Inc. as it does about the company
The last time we were this upset as a country, Donald had dropped the bat and we walked away empty-handed from a Cricket World Cup. That trauma feels very mild compared to the current cocktail of doom being served up by Eskom and its effect on our economy. It’s like a cancer that is growing in intensity by the day, with many victims along the way.
Having been smashed by 35% on Wednesday after releasing results, Transaction Capital is now way down at R7.11. For reference, my average in-price is R12.23 and that was after adding to my position at a similar level to where the directors recently bought shares. I would also point out that if you show me someone who has never suffered a loss in the market, I’ll show you a liar. I’ll take this one (and of course several others) on the chin.
This is where the “be greedy when others are fearful” approach really gets put to the test. It’s also where a banking concept called “value at risk” becomes extremely important. Adding to a position is great if you believe in the long-term story, but you also have to be aware of exposure in relation to the rest of a portfolio. Until Transaction Capital settles and starts delivering meaningful and sustained share price gains, I can’t see myself buying more.
With that out of the way, Transaction Capital’s results for the six months to March reflect a 355% decrease (not a typo) to a loss of 183.3 cents per share vs. earnings of 71.9 cents a share in the comparable period.
Even if you use core earnings (management’s view on things), this dropped by 48% and return on equity came in at a paltry 7.3%. This is officially lower than Sasfin’s levels and that’s quite the benchmark for underperformance.
The market is panicking about the balance sheet and whether we are headed for another Ascendis / EOH situation. Management has made strong statements like the balance sheet being “sufficiently capitalised” and “debt covenant levels remaining intact” – the first part being the key.
There are no cross-default clauses at subsidiary level, so the real question is whether SA Taxi could go to zero and what value would then be left in the rest of the group. The group has thrown the kitchen sink at the SA Taxi numbers, taking huge restructuring provisions in one shot. Another big claim is made that “Mobalyz” (the new name for SA Taxi) should settle into “sustainable and predictable profitability during the 2024 financial year” – management won’t say things like this lightly.
Of course, as Shakespeare reminds us, that by which we call a rose by any other name would still smell as kak. We need more than a rebrand here.
With core attributable earnings at Nutun up by 15% and core attributable earnings at WeBuyCars down by 22%, it’s not like the combined impact in the rest of the business is fantastic either. In case you’re wondering, the WeBuyCars issue is a margin problem rather than a volumes problem, with Transaction Capital noting a high base effect.
Here’s what a very painful ride looks like:
Universal Partners reports a drop in NAV per share (JSE: UPL)
Transaction Capital may be in the toilet, but this crowd has reinvented it
The JSE is nothing if not an entertaining place. One of the investments in the Universal Partners stable is a business called Propelair. It makes some pretty bold claims:
Jokes aside, Universal Partners has an incredibly interesting portfolio that includes various growth businesses in Europe and particularly the United Kingdom.
One of the them is Dentex Healthcare Group, a dental practice consolidation group focused on the UK. Through a merger with Portman Dental Care, Universal Partners has taken cash off the table and now holds a stake in a much larger business.
There’s also an accountancy and payroll company in the UK called Workwell, which Universal Capital has supported in executing a couple of bolt-on acquisitions. None of the services are sexy, but they are effective.
A more exotic business is SC Lowy Partners, a specialist financial group covering high-yield and distressed debt market-making and investment management. This literally couldn’t be more different to a vanilla accounting business.
That’s not all, folks. There is also Xcede (a global recruitment specialist) and of course Propelair, the toilet innovators mentioned at the start.
This investment holding company’s net asset value (NAV) per share has decreased year-on-year from GBP 1.458 to GBP 1.420. That’s roughly R33.80 per share, with the price currently trading at R24.00 per share. This is a discount of below 30%, which is actually rather good for a group like this.
Little Bites:
Director dealings:
An associate of a director of Ascendis Health (JSE: ASC) has bought shares in the company worth just over R92k.
In a move that might be more interesting than it sounds, PSG Konsult (JSE: KST) wants to change its name to PSG Financial Services Limited. This is a nod to the existing service offering and might be a clue to ambitions to broaden that offering further.
