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Ghost Wrap #34 (Richemont | ArcelorMittal | Pick n Pay | Truworths | Mr Price | Super Group | Northam Platinum | Vodacom)

The Finance Ghost
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Ghost Wrap #34 (Richemont | ArcelorMittal | Pick n Pay | Truworths | Mr Price | Super Group | Northam Platinum | Vodacom)

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.

  • Richemont suffered a significant sell-off after releasing numbers that showed negative growth in the Americas.
  • ArcelorMittal experienced incredible volatility after releasing a trading update that anticipates a substantial headline loss per share.
  • Pick n Pay also had a volatile week and is also expecting an interim loss, with pressure on sales in the core business and large once-off costs in this period.
  • Truworths experienced a slowdown in sales in the second half of the financial year in the Africa business, with the UK making up for it with a strong second half.
  • Mr Price is having a tough time, with slow sales growth excluding Studio 88 and clear pressure on margins.
  • Super Group is investing in the UK, with the acquisition of a 78.82% stake in the Amco business.
  • Northam Platinum is throwing in the towel on the Royal Bafokeng Platinum stake, accepting the offer from Impala Platinum and locking in roughly a R4 billion loss in the process.
  • Vodacom is growing revenue at mid-single digits, yet capital expenditure is growing at a much higher rate.

Listen to the podcast below:

Ghost Bites (Aveng | Glencore | Hulamin | Mr Price | Tongaat | Vodacom)

The Finance Ghost
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Ghost Bites (Aveng | Glencore | Hulamin | Mr Price | Tongaat | Vodacom)

Aveng: proof that construction is always a knife’s edge (JSE: AEG)

The share price has more than halved this year

There’s genuinely nothing riskier than construction. Just one bad project can almost sink an entire firm, or at least cause significant financial distress.

Speaking of distress, for the year ended June 2023, Aveng will report a headline loss per share. That’s a big and ugly swing from a headline profit of 252 cents per share in the previous year.

After the sale of Trident Steel, there are only two subsidiaries in the group.

The Australasian and Pacific business is McConnell Dowell. An operating loss of AUD65 million is expected vs. a profit of AUD70 million in the comparable year, driven by massive losses (AUD114 million) on the Batangas LNG (BLNG) terminal project in Southeast Asia.

They still need to finish that awful project, with completion and handover expected later this year.

The good news is that the McConnell Dowell debt of AUD43 million has been reduced by AUD20 million, with the remainder converted to term debt. This debt was linked to the BLNG project guarantee.

The business closed the financial year with a cash balance of AUD177 million. With work in hand of AUD3.5 billion, the group sounds confident about its 2024 revenue budget.

At South African subsidiary Moolmans, there has been significant investment (R900 million) in heavy mining equipment for the secured Tshipi é Ntle project. Equipment is being delivered to site and commissioned, with final delivery expected by September 2023.

Sadly, delays in the delivery from OEM suppliers means that the improved result in the last quarter wasn’t enough to mitigate losses in the first nine months of the financial year. The operating loss for the year is expected to be R105 million.

To add to the uncertainty, the managing director of Moolmans has left to pursue other opportunities. Group CEO Sean Flanagan has taken the role of executive chairman of Moolmans while they find a successor.

Although the underlying losses are obviously bad news, Aveng still has a net cash balance of R1.3 billion (cash of R2.3 billion and debt of R1 billion). Around 70% of the debt is asset backed finance in Moolmans and the rest is in McConnell Dowell, with the latter expected to be settled in the next financial year.

There is no debt in parent company Aveng, as this was settled when Trident Steel was disposed of.

Glencore sounds bullish on full-year guidance (JSE: GLN)

With the first half of the year out of the way, things are looking good

Mining groups are complicated, particularly when they are as large as the likes of Glencore. Production results vary wildly across the various commodities, especially when you take into account planned maintenance and the impact of acquisitions and disposals. There are always unplanned issues, like a strike at one of the nickel mines.

In the first half of the financial year, copper, coal and zinc performed in line with expectations and guidance previously given to the market. This doesn’t mean that production was higher, by the way. As this table shows, its a real mixed bag across the group:

Full-year production guidance is unchanged.

Production is only one part of the story. Pricing is the other. Individual commodities are incredibly volatile, like cobalt which declined to historic lows in May 2023 due to oversupply. This materially impacted earnings from African copper operations.

The investment case for a group like Glencore is built around taking overall mining exposure through a single investment, rather than highly risky bets on individual commodities. The group result is always smoother than the results as you dig deeper into the operations.

There’s also no shortage of mergers and acquisitions at Glencore, with three recent examples. The deal with Bunge Limited will close in mid-2024, the sale of Cobar Management to Metals Acquisition Corp already closed and the acquisitions of a 30% stake in Alunorte and 35% in MRN are expected to complete in the second half of 2023.

Hulamin kept strike disruptions to a minimum (JSE: HLM)

The entire thing was wrapped up within two weeks

Although there’s no “good” strike action for a company, sorting it out quickly keeps the pain to a minimum. You just need to think back to the strike by workers in Sibanye’s gold business for a perfect example of the financial destruction that labour action can bring.

Hulamin seems to have sorted it out quickly. Workers affiliated with NUMSA embarked on a strike on 10 July and operations will resume as normal on 24 July, after a resolution was reached on 21 July. No details are given of the resolution, which is a disappointing omission from the announcement.

Mr Price is treading water (JSE: MRP)

Like-for-like growth is hard to come by at the moment

Mr Price is down more than 8% this year, with a volatile ride along the way for investors. It’s been a rewarding stock for traders playing the load shedding game, although that is true for most local retailers.

The company needs to improve its image with investors after a pretty poor performance in the last financial period due to inadequate preparations for load shedding. This is a very tough environment to operate in, so there’s no room for scoring own goals.

