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Baidu’s Strategic Leap: Harnessing the Transformative Power of AI and Language Models

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Baidu’s Strategic Leap: Harnessing the Transformative Power of AI and Language Models

Embarking on a transformative journey, Baidu (NASDAQ: BIDU), the Chinese multinational technology titan, looks to stand at the forefront of technological revolution, poised to disrupt the industry and forge a new path towards long-term, sustainable growth.

Amidst the backdrop of impressive revenue growth and improved operating margins, Baidu has recognised the paradigm-shifting power of generative AI, having already launched its large language model, the ERNIE Bot.

Following Baidu’s earnings for the first quarter of its 2023 fiscal year, investors would have been pleased to see a 25.86% beat on its earnings projections, while first-quarter revenue also surprised to the upside.

In an era where artificial intelligence reigns supreme, Baidu aims “to invest unwaveringly in this area”, which will keep market players hungry with anticipation over how China’s largest search engine plans to disrupt an industry booming with excitement and undeniable potential.

Fundamentals

  • Over the first quarter of its 2023 fiscal year, Baidu posted stronger-than-anticipated financial results as China’s economy steadily emerged from a prolonged lockdown period. Total revenues increased by 10% year-over-year, reaching RMB31.14 billion for the first quarter. In comparison, operating income surged by a staggering 91% to RMB4.98 billion in the same period, up from RMB2.60 billion in the first quarter of last year. Revenues from online marketing services increased by 6% year-over-year to RMB17.97 billion in the first quarter as companies increased their advertising spending to benefit from rising consumer demand. The Chinese search engine behemoth posted a basic earnings figure of RMB16.17 per American Depository Share (ADS), up from a loss of RMB2.87 per ADS in the same period of last year and 18% up quarter-on-quarter, reflecting robust growth in the company’s bottom line.
  • Delving into Baidu’s cash flow statements, the company posted a highly impressive 212% year-over-year increase in its net cash provided by operating activities, coming in at RMB5.84 billion in the first quarter of its 2023 fiscal year, up from RMB1.87 billion in the same period a year ago. Quarter-over-quarter, Baidu saw its net cash provided by operating activities decline by 26% from RMB7.85 billion in the fourth quarter of 2022. Baidu’s free cash flow figure surged to RMB4.55 billion in the first quarter of its 2023 fiscal year, up from a negative figure of RMB107 million in the same period of last year but down from RMB5.92 billion in the fourth quarter of 2022.
  • Year-to-date (YTD), Baidu has proven relatively resilient, with its share price faring better than the Hang Seng Index, the renowned Hong Kong Stock Exchange barometer. Since the beginning of the year, Baidu’s share price has returned more than 20% to shareholders (green line), significantly exceeding that of the Hang Seng Index (orange line) and the S&P 500 index (blue line). Despite proving relatively robust amidst a turbulent macroeconomic environment coupled with lower-than-expected consumer demand, Baidu’s share price has meaningfully underperformed the NASDAQ 100 index (black line). The Chinese tech titan has struggled to enjoy the same growth trajectory as some of its U.S. peers, despite being one the world’s largest artificial intelligence companies.
  • Baidu’s current trailing twelve-month (TTM) price-to-earnings (P/E) ratio sits at a multiple of 24.9x, the company’s lowest reading since its 2018 fiscal year, while its forward-looking P/E ratio sits at a multiple of 13.2x. This could excite market participants who believe Baidu’s current share price is undervalued relative to its historical earnings and growth potential, specifically concerning the hype around artificial intelligence and large language models. Looking at Baidu’s current trailing twelve-month (TTM) price-to-earnings (P/E) ratio, the multiple comes in slightly higher relative to Alibaba (NYSE: BABA) and NetEase (NASDAQ: NTES), whose multiples sit at 22.4x and 19.9x, respectively. Alphabet’s (NASDAQ: GOOGL) current trailing twelve-month P/E ratio of 27.6x comes in higher than Baidu’s. On a forward-looking basis, Baidu’s current P/E ratio comes in lower when compared to Alphabet and NetEase, whose multiples sit at 17.5x and 22.2x, respectively. In contrast, Alibaba’s forward-looking P/E multiple currently sits at 10.2x.

China Explores Limited Stimulus Measures Amidst Economic Slowdown 

China is intensifying its efforts to rejuvenate its struggling economy. Still, due to mounting debt levels and concerns regarding financial stability, the scope of these measures is expected to be somewhat restrained compared to previous stimulus plans.

On Tuesday, the 13th of June, the central bank cut a key short-term interest rate that strongly influences interbank liquidity. Moreover, policymakers are contemplating a comprehensive range of stimulus proposals, including bolstering the real estate sector and domestic demand. This proposed course of action signifies a departure from the government’s usual cautious approach to stimulus, highlighting their apprehension over the economic slowdown following an initial surge driven by consumer spending earlier in the year, which has now lost momentum.

Nevertheless, the effectiveness of any stimulus measures, including the government’s flexibility in implementing them, will likely be hampered by the strained financial positions of local governments and the real estate industry.

China’s substantial debt burden presents challenges in rolling out an extensive support policy package. With business and consumer confidence remaining feeble, households hesitant to take on additional debt, inflation levels remaining low, and exports declining amidst global economic deceleration, it is no surprise that the Chinese government is looking to roll out a stimulus package. 

Given the slowdown in domestic consumer demand, companies will be hoping for some form of a stimulus rollout. With revenues from online marketing services accounting for more than 50% of Baidu’s top-line figure in the first quarter of its 2023 fiscal year, a stimulus rollout plan aimed at reviving domestic consumer demand has the potential to increase companies’ advertising spend, which may bode well for Baidu’s online marketing services revenue stream.

