ADvTECH invests in Ethiopia (JSE: ADH)
The group hopes for further success in Africa
ADvTECH understands how to put together a moat in the education space. In Africa, they are focused on strong international schools in appealing regions. To add to this strategy, they are acquiring a 100% stake in Flipper International School in Addis Ababa.
It may have a rather odd name, but this group been around since 1998. In 2018, the founders sold an 85% stake to Tana Africa Capital and the Saham Group, so it’s already had a period of private equity ownership. This is encouraging.
With Ethiopia has a high growth region that is experiencing urbanisation, the business case for a school like this is obvious. ADvTECH will pay $7.5 million for the group (around R135 million), adding five schools and 3,000 students to its portfolio.
City Lodge is prioritising margin over vacancy rates (JSE: CLH)
Ultimately, revenue is what pays the bill, not lower vacancy rates
It’s easy to get to a 100% occupancy rate: just sell the rooms for next to nothing and make a huge loss in the process. It therefore has to hold true that the right measure of success is revenue, rather than just the vacancy rate. City Lodge has to balance the volume vs. pricing considerations and has been putting more priority on pricing lately, which speaks to the quality of the offering.
The GNU-inspired upswing didn’t exactly lead to an immediate improvement in occupancy rates, but at least they are seeing some positive signs in corporate and government travel. Occupancy for the three months to September came in at 58% vs. 62% in the prior year. Although September itself was decent, October came in lower (57% vs. 63% last year) and so did November (58% vs. 59%).
Thankfully, the group average room rate was up 11% over two months, so the dip in vacancy isn’t a major problem. As they are now lapping a period that included the food and beverage offering, they haven’t seen such a big year-on-year jump in that part of the business.
So, in this period, it’s a story of gross margin improvements being realised as pricing moved higher.
In Botswana, Mozambique and Namibia, it doesn’t sound like things are going very well in this election year. Occupancy rates are struggling. They don’t separately disclose the South African occupancy rate, so this could be where some of the group pressure is coming from.
City Lodge’s balance sheet is in a net positive cash position and they’ve used R60 million of their R600 million loan facility for capital refurbishment projects and to pay the final 2024 dividend. The refurbishments will be ready ahead of the festive period and should help boost pricing.
The sale of City Lodge Hotel Katherine Street is unconditional and the hotel will stop operating in mid-December, ahead of an expected transfer in the third quarter of the financial year.
It all comes down to the peak season, with City Lodge’s effort to appeal to more than just business travellers hopefully bearing fruit.
Biological asset value movements impacted Crookes Brothers (JSE: CKS)
This volatility is a feature of agricultural businesses
Crookes Brothers released results for the six months to September. Although revenue was up 6% and operating profit before biological assets increased 9%, the extent of fair value movements in the biological assets means that HEPS took a nasty knock of 30%.
Over two interim periods, the biological assets experienced a total negative fair value move of more than R110 million. For reference, total headline earnings over the same period were R83 million. Without those fair value movements, profit would’ve been much higher. Welcome to the world of agriculture.
As if you need any further reminders of the risks of agriculture, Crookes Brothers hoped for an excellent banana segment contribution in the second half of the year. Alas, a severe storm in Mpumalanga in October ruined that party for the time being.
Investec manages mid-single digit growth (JSE: INP)
Return on equity has dipped though
Investec has released results for the six months to September. You have to keep in mind that the UK isn’t directly comparable to South Africa in terms of risk factors, so percentage growth rates also aren’t directly comparable. We have also had a most unusual period in which the rand has strengthened, so that negatively impacts rand hedges like Investec.
With that context, growth in adjusted operating profit of 7.6% (in GBP) is respectable, even if it only translates to 4.4% in rands! This was assisted by solid cost control, with the cost-to-income ratio improving from 53.3% to 50.8%. The same can’t be said for the credit loss ratio, which jumped from 32bps to 42bps – near the top of the through-the-cycle range of 25bps to 45bps.
Return on Equity (ROE) at 13.9% has decreased from 14.6%, but this level means the group is still on track for guidance. One of the impacts has been the completion of the combination of Investec’s wealth management business in the UK with Rathbones, creating a higher average equity base.
The interim dividend of 16.5 pence per share is up 6.4% and represents a payout ratio of 41.7%.
The full-year guidance is for ROE of 14% and a credit loss ratio near the top of the target range of 25bps to 45bps. South Africa sits at the lower end (15bps to 35bps) while the UK & Other is between 50bps and 60bps.
A truly excellent period at Lewis (JSE: LEW)
Here’s a casual 50% increase in the interim dividend to make people smile
Lewis has just reported a fantastic set of numbers for the six months to September. Merchandise sales were up 8.5%, so there’s a strong improvement here in consumer discretionary spending. Group revenue was up 13.6% and gross profit margin increased to 40.9%, so Lewis knows how to turn footfall into money.
