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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?

Exchange-Listed Companies

The results of GMB Liquidity’s November 2022 offer to Grand Parade Investments minority shareholders has closed, with an uptake of just 4.49%. Shareholders holding 21,107,480 PGL shares accepted the R3.33 per share offer. GMB Liquidity’s stake in the company has increased to a controlling 53.65%.

Stor-Age Property REIT is to acquire a 10% equity stake in a joint venture which has acquired the four property Easistore portfolio. The £4,4 million investment has been made along side Nuveen Real Estate which will hold 90% of the joint venture, providing Stor-Age with the opportunity to partner with the global investment manager. The company has the right of first refusal should Nuveen wish to exit any of the properties or portfolio.

Delta Property Fund is in the process of concluding the disposal of four office properties to DMFT Property Developers. The properties situated in Kimberley, Bloemfontein, Klerksdorp and Polokwane for a cash consideration of R50,8 million. The disposals are a category 1 transaction and so require shareholder approval. In a separate agreement Delta is to dispose of a property in Potchefstroom Central to Enaki Investment Holdings for R21 million.

Impala Platinum has concluded agreements to acquire a further 2.94% stake (8,543,294 shares) in Royal Bafokeng Platinum, resulting in an aggregate stake of c.44.48%.

Glencore has amended its unsolicited proposal to the Board of Canadian miner Teck by introducing a cash element to the all-share acquisition of Tech by the company followed by a demerger of the combined coal business. Teck shareholders would now own 24% of MetalsCo and US$8,2 billion. Glencore is also prepared to offer a combination of cash and/or CoalCo shares (up to a 24% stake) if all Tech shareholders were to elect shares rather than cash.

Wilson Bayly Holmes-Ovcon’s 2006 B-BBEE ownership transaction (Akani 1) is due to expire and will be wound up. The company proposes to establish a new scheme (Akani 2) and has entered into agreements with three trusts to whom it will issue 4,500,000 WBHO shares at a price of R0.01 per share. The shares, which will be held in a SPV, will be allocated as follows: 90% held by the BBESI Trust (employees of WBHO below a certain skill level and have been employed for five years), 8% by the ASI Trust (employees above a certain skill level) and 2% by the ADB Trust (for the benefit of black women, youth and those living in rural and under-developed areas).

Unlisted Companies

Agri-tech startup FarmTrace, a cloud-based farm management tool has received a significant equity investment from Secha Capital and Hassium Capital. The undisclosed sum will be used to grow the company’s capacity and bring about a next wave of farming cost savings, yield and efficiency improvements as the company serves more farms, more products as it grows its footprint.

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

Following PBT’s disposal of its investment in Payapps in March this year, shareholders will receive a special distribution of R0.75 per PBT share in addition to a further R0.75 per share in the form of a capital reduction distribution. The resulting total distribution of R1.50 per share equates to R156,9 million to be paid out to shareholders.

Tradehold is proposing to change its name to Collins Property Group, subject to shareholder approval. Tradehold’s primary investment focus will be its portfolio of industrial and logistics properties held through its subsidiary Collins Property Projects. In due course, the company will apply to the JSE for classification as a Real Estate Investment Trust.

A number of companies listed on one of South Africa’s Stock Exchanges have initiated share buyback programmes and each week update shareholders. They are:

South32 has increased its share repurchase programme by c. $50 million in anticipation of a stronger outlook for commodity prices in the second half of its financial year. This will enable the company to return $158 million to shareholders before September 2023. This week the company repurchased a further 1,665,680 shares at an aggregate cost of A$7,14 million.

Glencore this week repurchased 11,040,000 shares for a total consideration of £51,46 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 3 to 6 April 2023, a further 1,783,398 Prosus shares were repurchased for an aggregate €126,87 million and a further 351,220 Naspers shares for a total consideration of R1,15 billion.

Two companies issued profit warnings this week: Nu-World and Zeder Investments (due to the unbundling of KAL).

Three companies issued or withdrew cautionary notices: Finbond, Primeserv and Chrometco.

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

Nigeria’s sovereign wealth fund, The Nigerian Sovereign Investment Authority and Vitol have completed their carbon removal and abatement project JV, CarbonVista. The deal was first announced in July 2022.

Amethis and the Diot-Siaci Group have acquired an undisclosed stake in Moroccan insurance brokerage group ASK Gras Savoye. Financial terms were not disclosed. Apart from Morocco, the group has a direct presence in 11 countries in West and Central Africa.

Tech-enabled, scheduled mass transit company Shuttlers as announced a US$4 million Series A raise led by Verod-Kepple Africa Ventures. Existing investors VestedWorld, SheEquity, CMC21 & Also and Echo VC also participated in the equity round.

Uganda’s Pearl Dairy is awaiting a decision from the IFC on a US$35 million senior loan package. The company is looking to expand its capacity in Kenya and Uganda, which includes the acquisition of a packing plant in Kenya ($21 million) and the refinancing of an existing Standard Chartered Bank loan ($14 million).

