Not much to smile about at Balwin (JSE: BWN)

Of course, what they really need is more rate cuts

Balwin’s results for the six months to August 2024 are a sad and sorry tale of a property developer that has been in the wrong place at the wrong time. The high interest rate period has been really tough for them and there is far too much exposure to places like Gauteng, where sentiment lags far behind the Western Cape.

This leads to not just pressure on apartment sales volumes, but also on pricing as Balwin ends up discounting units to keep them moving. In turn, this leads to poor capital growth for buyers of Balwin properties, as there is new stock all the time and at competitive prices to keep the developer alive. In such a case, the motivation to buy properties isn’t great – and so the cycle continues.

The solution to this? Lower interest rates, but a much larger decrease than the recent 25 basis points cut is needed to really boost Balwin’s business.

Balwin saw a 23% reduction in apartments recognised in revenue in this period. Gross margin fell horribly from 28% to 23% as they cut prices, with growth in the annuity business managing to make the group gross margin picture look more consistent. As helpful as the annuity side is becoming, it doesn’t make up for the problems in the core business.

Revenue fell by 28%, a combination of fewer sales units and a lower price per unit. This led to HEPS dropping by a nasty 57%.

The silver lining, unsurprisingly for anyone who lives down here, was the Western Cape. It contributed 46% to total apartment sales and. More importantly, 94% of apartments brought to market were recognised in revenue in the corresponding period.

Much as I feel sorry at times for Balwin, I then read stuff like how they want to introduce rental developments and I remember that much of this is self-inflicted. Investors absolutely do not want to buy a mix of rental units and development profits, especially as the yields on residential properties are so weak.

In my view, instead of obsessing over the annuity side of the business, Balwin needs to get the basics right, try do as much as possible in the Western Cape and wait for the interest rate cycle to come to them.

Coronation’s circular for the B-BBEE deal is available (JSE: CML)

Very little imagination went into this structure

When Coronation first announced that they would be implementing a B-BBEE Ownership deal to take the group to 51% Black Ownership, my immediate reaction upon reading the overview was that this was a deal structured in a very old school fashion – and that’s not a compliment.

As a strong dividend payer and given the obvious focus of the group on the investment industry, they had a perfect opportunity here to list a retail scheme that would help with an unfortunate situation in which there are very few B-BBEE structures to choose from on the local market. Instead, they’ve gone with the tried and trusted approach of an employee share ownership scheme (ESOP) and broad-based ownership scheme (BBOS).

Now, an ESOP comes with all kind of practical challenges. Not only does it tend to exclude some staff members and create irritation along the way, but it often leads to disappointing outcomes for staff members who are included.

On the BBOS side, the use of a Public Benefit Organisation is cute and all, but it doesn’t come close to the brand win that Coronation would’ve achieved with a separately listed, tradeable scheme.

Worst of all, the deal is structured as the purchase of listed shares using notional funding. It would’ve made far more sense to structure this in the way that Phuthuma Nathi is structured at MultiChoice i.e. as an ownership structure in the unlisted subsidiary, thereby avoiding issues related to dilution and the volatility in the listed share price.

The corporate, legal and other advisors made over R20 million for this incredibly vanilla deal. Nice work if you can get it.

Delta Property Fund with a flurry of property sales – five of them! (JSE: DLT)

The purchasers aren’t related parties, so this is most unusual

Delta Property Fund still has a long way to go to try and bring its balance sheet in line. The fund is in the unfortunate position of having a portfolio of largely low quality properties, so they really aren’t easy to sell. Still, at the right price, anything can go.

In a surprising update, Delta has entered into five sales agreements that have nothing to do with one another! The property values range from R2.8 million to R23 million, with a total across the five of R63.6 million.

They are getting rid of a lot of vacant space here but goodness knows it comes at a “cost” – the five properties were last valued at around R173 million. In case you wondered why a fund might be trading at a discount to net asset value, there’s a perfect example.

Gold Fields completes the Osisko acquisition (JSE: GFI)

This is a major step in improving the quality of the Gold Fields portfolio

In early August, Gold Fields announced a deal to acquire 100% of Osisko, a deal that had various conditions precedent related to competition authorities and shareholders. It’s quite amazing how quickly this whole thing wrapped up, as the deal has now been completed.