They also know how to collect that money, with an improvement in satisfactory paid accounts and the debtors book up by 16.9%.
All of this adds up to a jump in operating profit of 54.1%, with operating profit margin up from 14.2% to 20.2%. HEPS increased by a lovely 49.1% and the icing on this cake is that the interim dividend is up 50%.
What’s not to love?
Even UFO, the broken part of the Lewis story, managed to swing from an operating loss of R9.8 million to profit of R1.5 million.
Inventory levels are up 17.8%. As you’ll see in Mr Price further down, this seems to be a trend at retailers who have learnt from the shipping delays last year. Stock availability at this time of year is far more important than being too cute on working capital ratios. Although this puts some pressure on borrowings, a decent trading period in the next couple of months should fix that.
Lewis has also quietly done a bolt-on acquisition, buying Real Beds (a chain of 13 stores) to increase its presence in the bedding base set market. There are also four stores in Botswana being acquired.
And of course, as Lewis is famous for, there were share buybacks – in this case, R43.9 million worth of buybacks at an average of R47 per share. Since 2017, Lewis has repurchased shares for R1.3 billion at an average price of R35.96 per share. The current share price is just below R80!
Mr Price keeps expanding into a tough market (JSE: MRP)
Despite weak same-store sales, the market just can’t get enough
The Mr Price share price is up nearly 90% this year. Despite pretty tough results across the local clothing retailers (including Mr Price on a same-store basis), the market is rewarding Mr Price for a store expansion strategy that is adding plenty of new revenue to the group. I guess the assumption is that the market share wins at this stage will pay off in future.
For the 26 weeks to 28 September, Mr Price total revenue increased by 5.2%. They gained 60 basis points of market share. Comparable store sales increased just 0.4%, hence my comments on this result being driven almost entirely by store rollouts.
Importantly, gross margin has expanded by 110 basis points to 39.7%. Combined with the revenue growth, you would therefore expect a big jump in HEPS, right?
Wrong. HEPS increased by 7.3%. Not bad by any means, but not a thrilling enough income statement to drive these kind of share price moves. In fact, operating margin actually went backwards by 10 basis points!
In terms of useful insights into consumers, I must point out the Homeware segment seeing comparable sales turn positive. This talks to some improvement in discretionary spending among consumers.
A focus area for Mr Price is the telecoms business, with Mr Price Cellular and Powercell achieving sales growth of 13.1%. Although this feels like such an old-school opportunity, they are clearly getting it right!
Heading into the festive season, there are two further encouraging metrics. The first is that inventory levels were up 13.6% at the end of the period, so they are well stocked and therefore not exposed to the incompetence at Transnet. The other metric is that sales momentum has been strong recently, with sales up 11.5% in October and 14.7% in the first two weeks of November.
My bearishness on Mr Price this year has been 100% wrong in terms of the share price performance. Before I’m convinced that these share price gains are sustainable, I would want to see comparable store sales running at a level that drives operating margin expansion. Until then, it’s easy to just keep driving revenue growth through capex.
Purple swings into the green (JSE: PPE)
The share price has made significant gains recently
Purple Group has released a trading statement for the year ended August. The big news is that the headline loss is a thing of the past. They’ve swung from a headline loss per share of 2.05 cents to positive HEPS of between 1.68 cents and 1.85 cents.
Given all that Purple has achieved for investors in this country, it’s really lovely to see this outcome for them.
The rights offer in mid-2023 at 81 cents per share has finally paid off for those who took a punt, with the share price now at 114 cents. Still, it remains a country mile off the levels in the pandemic that I avoided due to valuation silliness.
Underneath all the share price volatility, there’s a good business that is moving forward. I must however point out that it is currently on a P/E multiple in the mid-60s!
Reunert achieved growth despite the solar drag (JSE: RLO)
This is the importance of diversification
Reunert has released results for the year ended September. Revenue increased just 5% and operating profit was up 7%. Thankfully, HEPS was a bit more exciting at 10% growth and the interim dividend increased 11% as the payout ratio moved higher.
Reunert has a bunch of different businesses, with the battery storage business currently dealing with the nightmare of the sudden disappearance of load shedding. An entire industry was built around making up for Eskom’s shortcomings and suddenly that demand washed away, leaving the market in disarray.
Thankfully, other areas of the group did well, like the electrical engineering segment and its operating profit growth of 20%. On the ICT side, they were impacted by supply chain delays thanks to Transnet’s ports, so operating profit was up by only 7% – still a decent outcome.
In Applied Electronics, operating profit was down 16% despite a strong performance by the defence cluster within that business. The renewable cluster saw revenue drop due to the solar energy business moving from a subsidiary to a 50% joint venture (i.e. revenue is no longer 100% consolidated). Of course, the operating profit impact there is from ugly losses in the battery storage business, a problem that has nothing to do with accounting changes.