In the 13 weeks ended 1 July 2023, Mr Price managed to grow like-for-like retail sales by 0.9%, which is in the green but not by much. This excludes the Studio 88 acquisition, which obviously adds a lot of revenue to the system vs. the base period. If you include other income like debtors book income, then income was up 1.2% without Studio 88.

Selling price inflation excluding Studio 88 was just 2.4%, so volumes are down by roughly 1.5%. With plenty of commentary in the result about higher markdowns, I am quite confident that input cost inflation was higher than the selling price inflation. In other words, Mr Price took a bath on gross margin. The gross margin will be further impacted by the inclusion of Studio 88 in the results, as this is a lower gross margin business than the rest of the group.

The cash vs. credit sales relationship is important and the differing growth levels are quite surprising here. Excluding Studio 88, cash sales (87.8% of total retail sales) were up 1.5% and credit sales fell 2.7% as the group used stricter credit granting criteria. This ties in with recent bank updates that highlighted a quickly deteriorating credit environment. Several other apparel retailers have been less conservative on credit sales, particularly with cash sales under pressure.

And in case you’re wondering, higher-income customers at Yuppiechef aren’t feeling the pinch. Double-digit sales growth has been reported. Admittedly, this really is a great retailer with a solid brand and dominance in its niche.

The shape of the quarter is important here, which is why Mr Price gives detailed disclosure. April was still a rough period of load shedding with backup in only 60% of stores, so sales fell by 5% excluding Studio 88. In May and June combined, sales were up by 5.6% on the same basis. This is encouraging heading into the next quarter.

The group footprint is still expanding, with trading space up by 5.8% on a weighted average basis excluding Studio 88. With the acquisition included, trading space was up 22.6%.

In summary, the interim result isn’t going to be pretty. Although no specific guidance has been given, it’s not difficult to read between the lines that profitability is under significant pressure. It sounds like the promotions aren’t over either, with “responsible stock management” and the goal of achieving just low single digit inventory growth by the end of the interim period.

Tongaat announces an equity partner (JSE: TON)

This is surely good news for the local sugar industry

I doubt that Tongaat-Hulett shareholders will get much out of this process, but at least it looks like the company has found a saviour.

After a process to find a strategic equity partner, the company has selected Kagera Sugar – a sugar manufacturer in Tanzania which also has assets in the DRC and refineries in the Middle East. It looks like Kagera will acquire the entire South African business, as well as the investments in Zimbabwe, Mozambique and Botswana.

An updated business rescue plan will reveal full details to interested parties.

Vodacom manages mid-single digit growth (JSE: VOD)

You have to strip out Egypt to properly understand the numbers

Although Vodacom group revenue was up 36.9% in the quarter ended June 2023, you have to remember that Vodafone Egypt wasn’t in the base period. If you strip that out, you get growth in group service revenue of 9.8%. If you then take out foreign exchange movements for a “normalised” view on revenue growth, you get 4.3%.

Vodacom didn’t own Vodafone Egypt a year ago, so the year-on-year growth isn’t a true reflection of the impact on Vodacom numbers. It’s important to help us assess performance though, with that business doing very well. Vodafone Egypt services revenue grew by 27.6% in local currency, as financial services revenue more than doubled.

If we look at the South African business, service revenue increased by 3.9% and total revenue was 5.6% higher. Capital expenditure is 21.5% higher, so that’s a significant drag on free cash flow and is one of the major issues with the investment case in the telecoms industry. It’s also worth noting that customers fell by 0.6%, with pressure in the prepaid business year-on-year. They did increase prepaid customers this quarter when compared to the immediately preceding quarter.

The International business (i.e. everything other than South Africa and Egypt) grew service revenue by 4.9% on a normalised basis and total revenue by 4.2%. The problem is that capital expenditure more than tripled, so the free cash flow story doesn’t look good anywhere. A major driver of this jump was the purchase of additional spectrum in the DRC.

Looking beyond the core business, the mobile money platforms across the group processed $360.6 billion in transactions over the past twelve months, up 5.8%. That’s an annual number in a quarterly update which is a bit naughty, but it’s worth mentioning anyway. The “super-app” in South Africa has reached 6.7 million downloads.

Regulatory approval is still outstanding for the acquisition of a 40% stake in MAZIV, the fibre initiative in South Africa that will be a major play for Vodacom if it all goes through.

Little Bites:

  • Director dealings:
    • A director of a major subsidiary of Tharisa (JSE: THA) has sold shares worth R1.4 million.
    • A director of Acsion Limited (JSE: ACS) has bought shares worth R39.4k.
  • Although Trematon Capital Investments (JSE: TMT) closed 18.4% after releasing a cautionary announcement, this should be interpreted with great caution as this is an illiquid stock. There was very little in the way of detail on the potential deal. We don’t even know if they are looking at buying or selling an asset.
  • Reinet Investments (JSE: RNI) always releases the net asset value (NAV) movement in Reinet Fund as a precursor to the change in NAV for the group. Reinet Fund is the bulk of the group balance sheet, but not all of it. Between March 2023 and June 2023, the NAV of Reinet Fund fell from EUR 33.40 to EUR 32.98, a 1.3% decline.

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?

There was not much happening in the local M&A space this week – all eyes were on the SARB governor Lesetja Kganyago as to whether he would hike interest rates further. The sigh of relief was palpable with the governor announcing on Thursday to keep the repo rate unchanged at 8.25% and prime at 11.75%. He did add however that this may not be the end of the hiking cycle, but would reassess the data at each meeting going forward.

Exchange-Listed Companies

Super Group, through its UK subsidiary, SG International Holdings, has acquired a 78.82% stake in UK transport and logistics business CBW Group (t/a Amco) from management for a cash consideration of £30,3 million. Amco delivers its logistics services to 250 active UK and European customers operating in a diverse range of manufacturing sectors. The deal will significantly enhance Super Group’s supply chain offering providing opportunities for market share gains across the UK and Europe.

