Comparability is limited in Ascendis’ numbers (JSE: ASC)
The change to investment entity accounting is a big one
As flagged when Ascendis recently released a trading update, the shift to investment entity accounting makes a big difference to the numbers. They will now be focusing on metrics like net asset value (NAV) per share, rather than consolidated HEPS.
There’s nothing wrong with this approach, but it makes things difficult in the first year of its application. This is because the changes aren’t applied retrospectively, so the comparatives are now practically meaningless in the context of the latest numbers.
To give us a starting point for this new chapter of the company’s life, NAV per share was 105 cents as at December 2024. The Medical portfolio is 35% of the value and the Consumer portfolio is 65%.
The Consumer business is slow, with almost no growth at the moment in the face of subdued demand and pressure on pricing. The balance sheet is strong enough to allow them to launch new products to the market, which may be facilitated through acquisitions, like in the case of a new weight management product. Still, this feels to me like the narrow moat side of things, so it’s a pity that it forms the bulk of the portfolio.
The more interesting side is surely the Medical portfolio, with five entities providing a variety of devices to the private and government sectors. One of those entities is Surgical Innovations, which exited business rescue in 2023 and has been fighting for its life ever since. Thanks to the overall improvement to the balance sheet though, Ascendis could support one of its other investees making an acquisition of two strategic agencies. I’m no expert in this sector, but this sounds like a higher quality business than the Consumer portfolio in the South African context.
You may recall that there was an offer at 80 cents a share to take Ascendis private in late 2023 / early 2024. The NAV is now a fair bit higher than that number and the share price is at 83 cents.
Capital Appreciation’s payments division is doing well (JSE: CTA)
Importantly, the software division is no longer making losses
Capital Appreciation’s best business is undoubtedly the payments division. It continues to grow revenue at double digits and has a strong annuity flavour to its business model with multi-year contracts. Annuity revenue is more than half of total revenue and that obviously does great things for visibility and thus the valuation over time.
The ongoing growth of digital payments vs. cash will help them here, with innovations focused on providing solutions to micro-enterprise customers in Africa. There are good reasons to believe in the positive outlook for this division.
The recent drag on the story has been the software division. When work was slow to come in, Capital Appreciation tried to retain key staff in the hope that things would improve. At some point though, you simply have to restructure the business to respond to slower demand. This has now taken place, which is why the division returned to profitability in the second half of the year. Although the revenue prospects seem to be weak, they are no longer bleeding there.
Results for the year ended March will be released in early June. The share price is up 17.7% over 12 months. It’s well off the 52-week high of R1.90 though, currently trading at R1.40.
CA Sales just can’t stop growing (JSE: CAA)
This remains one of the most impressive local growth stories
If you’ve been paying attention to Unlock the Stock, you would’ve had the chance to engage with the management team of CA Sales Holdings on multiple occasions by now. In doing so, you would probably have reached the conclusion that they are a humble bunch who know what they are doing. Their next appearance on the platform is on 10 April (register for free here), so you have a chance to get to know them if you haven’t done so before.
When you consider that HEPS just grew by 25.3% in the year ended December 2024, it’s important to pay attention to this story. Sure, they are facing risk from exposure to the economy in Botswana and thus the look-through impact of diamond prices, but they’ve also done a fantastic job of diversifying beyond their home market. Management feels confident about the Southern and East African portfolio of businesses in the group, hence why the final dividend increased by 24.9%. This implies strong cash quality of earnings.
One of the things I appreciate most about the group is the bolt-on acquisition strategy. Instead of betting the farm on huge transactions, they go step-by-step in adding businesses to the portfolio. It’s like building a house out of lots of little Lego blocks rather than one or two big ones. If you’ve ever unleashed a toddler on a Lego house, you’ll know that small blocks are more resilient. African trading conditions and toddlers aren’t all that different.