Technicals 

The daily chart of Baidu indicates that the company’s share price has enjoyed a much-needed breath of fresh air since slumping to its October low toward the end of last year as China’s economic lockdown depressed market sentiment.

With China emerging from a prolonged lockdown in the latter parts of last year, the company’s share price has benefitted from bullish sentiment, returning around 20% year-to-date (YTD). Despite the positive year-to-date performance, there is still an opportunity for a long position at a discounted price, with the share’s current intraday value of $143 per share offering the potential for a 20.70% upside as the share converges towards its estimated fair value of $172.60 per share (green line).

Should bullish sentiment continue to push the price higher, the $153 resistance level could become significant as traders look for a short opportunity toward lower levels. If the $153 level fails to act as effective resistance with a sustained break above, the next resistance level could be at $160, a share level toward the fair value estimate of $172.60 per share.

In the bear case, should lower-than-expected consumer demand result in a retracement toward lower levels, the $133 per share support level could offer an opportunity for a long at a further discount, especially for market participants that are bullish on Baidu’s long-term prospects within the realm of artificial intelligence. A sustained break below the $133 per share support level could trigger a sell-off to lower levels, with the primary support level of $116 per share (red line) offering an opportunity for a long at 48.79% discount from the share’s fair value.

Summary

With Baidu having launched its own ChatGPT rival product, ERNIE Bot, the chatbot has already topped Xinhua’s large language model rankings, performing better in a range of tasks relative to competing chatbots.

Amidst an era of surging demand for AI-related services, Baidu aims to utilise its chatbot to increase its customer base and “establish a new ecosystem around the ERNIE Bot.”

Generative AI represents a significant potential to those equipped to incorporate it across business segments, but geopolitical tensions and the risk of state intervention prevail as potential headwinds facing Baidu. Should the Chinese government roll out a significant stimulus package, Baidu is poised to benefit from the possible effects of increased consumer demand and higher advertising spending by companies.

Summary: Baidu Inc., Bloomberg, Forbes, KoyFin, Trading View 

Ghost Wrap #29 (PPC | Sephaku Holdings | Naspers + Prosus | Spar | Alexander Forbes | Glencore | MultiChoice | Telkom)

The Finance Ghost
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Ghost Wrap #29 (PPC | Sephaku Holdings | Naspers + Prosus | Spar | Alexander Forbes | Glencore | MultiChoice | Telkom)

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:

  • PPC and Sephaku Holdings aren’t just good reminders of how tough the cement industry is, but also how poorly South Africa is trailing African peers when it comes to investing in growth and infrastructure.
  • Trading statements from Naspers and Prosus demonstrate the extent of the value destruction by this management team, with portfolio write-downs as internet valuations have come off since the stimulus-driven cycle.
  • With significant operational challenges at Spar at exactly the wrong time, the group’s dividend is gone and SAP issues desperately need to be resolved. 
  • Alexander Forbes has been an unlikely hero on the JSE since the pandemic, showing the value of proper execution of a solid strategy.
  • Glencore is still trying to do a deal with Teck Resources in Canada, while casually doing a deal to sell Viterra in exchange for 15% in Bunge Limited and $1 billion in cash.
  • As predicted, MultiChoice has seen a significant drop performance in South Africa and needs to invest heavily in its business, so the MultiChoice dividend is now a thing of the past.
  • When it comes to cash flow pressures though, Telkom takes the cake as it fights to stay relevant in response to rapid change in consumer preferences.

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.

Listen to the podcast below:

Ghost Bites (Acsion | Blue Label | Clientele | Motus | PPC | Sephaku Cement | Visual International)

The Finance Ghost
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Ghost Bites (Acsion | Blue Label | Clientele | Motus | PPC | Sephaku Cement | Visual International)

A little less conversation, a little more Acsion (JSE: ACS)

This is the property development company you’ve probably never heard of

Acsion isn’t in the news very often, yet it has a market cap of roughly R2.3 billion. This group is focused on growing its net asset value (NAV) per share rather than just its dividend, so this sets it apart from the REIT structures on the JSE.

Liquidity in the stock is very limited, with a 21% move on Thursday as a perfect example of what happens when liquidity is tight.

Results have been released for the year ended February 2023, with revenue up by 22% and HEPS up by 14%. The NAV per share has increased by 12% to R23.90. At a closing price of R5.80, that’s one of the biggest discounts to NAV that you’ll find on the market.

Although there were repurchases during the year, there is also a cash dividend of 18 cents per share. At this enormous discount to NAV and with no pressure on the company as it isn’t a REIT, there should theoretically be no cash dividend at all. Every cent should be invested in share buybacks.

As was pointed out to me on Twitter after the first version of this article was posted (thanks @RossMalt), the CEO holds most of the shares in issue. This makes it difficult to execute share buybacks to a great extent, though the difference between a cash dividend of R71 million and buybacks of R121k is still vast. It really begs the question of why this group is listed in the first place, as minorities could be taken out at a large discount to NAV.

Blue Label announces new management at Cell C (JSE: BLU)

An ex-Vodacom executive has taken the top job at Cell C

I quite enjoyed the comment in this Blue Label Telecoms announcement about how new CEO Jorge Mendes is “poised to steer Cell C towards new heights of success” – this implies there are previous heights of success, which there most definitely aren’t. Cell C has been a financial disaster throughout its life, with Blue Label now giving it another roll of the dice with a new, more capital-light strategy.