Northam Platinum (Northam) advised shareholders this week that it had submitted its acceptance of the Impala Platinum (Implats) mandatory offer to acquire its 34.5% stake in Royal Bafokeng Platinum (RBPlat). The protracted struggle for control of RBPlat began in November 2021. Northam will receive R9 billion and 30,065,866 Implats shares (a 3.3% stake) valued at c. R4,1 billion. In a market statement, Northam said the disposal provided a well-timed opportunity for the company to secure a significant cash injection which would materially strengthen its balance sheet and liquidity position at a time when prevailing PGM market conditions and the decline in the PGM basket price may signal a potentially protracted cyclical downturn.

Unlisted Companies

RSM South Africa is to merge with local accounting services firm Ngubane Johannesburg. The combined business will operate under the RSM South African brand. Financial details were undisclosed.

Transnet announced International Container Terminal Services Inc., a Philippines-headquartered company, as the preferred bidder for the 25-year joint venture to develop and manage the Durban Container Terminal Pier 2.

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

Ghost Bites (Amplats | Anglo American | Balwin | BHP | Famous Brands | Jubilee Metals | Karooooo | Kumba | Northam Platinum | Telkom | Truworths)

The Finance Ghost
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Ghost Bites (Amplats | Anglo American | Balwin | BHP | Famous Brands | Jubilee Metals | Karooooo | Kumba | Northam Platinum | Telkom | Truworths)

Amplats really isn’t shining (JSE: AMS)

Production pressures have come at exactly the wrong time

In the second quarter, there really aren’t many highlights at Anglo American Platinum, or Amplats as it is more commonly known.

Total PGM production is down 9% year-on-year, with reasons ranging from planned infrastructure closures through to Eskom load curtailment. Refined PGM production fell by 13%, with lower metal-in-concentrate as an additional factor.

Sales volumes fell by 8% based on lower refined production.

Despite this, guidance for 2023 in terms of volumes is unchanged. Unit cost per ounce is expected to be at the upper end of the range, which makes sense in the context of production challenges and inflationary pressures.

With PGM basket prices down horribly, Amplats simply cannot afford a poor production result.

Anglo gets a boost from Quellaveco (JSE: AGL)

Other production numbers were a mixed bag this quarter

In the quarter ended June, Anglo American increased overall production by 11% year-on-year.

The Quelleveco copper mine in Peru was a big part of this, driving copper production up by 56% (despite operations in Chile falling by 2%).

Beyond copper, there were drops in Nickel (4%), PGMs (9%) and diamonds (5%), with the latter impacted by the De Beers Venetia mine transitioning to underground operations.

Iron ore increased by 9% thanks to a big performance at Minas-Rio and steelmaking coal was up 28%, with unseasonal poor weather in the base period.

In several commodities, unit cost guidance has been increased. This is usually a combination of production pressures and inflationary impacts.

Over the last six months, realised commodity prices have fallen almost across the board. Notably, Nickel is down 22%, the PGM basket price is down 29% and De Beers down 23%. Iron ore and steelmaking coal are also on the wrong side of 20% declines.

The share price is down around 20% this year.

Balwin takes out the B-BBEE lock-in (JSE: BWN)

This potentially sets very important precedent

In an announcement innocently titled “amendments to the notice of annual general meeting”, there’s a bit of a bombshell for B-BBEE Ownership deal structuring.

Balwin’s initial proposed deal would see the B-BBEE partner (Tatovect) locked in for 10 years. This is quite long even by recent deal standards, but lock-ins are generally seen as part of the B-BBEE landscape.

Well, they were at least.

The transaction was registered as a Major Transaction with the B-BBEE Commission and that’s where the trouble started, as the Commission wasn’t happy with it. Although the lock-in is perfectly legal, Balwin chose to amend the terms to get the Commission across the line.

So, instead of a 10-year lock-in structure, Tatovect can exit at any time provided (1) the loan from Balwin is repaid in full and (2) the 20% discount on VWAP initially granted to Tatovect on its entry price can be refunded.

If the exit takes place after 10 years, then the refund of the 20% discount would not apply.

BHP released an operational review (JSE: BHG)

Full year production guidance was mostly achieved

For the year ended June 2023, BHP achieved guidance for copper, iron ore, metallurgical coal and energy coal. Nickel achieved revised guidance, finishing in line with the lower end of original guidance.

Full year unit cost was a mixed bag, with facilities generally meeting or being slightly above guidance.

BHP can’t do much about prevailing commodity prices, with average realised prices for copper, iron ore and metallurgical coal being lower in the 2023 financial year than the prior year. Nickel prices were stable and thermal coal prices were stronger, but mainly in the first half of the year.

The acquisition of OZ Minerals was completed in May, with this deal expected to lift production in the South Australian copper business.

Although profitability will only become clear once financial results are released, the CEO commentary does note that inflationary pressures impacted the business.

Famous Brands gives a trading update at the AGM (JSE: FBR)

The company is highlighting the costs of load shedding

I must say, I’ve generally held the view that quick-service restaurants are net winners from load shedding. When the lights are off, the local Steers is your friend. If you’ve seen the menu prices though, you’ll also know that inflation is high and consumer budgets are finding it very hard to keep buying burgers.

In the back-end, Famous Brands and its manufacturing plants must keep the power on even during stage 6, otherwise they can’t supply restaurants. This is why diesel usage for the first quarter is up from R1 million last year to R8.8 million this year. It dropped again in June, as load shedding improved.

Looking at sales for the four months to June, Leading Brands increased by 9% and Signature Brands fell by 1% with a slowdown in evening dining. Affordability, perhaps?

The retail portfolio is up 61%. A good way to feel better during load shedding is to pile on the Steers sauce at home.

In the UK and in the AME segment, revenue increased by 20%. SA was up 10% overall. This means that group sales increased by 11%, with no indication of net profit for the period.

Jubilee Metals mostly beat production guidance this year (JSE: JBL)

PGM and chrome production were ahead, while copper lagged guidance marginally

In an operational update for the year ended June 2023, Jubilee Metals noted a strong operational performance from the South African PGM and chrome operations. In both cases, production was ahead of guidance. PGM production was 2% higher year-on-year and chrome was 7% higher.