Development Partners International and Amethis have co-invested in Egyptian pharmaceutical manufacturer, Marcyrl Pharmaceutical Industries. Financial terms were not disclosed.

The battle for Egypt’s Paints and Chemical Industries Company (Pachin) is still ongoing. With two offers already on the table from Eagle Chemicals and National Paints, Compass Capital is said to be preparing its bid. The company submitted a non-binding offer to acquire between 51% and 90% of Pachin in January. Two other contenders have already pulled out of the race – Universal Building Materials and Chemicals (Sipes) and Saybad Industrial Investment, who withdrew their offers after the board rejected them as undervaluing the firm.

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

Infrastructure development: the catalyst to unlock growth on the African continent?

Siyabonga Shandu
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Infrastructure development: the catalyst to unlock growth on the African continent?

Africa accounts for an estimated 12% of the world’s population, yet only contributes approximately 1% to global gross domestic product and around 2% to world trade1. A central obstacle to transformative economic growth and development of the continent is the lack of quality sustainable infrastructure.

The African Development Bank estimates that the continent’s infrastructure needs amount to US$130 to $170 billion a year, with a financing gap in the range of $68 to $108 billion.2 These infrastructure needs are expected to increase over the next few decades, as Africa’s population is projected to reach 2,4 billion by 2050 (2022: 1,4 billion).3

Therefore, a great need (read: opportunity) exists for investments into African infrastructure, especially for the development of power, transport, ICT/digital, and water and sanitation infrastructure, which have been identified as critical to help drive Africa’s economic growth and improve business productivity and competitiveness. This will, in turn, help to deliver significant developmental impacts across the region, thereby reducing unemployment and inequality, and alleviating poverty.

INFRASTRUCTURE TRENDS

In developing the continent’s infrastructure to meet its growth requirements, several trends4 should be considered, which include, among others:

• Rapid urbanisation. The abovementioned growth in Africa’s population is coinciding with rapid urbanisation; it is expected that 59% of the continent’s population will be urban by 2050.5 In order to meet this trend, significant infrastructure development will be required.

• Increased need to mobilise private funding to support infrastructure development. Governments across the continent, impacted by rising debt burdens driven by the ongoing effects of the COVID-19 pandemic, are embracing private capital for infrastructure investments, and changing legislation to encourage greater participation by private institutions. This has resulted in an increased appetite from global investors who are seeking greater growth opportunities with enhanced, risk-adjusted returns, which Africa could provide. However, like Botswana, Ghana and Rwanda, other African countries need to create the correct investment environment and policy certainty to take advantage of this.

• Increased focus on sustainability and the environment. There is an increased call, amplified by the COVID-19 pandemic, for governments to build back better with the right kind of environmentally and socially friendly infrastructure, ranging from renewable energy and public transport to improved internet connectivity. In addition, governments across the continent are supporting initiatives that encourage more funding for infrastructure projects that would support Africa’s transition towards net-zero emission objectives. The spectre of climate change and the increasing number of extreme weather events point to the importance of investing in climate resilience, aimed at successfully coping with and managing the impacts of climate change while preventing those impacts from growing worse. Many African countries, like Kenya, do not have the legacy of coal and can therefore embrace green energy.

• Growing focus on ICT and digital infrastructure. ICT is increasingly becoming a driving force for how infrastructure is planned, delivered, operated and maintained, and as a means of leapfrogging traditional infrastructure constraints. Smart grids, for example, will increase energy efficiency and the uptake of renewable energy, and digitalisation is creating new opportunities in the services sectors, while increased mobile connectivity and communication infrastructure assists in improved financial service offerings. Rwanda is an excellent example of an African country focused on ICT and digital infrastructure development.

• The African Continental Free Trade Area Agreement (“AfCFTA”) will boost regional infrastructure development. There is a growing demand for large, regional projects which will allow countries and investors to take advantage of the economies of scale offered by the AfCFTA, drive intra-African trade, and gain access to new African and international markets.

KEY INTERVENTIONS

While not an exhaustive list, the following key interventions could help drive the continent’s infrastructure development:

(i) Mobilising greater pools of private sector capital towards commercially viable, large-scale infrastructure projects. While the availability of private-sector funding is a consideration, attention should also be given to better matching this capital with viable projects. Greater focus should be placed on improving the commercial viability of projects, including the mitigation of political, currency, and regulatory risks, and by increasing the deal flow of bankable projects.6

(ii) Increasing the number of commercially viable projects. Larger upfront investment is required to develop projects from concept to bankability. This will ensure that the most feasible projects are correctly prepared through the delivery of quality feasibility studies and commercial plans. This is expected to increase the number of commercially viable projects that are funding-ready. This will require greater collaboration by governments with financial institutions that can offer them critical skills in areas such as planning, transaction support and risk allocation.