Go Life International (JSE: GLI) is the penny stock you’ve probably never heard of. You haven’t missed out, since it spectacularly destroyed shareholder value and trades (very rarely) at one cent per share. The company has announced a specific issue of shares for R4.75 million, the proceeds of which will be used to settle creditors. Management reckons there are “sound prospects” yet when I tried to access the website link they provided, I found a GoDaddy domain parking page. There really are some inexplicable zombies on the JSE. PS: I eventually found the right website.
Equites joins Redefine in the property naughty corner (JSE: EQU)
A sell-off in the share price greeted the news of a nasty drop in net asset value per share
Sentiment in the property sector isn’t great at the moment. Property valuations are under pressure in this environment and that’s not good for the share prices, which are usually valued on a combination of yield and a reference to net asset value (NAV) per share.
After Redefine released results that upset the market, Equites Property Fund followed suit and fell nearly 6.5% on the day. Despite distribution per share growth of 4.1%, the market looked at the drop in NAV per share of 10.5% and acted accordingly.
The pain was especially felt in the UK portfolio, where values fell by 21.4% on a like-for-like basis because logistics yields shifted outwards by a huge 175 basis points from 3.25% to 5.00%. An increase in the South African portfolio value of 4.3% looks a little odd in that context (shouldn’t our yields also be higher?), but that local performance managed to turn a gaping wound into a bad scratch instead.
I’ve written on this topic a few times in Ghost Mail, but it is worth repeating here: property funds may offer inflationary protection in cash distributions as rentals increase, but they don’t help you with property values as the yields move higher and the values come down accordingly.
In a much simpler explanation that brings it closer to home (literally): what happens to the price of your house when interest rates have moved higher? If you aren’t sure, pour yourself a strong one before phoning an estate agent.
Industrials REIT releases the circular for the Blackstone deal (JSE: MLI)
As we already knew, the board is recommending the cash offer
An acquisition process is highly regulated and full of paperwork. You can expect to see several complicated announcements as Blackstone’s buyout offer for Industrials REIT goes through the motions.
This is especially true as the process is playing out in English law, which from my observations is even more complicated than our local takeover law. If they can go to such lengths in that country to recognise a new king, then you can imagine what a takeover process looks like.
The important point is that the directors of Industrials REIT unanimously recommend the deal to shareholders in the circular. It would be a surprise if it doesn’t get approved by shareholders.
Karooooo is growing, but not as quickly (JSE: KRO)
The world’s most stubborn traded range continues
If ever you wanted an illiquid stock where you could just patiently sit on the bid or offer to try and capture the spread, you could do far worse than Karooooo:
With more sideways action in the share price than a Monster Energy drifting competition, Karooooo has released its results for the quarter and year ended 28 February 2023. The numbers aren’t going sideways even if the share price is, with subscribers up 13% year-on-year.
There’s a concern about the rate of growth, with subscriber growth in Q4 2023 coming in 31% slower than in Q4 2022. This is measured based on the number of net new Cartrack subscribers (38,471 in this quarter vs. 55,587 a year ago).
Total revenue increased by 22% on a constant currency basis and subscription revenue only increased by 16% on a constant currency basis, as the group has increasingly moved away from the focused model that made me buy shares in the first place.
The core business (Cartrack) grew operating profit by 28% for the full financial year and expanded its operating margin from 27% to 30%. That is the gem in this group.
Sadly, management continues to be distracted by the Carzuka project, a used car business that should’ve been called bazooka as a fairer reflection of what it does to group profits. The loss this year was R38 million vs. R13 million the prior year as that business scales up.
Record free cash flow for the year of R547 million was achieved vs. R379 million a year before.
Interestingly, there’s been a change in the accounting policy that sees 56% of costs of acquiring a subscriber capitalised rather than 66% a year before. This is a more conservative approach. Although there is no impact on free cash flow, it does mean that adjusted EBITDA is lower than it would’ve been under the old policy.
Can it get any worse for Quantum Foods? (JSE: QFH)
Load shedding, meet bird flu
The poultry industry is seeing absolute flames at the moment. Even Nando’s Peri-Peri isn’t a fair reflection of what’s going on out there.