In fairness, this is probably Cell C’s best chance of success. The announcement is just doing an excellent job of putting perfume on a pig.

Mendes is the former Chief Consumer Business Officer at Vodacom South Africa and has experience in various African markets. Let’s see what he can do!

The blandest of bland cautionaries at Clientele Limited (JSE: CLI)

Bland or not, the stock closed 20% higher

Although large bid-offer spreads always need to be considered when looking at one-day moves in JSE stocks, I still found it interesting that Clientele managed to close 20% higher after releasing the blandest cautionary possible.

The JSE doesn’t love these bland cautionaries that are drier than a small McDonald’s burger without tomato sauce. We don’t even know whether Clientele is looking to buy or sell a business. All we know is that shareholders should exercise caution when trading in the shares. That didn’t stop the late afternoon punters!

Highlights from the Motus investor day (JSE: MTH)

The company has made the presentation and recording available

An investor day is a wonderful thing if you hold the stock in question. Although there is often a lot of repetition of the most recent results, there are also updates on the state of the market and the recent performance.

The very first meaningful slide in this investor presentation from the Motus event deals with the “fragile consumer” and why that is the case. As one might expect, the list of problems in South Africa is longer than in the UK and significantly longer than in Australia.

This is a smart way to kick off the story around the investment thesis, as Motus is pursuing a diversification strategy. The target is a 50-50 EBITDA split between vehicle sales and non-vehicle sales. There is also a goal to get to a 70 – 30 split in terms of SA vs. international contributions to operating profit. These aren’t pie in the sky targets, as the group is pretty close on both metrics.

And for all the noise around electric vehicles in the market, there’s a great slide in the presentation showing the level of adoption in SA vs. other countries:

There’s another slide that I want to highlight. It quite brilliantly shows how the cost of mobility has gone through the roof in recent years, driven by everything from currency weakness through to inflation and fuel costs. Consumers are trading down in response to this, with banks still happy to lend money against the cost of vehicles. In a country with such limited public transport alternatives, here’s part of why our savings rate is so poor:

You’ll find the full presentation here and the recording here.

PPC is still loss-making (JSE: PPC)

But the headline loss at group level is smaller than before

As a strong reminder of what happens when a balance sheet goes wrong in a complicated African group, PPC reports based on the “SA obligor group” and that obligation relates to debt. In other words, this is the part of the group that has to keep the banks at bay.

One of the biggest threats to the company is cement imports, with a weaker rand actually helping PPC in that context. But despite the coastal regions enjoying better competitiveness against imports, volumes in the SA obligor group still fell by 5.8% because of pressure on the inland region. Thankfully, pricing increases at least took the revenue growth to 1.7% for South Africa and Botswana collectively. Costs were up 4%, so that means margins went the wrong way.

EBITDA in the SA obligor group fell by 26% to R570 million in the year ended March 2023. Importantly, net debt reduced considerably from R1.06 billion to R800 million. This is a decent debt to EBITDA ratio and it excludes any dividends from Rwanda and Zimbabwe.

The business in Zimbabwe is debt-free and achieved EBITDA of R365 million, down 7%. This allowed PPC to receive R147 million in dividends (net of withholding taxes), significantly higher than R91 million in the prior year.

Rwanda is the jewel in the crown right now, with EBITDA up by 31% to R447 million. There is net debt of R105 million in that group. The SA obligor group received dividends of R79 million, net of withholding taxes. The annoyance is that PPC only holds 51% of this jewel, hence the significant difference between EBITDA and the dividend received.

So from a balance sheet perspective, the hard work to get net debt to a reasonable level has certainly paid off. If you include the dividends from Zimbabwe and Rwanda in the SA obligor group EBITDA, the net debt to EBITDA ratio looks manageable.

Despite all this effort, group HEPS is still a loss of between -8.0 cents and -10.5 cents. This is an improvement on -13 cents in the comparable period but is obviously still a loss.

As in every PPC announcement, the group reminds the market that it has excess capacity and is ready to respond to an uptick in infrastructure spending and economic growth.

Sephaku’s local business drops to breakeven levels (JSE: SEP)

This has had a significant impact on group results

For the year ended March 2023, Sephaku Holdings has noted a drop in HEPS of between 38% and 46%. Although we have to wait until detailed results on 28 June to get all the information, we do know where the problems were.

Sephaku Cement managed to maintain market share but sadly market share is no measure of profitability. Financial performance deteriorated to breakeven levels, which obviously hit the group numbers. Thankfully, the impact was blunted somewhat by a strong performance at Métier across revenue and profit.

Visual puts the concern in going concern (JSE: VIS)

This listed company had R3.7k in the bank at the end of February – not a typo

It’s not every day that a company will happily continue trading with current liabilities exceeding current assets by 78 times. Again, that’s not a typo. Current liabilities at Visual International Holdings are R25.3 million and current assets are R0.3 million.

This property developer is in a world of hurt, with SARS fights being part of the mix and even a claim by the old auditors that the company is now defending.

The company is a going concern in the opinion of the directors for various reasons, including disposals of land and the development at Stellendale Junction that is finally underway. I hope they are right, as the Companies Act provisions related to reckless trading aren’t pretty. I’ve seen companies go into business rescue with healthier balance sheets than this one.