(iii) Focus should be placed on developing infrastructure projects that have greater development impacts. Governments and investors should focus on developing projects that can drive greater developmental impacts, such as addressing issues of high unemployment, inequality, and the alleviation of poverty on the continent. Focus should also be placed on projects that deliver on the environmental, social and governance objectives of the continent.

If you are an investor wishing to invest in African infrastructure or in companies that are likely to benefit from African infrastructure development, a prudent first step would be to find a trusted adviser who is familiar with the African business landscape, to help navigate any potential pitfalls en route to future success.

1.https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Energy-and-Resources/dttl-er-power-addressing-africas-infrastructure-challenges.pdf
2.https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/2018AEO/African_Economic_Outlook_2018_-_EN_Chapter3.pdf
3.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
4.https://www.africa50.com/fileadmin/uploads/africa50/Casablanca_Finance_City_Africa_Insight_Report_on_Infrastructure.pdf
5.https://www.hoover.org/research/africa-2050-demographic-truth-and-consequences
6.https://www.mckinsey.com/capabilities/operations/our-insights/solving-africas-infrastructure-paradox

Siyabonga Shandu is an Associate Director | PSG Capital

This article first appeared in DealMakers AFRICA.

DealMakers AFRICA is the continent’s quarterly corporate finance publication.
www.dealmakersafrica.com

What constitutes financial assistance for purposes of section 45?

Thandiwe Nhlapho and Brian Jennings
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What constitutes financial assistance for purposes of section 45?

The Supreme Court of Appeal set aside an indemnity agreement for failure to comply with financial assistance requirements.

Section 45 of the Companies Act 71 of 2008 (Companies Act) is one of the most applied sections in commercial practice, particularly in financing transactions. Given the wide application of the section, there has often been debate about which transactions or actions constitute “financial assistance” and are, therefore, subject to the requirements of s45. The Supreme Court of Appeal (SCA) in Constantia Insurance Company Limited v The Master of the High Court, Johannesburg and Others (512/2021) [2022] ZASCA 179 (13 December 2022) recently laid the debate to rest.

Facts

The appellant, Constantia Insurance Company (Constantia) issued various performance guarantees to secure the obligations of Protech Khuthele Proprietary Limited (Protech Khuthele (Guarantees) owing to third parties. Protech Khuthele was one of the six subsidiaries wholly-owned by Protech Khuthele Property Investments (Protech Investments), which in turn was wholly-owned by Protech Khuthele Holdings Limited (Protech Holdings) (together they constituted the Protech Group).

In return, Protech Holdings and its subsidiaries, represented by its CEO, undertook in favour of Constantia to indemnify and hold it harmless from and against, among other things, any demands, liabilities or payments payable by Constantia under the Guarantee to third parties (Indemnity). The effect of this was that each of the companies in the Protech Group undertook this obligation.

The Protech Group, including Protech Khuthele went into liquidation. Various third-party creditors made demands on Constantia in terms of the Guarantee. At the meeting of creditors of Protech Investments, Contantia unsuccessfully called on Protech Investments to indemnify it in respect of the demands under the Indemnity, which amounted to some R182m, to secure Protech Khuthele’s obligations (Claims).

The liquidators of the Protech Group disputed the Claims on the basis, among others, that the Indemnity in respect of the Guarantees constituted financial assistance by Protech Investments to Protech Khuthele within the meaning of s45 and that the requirements thereof were not complied with; namely, the board of directors satisfying itself of the solvency and liquidity test and that the terms under which financial assistance was proposed were fair and reasonable (Board Consideration).

The SCA Decision

In an appeal to the SCA, the court had to decide, among other things, whether the Indemnity constituted “financial assistance” as contemplated in s45 of the Companies Act. In interpreting s45, the court found that:

• All the matters included by s45(1)(a) (and excluded by s45(1)(b)) fall within the primary meaning of financial assistance and concluded that the matters mentioned in s45(1)(a) are exhaustive of the meaning of financial assistance.
• S45(2) applies to both direct and indirect financial assistance. Protech Investments (and not Protech Khuthele directly) put its property at risk through the indemnity to ensure that Constantia provided the Guarantees. Thus, Protech Investments indirectly secured the obligations of Protech Khuthele within the meaning of s45(1)(a).
• The fact that the solvency and liquidity of the Protech Group was considered by the audit and risk committee of Protech Holdings clearly did not meet the requirements of the Board Consideration contemplated in s45.
• Non-compliance with the ex post facto notices contemplated by s45(5) would not render a resolution or an agreement to provide financial assistance void.

The court ultimately found that despite that there may have been compliance with the requirement for a special resolution of shareholders by Protech Holdings authorising the CEO to execute the Indemnity on behalf of Protech Holdings and the members of the Protech Group, there was no board resolution evidencing the Board Consideration by Protech Investments and, as a result, the Indemnity was void in terms of s45(6) and the Claims had to be expunged.