Back in February, Quantum Foods released a trading statement that reflected an expected decrease in HEPS of at lest 100% for the six months ended March. In other words, the company expected to be loss-making.
An updated trading statement reflects a decrease of between 76% and 87%, which is still horrible but obviously better than expected. Load shedding and consumer pressures are causing havoc for this business and the broader industry.
Just when things were looking up, the second half of April 2023 saw an outbreak of highly pathogenic avian influenza (HPAI) at Lemoenkloof layer farm in the Western Cape. This resulted in 420,000 layers being culled at a cost of R34 million. Competitor farms in the region were also affected, so eggs are likely to be more expensive in the fairest Cape for the rest of the year.
This industry literally cannot catch a break at the moment.
Sibanye is still a rollercoaster (JSE: SSW)
Many hearts (and wallets) have been broken by this stock
If you’re looking for a steady, safe investment that won’t keep you up at night, Sibanye-Stillwater should be at the very bottom of your list. If the company isn’t dealing with a gold strike, it’s dealing with floods. When those disasters are finally gone, PGM prices fall over. It’s wild.
At least the “green” metals are starting to show signs of promise. The Finnish government is supportive of the Keliber project, having agreed to increase their equity stake to 20%. The Rhyolite Ridge JV has received support from the United States Department of Energy through a conditional $700 million loan.
The South African gold operations have returned to profitability, thankfully. It couldn’t have come at a better time, as the PGM operations have suffered a dip in production and a nasty drop in average basket prices.
With all said and done, adjusted EBITDA for the quarter ended March 2023 is down to R7.8 billion from R13.7 billion a year ago. Yikes. It even looks bad compared to the quarter ended December 2022, which came in above R10 billion.
The culprit is the local PGM business, where production was impacted by Eskom load curtailment and copper theft of all things. Adjusted EBITDA fell 43% year-on-year (admittedly vs. a record base period) and the company believes that the outlook for the second quarter is more positive.
The share price closed 11.3% lower on the day.
Steinhoff: what the FAQ? (JSE: SNH)
This frequently asked questions list makes for entertaining (and rather sad) reading
I don’t know how many more times the Steinhoff board needs to tell investors that the thing is worthless. A frequently asked questions (FAQ) list is the latest attempt, which you can find here.
To save you the time, here’s a pretty blunt answer to this ongoing debate:
The document even includes perhaps the most important question of all:
Jokes aside, there is some important deal news from the company. Mattress Firm and Tempur Sealy International have reached a deal that would see Tempur Sealy acquire all the shares in Mattress Firm in a cash and share transaction valued at $4 billion. Steinhoff holds an economic interest of 45% on a fully-diluted basis in Mattress Firm.
$2.7 billion of the price is payable in cash and the rest is in shares in Tempur Sealy. This will give Steinhoff a 7.5% stake in the combined company, which I’m sure makes the debt holders happy. As per the FAQ, this doesn’t exactly help the equity holders, as the price doesn’t differ materially from Steinhoff’s recent disclosures. Sorry to disappoint.
The deal is only expected to close in the second half of 2024 as there is an extensive regulatory process to be followed. The Federal Trade Commission (FTC) has requested additional information and documentary material, so this won’t be a slam dunk.
Vukile chooses more Spain vs. local pain (JSE: VKE)
And City of Joburg is living up to expectations
Let’s start with the bad news, although some on Twitter felt it might be good news.
Vukile Property Fund’s deal to acquire the Pan Africa Shopping Centre is dead. One of the conditions precedent was for the seller to obtain a written amendment to the notarial head lease from City of Joburg (COJ). It’s hard enough to renew a driver’s licence with those people or pay a traffic fine, so I have no idea why anyone thought this would be successful. Unsurprisingly, the initial deadline of November 2022 was pushed out to April 2023 and then missed again.
The deal is off and I wish the seller luck in ever successfully selling this property. Relying on COJ for something is a horrible position to be in.