Little Bites:

  • Director dealings:
    • In case you thought your last derivative trade was impressive, the latest from Dr Christo Wiese in Shoprite (JSE: SHP) should bring you back down to earth. He bought puts with exposure of R226.5 million at R226.45 per share and sold calls with exposure of R236 million at R236.18. These are December 2023 options. He also bought single stock futures contracts with exposure of R465 million.
    • A director of Investec (JSE: INL) has sold shares worth £829k.
    • An associate of a director of Ethos Capital (JSE: EPE) has bought shares worth roughly R5 million.
    • Associates of two directors of Ascendis Health (JSE: ASC) have each bought shares worth R514k (total purchase R1.03 million)
  • I skimmed the proposed amendments to the JSE Listings Requirements in terms of a new BEE Section on the exchange. One of my great irritations is how tiny the local investable universe is for BEE investors, especially when companies like Absa add to the problem by doing fresh deals that don’t have a listed element available to retail investors. The new rules relate to the listing of BEE special purpose vehicles. It would be great to see more listings in this part of the market as a way to encourage saving and investing.
  • In an important step for the working relationship between the two companies, the CEO of Sanlam (JSE: SLM), Paul Hanratty, has been appointed to the AfroCentric (JSE: ACT) board as a non-executive director. Marinda Dippenaar has also joined the AfroCentric board from African Rainbow Capital.
  • In a very fluffy ESG-filled announcement that says a lot but also doesn’t say very much at all, Anglo American (JSE: AGL) announced a collaboration with Jiangxi Copper in China on “responsible copper” – which means knowing how the stuff is mined, processed and brought to market. It reads like a government announcement about a foreign visit, with no indication of what this actually means for shareholders.
  • Buried at the bottom of an announcement about its AGM, Finbond (JSE: FGL) announced that Protea Asset Management (linked to Sean Riskowitz) now holds 12.08% in the group after acquiring more shares.

Ghost Bites (Labat | Mantengu Mining | Marshall Monteagle | Naspers + Prosus | Shaftesbury | Spar)

The Finance Ghost
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Ghost Bites (Labat | Mantengu Mining | Marshall Monteagle | Naspers + Prosus | Shaftesbury | Spar)

Labat takes the risky approach with its rights offer (JSE: LAB)

It is highly unusual to see a structure like this

Given the lack of support for small caps on the JSE, it’s very rare to see an “exposed” capital raise, like a rights offer without an underwriter. Companies generally push for a capital raise that technically cannot fail, thanks to the presence of an underwriter who is usually a large existing shareholder or a new shareholder looking to take a strategic stake.

Cannabis group Labat is taking a different route, looking to raise R74.7 million without the support of a genuine underwriter. Strangely, the offer price is 12 cents per share at a time when the share price is 8 cents a share. As a final twist in this tale, no excess applications are allowed, so any rights that aren’t taken up by the rights holder will simply lapse.

I’m not sure what’s going on here, because no company that is serious about raising money uses a structure like this. They want to use the capital to invest in the infrastructure around the SAPHRA extraction licence, with any leftovers set aside for working capital.

Directors and associates will “partially underwrite” the offer by committing to capitalise existing amounts owed to them. As I understand it, that means they would offset loans against equity, which is hardly a capital raise that helps drive growth. No commission is payable to them, as one would hope.

This is a most unusual situation, not least of all when the market cap of R50 million is well below the proposed capital raise!

Mantengu Mining reports on its first Langpan year (JSE: MTU)

This is the base against which earnings will be measured going forward

Mantengu Mining has released results for the year ended February 2023. This is the first year with the Langpan Mining reverse takeover in the numbers, a deal that was effective on 27 July.

The accounting is complicated here, with an attempt made by accounting rules to make the comparable period useful by including Langpan numbers that had nothing to do with Mantengu in that period.

The commissioning of the Langpan chrome beneficiation plant took place after year end, so that will be the real focus of the numbers going forward.

For the sake of completeness, Mantengu recorded a loss for the year of R16.9 million.

Marshall Monteagle’s earnings evaporate (JSE: MMP)

Earning in ZAR and reporting in USD isn’t ideal

FMCG support business Marshall Monteagle has released a trading statement for the year ended March 2023. It doesn’t make for pretty reading.

The company reports in USD and earns in ZAR, which is the first problem based on the rapid devaluation of our currency. The other problems are inflation and losses in South African trading subsidiaries.

HEPS has fallen from positive $7.9 cents in the prior period to a headline loss of $2.3 cents in this period.

Naspers and Prosus released trading statements (JSE: NPN | JSE: PRX)

I love the reference to a “market correction in internet valuations”

In case you don’t know the story of Naspers and Prosus, it goes something like this…

Group makes investment in China many years ago. Investment does insanely well. New management team inherits cash cow. New management team takes cash and incinerates it in stupid deals. New management team becomes fabulously wealthy along the way. Market shouts. New management team doesn’t listen, putting in place more ridiculous structures to keep buying time. Market shouts more. New management team eventually listens and buys back shares instead of throwing cash in the furnace. New management team celebrates this success like it was their own. New management team becomes wealthier.

The sale of shares in Tencent and the repurchase of shares by Prosus has created $29 billion worth of value, according to the management team. Of course, what they don’t say is that the value was destroyed by the company in the first place. It should rather say “recovered $29 billion worth of value” – a lot closer to the truth.

Headline earnings per share has fallen by between 73.6% and 80.6%. A lower contribution from Tencent is obviously part of this, with higher impairment charges on the portfolio due to a “market correction in internet valuations” – of course, those were the exact valuations at which they were merrily buying assets during the pandemic.

Just to confuse you even further, the share price is up nearly 70% over the past year. This is a direct result of the share buybacks closing the gap to NAV, rather than anything to do with performance in the rest of the portfolio. Over 3 years, the share price is flat.