The market has certainly taken notice of the company, with the P/E multiple at over 13x. The share price is up 48% over 12 months. Even more impressively, they are up slightly year-to-date, bucking the trend we’ve seen in consumer businesses on the JSE.
The company greatly values the Ghost Mail audience and they have placed their results at this link on the site, along with great visual summaries and the investor presentation. Don’t miss it!
Datatec is managing mid-single digit growth (JSE: DTC)
The company wants you to focus on gross profit as the right metric
Datatec has been quite busy in talking to the market recently, having released a couple of presentations that explain the overall group. To add to this, they’ve now released a trading update dealing with the year ended February 2024.
Revenue isn’t the metric that they believe you should be focusing on, as software and services are sometimes sold on a net basis (i.e. just the gross profit is recognised instead of sales and cost of sales). Ultimately, what actually matters is gross profit, so that’s how they’ve chosen to deliver this update.
At group level, gross profit is up 6% (measured in USD). Westcon International led the way with 9% growth, which is particularly helpful as that’s also the largest segment. Logicalis International is up next, both in terms of size and growth rate, with a 5% uplift. Sadly, Logicalis Latin America was down 12%, although the company has noted that overall financial performance has actually improved – so there must be cost reductions in that business.
Investors will have to wait for 27 May for full details.
Fairvest expects to hit the upper end of guidance for B shares (JSE: FTA | JSE: FTB)
They had no problem raising R400 million this week
If you’ve been reading Ghost Bites this week, you would’ve seen that Fairvest raised R400 million on the JSE in a matter of a couple of hours. Best of all, they did it at an almost immaterial discount to the share price. This is the power of an accelerated bookbuild structure combined with a deep capital market (by emerging market standards).
The company has now released a pre-close presentation for the six months ending March 2025. The good news is that they expect to meet the upper end of their tight guidance of a distribution per B share of 45 to 46 cents. That’s what shareholders want to see.
The other thing that shareholders love seeing is a balance sheet in decent shape. The loan-to-value is expected to be below 32% at reporting date. They are in the process of refinancing R1 billion at what sounds like an appealing cost of debt.
So, what sits underneath all this? Fairvest isn’t typically on the tip of the tongue when people think about examples of local property funds, yet this is a substantial player (market cap of over R9 billion) with a lot of properties across retail, office and industrial sectors. The properties are spread across the country. To add to the diversification, Fairvest also has a 26.3% stake in Dipula, up from 5.0% as at the end of September 2024.
At overall portfolio level, rental reversions were positive 4.2%. That’s better than 3.6% in the interim period. Vacancies did increase though, from 4.3% to 5.9%. This suggests that they are being stickier on price, with a willingness to let tenants go if they can’t afford the new lease. They are locking in renewals with a weighted average escalation of 6.8%, so tenants are having to make significant commitments here.
As you dig into the different property types, you can see some really different trends coming through. The retail portfolio achieved a positive rental reversion of 2.5% and achieved a steady tenant retention rate of just over 86%.
The office portfolio is much more interesting, with impressive rental reversions of 7% but a retention rate of only 67.6%. The vacancy rate in the office portfolio is up from 9.6% to 14.8%. I get the sense that they are putting their foot down in negotiations, preferring to lock in higher quality leases rather than simply putting in whoever they can find.
The industrial portfolio managed positive reversions of 7.5%, which is actually down from 9.7% in the interim period. This asset class has been running hot in South Africa (and abroad). Tenant retention fell though, down from 91.5% to 82.1%.
The share class structure at Fairvest means that the A shares get their distribution first based on set rules, with the B shares then getting the rest. This is why the guidance is focused on the B shares. When things are going well, you would therefore expect to see the B shares outperforming the A shares (as they carry more risk). This chart confirms the position:
Acquisitions have boosted Heriot REIT (JSE: HET)
There’s impressive growth here
Heriot REIT has released results for the 6 months to December 2024. Although distributable earnings jumped by 42.5%, you need to keep in mind that there was an acquisition made in this period that saw more shares being issued. It’s always important to look at the distribution per share for this exact reason. Even on that basis though, the increase was 14% and that’s impressive.