Perhaps reminded of just how poorly run parts of our country are, Vukile has exercised its call option to acquire more shares in the Spanish subsidiary, Castellana Properties. This is for a meaty amount, coming in at €63.9 million (note the currency). When this is finalised, Vukile will own 99.6% of Castellana.
Little Bites:
Director dealings:
GMB Liquidity (an associate of newly minted Grand Parade Investments (JSE: GPL) director Greg Bortz) is still mopping up shares in the company, this time buying R2.67 million worth of shares.
Two prescribed officers of Capitec (JSE: CPI) have bought shares worth R2.15 million in total.
An associate of Gareth Ackerman has bought shares inPick n Pay (JSE: PIK) worth R627k as the price has continued to slide.
A director of KAL Group (JSE: KAL) has bought shares worth R22.7k.
OUTsurance Group (JSE: OGL) has completed the acquisition of 50% in Youi Holdings (the Aussie business) from Willem Roos, co-founder of the business. Minority shareholdings are a feature of the OUTsurance structure, as OUTsurance Group only owns 89.7% of OUTsurance Holdings, which in turn has bought the 50% stake.
Octodec (JSE: OCT) has announced a new asset and property management agreement with City Property Administration (CPA). As a reminder of how incestuous the property industry actually is, this is a related party deal as the chairman and managing director of Octodec are also shareholders in CPA and directors of that company. CPA also holds shares in Octodec. With more surprising related parties running around than at a hillbilly’s birthday party, an independent expert will need to opine on the agreement and a circular will be released to shareholders.
Investors in Ethos Capital (JSE: EPE) should note that an investor update presentation will be made available on Wednesday morning as part of an event scheduled for 9am. I’ll revisit it in Ghost Bites this week.
PSV Holdings (JSE: PSV) is suspended and in business rescue. The updates are always a bit of a soap opera, with the latest news being that DNG Energy will put forward a proposal to recapitalise the company during the next 3 months.
The difference between continuing and discontinued operations is critical
At first glance, Barloworld’s results for the year ended March 2023 don’t look good. HEPS fell by between 4.5% and 6.3%, which suggests that the core operations are struggling.
You need to dig deeper, particularly after the mobility business Zeda was unbundled to shareholders and the Logistics business was sold. When earnings have been sold off or simply passed on to shareholders, then group earnings obviously move lower.
This is why the concept of “continuing operations” is so important, as it tells you about what is left in the group. On that measure, HEPS increased by between 28.5% and 31.0%. That’s more like it!
DRDGOLD reports a huge positive swing in EBITDA (JSE: DRD)
The company has enjoyed a higher gold price
DRDGOLD gives punters an exceptionally leveraged play on gold. This chart of DRDGOLD vs. competitors will show you that if you believe gold is going higher, then picking the company with the highest operating leverage (i.e. DRDGOLD) is the way to go:
The reverse is also true, in case you’re wondering. Get it wrong and DRDGOLD will bite your head off.
The reason for this is that DRDGOLD is a tailings business, so it processes ore that was previously mined to get more gold out of it with modern techniques. This isn’t exactly the most efficient way to find the yellow stuff, so the production cost is high and margins are very thin unless the gold price moves higher. You can see where this is going.
Quarter-on-quarter production increased by 4% and the average gold price received was 11% higher in rand. With all-in costs per kilogram only up by 2% over the same period (thanks to improved yield in the process of extracting the gold), the net result is a 54% jump in adjusted EBITDA!
There is no debt in this business, which is why investors see it as a cash cow during a period in which gold prices are rising.
Eastern Platinum completed a rights offering (JSE: EPS)
Most of the capital was raised in Canada
Eastern Platinum has raised roughly R96.5 million through a rights offering, with the vast majority of the capital (around R94.5 million) being raised on the Toronto Stock Exchange.
Ka An Development Co now owns 49.9% in the company after following its basic rights and exercising what the announcement refers to as a subscription privilege.
Orion gets a step closer to unlocking funding (JSE: ORN)
A crucial condition precedent has been met
Orion Minerals rallied 16.7% on the news that the company managed to repay the Anglo American sefa Mining Fund loan facility. The loan dates back to 2015 and was used for exploration and development of the Prieska Copper-Zinc Project.