As for Naspers, the HEPS story and underlying drivers are all similar to Prosus for obvious reasons. The share price is up 82%, as Naspers has been a relatively larger beneficiary of the discount closing. Over 3 years, you would’ve made just over 6% in Naspers – in total.

Remind me again what this management team gets paid? Actually, please don’t. I have enough to deal with.

Shaftesbury Capital gave a detailed update at the AGM (JSE: SHC)

This is a “first 100 days” speech that you normally see in politics

After Capital & Counties merged with Shaftesbury and primarily adopted the latter’s name, the enlarged group (Shaftesbury Capital) obviously wants to have clear communications with the market. The AGM featured a detailed trading update that was released on SENS, covering the first 100 days of life as a merged group.

It’s not quite 100 days mind you, unless we are talking business days. For the first five months of the year, leasing transactions saw an uplift of 6% vs. the estimated rental value given at December 2022. Happily, the cost savings indicated in the merger documentation are running ahead of schedule, so that’s good news for margins.

I found it quite surprising that the biggest rental uplift vs. expectations is coming from office properties, where rents are up 8%. Residential was up 4%, hospitality and leisure 5% and retail 7%.

To give you a sense of how upmarket this London portfolio is, they make reference to restaurant openings by Michelin Star chefs. This isn’t your local food court with a Steers, I’ll tell you that much.

With significant debt refinancings on the horizon, investors need to keep an eye on the weighted average cost of debt.

No dividend at Spar (JSE: SPP)

When a company announces a SAP project, hit the sell button

I’ll never understand how a SAP project can cause so much pain at a retailer. Shoprite had its fair share of challenges, with Spar as the latest victim of go-live challenges. I don’t have the time to work back through Ernie Els’ career to figure out whether his SAP branding on his cap caused him any missed shots, but it wouldn’t surprise me. The SAP issues in KZN still haven’t been sorted out, amazingly, which means huge inventory and ordering problems in the region.

Spar’s troubles can’t be exclusively blamed on SAP, that’s for sure. They are the masters of scoring own goals, with diluted HEPS falling by 30.2% in the wake of huge management changes and no shortage of controversy. This time, we can’t even attribute the pain to the business in Poland.

Despite group turnover being 7.9% higher, operating profit fell by 17.5%. Add on the cost of debt and you can quickly see why HEPS fell by over 30%.

SPAR Southern Africa managed to grow turnover by 5.6%. If we unpack that number, core groceries were up 7.9% against price inflation of 10.8%, which means volumes fell sharply. TOPS turnover fell by 1.9%, admittedly against a strong base where South Africans were unleashed from lockdowns. Build it saw turnover fall by 3.8%, nothing we aren’t used to seeing in the building sector. At least S Buys Pharmacy at SPAR grew by 20% in this period, admittedly off a small base vs. the rest of the business.

In Ireland and South West England, BWG Group saw turnover increase by 8.8% in local currency and 15.1% as reported in ZAR. There was far less joy in Switzerland, where turnover fell 4.3% in local currency and 6.9% in ZAR. People in Switzerland literally cross the border to buy groceries, something that wasn’t possible when borders were closed in the pandemic. In Poland, growth in local currency was 4.9% and in ZAR was 9.3%, with a significant increase in retailer loyalty after a difficult period with the newly acquired franchise network. The Polish business is unfortunately still loss-making.

Even if you knew nothing about the balance sheet, you wouldn’t be surprised to learn that there is no dividend based on these numbers. But when you read the section on net debt, you’ll very quickly realise that your best chance of cash back from Spar is a coupon at the till. Group net debt has ballooned from R9.8 billion at 30 September 2022 to R12.8 billion, with a breach of the leverage covenant that lenders are waiving for now at least. A major reason for the breach is the translation of foreign debt into ZAR.

This is going to be a tough journey.

Little Bites:

  • Director dealings:
  • It seems so strange that a property management company internalisation needs to be approved by the competition authorities, but the rules are the rules. The Investec Property Fund (JSE: IPF) deal is big enough to require a merger filing. The Competition Commission has approved the deal without conditions and the Competition Commission Tribunal must now consider it.
  • The vote on the business rescue plan for Tongaat Hulett (JSE: TON) and two of its subsidiaries has been postponed to allow the business rescue practitioners to amend the plans of the companies to take into account various developments.
  • Steinhoff (JSE: SNH) has announced that the hearing for the WHOA Restructuring Plan will take place on 15th June. This will help shareholders find out whether their shares are worthless now or later.

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

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

A short and quiet week on the M&A front with news focusing rather on what was not happening in South Africa.

Exchange-Listed Companies

Glencore is to dispose of its 50% stake in virtually integrated business, Viterra, which is focused on the global agricultural product value chain. Viterra is to be merged with Bunge, a company connecting farmers to consumers to deliver food, feed and fuel globally. The deal is expected to realise significant value to Glencore. Under the terms of the agreement, Glencore will receive c.$3,1 billion in Bunge stock (32,8 million shares, representing 15% in the combined group) and $1 billion in cash.

Glencore (take three). The company continues in its quest to implement a deal with Teck Resources with the company proposing an alternative offer to acquire the steelmaking coal business Elkview Resources (EVR). While the financial details of a proposed transaction were not disclosed, the latest proposal provides a middle ground for both companies – an exit for Teck Resources from the coal business and the option for Glencore to split its business into CoalCo and MetalsCo. Glencore’s first prize remains a merge with Teck Resources and a demerge of the coal business, having offered $8,2 billion to Teck shareholders who did not want exposure to the coal business.