Going forward

This judgment will be a reminder to parties entering into financial transactions that:

• what constitutes financial assistance for purposes of s45 is a closed list;
• the requisite board resolution under s45(3) must be passed by the directors of the company granting financial assistance at each instance and not at group level;
• non-compliance with the Board Consideration will result in a transaction being void; and
• the question is not whether there could have been compliance with the Board Consideration at the time, but rather, whether there was, in fact, compliance.

Thandiwe Nhlapho is a Senior Associate and Brian Jennings a Director in Corporate and Commercial | Cliffe Dekker Hofmeyr.

This article first appeared in DealMakers, SA’s quarterly M&A publication.

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

Ghost Bites (Brikor | De Beers | Stor-Age)

The Finance Ghost
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Ghost Bites (Brikor | De Beers | Stor-Age)

What’s brewing at Brikor? (JSE: BIK)

Nikkel Trading is nearly at mandatory offer level

Against the backdrop of brick-making business Brikor reporting a 100% drop in HEPS for the six months ended August 2022 (not something you’ll see every day), the share price has lost around 45% in the past year.

With a market cap of R142.5 million, this company really is ripe for a takeover bid.

Nikkel Trading is coming, having entered into agreements with major Brikor shareholders to acquire over two-thirds of the company’s shares. This was announced back in March, so it’s not a surprise to see another announcement that Nikkel Trading’s stake has increased.

This investor now holds 34.2% in Brikor, so the mandatory offer that was alluded to in March is right around the corner. A mandatory offer is triggered once a stake moves above 35%.

De Beers sales in line with expectations (JSE: AGL)

The third sales cycle brings more good news for Anglo American

De Beers really is a fantastic business within Anglo American. The sales cycles are hard to understand though, as I’m never sure how comparable a particular sales cycle in 2023 would be to the same cycle in 2022.

For this reason, I tend to focus on the CEO commentary. In the latest sales cycle (worth $540 million), De Beers sounds happy as sales were in line with expectations. Encouragingly, there are positive trends in demand for diamond jewellery, especially in China where a relaxation of travel restrictions is coming through in consumer confidence.

This is an important read-through for all luxury brands, as China is a huge market.

Stor-Age is doing clever deals in the UK (JSE: SSS)

The company is taking just a 10% stake in four properties and will manage them as well

For Stor-Age to create shareholder value, the company needs to find ways to enhance its yield. One way to do this is to manage properties, not just acquire them. This introduces an element of capital-light earnings, which would go a long way towards injecting some excitement into the share price.

The latest deal in the UK is a good example. Stor-Age is acquiring a 10% interest in a joint venture that is buying four Easistore properties as its first deal. The 90% partner is Nuveen Real Estate, a global investment manager with a whopping $154 billion in assets under management. There’s a very good chance of further deals down the line for this joint venture if the initial acquisition is a success.

Here’s the kicker: the properties will be branded and managed by Storage King under its third party management platform. Storage King is Stor-Age’s brand in the UK. This is why the forecast pre-tax yield on investment is 15%, with Stor-Age contributing £4.4 million (including transaction and rebrand costs).

This deal takes the Storage King portfolio to 39 properties by the end of the year.

The group is still investing locally as well. The development and expansion pipeline of 11 properties is as even a split as you can get: 5 in SA and 6 in the UK.

Looking a bit deeper into this deal, the debt funding is being provided by Natwest in the form of a £41 million five-year bullet facility (i.e. only interest is paid until maturity). There is also considerable room for value creation at property level, with occupancy at the largest property as low as 63.6%. The other properties vary from 84.8% to 93.1%.

Little Bites:

  • Bytes (JSE: BYI has announced the appointment of Sam Mudd as an executive director of the group. Sam is currently the MD of Phoenix Software, a subsidiary of the group. Her CV is a wonderful throwback, with extensive experience including a stint at WordPerfect! If you were around before Microsoft absolutely dominated with its Office suite, you might remember that name.

Investment School with Bruce Whitfield: how to research stocks

The Finance Ghost
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Investment School with Bruce Whitfield: how to research stocks

In my first ever appearance on The Money Show with Bruce Whitfield, he hit me with a left-field pop quiz about Capitec. Then we talked about the topic I was expecting.

When Bruce’s team approached me to be a guest on the show, I jumped at it. The Money Show needs no introduction and this was a golden opportunity to share some insights into researching stocks and why I believe this is so important.

We talked about everything from the importance of common sense through to the different retail categories and their margins. Yes, the conversation was as varied as that.

Get ready to learn and listen to this great Investment School segment:

Ghost Bites (Alphamin | Glencore | Grand Parade | PBT | Primeserv | Rex Trueform | Royal Bafokeng Platinum | Sibanye-Stillwater | Zeder)

The Finance Ghost
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Ghost Bites (Alphamin | Glencore | Grand Parade | PBT | Primeserv | Rex Trueform | Royal Bafokeng Platinum | Sibanye-Stillwater | Zeder)

Records tumble at Alphamin (JSE: APH)

Higher recovery rates drove record tin production

A read through the Alphamin numbers is interesting. They compare the quarter ended March 2023 to the quarter ended December 2022, an approach I enjoy as they are behaving like entrepreneurs. Corporates do the whole year-on-year thing, but hustlers are only worried about how they performed vs. recent months.