The acquisition of Thibault and the underlying growth in Safari (in which Heriot holds 10%) were positive contributors here, with further good news coming in the form of debt refinancing at favourable rates. They are paying 100% of distributable earnings as a dividend, so they are in good shape over there.
The NAV per share increased by 20% to R18.96. The share price of R16 is a pretty modest discount to NAV, with the market clearly believing management’s guidance of distribution per share growth of 10% to 15% for the full year. Based on the interims, why wouldn’t you believe it?
Sirius Real Estate: buying low in Germany, selling high in the UK (JSE: SRE)
This is how to make money in property
Sirius Real Estate is known for pulling off some smart deals in the property sector. They are particularly good at buying properties and then actively managing them to get a better exit yield. The latest announcement is a great example of both legs of these property deals.
First, you have to buy a property. Sirius is acquiring a multi-tenanted business park in exotically named Mönchengladbach, Germany for €17.21 million. They are getting it for a net initial yield of 8.21%. This deal is a sale and leaseback with the current owner, a large engineering company occupying 26% of the site. The new leases have terms of between 3 and 10 years. The property as a whole is only 66% occupied, so you can be sure that Sirius will apply its expertise in getting that percentage up.
Then, once a property has been improved, you have to sell it. Sirius has done exactly this in the UK (the other region of focus), with a sale of BizSpace Cardiff at a 10% premium to book value. Sirius has sold four properties in the UK this year at an average premium of 13.5% to book value.
With the conclusion of this deal in Germany, Sirius will have deployed €118 million of the €181 million raised in July 2024. This means they still have a significant war chest for deals, particularly when you add in the €100 million of headroom on the balance sheet for additional debt. As Sirius can borrow at rates below 4% at the moment, the deals are coming in at yields well above the cost of debt.
Meanwhile, in South Africa, property funds are having to fund transactions at a cost of debt that is higher than the yield on the properties. It’s not hard to work out which model can be more lucrative.
Nibbles:
- Director dealings:
- The CEO of Standard Bank (JSE: SBK) received share awards and sold the whole lot (not just the taxable portion). The after-tax portion that he elected to sell was worth R8.9 million. Although he remains heavily invested in the bank, the timing isn’t great when the bank has been telling the market that this will be a strong year for Africa.
- Various Investec (JSE: INL | JSE: INP) executives sold shares worth R8.2 million.
- A non-executive director of BHP (JSE: BHG) bought shares worth around R910k.
- The COO of Spar (JSE: SPP) has bought more shares in the company, this time to the value of R407k.
- The board of PPC (JSE: PPC) has approved the construction of the R3 billion integrated cement plant in the Western Cape. Although the company announced this a couple of months ago, at the time the decision was still subject to final approval. Sinoma Overseas Development Company has been approved as the counterparty to the EPC contract for the project. Work will commence in the next quarter.
- Telemasters (JSE: TLM) is trading under cautionary due to a potential acquisition by the company as well as due to discussions that investors are having with the major shareholders. Against this backdrop, revenue for the six months to December 2024 increased by 6.2% and HEPS fell by a whopping 42.6%. It feels like something needs to happen here, even if it’s not clear what exactly.
- Copper 360 (JSE: CPR) released an update on hard rock mining at Rietberg Mine. Perhaps it means something to you that the ore is a mafic noritic rock primarily hosting bornite and chalcopyrite mineralisation. It certainly doesn’t mean anything to me. All I can tell you is that the CEO is “determined to adhere to the development and production schedule” – so that’s a good thing, I guess.
- Acsion Limited (JSE: ACS) released a cautionary announcement. They have entered into “negotiations with a non-related third party” that could have a material effect on the share price. At this stage, there are no other details available.