Telkom has, it is reported, rejected the latest offer from the Maseko-led consortium with the Business Times reporting that the consortium had offered R46 per share for a controlling stake. Management has requested that the consortium provide further clarity on several matters including the proposed offer price and certainty of funding.

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

Weekly corporate finance activity by SA exchange-listed companies

Marylou Greig
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Weekly corporate finance activity by SA exchange-listed companies

Labat Africa intends to raise a maximum of R74,68 million via a partially underwritten (by directors) rights offer for working capital purposes with the balance to be retained in an interest-bearing cash reserve account. If fully subscribed, 622,312,545 shares will be issued at 12 cents per rights offer share. Currently the company has a market capitalisation of R49,79 million with the share price trading at 8 cents.

Ellies has proposed to raise R120 million via a Rights Offer to part fund the acquisition of Magetz Electrical and Power On Wheels announced in February. Mazi Asset Management and Imvula Education Empowerment Trust have, together agreed to underwrite the proposed capital raise. Shares will be issued at R0.07 per rights offer share.

Purple Group has successfully raised R105 million via the issue of 129,629,630 shares at an offer price of 81 cents. The rights offer was oversubscribed and accordingly SIH in its capacity as underwriter was not required to subscribe for any shares.

Oasis Crescent Property Fund unit holders representing 45.4% of units qualifying to receive a distribution have elected to reinvest their distribution. The company has accordingly issued 748,452 units in terms of its scrip dividend election at R23.91 per unit amounting to R17,89 million.

Shareholders holding 28.07% of Dipula Income Fund shares have elected to receive the dividend re-investment option resulting in the issue of 18,253,926 new shares retaining R64,25 million in new equity for Dipula.

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 552,644 Investec Plc shares at an average price of 451 pence per share (LSE and BATS Europe) and 752,733 Investec Plc shares at an average price of R107.42 per share (JSE).

Brait has revealed to Business Day that it aims to wind-down, sell and unbundle its remaining assets which would result in Virgin Active remaining as the listed entity with a primary listing in Luxembourg and a secondary listing on the JSE.

Merafe Resources will join the growing number of JSE-listed companies to take a secondary listing on A2X. The company will trade on the exchange from June 21, 2023. The listing of Merafe brings the number of instruments listed on A2X to 135.

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:

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. This week 778,251 shares were repurchased at an average price per share of R106.07. Since November 21 2022, the company has repurchased 11,200,577 shares at a cost of R1,2 billion.

South32 this week repurchased a further 1,327,431 shares at an aggregate cost of A$5,17 million.

This week Glencore repurchased a further 11,760,000 shares for a total consideration of £51,9 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 June 5 to June 9 2023, a further 1,692,901 Prosus shares were repurchased for an aggregate €111,41 million and a further 364,626 Naspers shares for a total consideration of R1,14 billion.

Seven companies issued profit warnings this week: Novus, Thungela Resources, African Equity Empowerment Investments, Mantengu Mining, Prosus, Naspers and Marshall Monteagle.

Four companies issued or withdrew a cautionary notice: Afristrat Investment, Telkom SA, enX and Ellies.

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

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

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

DealMakers AFRICA

Société Générale, the European financial services group, is to divest of its stakes in its African subsidiaries in Congo (93.5%), Equatorial Guinea (57.2%), Mauritania (95.5%) and Chad (67.8%). Pan-African banking groups Vista and Coris will acquire the subsidiaries. Financial details were undisclosed.

Two of Egypt’s largest entrepreneur communities, The GrEEK Campus and MQR, have announced their merger. The entities combined have a total resident community of 3,500 members representing over 450 companies. The two brands will continue to operate independently under a centralised leadership. Financial details were undisclosed.

Digital Africa, an organisation investing in technological advancement and innovation in Africa, has made an undisclosed investment in Ivorian startup Fatala Digital House. Fatala is a digital services company assisting organisations in Europe and Africa on their path to digital transformation. The investment by Digital Africa is its first in Côte d’Ivoire.

Egyptian logistics platform Trella, which connects shippers with qualified carriers to seamlessly move and manage loads, has raised US$3,5 million from Avanz Capital Egypt. The startup, which also operates in Saudi Arabia, the UAE and Pakistan, will use the funds to expand and develop its logistic solutions.

Nigerian startups Messenger, a logistics platform and customer engagement solutions provider Termii, have received funding from Nama Ventures. The Saudi Arabian venture capital fund led a pre-seed round in which Messenger raised an undisclosed amount. Termii raised US$3,6 million in a round led by Fintech Collective and Ventures Platform with participation from several investors including Nama Ventures and Launch Africa Ventures.

The International Finance Corporation (IFC) has announced a US$257,4 million debt ($100 million) and equity ($157 million) injection in Safaricom Ethiopia. Following the transaction, IFC will hold a minority stake in Safaricom Ethiopia. Funds will be used to create a competitive market for mobile connectivity.

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

Risk it for the biscuit: opportunities for private equity in business rescue

Jessica Osmond and Tobie Jordaan
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Risk it for the biscuit: opportunities for private equity in business rescue

Private equity firms have long been known for their ability to strategically identify and act on opportunities where others may not see them, and business rescue is no exception.

Business rescue presents a unique opportunity for private equity firms and investors to invest in companies that are struggling financially, but that, with the right resources and support, have reasonable prospects of a profitable turn around or rehabilitation.

With the increase in interest rates, rising inflation and relentless loadshedding, the economic strain experienced by businesses and consumers around the country continues to grow. It is only a matter of time until we see a surge in business rescues, where companies are left with little to no option but to restructure their debts through mechanisms provided for in the Act. This presents enormous opportunity for private equity players in the market who understand how business rescue may be used as an attractive vehicle to pursue their investment objectives. Private equity firms play a pivotal role in the distressed and restructuring sector as they are able to act quickly and decisively, which is vital in ensuring a successful and efficient rescue.