Copper production increased by 2% but narrowly missed guidance (2,923 tonnes vs. guidance of 3,000 tonnes) due to power and water disruptions in Zambia in the first half of the year that impacted ramp-up of the Roan Concentrator. Jubilee is pushing hard with the copper strategy, with a planned capital investment of $8.5 million for further upgrades.

The company expects further growth in production in FY24.

Karooooo accelerates subscriber growth (JSE: KRO)

It’s also good to see positive growth in cash from operations

In the first quarter of the 2024 financial year, Karooooo grew Cartrack subscribers by 14% to 1.757 million. Importantly, the rate of growth increased sharply. There were 40,375 net new subscribers in this quarter, vs. 16,800 net new subscribers in the comparable quarter.

Total revenue increased by 24%, or 19% on a constant currency basis. As the group has increasingly invested in non-subscription businesses (to my irritation as a shareholder), subscription revenue was up 18% or 12% in constant currency – quite different to the group total revenue growth.

Cash generated from operating activities was up 7%. Growth is generally a drain on cash for Karooooo, as the telematics devices are an expensive initial outlay to get a new customer onto the Cartrack system.

Net cash increased by 33% to R1.137 billion.

Kumba on track to achieve full-year production guidance (JSE: KIO)

The first half of the year has delivered encouraging numbers – other than re: Transnet

It sounds like a fairly successful interim period at Kumba, with the management team feeling bullish about meeting full-year guidance. Well, guidance for production, that is.

Iron ore production was 6% higher in this period, although ongoing issues on the Transnet rail line meant that ore railed to port at Saldanha Bay was down 3%. Sales fell by 4% due to lower finished stock levels at the port.

Production and unit cost guidance for the full-year has been maintained but sales guidance has been revised downwards because of rail constraints. Non-critical capital expenditure has been deferred based on logistical challenges, so there’s yet another example of Transnet scoring more own goals for SA.

If you read far enough down, you’ll find a trading statement in this announcement that was almost hidden from view. For the six months to June, HEPS is expected to decrease by between 14% and 22%. This puts HEPS at between R28.16 and R31.17. For reference, the share price is around R444 and has dropped more than 9% this year.

Northam Platinum takes a bath on RB Plats (JSE: NPH)

Impala Platinum is the overall winner…right?

The saga around Royal Bafokeng Platinum (JSE: RBP) has been quite something to behold. After Impala Platinum (JSE: IMP) finally got through all the hurdles, including the ones raised by Northam Platinum (JSE: NPH) at the Takeover Regulation Panel (TRP), the questions remained around what Northams would do with its 34.5% stake in RB Plats.

We now know what the company will do. It will be accepting the mandatory offer from Implats, locking in a substantial loss (roughly R4 billion) but also liquidating the stake at a time when the PGM market has deteriorated since the initial deal.

To be fair, the original stake in RB Plats was acquired back in November 2021. The deal has taken an incredibly long time to be concluded.

Northams will receive R9 billion in cash and shares in Implats worth roughly R4.1 billion as consideration for the stake. This is a 3.3% stake in Implats, so it should be liquid enough to sell down over time if the company so chooses.

The market didn’t care about the loss being locked in by Northams. Instead, it added over 6% to the share price in celebration of cash coming into the group during a period of uncertainty in PGMs.

Is Implats the winner here? In a strict reading of the deal, then yes. But have they ended up overpaying for an asset and being incredibly distracted along the way by Northams’ tactics? There’s an argument to be made along those lines as well.

Telkom declares victory in court (JSE: TKG)

Now here’s a rare thing: some good news for Telkom!

Back in January 2022, a Presidential Proclamation was gazetted that gave the Special Investigative Unit the power to investigate various matters that included the disposal of former Telkom subsidiaries.

Telkom went straight to court and has won in the Pretoria High Court, which declared the proclamation unconstitutional, invalid and of no force or effect. Considering the amount of financial pain Telkom has been taking recently, it’s also quite handy that they were awarded costs.

The argument here isn’t that nothing had been done wrong historically, but rather that Telkom had taken action based on its own investigations and had launched legal proceedings where appropriate.

Truworths: a slowdown in H2 sales in the local segment (JSE: TRU)

Load shedding and high interest rates: when the fun stops for retailers

Truworths has released a sales update for the 52 weeks to 2 July 2023. The first important point is that the prior period was a 53-week reporting calendar, so the numbers aren’t directly comparable to what was reported. Truworths does the right thing by giving us growth rates based on 52 vs. 52 week periods, and even goes so far as to split this into H1 and H2 (the two halves of the year).

I will only be quoting the 52 vs. 52 week numbers as the others are worthless.

For the full year, Truworths Africa (which includes SA) grew sales 9.1%. Office in the UK was up 18.8% and the group total was thus 13.2%.

Split into halves, the group level numbers are remarkably consistent: growth of 13.0% in H1 and 13.4% in H2.

If we dig a little deeper, we find that Truworths Africa slowed down sharply in H2, growing just 4% vs. 13.4% in the first half. That’s a direct result of consumer pressures and load shedding. It really doesn’t help that power backup costs were elevated in that period, so I’m quite sure that the eventual release of full financial results will show a tough profitability result in Truworths Africa.

For the full year, volumes fell sharply as like-for-like sales growth was 4.4% and product inflation was 12.6%. This means an 8.2% drop in volumes.

Account sales were 70% of the Truworths Africa total (vs. 69% last year) and overdue balances as a percentage of gross receivables increased from 14% to 16%, so credit quality is showing a negative trend.

This means that Office in the UK had a phenomenal H2 performance, in order to balance out the local performance and give a consistent group result over the year. Sure enough, H1 growth was 12.3% and H2 was 27.1%. Online sales contribution was unchanged at 45% and this sales growth was achieved despite a decrease in trading space of 12.6%.