Speaking of performance, ore processed actually fell by 10%. But thanks to an improvement in recovery rates, tin production increased by 2% to a record 3,187 tonnes. Sales increased by 1% to 3,161 tonnes.

The real win is the 23% increase in the average tin price achieved, a very happy outcome that is beyond Alphamin’s control. It’s lovely when it happens though, leading to blowout EBITDA of $41.4 million vs. just $27.1 million in the preceding quarter.

Even after paying the FY22 dividend of $28.2 million, the net cash on the balance sheet is $86 million. The company invested $15 million during the quarter in the Mpama South project and capital allocation in FY23 will be prioritised towards that project.

Mpama South’s processing plant is 66% complete overall and is apparently on track for a December 2023 commissioning date.

Tick tock. Tick tock.

And to end off this section by giving you a severe feeling of regret, the share price is up 410% over three years. There we all were, buying tech companies in the pandemic instead of a lucrative tin mine.

Glencore offers another rose to Teck (JSE: GLN)

In this corporate romance, will Teck ever swipe right?

Well, give Glencore some credit here. After arriving at the door with roses the first time and being booted into the mud, our plucky suitor has arrived once more with new flowers and clean clothes. Will it go any better this time around?

Glencore has realised that not all Teck shareholders will be happy holding dirty assets like thermal coal. The proposal is to introduce a cash element to the proposed merger and demerger, which would see Teck shareholders receive 24% of “MetalsCo” and $8.2 billion in cash. In other words, a stake in the transition metals business (copper etc.) and cash to avoid equity exposure to coal.

Glencore is also willing to offer a combination of cash and “CoalCo” shares to those who have no problem holding investments in fossil fuels.

I’m old enough to remember when nobody would touch Thungela because it was dirty. I’m also old enough to remember how that tune changed when Thungela delivered extraordinary share price returns.

It gets a bit technical, but Glencore has also essentially promised not to break the balance sheet in the process of adding a cash element to the offer.

Glencore makes a compelling point around the balance sheets. Although Teck is currently trying to split its businesses anyway, there will be intercompany funding arrangements for 7 – 11 years. Under the Glencore proposal, there would be two separate companies with suitable balance sheets from day one, without cross-holdings.

Glencore proposing a better ESG outcome? Well now, there’s a thing.

Not much of a parade for this mandatory offer (JSE: GPL)

The acceptance rate for GMB’s mandatory offer was low

It seems as though most Grand Parade Investments shareholders aren’t looking for a liquidity event. The mandatory offer by GMB Liquidity Corporation (a very funny name in this context) was only accepted by holders of 4.49% of total shares in issue.

This takes GMB’s stake to 53.65%, so the company has crossed the control threshold.

PBT makes shareholders feel special (JSE: PBG)

After selling Payapps, it’s payday for shareholders

PBT Group has been one of the best small cap success stories on the JSE in the past few years. With the sale of its business in Australia, there is cash on the table and management is giving almost R157 million back to shareholders.

There is a special dividend of 75 cents per share and a special capital reduction distribution of 75 cents per share. The tax treatment is what makes the difference here. The total distribution is obviously R1.50 per share, in case your coffee hasn’t kicked in yet.

On a closing share price of R8.30, that’s special indeed.

Primeserve gives a few more details to chew on (JSE: PMV)

The cautionary is slightly less bland

After Finbond released a bland cautionary and then an updated announcement with ever-so-slightly more in the way of details, Primeserv has done the same.

In this case, Primeserv is negotiating a potential acquisition in the staffing services sector which may have a material effect on the share price. This does sound quite serious, as negotiations are at an “advanced stage” – though any deal can fall over in the dying seconds. Trust me, I’ve watched it happen.

Rex Trueform’s earnings more than double (JSE: RTO)

We will need to wait a few more days to get full details

With interim results due for release on 14 April, Rex Trueform has released a trading statement confirming that HEPS will be 114.9% higher for the six months ended December 2023, coming in at 270.8 cents.

Part of the same group is African and Overseas Enterprises Limited, with HEPS growth for the same period of between 138.7% and 158.7%.

I’m afraid that you’re more likely to find a road in Joburg with no potholes than any liquidity in these stocks.

Royal Bafokeng aims for management stability (JSE: RBP)

The execs are sticking around a bit longer

The CEO and COO of Royal Bafokeng Platinum retired during this difficult period of prolonged corporate action by Northam Platinum and Impala Platinum. With Northam deciding to walk away, the only uncertainty now is the extent to which Impala will achieve acceptances from other shareholders.

The distraction for the company has been severe and would’ve been a lot worse if the executives hadn’t agreed to stay on under fixed term contracts. Of course, such contracts won’t do their pension savings any harm at all.