Chapter 6 of the Companies Act provides a rehabilitation mechanism for financially distressed companies through the process of business rescue, but one of the prerequisites for placing a company in business rescue is being able to prove that there is reason to believe that the company can be successfully rehabilitated, and this can look different from one distressed company to another.

Since Chapter 6’s inclusion in the Act, business rescue has continued to evolve, and the interplay between various sectors, particularly in the private equity, capital investments and distressed mergers and acquisitions space, has become evident.

While business rescue can be a complex and challenging process, for those with the right expertise and experience, it can be used as an opportunity to create significant value in the long run.

Unlike other potential investors, private equity firms typically have the resources and operational expertise and experience to undertake the necessary due diligence and make swift investment decisions, affording them the ability to take advantage of the opportunities presented in a distressed scenario.

This can be particularly valuable in a business rescue situation, where time is often of the essence and the company may need significant operational improvements to return to profitability. Similarly, the business rescue practitioners are often under immense pressure to ensure that processes are followed in accordance with the time frames stipulated in the Act and the approved business rescue plan.

It’s no secret that when a company is struggling financially, its assets are often undervalued or overlooked by investors. However, in such circumstances, private equity firms are able to leverage their experience to acquire these assets at a discount, seeing the potential to generate significant value in the long term. Being able to take advantage of these opportunities may also afford these firms an invaluable window to secure a position in industries in which there are significant barriers to entry, where acquiring distressed assets may be one of the few ways to gain a foothold in the market.

Apart from their unrivalled expertise and resources, private equity firms are also able to bring significant financial resources to the table in a business rescue or distressed situation. This is particularly important given that the company in rescue is, more often than not, struggling with significant debt and disgruntled creditors and stakeholders. This capital injection can provide the necessary funds to compromise its debts, or restructure the debt in such a way as to allow the company to return to solvency.

Whilst, in these circumstances, private equity can offer high returns in the long run, this type of investment is not without risk. Like with most investment strategies, there is often uncertainty as to whether the investment will pay off, and sometimes even more so when investing in distressed companies. To best mitigate this risk, private equity investors should appreciate the importance of winning over the cooperation and approval of stakeholders – being both creditors and shareholders. This may involve working alongside the business rescue practitioner in conducting extensive due diligence, analysing the company’s financials and operations in detail, and developing a comprehensive plan for turning the business around.

Much like in instances of distressed mergers and acquisitions, we are seeing an uptick in the interplay between private equity takeovers or buy-ins as a means of rehabilitation in the business rescue space. This is promising for the future of business rescue and other restructuring endeavours, as it serves as a win-win for investors and companies looking to return to a healthy position of solvency.

Jessica Osmond is an Associate, Dispute Resolution and Tobie Jordaan a Director in Cliffe Dekker Hofmeyr’s Dispute Resolution practice and Head of its Business Rescue, Restructuring & Insolvency sector.

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

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

The increasing focus on public interest considerations in African competition policy

Lerisha Naidu, Angelo Tzarevski and Sphesihle Nxumalo
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The increasing focus on public interest considerations in African competition policy

There has been a general upward trend in competition policy enforcement across the continent over the past few years. African jurisdictions have strengthened their competition and antitrust regimes by way of amendments to existing legislation, the introduction of new laws and regulations, and renewed fervour and political will to enforce existing laws. Most notably, there has been a growing convergence of competition law and social policy on the continent.

The central tenet of competition policy is that inclusive economies yield better outcomes for both producers and consumers. Recent trends indicate that governments in various parts of the world, particularly Africa, are moving away from the purely economic origins of competition regulation, and are instead adopting a model that recognises and, to some extent, caters to the broader needs of modern society and socioeconomic transformative narratives. In this context, the South African Competition Act was amended in 2019, to ensure economic transformation (among other things) by providing mechanisms to address high levels of economic concentration, enhance small business development, and combat the “racially-skewed” spread of ownership through merger control, as well as by vesting the authority with increased powers to launch market inquiries into highly concentrated industries and impose structural remedies to facilitate the effective and sustainable participation of small and medium enterprises (SMEs) and historically disadvantaged persons (HDPs) in the economy.

As another illustration, competition authorities in Africa have increasingly acknowledged their role as protectors of fair practice and consumer protection, and have stated their intention to enforce these principles in the future. Across the continent, the price volatility of essential food items is a growing concern. In addition, businesses in the consumer goods and retail sector are facing significant supply chain disruptions due to geopolitical, environmental, and infrastructure challenges.

The issue of price volatility in relation to essential food items was addressed in the South African competition authority’s Essential Food Pricing Monitoring report, which included a list of fruits, meats and cooking oils that have recently experienced price volatility. It was noted that poorer communities were most negatively affected by such price increases. Having said that, it bears noting that not all increases in the cost of essential foods were caused by the pandemic. Changing weather conditions (from drought to heavy rain), oil price fluctuations, severe supply chain blockages and massive geopolitical challenges have all contributed to a decrease in supply, and subsequent price increase. The authority stated that it would continue to keep a close eye on the price of essential and imported food items to ensure that anticompetitive behaviour does not occur, and that the increase in prices of essential food items can be justified. After noting “unjustified price increases” in recent years, the authority announced in early 2023 that it would investigate the prices of a variety of essential food products, including bread, cooking oils, corn meal, rice, flour and margarine. It noted that food was a priority sector due to the fact that poor consumers spend a significant portion of their income on essential foodstuffs.