No guidance for profitability has been given. Truworths Africa is 73% of group revenue, so don’t get too excited by the UK results.

Little Bites:

  • Director dealings:
    • After a major recent sale by directors of The Foschini Group (JSE: TFG), a different director has now sold shares worth nearly R2.9 million. Given the risks in local retail and the level of debt that TFG took on, this is a strong negative signal for me.
    • The company secretary of Oceana (JSE: OCE) has sold shares worth R201k.
    • A director of RFG Holdings (JSE: RFG) has bought shares worth R39k.
    • In one of the strangest SENS announcements you’ll see, included here for comedic value rather than anything else, a trust linked to the CEO of Argent Industrial (JSE: ART) sold one share.

Weekly corporate finance activity by SA exchange-listed companies

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

As part of its capital optimisation strategy, Investec Ltd acquired on the open market a further 280,009 Investec Plc shares at an average price of 435 pence per share (LSE and BATS Europe) and 294,217 Investec Plc shares at an average price of R107.73 per share (JSE).

Datatec has issued 4,606,140 new Datatec shares in terms of its scrip dividend election at R36,42 per share amounting to R167,7 million.

The specific repurchase by Texton Property Fund of 72,1 million of its shares from the Government Employees Pension Fund for R155 million is unconditional and the shares will be delisted on 20th July.

Tsogo Sun, which dropped ‘Gaming’ from its name in June, proposes to implement an odd-lot offer to facilitate a reduction in the large number of shareholders who hold less than 100 Tsogo Sun shares. The offer price will be announced is expected to be announced in mid-August with the results of the offer released on 11 September 2023.

The consolidation of Nampak’s shares as set out in the circular sent out in May will take effect next week on 26 July, 2023. The authorised and issued share capital will be consolidated and reduced in the ratio of 1 share for every 250 shares.

The JSE has flagged the following companies as having failed to submit their provisional reports within the three-month period as stipulated in the JSE’s Listing Requirements: Accelerate Property Fund, Salungano Group and Sebata Holdings. If provisional reports are not submitted on or before 31 July, 2023, their listings may be suspended.

The following companies reported repurchasing shares. They were:

Investec’s share repurchase programme has been renewed and commenced on May 30. The programme will end on or before September 29. Over the period 10 -14 July 2023, 329,4031 shares were repurchased at an average price per share of R106.73. Since November 21 2022, the company has repurchased 13,041,882 shares at a cost of R1,39 billion.

Prosus and Naspers continued with their open-ended share repurchase programmes. During the period 10-14 July 2023, a further 2,677,348 Prosus shares were repurchased for an aggregate €179,76 million and a further 431,515 Naspers shares for a total consideration of R1,4 billion.

Four companies issued profit warnings this week: Anglo American Platinum, Arcelor Mittal, Pick n Pay and Kumba Iron Ore.

Two companies issued or withdrew a cautionary notice: Astoria Investments and Trustco.

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

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

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

DealMakers AFRICA

Access Bank Plc and Standard Chartered Bank have reached agreement on the sale of Standard Chartered’s shareholding in its subsidiaries in Angola, Cameroon, The Gambia, Sierra Leone and its Consumer, Private & Business Banking divisions in Tanzania. Financial terms were not disclosed.

Vantage Capital has acquired a controlling stake in Aquasantec International. The US$25 million investment of mezzanine debt and equity is part of a leveraged management buy-out which saw the exit of the founding Shah family, Ramco Group and Terra Mauricia. Aquasantec manufactures and distributes water tanks, pipes and related products across East Africa.

UGFS North Africa has invested an undisclosed sum in Tunisia’s Kaco. The mobility startup was founded in 2018 and the new fundraising round will provide the financial support the company needs to complete the construction of a new production facility with the capacity to manufacture a thousand scooters a year.

Egyptian fintech Flash has announced a US$6 million seed round led by Addition. The round also included Flourish Ventures and some angel investors. The funding will accelerate the fintech’s product development and customer and business acquisition in Egypt.

Sahel Capital has extended a three-year term loan and renewable working capital line to Tanzania’s Rogathe Dairy Farm Products. The investment was made from its impact fund – Social Enterprise Fund for Agriculture in Africa.

Scatec ASA has agreed to sell its 52.5% equity stake in the 40MW Mocuba solar power plant in Mozambique, to Globeleq for US$8,5 million. The Mocuba solar power plant is located in the Zambézia province; has an approximate 75GWh annual production and a 25-year PPA with state-owned utility, EDM.

Ventures Platform, Founders Factory and Techstars (follow-on investor) have made a pre-seed investment of US$1,25 million in Nigerian insurtech, MyCover.ai.

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

Ghost Bites (Accelerate Property Fund | Pick n Pay | Super Group)

The Finance Ghost
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Ghost Bites (Accelerate Property Fund | Pick n Pay | Super Group)

Accelerate releases detailed results (JSE: APF)

Investors can now see why the distribution is a thing of the past

Property funds are supposed to pay dividends. When they don’t, there is much unhappiness and understandably so.

Accelerate Property Fund released results for the year ended March 2023 and they make for ugly reading. Distributable income has dropped from R210.5 million to R56.8 million, with the distribution itself dropping from 21.98 cents to absolutely nothing.

Decelerate Property Fund, more like it.

Metrics have really deteriorated, like interest cover down from 2.1x to 1.8x and loan-to-value down from 42.8% to 44.8%. The net asset value (NAV) has nosedived from R6.21 to R4.13.

The share price is 79 cents, so it still trades at a huge discount to NAV. As we’ve just seen though, the NAV can quickly diminish.

The group sold R146.7 million worth of assets in this period and has another R292.4 million held for sale. With discussions underway to restructure debt and reduce covenants on a temporary basis to give the balance sheet some breathing room, these disposals are important. Of total debt of R4.5 billion, a whopping R2.4 billion is short-term in nature.