Thanks to the share placement with Clover Alloys and major existing shareholders, the company settled the loan and has released the shares held as security against the loan. This is the key in unlocking the IDC convertible loan facility and Triple Flag Precious Metals Corp early funding arrangement, as those shares are needed as part of the related security package.
Drawdown on those packages is expected imminently, with the initial capital earmarked for trial mining, dewatering and feasibility studies.
Redefine gets a bloody nose from the market (JSE: RDF)
A significant drop in the dividend never puts a smile on the faces of REIT investors
Redefine (JSE: RDF) finds itself in the unfortunate position in which a large proportion of its portfolio is in the Office sector, which is still a horrible place to be. 38% of the South African portfolio is Office, with a 14.3% vacancy rate and -12.4% rental reversions in the six months to February 2023.
The fair value movements in the Office portfolio make for sad reading regardless of the grade of the property:
In the South African Retail portfolio, reversions were also negative at -3.7%. In other words, new leases are being concluded at lower rates than the expired leases. The vacancy rate of 4.4% is steady year-on-year and the portfolio’s fair value moved higher by R139 million – nowhere near enough to offset the Office move.
Enter the Industrial portfolio: an asset class that is still doing very well. Although vacancies increased from 3.1% to 4.9%, reversions were positive at +1.3% and the total fair value was R141 million higher. In case you’re keeping score, that still doesn’t make up for the Office move.
We can’t just look at the R59.4 billion South African portfolio, as there’s also the R34.7 million portfolio in Poland as part of the Redefine story. 82% of that portfolio is in the Retail sector and only 3% is in Office, with the rest in Industrial – a much better split than in the local business. Metrics are mixed in the overseas business, with reversions still negative as a headache for investors.
If we look at the balance sheet, the SA REIT loan-to-value increased from 40.2% to 40.9% and the weighted average cost of debt in South Africa moved from 8.7% to 9.2%. This really isn’t the right time for debt to be going up, which is part of what the market didn’t like. Although 81.2% of group debt is hedged for an average term of 1.7 years, these hedges can’t be achieved for free and the cost is becoming increasingly more expensive.
With all said and done, distributable income per share was down by 9.2% and the dividend per share fell by 14.2%. The market punished Redefine with a 6.6% drop in the share price.
South32’s Hermosa project gets FAST-41 status (JSE: S32)
Zinc and manganese are of strategic importance
South32 is the proud owner of 100% of the Hermosa project, the only advanced project in the US that could supply two federally designated critical metals: zinc and manganese. With the project now given FAST-41 status, South32 expects a more efficient and transparent process in achieving the federal permits required as the development of the Taylor and Clark deposits continues.
The feasibility study for the Taylor zinc-lead-silver deposit is expected to be completed in the second half of the calendar year and early stage work is underway at the Clark battery-grade manganese deposit, with the focus on moving to a pre-feasibility study.
Little Bites:
Director dealings:
Des de Beer has bought another R2.75 million worth of shares in Lighthouse Properties (JSE: LTE).
An associate of a director of Ascendis Health (JSE: ASC) has bought shares in the company worth R211k.
Sanlam’s (JSE: SLM) partial offer to AfroCentric (JSE: ACT) shareholders is now wholly unconditional, with regulatory approvals having been met.
Claims filed by market purchase claimants in relation to Steinhoff’s (JSE: SNH) global settlement will be settled through the Stichting Steinhoff Recovery Foundation on a rolling basis from 10 May 2023.
Jasco Electronics (JSE: JSC) has received the necessary compliance certificate from the Takeover Regulation Panel (TRP) that will enable the offer and delisting to go ahead.
Efora Energy (JSE: EEL) is suspended from trading and released a trading statement noting a headline loss of between 33.51 cents and 34.51 cents. With a suspended price of 12 cents per share, that doesn’t sound good.
This is a voluntary announcement of a typical bolt-on acquisition
The term “bolt-on” acquisition gets used loosely to describe a deal that is typically low on risk, as the acquirer is buying a business that slots quite easily into the existing business. Or bolts onto it, for that matter.