Thankfully, despite Eskom’s miraculous recovery, Reunert’s diversification has led to decent growth and a positive outlook for most of the businesses.
In management news, CFO Nick Thomson is retiring and the group is looking for a successor.
Southern Sun has the perfect income statement shape (JSE: SSU)
A modest revenue uptick has driven a big jump in earnings
Southern Sun has reported a 6% increase in income for the six months to September 2024. That doesn’t sound like much, yet it ends up being a 35% increase in HEPS!
The first trick lies in operating leverage, or the benefit of having fixed costs in the system and decent cost control. You can see this by considering EBITDAR (a hotel industry standard – the “R” isn’t a typo) increasing by 10%, a higher percentage than the move in income. This means that margin improved.
Then, we get to financial leverage, with a reduction in finance costs helping to turbocharge the increase in EBITDAR into an even better increase in HEPS. The group now describes its debt levels as being sustainable.
Southern Sun has a strong tilt towards group and leisure travellers and appeals to international travellers as well, which is why I still prefer it to City Lodge. This broader appeal comes through in the occupancy rate, sitting at 58.9% for the six months (up 260 basis points) and an impressive 68.2% in September. The average room rate is up 3%, so they’ve gone the route of being more competitive on price and driving occupancies higher, with a solid net outcome.
Surprisingly, revenue in Gauteng grew by 18% – even faster than the Western Cape at 14%! As for KZN, that suffered a decline of 8%. There are some other problem areas in the group, like the disappointing performance of the Mozambique hotels based on security concerns for travellers.
The share price is up roughly 70% this year, so that’s a terrific performance for investors.
Spar is moving in the right direction (JSE: SPP)
They need to keep this momentum going
Spar has released a trading statement for the year ended September. If you focus only on continuing operations (i.e. excluding Poland), then HEPS increased by between 6% and 16%.
That’s a move in the right direction, despite some ongoing headaches like lower turnover growth in the second half of the year and the SAP system “upgrade” (ahem) in KZN still not working 100% properly. These issues were mitigated by cost containment and considerable reductions in group net debt.
The group is in the process of giving away – I mean selling – the Poland business. It will go down as one of the most disastrous corporate deals in South African history. Including those operations, HEPS moved higher by between 16% and 26%, so there’s even some improvement in Poland.
Spar has had to take on more debt to get the Poland deal across the line. The bridge facility for this is included in Spar’s net debt of R9.1 billion. This makes it quite impressive that debt has come down from R11.1 billion.
Results are scheduled for release on 28 November.
Nibbles:
- Director dealings:
- There are some chunky sales by prescribed officers of Thungela (JSE: TGA). Three such officers sold shares with an aggregate value of R17.8 million.
- The chairman of Raubex (JSE: RBX) took advantage of recent share price strength to sell shares worth R15.3 million.
- Acting through Titan Premier Investments, Christo Wiese has bought another R7.5 million worth of shares in Brait (JSE: BAT).
- A non-executive director of BHP (JSE: BHG) bought shares (well, American Depository Shares to be exact) worth $52k.
- A director of Momentum (JSE: MTM) purchased shares worth R300k.
- An associate of a director of The Foschini Group (JSE: TFG) sold shares worth R27.4k.
- Small cap Mahube Infrastructure (JSE: MHB) is highly illiquid, so don’t get too excited by a 20.5% move in a single day after the release of a trading statement. The bid-offer spread can get very wide on these stocks. Still, HEPS for the six months to August has increased by between 34.5% and 48.5%, so those results will be worth a look when they are released on 29 November.
- Thanks to S&P Ratings revising the outlook on South Africa’s sovereign debt from stable to positive, Capitec (JSE: CPI) and Nedbank (JSE: NED) have enjoyed a similar change in outlook. In reality, all the banks will benefit if the South African credit rating improves, leading to a lower cost of borrowing and prosperity for everyone involved.
- Adding to the news earlier this week about a sale of property, Delta Property Fund (JSE: DLT) has agreed to sell Thuto House in Bloemfontein for R16 million. Unlike the other sale which was on auction and at a price far below the valuation of the property, this sale seems to have been done in the traditional way and achieved a price R700k above the last valuation. Inch by inch, they are slowly making progress at Delta.
- If you’re interested in South32 (JSE: S32), then you might want to check out the presentation from the recent Sierra Gorda site visit. It’s available here.
- There’s some hope for Conduit Capital’s (JSE: CND) disposal of CRIH and CLL. After the planned sale of these businesses to TMM Holdings was blocked by the Prudential Authority, as application to the Financial Services Tribunal led to a decision to set aside the ruling of the Prudential Authority and refer the deal back to them for consideration at an internal meeting scheduled for February 2025. The wheels turn very, very slowly.