Gold Fields paid $1.39 billion for the deal (net of cash received). Despite a significant portion being funded by debt, Gold Fields has maintained its investment grade credit rating and is looking forward to a strong 2025, boosted by this new asset in Canada.

Mantengu Mining with a Sublime deal that nobody understands (JSE: MTU)

I somehow doubt they paid $100k for a net asset value of R205 million

Mantengu Mining is acquiring 100% in Sublime Technologies from Sintex Minerals and Services, a company based in the US. Sublime is in Mpumalanga and manufactures and distributes silicon carbine with around 2% global market share.

That’s the part of the announcement that makes sense. We now get to the confusing part.

The net asset value of Sublime was R247 million as at December 2023 and the current assets and liabilities come to a net asset value of R205 million. This includes $1 million in cash (no, I’m also not sure why we’ve switched currency now). Profit after tax for the year ended December 2023 was R12 million.

The purchase price for this? “The rand equivalent of USD100,000.00” – which implies $100k. It simply cannot be right.

Instead of spending time on SENS making wild accusations about share manipulation, perhaps Mantengu Mining should focus on writing SENS announcements that make sense.

Pick n Pay: a long, long road ahead (JSE: PIK)

In a separate announcement, they’ve laid out the Boxer investment case

As you surely know by now, Pick n Pay consists of a very good business (Boxer) and a bad business that is struggling to achieve any kind of turnaround (Pick n Pay). I’ll start with the former, which is coming to the market soon.

Pick n Pay is separately listing Boxer as they need to unlock cash by reducing their stake in that business. The initial guidance was a raise of R6 billion to R8 billion, with Pick n Pay expecting it to be towards the upper end of the guidance. This is because the market loves Boxer, with a two-year compound annual growth (CAGR) rate of 14% in store rollouts and a three-year CAGR in turnover of 18.6%. Turnover for the first half of the year was up 12% and trading profit was up 11.8%. That’s decent in isolation and utterly incredible when viewed against the disaster that is Pick n Pay.

Boxer only has 4.2% market share of the formal grocery market, so there’s much room for growth even though the group is purely focused on lower income consumers. They use what is called a “soft discounter” strategy, which means a far tighter range that you would get at a typical Pick n Pay supermarket, but still wide enough to give consumers a worthwhile shopping experience. Balancing the importance of assortment with the value of a focused range and thus great prices is how Boxer has achieved success.

One of the key drivers of Boxer’s growth will be the shift from the informal into the formal market as South Africa continues to develop. This is no doubt a key part of Boxer’s medium-term outlook of turnover growth in the mid-teens, while achieving a trading margin of 5% and spending 2.5% of annual turnover on capex. They expect to pay 40% of headline earnings as a dividend in the medium term.

It’s not all roses, of course. Boxer’s gross margin declined from 20.7% to 20.3% in the interim period, with strong investment in price to drive volume and turnover growth. This is why trading margin was flat at 4.1% despite the saving in diesel costs, as Boxer put that money into better prices instead. It’s a highly competitive market in which Boxer is up against the likes of Shoprite amongst others.

Of course, the biggest irritation of all is that retail investors were shut out of this capital raise. For a business that is built on empowering South Africans, it seems like such a waste that they didn’t bother including retail investors in the pre-listing capital raising process despite having all the time in the world to do so.

The listing is expected to happen before the end of the year. It’s important to remember that Pick n Pay is retaining a controlling stake in Boxer after the listing, so they are only partially realising their investment here.

We now move on to Pick n Pay, where that business saw its trading losses worsen by 9.1% due to gross margin pressure. It is very difficult for a weak retailer to survive in this environment, particularly when facing tough competitors who are putting on the squeeze.

There were bright spots elsewhere, like Pick n Pay Clothing with 9.8% sales growth and Pick n Pay Online at 60.6%. Company-owned supermarkets saw like-for-like growth swing into the green at 3.1%, which is a lot more than the franchise base can say.