This is a crunch year for Accelerate, which is why the distribution is gone.

Pick n Pay’s volumes have dropped sharply (JSE: PIK)

Grocery retail isn’t nearly as defensive as people think it is

I frequently write about the “defensiveness” of grocery retail, or the lack thereof. Yes, people need to eat. No, they don’t need to put fancy cheeses in the basket that carry a high margin. Instead, they can put baked beans in the basket that are on promotion, because every grocery retailer is fighting over the same base of consumers and their affordability challenges.

Pick n Pay has released a trading update for the 20 weeks ended 16 July 2023 that supports this view. Although there are rainbows among the clouds like Boxer and growth in the online business, the core Pick n Pay grocery business is taking pain.

At group level, sales for the first 4.5 months of the financial year were up 4.8%. South Africa grew 4.4% and Rest of Africa was up 15.9%.

Clothing in stand-alone stores grew 10.9%, which is solid. Group liquor was up 9.8%. Online jumped by 75.3%, showing how consumer preferences have shifted since the pandemic.

If we dig into South Africa though, Pick n Pay SA fell by 0.3%. The result was 0.0% on a like-for-like basis, with internal selling price inflation of 9.5%. This means that volumes fell by 9.5%! Although inflation was well below the Stats SA Food CPI of 13.2%, Pick n Pay notes that sales were impacted by less promotional activity in this period as they had to try and protect margin with pressures from load shedding. Diesel costs for generators for 4 months was R300 million, with incremental net energy costs of R165 million.

Conversely, Boxer managed to grow by 15.4%. The like-for-like growth was only 3.0%, so most of this was from new stores. Growth in volumes would’ve been negative as well.

The stores that have been upgraded under the Project Ekuseni programme are outperforming other stores, as one would hope. To help pay for it, the next phase of Project Future (a voluntary severance programme and a restructuring of junior store management) incurred a restructuring charge of around R250 million, with expected annual cost savings of R300 million.

Interestingly, Pick n Pay is putting debt back on the balance sheet. The group raised R5.5 billion of medium- and long-term facilities, a significant strategic shift from the deleveraging strategy a few years ago.

For the interim period ending in August, the net incremental energy cost for the period is expected to be R250 million. To add to the struggle in a period of heightened load shedding, there was R110 million in duplicated supply chain costs during the Longmeadow / Eastport handover and R250 million in Project Future restructuring costs, as noted above.

If you add that up, you get to R610 million. Profit before tax in the comparable period was R588 million, so Pick n Pay is going to report a headline loss in this period. The full-year result should be profitable, as the worst of the once-off costs are all being taken in the first six months.

Either way, this is a perfect example of why I’m not invested in local retailers in a load shedding environment.

Super Group is acquiring CBW Group (JSE: SPG)

This is a transport and logistics business in the UK

Super Group has announced the acquisition of a 78.82% stake in CBW Group in the UK, which trades as Amco. The deal value is £30.3 million, settled in cash. Existing management will retain the remaining 21.18% and will remain employed in the business, so that’s good for alignment.

Super Group has paid for the deal by raising a five-year corporate bond of R810 million. The announcement doesn’t give an indication of what the cost of this debt is.

Amco is a transport and logistics business in the UK. It has been around since 1983 and operates across 11 locations in the UK, with strategic hubs in Europe as well. The company services a number of sectors. Super Group likes this business because it complements the existing supply chain offering and provides opportunities for market share gains in the region.

The business generates EBITDA of £9.2 million and profit after tax of £6.65 million. If we scale up the purchase price to a 100% stake, it implies a value of £38.44 million for the entire business. That’s a Price/Earnings multiple of roughly 5.8x.

There are no outstanding conditions and the deal closed on the day it was announced i.e. 19 July 2023.

Little Bites:

  • Director dealings:
    • The CFO of Famous Brands (JSE: FBR) loves a bit of contracts for difference (CFD) trading in Famous Brands shares. His latest purchase is CFDs to the value of R871k.
    • The company secretary of CMH (JSE: CMH) has sold shares worth R1.13 million.
  • Trustco (JSE: TTO) has been trading under cautionary for a while. One of the potential transactions relates to a management fee with Next Capital. The other relates to the Meya asset in which a third party is looking at subscribing for shares. Trustco has been waiting for a ruling from the JSE on the categorisation of that deal. As a terms announcement will be coming soon, we can assume that it is a Category 2 deal (although the announcement doesn’t explicitly say that).

Ghost Global: Champagne Problems

The Finance Ghost and Dominique Olivier
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Ghost Global: Champagne Problems

It’s the old story, isn’t it? Would you rather own a Louis Vuitton bag, or Louis Vuitton shares?

If you bought Swatch shares 10 years ago instead of one of the watches, you would’ve been better off with the watch! There’s never a guarantee of success when it comes to investing.

As we discover in Magic Markets Premium this week, Swatch isn’t really a luxury goods company. Although it includes brands like Omega and Blancpain, Swatches themselves are far from luxurious and are facing disruption from smart watches and fitness watches.

The Louis Vuitton (or Richemont) products face no such disruptions from tech-enabled substitutes. This doesn’t mean that there are always customers available for the products though, evidenced by Richemont’s drop in revenue in the Americas in the latest update. That gave the share price a nasty knock of 9.5% on the day of the release.

How big is luxury?

Big. Very big. Depending on which reports you look at, the industry delivers annual revenue somewhere between $300 billion and $350 billion, with very juicy profit margins as well. This characteristic arises from the allure of exclusivity and the aspirational status associated with these coveted products. Brands within this realm often have long-standing traditions of craftsmanship, unparalleled attention to detail, and the use of the finest materials, creating an aura of unmatched prestige.

They also tend to write adverts that sound just like that paragraph.

Of course, it doesn’t hurt that the target audience for these ultra-luxe brands is the upper 0.01% of earners – in other words, the kind of folks who don’t get their feathers ruffled by silly things like recessions.