Alexander Forbes has agreed to acquire a 60% stake in TSA Administration, an independent provider of institutional group risk insurance administration services in South Africa. The business has been at it for 25 years and serves over 120,000 insured members.
Alexander Forbes has the option to acquire the remaining 40% stake over a period of five years. This is a good example of an initial position of control, with the ability to take out the minorities over time.
The deal is too small to even be categorised for JSE purposes, so details of the purchase price haven’t been announced.
MTN Rwanda under margin pressure (JSE: MTN)
This subsidiary seems to be struggling more than the others
MTN Rwanda has grown mobile subscribers by 7% and active data subscribers declined by 0.7%. That’s not exactly a high growth story, even if Mobile Money subscribers grew by 17.2% in the latest quarter. MTN Rwanda experienced a 50 basis points drop in customer market share as competition started to bite.
Service revenue was up by 14.9% and EBITDA by only 9.4%, so margin fell by 220 basis points to 45.5%.
The story at profit after tax level is anything but good, with a 32% drop due to increasing financing costs relating to inflation adjustments on lease payments.
Ouch.
Santova investors can’t wait for Monday (JSE: SNV)
Shortly after the close on Friday, Santova released excellent numbers
To say that Santova has been a winner of the pandemic would be an understatement. This small cap now boasts a market cap of over R1 billion and has been executing a strategy to make the most of the gift that was the supply chain crunch of the pandemic.
It’s clearly been working, with share price growth over three years of a whopping 430%. To avoid using the depths of the pandemic as a base for comparison, we can look at a five-year chart that shows growth of over 162%, which is a compound annual growth rate (CAGR) of 21.4%.
This company is a perfect example of why small cap investors get excited about the world. When it works, it works incredibly well.
The company is still growing its earnings strongly, with growth in headline earnings per share (HEPS) for the 12 months to 28 February 2023 of between 19.1% and 24.1%.
I’m sure that Santova investors are looking forward to seeing what the share price action on Monday morning might bring. Based on the midpoint of the earnings guidance, the company is trading on a Price/Earnings multiple of roughly 5x.
Little bites:
Director dealings:
An associate of a director of FirstRand (JSE: FSR) has sold shares worth R6.7m in exchange for units in a unit trust.
A director of a subsidiary of Growthpoint (JSE: GRT) has sold shares worth nearly R1.7m.
You guessed it – Des de Beer has bought another R1.55 million worth of shares in Lighthouse Properties (JSE: LTE).
The chairman of Southern Palladium (JSE: SDL), Terence Goodlace, has resigned from the board based on other board positions and advice received on the number of board positions in the industry that would be appropriate. Mike Stirzaker, an existing director, has been appointed as the interim chairman.
Attention Indluplace (JSE: ILU) shareholders: check your inboxes for the circular related to the offer by SA Corporate (JSE: SAC).
If you are a shareholder in WBHO (JSE: WBO), take note that the circular regarding the B-BBEE transaction has been posted to shareholders.
And in a final circular reference (Excel jokes are always allowable), Premier Fishing and Brands (JSE: PFB) has released the circular regarding the offer by Sekunjalo Investment Holdings.
The small related party transaction atAcsion Limited (JSE: ACS) has received the nod of approval from the independent expert as being fair to shareholders.
Welcome to Ghost Wrap. It’s fast. It’s fun. It’s informative.
In this week’s episode of Ghost Wrap, we cover:
AB InBev is making a strong case for itself as a more defensive stock than the likes of British American Tobacco.
Famous Brands doesn’t think that load shedding is working out well for the group but I disagree – and the latest numbers seem to support my view.
Calgro M3 has released very strong numbers and is using the depressed share price as an opportunity for buybacks.
CMH’s profitability has been a high performance machine of note.
Astral Foods is firmly on the wrong side of load shedding, with narrow margins on a good day turning into nearly no margin at all on a bad day.
Pick n Pay is taking serious strain at the moment and the share price has horribly underperformed Shoprite.
Santova is a great example of what gets small cap investors excited.
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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