As a final extension while the Impala offer plays out, the CEO and COO will stay until the earlier of “certainty on the corporate action” and a “transition of the company to its new end state” has been secured (good luck debating that in court), or 7 October 2023.

I would bet on 7 October for the farewell party.

Sibanye is good enough for ten international banks (JSE: SSW)

The revolving credit facility has been refinanced and significantly increased

In this macroeconomic environment, debt is a fun place to play. Yields are strong and in many companies, debt providers are doing better than equity investors at the moment.

So although Sibanye-Stillwater quite rightly points out the macroeconomic uncertainty and reasons to feel proud about a refinanced and enlarged revolving credit facility, the reality is that the banks are loving life at the moment. This is made clear by no fewer than ten international banks participating in the syndication, led to Citi and Royal Bank of Canada.

This is a US dollar denominated facility, so local banks aren’t the focus here. Sibanye needed to raise debt from global markets.

The facility has been refinanced and increased from $600 million to $1 billion, with an option for Sibanye to increase it further to $1.2 billion. The margin (above a benchmark rate i.e. not the total cost of debt) is between 1.60% and 2.00% dependent on leverage. This is essentially Sibanye’s credit spread.

The maturity is three years, extendable to five years at Sibanye’s request in the form of two one-year extensions.

Sibanye loves dealmaking and you can’t do that without access to finance, so this is good news for the group.

Zeder: read this one carefully (JSE: ZED)

The trading statement is no reason to panic

At first blush, the trading statement from Zeder looks like a reason to run for the hills. Or perhaps away from the hills, since the investments are agricultural in nature.

Luckily, the reason for the huge drop in net asset value (NAV) per share is that the company simply became smaller through deliberate actions. When investments are unbundled (as was the case in KAL Group – previously Kaap Agri) or sold and then paid to shareholders as special dividend, Zeder has transferred value from itself to shareholders.

The net result is a drop in NAV per share for reasons other than performance. With an expected drop of between R2.04 and R2.10 per share in this trading statement, it helps that R2.06 is because of corporate actions. In other words, NAV is approximately flat with a bias towards slightly lower.

Not great, but not a panic.

Little bites:

  • It’s been a while since I made all of us feel poor by noting the share repurchases by Naspers (JSE: NPN) and Prosus (JSE:PRX). Between 3 April and 6 April, Naspers repurchased R1.15 billion in shares and Prosus repurchased $138.6 million worth of shares. Interestingly, Prosus put another 96 million Tencent shares in certificated form into the Hong Kong Central Clearing and Settlement System – this step is necessary before selling those shares to continue funding the repurchase.

Trimming the Hedges: What to Do with the Rand in Your Portfolio?

Nico Katzke
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Trimming the Hedges: What to Do with the Rand in Your Portfolio?

By Nico Katzke, Satrix

Few need reminding of the volatility of our currency and the devastating impact it has on imported goods prices, and our ability to travel in comfort. The rand has slumped to its second lowest average monthly value to the USD in March, and few will dare make a case for the prospect of significant strengthening in coming quarters. With this in mind, we tackle the question of what to do with the rand in your investment portfolio, given its volatile nature – and the answer might surprise you.

The TL;DR summary of this piece follows:

  • Hedging the rand exposure of offshore assets systematically (i.e., as a rule over the long term) reduces returns and increases volatility;
  • Empirical evidence clearly shows that currency hedging should be a tactical short-term call on the currency, not a hard rule.

We unpack this somewhat unintuitive conclusion below.

The Volatility Paradox

If you are invested in a balanced fund, chances are your manager increased offshore exposure in the last year given changes in Regulation 28. A key question is how to treat the currency exposure from those offshore assets. Some managers have chosen to partially hedge out the currency exposure systematically – which is typically motivated by trying to reduce overall volatility.

But how does currency hedging work? If you held the MSCI All Country World Index (ACWI) in your balanced fund – the return for this index would be in USD (say 6%). If the rand depreciates, the offshore holding is now worth more in rands, and vice versa. Hedging this exposure would mean you neutralize (in full or in part) the movement of the rand, so that you only earn the USD returns.

With the rand being volatile, it seems perfectly reasonable to reduce currency exposure in order to achieve smoother returns. The data, however, suggests otherwise.

This follows due to a volatility paradox. Simply put, we tend to incorrectly think of volatility in a linear way similar to returns. If I hold two assets, with one returning 10% and the other 20%, holding both in equal proportion leads to an overall return of 15%. Volatility does not work this way, as co-variance needs to be considered too. If we hold two assets (A and B) in a portfolio with annualised volatility of 10%, then adding an asset (C) with a volatility of 20% does not necessarily increase the portfolio’s volatility. This seems unintuitive but can be understood simply. If A and C were strongly negatively correlated, then movements in A (say +10% return) would be offset by movement in C (say -9% return). This way, adding a volatile asset could actually reduce overall portfolio volatility – depending on its co-movement with other assets in the portfolio. Think of waves cancelling each other out, which is exactly what noise cancelling headphones do.