Public interest considerations are especially taken into account in the case of merger control, but they can also be factored into investigations into alleged abuses of dominance and other prohibited practices. Notably, merger regulation in South Africa, and in many other African countries, is heavily influenced by the government policy agenda. Many African merger control regimes have developed a competition policy approach that balances traditional competition law considerations with public interest concerns, especially in terms of market concentration, access to competitive markets for SMEs, greater spread of ownership by firms owned by HDPs, and employment considerations. For example:

• Botswana’s competition legislation mandates “certain aspects of general public interest.” The use of the specified public interest considerations is especially notable in the context of mergers. In previous years, the authority imposed conditions on merger clearances aimed at promoting the sustainability and growth of a sector by ensuring that the merged entity sources its input requirements from local suppliers; maintaining and creating employment; promoting citizen economic empowerment by ensuring that Botswanan citizens hold shares in the merged entity; ensuring the professional development or employability of local citizens by ordering their appointment to certain positions in the merged entity; and promoting citizen economic empowerment by ensuring that Botswanan citizens hold shares in the merged entity.

• In Ethiopia, the authority considers the contribution that a merger will make to accelerating economic development, promoting technical knowledge transfer, improving the production and distribution of goods and services, and enabling SMEs to be capable and competitive.

• Namibia and Nigeria, like South Africa, consider the likely impact of a merger on a specific industrial sector or region; employment (whether the merger will result in redundancies); SMEs’ and HDPs’ ability to effectively access or compete in the market; and national industries’ ability to compete in international markets. The Namibian authority frequently considers the employment implications of a transaction. For example, during the 2017- 2018 fiscal year, the authority imposed employment conditions on the majority of the mergers evaluated, with the result that approximately 860 jobs were secured.

• In Kenya, the Competition Act includes a public interest test in merger control that assesses a merger’s impact on a particular sector or region, the creation and retention of employment, and the competitive access that SMEs have to the market. The Act also provides for the granting of exemptions to certain indispensable restrictive practices aimed at increasing exports, enhancing efficiency in production and maintaining the quality of services, only under exceptional and compelling reasons of public policy.

• In Tanzania, the public interest factor is especially important when a merger is likely to create or strengthen market dominance. In such cases, the authority may consider whether the merger is likely to benefit the public by increasing efficiency in production or distribution, promoting technological or economic progress, increasing efficiency in resource allocation, or protecting the environment.

Although legislatively mandated public interest factors frequently carry equal weight, the employment effects and promotion of ownership by local citizens (particularly in Botswana) and HDPs (particularly in South Africa) are scrutinised by the authorities in every transaction. Conditions are almost always imposed when job losses are intended or anticipated, even when the numbers are negligible. Even if job losses are not anticipated, conditions may nevertheless be imposed to safeguard against potential merger-specific job losses in cases of uncertainty. The promotion of greater ownership diversity, particularly among HDPs, is also gaining importance, especially as transactions that reduce ownership by historically disadvantaged individuals are scrutinised more closely by authorities. In the last 24 months, the South African competition authority has been particularly active, imposing public interest conditions on more than 74 mergers relating to employment, and with heavy focus on greater spread of ownership by HDPs, as well as local production and procurement, amongst others.

As social imperatives play an ever-increasing role in the development of competition policy, the trend of placing emphasis on the empowerment of SMEs as a means of fostering a healthy economic ecosystem, as well as the need to provide adequate opportunities to HDPs, will continue into the future. Furthermore, with digital innovation allowing many previously excluded individuals and businesses to participate in the African economy, it is likely that public interest imperatives will play a critical role in the development and implementation of competition law in the digital space across the continent.

The African Continental Free Trade Area (AfCFTA) is providing impetus for the continent to move toward the adoption of a pan-African competition policy, which could be geared toward socioeconomic transformative goals (such as maintaining acceptable consumer prices) and a consistent approach to public interest. In February 2023, the African Union Assembly of Heads of State and Government adopted the protocol on competition policy.

Doing business in Africa will necessitate awareness of the public interest mandates of competition authorities and how practices promote or impact public interest outcomes, as enforcement trends on the continent indicate that public interest considerations will significantly influence broader enforcement activity, especially through prioritisation policies.

Lerisha Naidu is a Partner and Head of the Antitrust & Competition Practice, Angelo Tzarevski is a Director Designate and Sphesihle Nxumalo is a Senior Associate | Baker McKenzie, Johannesburg

This article first appeared in DealMakers AFRICA, the continent’s quarterly M&A publication.

DealMakers AFRICA is a quarterly M&A publication
www.dealmakersafrica.com

MultiChoice returns rest of Africa to profit and continues to expand

Sponsored Content
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MultiChoice returns rest of Africa to profit and continues to expand

MultiChoice Group (MCG, or the group), Africa’s leading entertainment company, returned its Rest of Africa business to profitability and further expanded its consumer services ecosystem during the year ended 31 March 2023 (FY23).

“We continued to scale our overall subscriber base and benefited from a strong performance in the Rest of Africa, that delivered a trading profit for the first time since our listing in 2019. It is a remarkable performance by the team considering that they have had to absorb almost ZAR3bn in currency losses in the last four years” says Calvo Mawela, Chief Executive Officer. “We increased the breadth and depth of services offered to our customers and continued to grow our entertainment ecosystem, most notably through our recent streaming partnership with Comcast,” he added.

Visit the Group’s Investor website for more results information

Read the full press release here:

MultiChoice-FY23-Results-Press-Release

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