Ghost Bites (Absa | De Beers (Anglo) | Pick n Pay | Primeserv | Sephaku)

Get the latest recap of JSE news in the Ghost Wrap podcast, brought to you by Mazars:

Absa flags a drop in profits (JSE: ABG)

A slow pre-election period in South Africa didn’t help matters

Absa has released a voluntary trading update for the six months to June 2024. It’s voluntary because the move in earnings is less than 20%, so this isn’t a mandatory trading statement.

As we saw in Nedbank, conditions in South Africa in the pre-election months this year weren’t conducive to growth. Consumers have been under pressure and large corporates have been playing a game of wait-and-see.

In an Absa-specific issue, they have a very strong base effect for these earnings. This simply means that the first half of 2023 was much stronger than the second half, so the basis for comparison (1H24 vs. 1H23) gives the growth rate a steep hill to climb.

Unfortunately, the hill is simply too steep. They expect headline earnings to decline by mid- to high single digits for the period. Return on equity is expected to drop from 15.7% to 14.0%. That’s not good.

If we dig deeper, we find low single digit revenue growth. Interestingly, net interest income is up high single digits vs. non-interest revenue decreasing by low single digits. Not only is insurance income under pressure (as we saw at Nedbank), but so is trading income. Although these announcements are light on details, at this point it looks like Absa has underperformed its green competitor.

The expense pressures are visible at Absa as well, with expense growth in the high single digits. This means we are in negative jaws territory, with a drop in pre-provision profit. At least the credit loss ratio is in line with the base period, so no further pain there.

There are other problems that have carried through from the second half of 2023, like hyperinflation accounting in Ghana and further losses on the Nigerian currency that has inflicted so much pain.

As a silver lining, Absa expects to declare a flat interim dividend despite the drop in earnings.

Guidance for the full year is mid-single digit revenue and expense growth, leading to a fairly similar cost-to-income ratio to 2023’s level of 53.2%. They expect return on equity of 14% to 15% vs. 14.4% last year. In other words, the tough base in 1H23 that wasn’t repeated in 2H23 will help when viewing 2024 on a full year rather than interim basis.

Rough diamond sales at De Beers are looking even rougher (JSE: AGL)

The narrative is now a “U-shaped recovery”

The problems in the diamond industry continue. Although De Beers (part of Anglo American) is quick to point out that this time of year is a quieter period for rough diamond sales, the reality is that the issue is clear to see.

In Cycle 5 last year, they sold $456 million in diamonds. This year, it’s down at $315 million. That isn’t explained by seasonality. The seasonal effect is seen by comparing cycle 5 this year to the immediately preceding cycle 4, which was $383 million.

Although De Beers is trying to pick out hopeful statements like a resurgence in demand for natural diamonds in the US, they are also expecting a protracted U-shaped recovery in demand, with one of the factors being China. The factor they love ignoring, of course, is lab-grown diamonds.

In a U-shaped recovery, rather than a V-shaped recovery, the period at the bottom is longer. Buckle up.

Pick n Pay is lining up its rights offer (JSE: PIK)

Shareholders have approved various related resolutions

There isn’t much good news at Pick n Pay, but at least shareholders are in agreement with the recapitalisation plan. The various resolutions required to prepare for the rights issue achieved a very high approval rate at a general meeting.

The plan remains to pursue a rights issue of up to R4 billion in mid-2024, along with a separate listing and public offer of Boxer towards the end of 2024.

Primeserv’s earnings jump is matched by the dividend (JSE: PMV)

On big moves in HEPS, it’s always good to look at the payout ratio as well

Primeserv has released its results for the year ended March 2024. This is a staffing, recruitment, functional outsourcing and training business and it doesn’t get much attention on the local market, with a market cap of under R200 million.

This financial year was a good one, with revenue up 18% and HEPS up by a meaty 40% to 32.68 cents. Share buybacks were a significant help here. Importantly, the dividend followed suit, up 39% to 12.5 cents. Although that’s a modest payout ratio, it’s still good to see a similar growth rate in the dividend vs. HEPS as this speaks to the cash quality of earnings.

You won’t find too many listed companies that have performed with this level of consistency, as though there was no pandemic in the middle:

Sephaku’s numbers look as strong as the cement (JSE: SEP)

There’s a substantial jump in profits

Sephaku Holdings has released results for the year ended March 2024. They have two underlying businesses: Métier (a subsidiary) and Dangote Cement (an associate referred to as SepCem).

At group level, this has been a year of green numbers everywhere you look. HEPS has jumped from 9.66 cents to 25.71 cents, so that’s a strong positive move.

If we look deeper, we find that margins have improved at both Métier and SepCem, which supercharges the growth in EBITDA. At Métier, EBITDA increased 35.7% to R133 million and margin expanded by 150 basis points to 11.5%. At SepCem, EBITDA grew by 29.4% to R361 million and margin expanded by 140 basis points to 12.8%.

Notably, the SepCem numbers are for the 12 months to December 2023, as the companies don’t have the same year-end.

It’s particularly encouraging to see that revenue at Métier is above FY19 levels for the first time, with plant expansion leading to a recovery in volumes above pre-pandemic levels. In a year where volumes increased 11% and prices were up 9%, Sephaku can smile about the numbers at its subsidiary. As a very happy resident of Cape Town, it also doesn’t shock me to see that much of the boost to Métier’s business is coming from the Western Cape.

As part of the results presentation, the company gave an indication of performance in the first quarter of the new financial year. Revenue is only up 2.2% year-on-year, as we’ve seen a sluggish environment. This aligns with what the banks have been saying about the pre-election period.

Sephaku’s performance this year will depend greatly on whether we see a GNU-inspired acceleration in investment in South Africa.

In a separate announcement, Sephaku noted that Métier has agreed to buy a property in KZN for R21 million. They have been the tenant for 17 years and the lessor was not going to renew the lease due to an intention to sell. As this is a strategically important site, it makes sense to buy it.

Little Bites:

• Director dealings:
  • A non-executive director of Bytes (JSE: BYI) bought shares worth £50k.
  • A director of a major subsidiary of Insimbi (JSE: ISB) sold shares worth R147.4k.
  • A director of Copper 360 (JSE: CPR) bought shares worth R69.6k.
  • A director of RH Bophelo (JSE: RHB) bought shares in the company worth R12k.
  • A director of Afine Investments (JSE: ANI) dug around in the couch for some coins and bought shares in the company worth R3.4k.

• OUTsurance (JSE: OUT) has a programme in place that allows directors of OUTsurance Holdings (which holds the operations) to swap their shares for shares in OUTsurance Group (the listed company). In the latest examples of these trades, OUTsurance has now increased its stake in OUTsurance Holdings from 90.20% to 90.45%. They’ve issued more shares in the group company to pay for it though, so there’s a dilution of other shareholders. In other words, this is a structural thing that comes out in the wash.

• Capital Appreciation (JSE: CTA) has repurchased R56.8 million worth of shares between September 2023 and June 2024, representing 3.6% of shares in issue. The average price paid was R1.21.

• At a general meeting of shareholders, AYO (JSE: AYO) obtained approval for the resolutions related to the specific repurchase of shares from the GEPF.

• In the extremely unlikely event that you are a shareholder in Globe Trade Centre (JSE: GTC), be aware that there is a dividend of PLN 0.22 per share coming.

• For those interested in how BHP (JSE: BHG) is thinking about its decarbonisation strategy, there’s a presentation on this topic available here.

INVEST IN SHARES