Economists and finance geeks call these Veblen Goods – products where demand increases as the price increases. In motoring, Ferrari is another good example.

Burberry, not BlackBerry

We’ve covered LVMH, Farfetch (the pure-play online luxury goods business) and Ferrari in Magic Markets Premium. We haven’t covered Burberry in detail yet, but we touch on the latest earnings here.

Burberry’s latest earnings report makes a lot of noise about a strong recovery in Mainland China. In the wake of a pandemic and on the heels of a global recession, the richest of the rich are back to swiping their black cards, resulting in a 46% rise in store sales in what was formerly Covid-19 ground zero. 

The global expansion of a brand like Burberry, which carries a deeply ingrained association with the British elite, might appear paradoxical at first glance. Traditionally tied to British heritage, Burberry’s foray beyond the British Isles reflects a complex interplay of factors and strategic decisions that have driven its international success.

The allure of British heritage and the aristocratic connotations that Burberry embodies have a universal appeal. Across the world, there exists a fascination with British culture, history, and the sophistication associated with the British elite. The fact that Kate Middleton’s signature blowout (her hairstyle) is recognisable to people from South America to the UAE is nothing if not a testament to the reach of the royal family. 

Burberry has capitalised on this fascination by leveraging its rich heritage to craft a powerful and aspirational brand identity that resonates with consumers far beyond the borders of the United Kingdom.

The fashion industry thrives on the concept of luxury and exclusivity. By expanding internationally, Burberry has embraced the opportunity to cater to a broader clientele, many of whom are drawn to the allure of owning a piece of British luxury. This strategy allows the brand to access new markets and tap into the spending power of consumers from diverse cultural backgrounds.

Burberry’s expansion is also a response to the evolving landscape of the global luxury market. As emerging economies have experienced rapid growth and an increase in affluent consumers, luxury brands have sought to establish a presence in these regions. 

Remember, almost every economy has a rich top layer, even if the layers below are knee-deep in trying to afford food. The aspiration for prestigious and high-end products has become increasingly universal, creating a demand for renowned luxury brands like Burberry in the places you might least expect it. 

The numbers

Here are a few financial highlights from Burberry’s latest quarter (Q1’24):

  • Comparable group sales up 18% year-on-year, with Mainland China up 46%.
  • In the most British thing ever, “heritage rainwear” was one of the fastest growing categories.
  • Leather goods grew by 13%, trailing the growth in other categories.

The group has been targeting a high single-digit revenue CAGR (Compound Annual Growth Rate) off the FY20 base. To achieve that, they will need double-digit growth in FY24. So far, so good.

Where to from here for the industry? Probably only up

In our most recent report on luxury goods powerhouse LVMH, we deduced that the luxury industry is not only making strides in new territories but also breaking the age barrier when it comes to attracting consumers. This begs the question: with every generation becoming more socially conscious and spendthrift than the one before, will luxury survive yet another turn of the wheel? 

According to research gathered by Bain, the Gen Z demographic is embracing luxury items at an astonishingly young age, splurging on these coveted products 3 to 5 years earlier than their Millennial predecessors. The trend starts as early as 15 years old, indicating a growing fascination with luxury goods among the younger generation. 

This shift in behaviour can be partly attributed to the influence of social media and the ability to access brand messages and aspirational lifestyles with unprecedented ease. As a result, luxury brands have become more accessible and appealing to a wider audience, even those in their teenage years.

As the saying goes: there’s a millionaire born every minute. And it would appear that the luxury goods industry is standing at the ready to receive those #blessed dollars.

Stock picking needs deeper research

One thing that should never be considered a luxury is knowledge. Deep research into these companies is the only way to assess the investment quality of each business. Investment success is always a function of what you buy and what you pay for it.

With well over 80 research reports on global stocks available in the library, a subscription to Magic Markets Premium for just R99/month gives you access to an exceptional knowledge base that has been built since we launched in 2021. It may say Premium in the name, but that doesn’t mean you’ll pay a premium price!

There is no minimum monthly commitment and you can choose to access the reports in written or podcast format – whatever floats your boat. Sign up here and get ready to learn about global companies>>>

Unlock the Stock: PBT Group

The Finance Ghost
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Unlock the Stock: PBT Group

Unlock the Stock is a platform designed to let retail investors experience life as a sell-side analyst. Corporate management teams give a presentation and then we open the floor to an interactive Q&A session, facilitated by the hosts.

This year, Unlock the Stock is delivered to you in proud association with A2X, a stock exchange playing an integral part in the progression of the South African marketplace. To find out more, visit the A2X website.

We are also very grateful to the South African team from Lumi Global, who look after the webinar technology for us.

In the 21st edition of Unlock the Stock, PBT Group returned to the platform to update investors on recent performance and the way forward.

As usual, I co-hosted the event with Mark Tobin of Coffee Microcaps and the team from Keyter Rech Investor Solutions. Watch the recording here:

Ghost Bites (ArcelorMittal | Coronation | Kore Potash | Indluplace | Sebata | Tsogo Sun)

The Finance Ghost
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Ghost Bites (ArcelorMittal | Coronation | Kore Potash | Indluplace | Sebata | Tsogo Sun)

ArcelorMittal gets smoked (JSE: ACL)

There’s nothing quite like a 42.7% drop in one day with the next best bid at 1 cent per share

Investing in cyclical businesses requires a strong stomach. If they look cheap based on the Price/Earnings (P/E) ratio, it’s usually for a good reason. A low trailing P/E is a widowmaker of note in cyclical stocks.

ArcelorMittal is the latest example, with a huge drop in the price after releasing a trading statement for the six months to June 2023. Headline earnings swung wildly from R2.71 per share to a headline loss of between -R0.38 and -R0.46 per share. I can understand now why the CFO left with immediate effect before this result was released. I would also rather find something else to do!