This follows similarly for global holdings and their typical relationship to the volatile rand. We’ve mostly seen a strong negative correlation between offshore USD returns (say for the MSCI ACWI) and the rand. When global equities rally, the rand most likely strengthens (risk-on sentiment), with the opposite holding more likely too. To better visualize this relationship and understand the impact of the rand’s movements, consider a simple 60 / 40 equity and bond portfolio, with a 70% local and 30% global allocation. 1

The following scatter plot shows the strong negative relationship between the global allocation and the rand since 2004 – with labels at the top shown to help with interpreting the impact of rand hedging.

Source: Bloomberg. Calculation Satrix. (31 December 2004 – 31 January 2023).

The reason for the strong negative correlation (grey line) is simple to understand and persistent. The rand does not move in isolation. The same global factors underpinning global asset returns also influence the rand. Amongst other, positive risk sentiment tends to favour both (and vice versa). Also note the strong right-tail in the scatterplots – meaning the rand experiences far deeper monthly depreciations than appreciations: meaning the cost of getting the hedge wrong (right side) is mostly far greater than the benefit of getting it right (left-side).

But what about overall portfolio returns and volatility? If we rebalanced our simple 60/40 : 70/30 portfolio quarterly and compared a fully hedged and unhedged alternative – the results are clear. It shows that the strong negative correlation between the rand and USD returns of global equities and bonds serve to reduce portfolio volatility. Also, the rand’s general weakening trend means it generally serves to increase overall returns when left unhedged.

Source: Bloomberg. Calculation Satrix. (31 December 2004 – 31 January 2023).

Conclusion

The rand is a volatile currency, and carefully managing currency exposure can be a very important tactical tool for short-term risk-mitigation. The motivation for longer-term strategic hedging is more problematic though. It is mostly put to investors that hedging the volatile currency reduces portfolio risk (few would take comfort from shielding against significant rand strengthening) – which seems perfectly plausible. Yet the data simply does not support this.

Considering the consistent interactions between the rand and offshore asset returns, the rand’s variability actually serves as an important cushion against both losses and volatility. Neutralising this benefit through hedging should be very carefully considered – and only done tactically (applied through strong short-term conviction). The data on this is simply too clear to ignore.

1 This translates to a 42% allocation to FTSE/JSE All Share equities Index, 28% to the FTSE/JSE All Bond Index, 12% to the Bloomberg Global Aggregate Bond Index, 18% to the MSCI ACWI Equities Index.

Disclosure

Satrix Investments (Pty) Ltd is an approved FSP in term of the Financial Advisory and Intermediary Services Act (FAIS). The information does not constitute advice as contemplated in FAIS. Use or rely on this information at your own risk. Consult your Financial Adviser before making an investment decision.
While every effort has been made to ensure the reasonableness and accuracy of the information contained in this document (“the information”), the FSP’s, its shareholders, subsidiaries, clients, agents, officers and employees do not make any representations or warranties regarding the accuracy or suitability of the information and shall not be held responsible and disclaims all liability for any loss, liability and damage whatsoever suffered as a result of or which may be attributable, directly or indirectly, to any use of or reliance upon the information. 

View the disclaimer here >>

Ghost Bites (Eastern Platinum | Finbond | Harmony | Kibo Energy | Nu-World | Rebosis | WBHO)

The Finance Ghost
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Ghost Bites (Eastern Platinum | Finbond | Harmony | Kibo Energy | Nu-World | Rebosis | WBHO)

Eastern Platinum releases annual results (JSE: EPS)

The outstanding amounts from Union Goal remain a major problem

The cash flow picture at Eastern Platinum is concerning. In the year ended December 2022, the company burnt through $5.4 million in cash from operations, after generating $890k in the prior year.

One of the major problems is that customer Union Goal hasn’t been paying Eastern Platinum, leading to a suspension of shipments to that customer in the third quarter of 2022. The company is now relying on free market sales and this introduces uncertainty into the business.

Revenue for the year fell by 27% and the headline loss worsened from $0.01 per share to $0.02 per share.

Finbond’s slightly-less-bland cautionary (JSE: FGL)

There still aren’t many details to work off here

A “bland” cautionary is a horrible thing. Basically, a company releases an announcement warning shareholders to be cautious because something may or may not be happening. Nobody even knows if it is a positive or negative step.

The market hates these announcements and with good reason, as they tend to do more harm than good. Finbond has at least improved on its cautionary that was released on 4th April, with an almost immediate follow-up that gives some information at least on what the company is up to.

The cautionary relates to potential acquisitions in Southern Africa. It’s still bland, with some salt and pepper at least added to it.