At the start of the year, the outlook was reasonable with positive movements in international steel prices. Globally, de-stocking and lower energy prices were tailwinds for the sector. ArcelorMittal saw none of those benefits in South Africa, with load shedding and negative growth in key steel consuming sectors (like manufacturing and construction) having a substantial effect on the business.

The company simply couldn’t respond to the extent of load shedding. Aside from the obvious impact on earnings, the company also struggled to release working capital. That’s just a way of saying that the balance sheet also came under strain, evidenced by net borrowings remaining too high.

With the company talking about a “weaker-for-longer steel trading environment”, the market ran for the exit.

A slight uptick in AUM at Coronation (JSE: CML)

And I mean slight…

Each quarter, Coronation releases its assets under management. The company never gives comparatives in the announcement, forcing me to go dig through the archives to find the history.

Here it is, with the latest number included:

  • 30 Jun 2023: R627bn
  • 31 Mar 2023: R623bn
  • 31 Dec 2022: R602bn
  • 30 Sep 2022: R574bn
  • 30 Jun 2022: R580bn
  • 31 Mar 2022: R625bn
  • 31 Dec 2021: R662bn

If you’ve been paying attention, you’ll know that Coronation was recently in trouble with SARS and got hit with a major penalty. Along with the pressure on AUM, that’s why the five-year share price chart looks like this:

Coronation is historically a strong dividend payer, so a total return chart would be a fairer reflection. The tax issue wiped out the dividend temporarily, so investors are waiting for the yield play to return.

Kore Potash still needs to finalise the EPC contract (JSE: KP2)

The focus remains on the Kola Project

Way back in 2021, Kore Potash signed a Memorandum of Understanding with the Summit Consortium for the Kola project. By 2022, an optimisation study had been concluded, with heads of agreement signed with SEPCO for the construction of Kola.

A year later, Kore Potash and SEPCO are still trying to finalise the Engineering, Procurement and Construction (EPC) contract. As part of this, Kore looked to SEPCO’s parent company (PowerChina) to provide guarantees, including performance and retention bonds. With PowerChina’s involvement in the project, some design improvements have been suggested that would reduce the cost and shorten the construction time.

Within six weeks of the EPC terms being finalised, the Summit Consortium will provide the necessary finance.

The company also needs to manage impatient government officials in the Congo, so there’s a lot of pressure on getting this across the line.

Kore Potash spent $1.08 million on exploration this quarter. It has $2.6 million remaining in cash.

Indluplace declares its clean-out distribution (JSE: ILU)

This is part of the buyout by SA Corporate Real Estate (JSE: SAC)

Indluplace and SA Corporate Real Estate released a joint announcement confirming that the buyout of Indluplace is now unconditional, with the Takeover Regulation Panel (TRP) having issued a compliance certificate.

The transaction structure includes a clean-out distribution to Indluplace shareholders to reward them for recent earnings before the shares are sold to SA Corporate Real Estate. This distribution has been confirmed as 7.73562 cents per Indluplace share.

For reference, the Indluplace share price is R3.45 and the cash offer from SA Corporate is R3.40. The share price started the day at R3.39, so it moved higher after the distribution was confirmed.

Sebata reported another operating loss (JSE: SEB)

The cash outflow from operating activities has been consistent

In the previous financial year, Sebata recognised some large impairments and fair value losses in operating profit, leading to a substantial loss. This year, there is still a loss but it is much smaller at R21.6 million instead of a whopping R939 million.

Although that sounds much better, the reality is that the company has seen an outflow of cash from operating activities of around R21 million for two years in a row. It only has R4.7 million in cash on the balance sheet, with a potential receipt of cash for the disposal of assets to Inzalo Capital Holdings as the major asset. It’s very touch-and-go whether this amount will be received. If not, the sold businesses come back to the group.

Based on this balance sheet, they need the cash a whole lot more than they need the underlying assets.

Tsogo Sun is the latest odd-lot offer (JSE: TSG)

At the current share price, there isn’t an exciting arbitrage opportunity here

Odd-lot offers can sometimes dish up free money, if the price offered by the company to holders of fewer than 100 shares ends up being significantly higher than the prevailing market price. In that case, you buy up the shares in the market and then wait for the automatic offer to kick in.

Tsogo Sun only trades at R12.34 per share, so you’re dealing with only R1,234 as the maximum value off which to earn an arbitrage profit. At best, this is McDonald’s money. It probably won’t cover the trading fees even if there is an arbitrage available.

In case you’re curious, the price will be the 10-day VWAP calculated on 23 August 2023, plus a 5% premium.

Little Bites:

  • Dipula Income Fund (JSE: DIB) announced that Global Credit Ratings affirmed its rating and maintained the stable outlook. The ratings agency noted “solid gearing metrics” and “improved financial flexibility” as part of the decision.
  • Look out for a big change in the Nampak (JSE: NPK) share price (but theoretically not the market cap unless the price does something crazy in response to this) as the share consolidation is due to take place on 26 July. Don’t get a fright when you see the price that day, as this is a 250-to-1 consolidation.
  • Although not specifically related to a local listed company, Transnet announced that International Container Terminal Services Inc. (ICTSI) is the preferred bidder for the 25-year joint venture with Transnet Port Terminals to develop and upgrade the Durban port. This should improve Transnet’s biggest container terminal, which handles 46% of South Africa’s port traffic. ICTSI trades on the Philippine Stock Exchange and over-the-counter in the US.
  • Deutsche Konsum REIT (JSE: DKR) issues more SENS announcements than the number of its shares that ever change hands on the JSE. I ignore most of them because there is truly no liquidity, but I did find it interesting that the company is on the wrong side of a tax dispute in Germany to the value of €16.2 million. The company had fully provided for this amount previously and is considering further options after the latest court blow.
  • Go Life International (JSE: GLI) is another penny stock zombie on the JSE, trading at one cent per share. The auditors haven’t finalised the audit, so the company has received approval from the Stock Exchange of Mauritius (its primary regulator) to extend publication of the financials for the year ended February 2023 to 31 July 2023.
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