Harmony makes progress in Papua New Guinea (JSE: HAR)

The Tier 1 Wafi-Golpu Project is a copper-gold deposit

Developing mining assets really isn’t a simple process, especially in emerging and frontier markets that introduce many sensitivities around state participation and development of local communities. Harmony Gold has a joint venture in Papua New Guinea with Newcrest Mining and the parties have signed a Framework Memorandum of Understanding with the government. The terms demonstrate how challenging the process can be.

Aside from social contributions that need to be made by the project, equity participation by the fiscus is also covered in the agreement both in terms of royalties and the option to buy an equity stake. The State of Papua New Guinea has the right to purchase up to 30% in any mineral discovery at the project, exercisable at any time before the commencement of mining. The price would be based on a pro-rata share of accumulated exploration expenditure.

In other words, Harmony and Newcrest would carry all the development risk, with the government able to invest at the last minute at a price that only reflects the costs to date, not the risk that was taken along the way.

The company describes the project as “one of the world’s premier, undeveloped copper-gold deposits” – so it must be worth it!

Kibo Energy releases an update on its projects (JSE: KBO)

The company is still confident that deadlines set for 2023 will be met

Kibo Energy has various projects in the UK and South Africa.

In this update, the company didn’t give any further information on the MAST Energy Developments projects. At the Sustineri project, the company is awaiting final laboratory results to finalise an off-take agreement for synthetic oil production in phase 1. At National Broadband Solutions (a long duration energy storage project), a change in ownership at the client has necessitated additional reciprocal due diligence processes. And in the UK portfolio, there is slower progress than expected in the engineering and design study, with funding constraints as one of the concerns.

Still, the CEO sounds upbeat, noting that the company is confident of meeting deadlines in 2023. Kibo has been struggling with a very weird issue in its shareholding voting mechanisms which has been forcing the adjournment of meetings. This needs to be resolved soon or it will start impacting the company.

Nu-World’s profitability has taken a big knock (JSE: NWL)

Get ready for pain after Easter in this share price

Before a long weekend, there’s a graveyard shift on SENS where companies release bad news in the hopes that nobody will notice. This time around, Nu-World was the culprit.

For the six months ended 28 February 2023, HEPS fell by an abysmal 45% to 55%. The company blames broader economic circumstances, high inflation and rising interest rates.

Nu-World is a consumer goods business that sells a variety of mainly durable products, like appliances. That’s not an appealing business model when consumers are taking strain.

The great Rebosis fire sale is now on (JSE: REA | JSE: REB)

The business rescue plan is being implemented

The Rebosis business rescue plan was almost unanimously accepted by creditors. There’s always that one person in every residential complex, WhatsApp group or “I demand to the speak to the manager” setting that refuses to conform, with no better example than this:

Someone out there is very angry about that R22.8k!

The business rescue practitioners are now being paid the princely sum of R4,000 per hour. What do you get for this amount? Well, a plan to settle debt by selling as many of the properties in the group as possible.

I know, right? I also suddenly feel like I’m working too hard for my money.

In a separate announcement, Rebosis invited members of the public to apply for the public sale process. There’s a non-refundable registration fee of R5,000, presumably to weed out opportunists and those with nothing better to do with their time.

The entire process should be wrapped up by the end of July.

If you are wondering what the business plan looks like (and what the practitioners really get paid for), you’ll find it here>>>

WBHO looks to implement a follow-on B-BBEE deal (JSE: WBO)

The original transaction was implemented in 2006 and is about to expire

With WBHO’s first B-BBEE deal on the verge of being wound up, the company is proposing a new deal that includes three different trusts.

There is a share incentive trust that will operate for the benefit of employees up to junior management level who meet certain minimum qualifying criteria, including having been employed by the group for at least five years. There is also a trust that will benefit employees above junior management level, but excluding prescribed officers and directors. These trusts will own 90% and 8% in the new scheme respectively.

The remaining 2% will be held by a defined beneficiary trust that will operate for the benefit of black women, youth and black people living in rural and under-developed areas.

The deal will be implemented through WBHO issuing 4,000,000 shares to the special purpose vehicle (SPV) through which the three trusts will hold their stakes. The price will be R0.01 per share. WBHO also reserves the right to issue further shares to the SPV to maintain its B-BBEE score, for a period up to 15 years after the deal is implemented.

This is a notionally funded structure, which means the SPV needs to pay off imaginary debt for the shares over 15 years based on the 30-day VWAP, minus R0.01 per share. Inevitably, these deals fail to pay off the debt within the stipulated period, leading to only a portion of the shares eventually vesting in the hands of participants.

This complicated structure is expected to result in a 3.0% decrease in diluted HEPS for WBHO.

Little Bites

  • Director dealings:
    • The company secretary of Sasol (JSE: SOL) sold shares worth R382k.
    • An associate of a director of Ascendis Health (JSE: ASC) bought shares worth R95k.
  • Philip Kotze, CEO of Clover Alloys (SA), has joined the board of Orion Minerals (JSE: ORN). This is part of the broader strategic partnership between the companies that saw Clover Alloys invest around R80 million in Orion’s recent capital raise.
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