The group’s comparable loss before tax was 25.7% worse than last year. They are excited to confirm that for the first time in several years, they performed in line with the plan! I guess that above all else, this is a great example of the happiness it can bring your life to have really low expectations.

The first 8 weeks of the second half of the financial year reflect a sales decline of -1% in Pick n Pay South Africa, or +1.3% on a like-for-like basis. This shows the impact of store closures. Over at Boxer, they are up 9.6% or 5.2% on a like-for-like basis.

They still expect to make a substantial full-year trading loss in Pick n Pay this year. The good news is that they hope it will be about half of the loss suffered last year. The bad news is that it’s still a huge loss and they are by no means out of the woods yet despite a large capital raise.

PPC’s earnings head in the right direction (JSE: PPC)

The mid-point suggests double-digit growth in HEPS

PPC has released a trading statement dealing with the six months ended September 2024. An importance nuance here is that the prior period results are being presented in such a way that CIMERWA in Rwanda is shown as a discontinued operation. The focus is thus on continuing operations rather than total operations.

Earnings per share, which includes the impact of impairments (particularly in the base period), will be between 11% and 31% higher. Headline earnings per share (HEPS) excludes impairments and will be up by between 0% and 18%. This is why HEPS is used by the market as a better indication of underlying performance.

It seems as though the uptick in earnings isn’t coming from the best possible places. Rather than highlighting revenue growth, the narrative in the announcement focuses on cost reductions, higher income from the average cash balance and the partially offsetting impact of a higher tax rate.

Never a dull moment at Renergen (JSE: REN)

There’s a fight with a solar developer that could have far-reaching effects

There’s a rather awkward situation underway at Renergen which goes to the very core of the business case. A group called Springbok Solar is busy building a project in an area designated for future natural gas extraction. Now, Renergen notes that they hold a valid petroleum production right granted under the MPRDA, so that should not be possible without Renergen’s permission.

But here’s the catch: Springbok Solar is challenging aspects of the production right in law, something that could take years to go through the courts and which casts material uncertainty over Renergen at a time when they really can’t afford it, with hopes to list on the NASDAQ soon.

Renergen has been negotiating with Springbok Solar around permission for their project, but they seem to have reached a stalemate relating to Renergen wanting a buffer zone around the gas bearing structures.

This is a mess. If this cannot be resolved, Renergen has a huge overhang regarding its right to extract helium. Springbok Solar also runs risk of course, as their project could be declared unlawful one day, but it feels like they have less to lose and they know it.

Southern Palladium releases the prefeasibility study (JSE: SDL)

This is a huge moment for any junior mining group

Southern Palladium has achieved a key milestone: the release of a prefeasibility study for the Bengwenyama PGM project. The life of mine is estimated at 29 years and they believe that the cash costs will be “firmly at the low end” of the global cost curve thanks to shallow mining depths and a high grade. They expect cash costs of $644/6E ounce.

The estimated post-tax internal rate of return is 28%, with a post-tax capital payback of 3.5 years from first concentrate production. EBITDA over the life of mine is expected to be $5.6 billion at a margin of 50%.

The initial capital expenditure estimation is $385 million, including a 15% contingency.

The important thing is that key metrics are better than the scoping study suggested, so the economics of the project are getting better as they do more work on the plan.

The next steps are to get the Environmental Authorisation and Mining Right. They then need to complete the required drilling and complete a definitive feasibility study, after which there’s a final investment decision and the development of the mine.

Director dealings:

• Director dealings:
  • Various members of the Mouton family bought shares in Curro (JSE: COH) worth R5.3 million.
  • The CEO of De Beers has sold shares in Anglo American (JSE: AGL) worth around R2.3 million.
  • A director of CMH (JSE: CMH) has once again sold shares worth R258k.
  • The CEO of 4Sight Holdings (JSE: 4SI) and an associate sold shares worth around R250k.
  • A director of Standard Bank (JSE: SBK) bought shares worth R119.5k.
  • The CEO of Spear REIT (JSE: SEA) and an associate bought shares worth R39k.

• Europa Metals (JSE: EUZ) is busy with a potential reverse takeover by Viridian Metals Ireland that will completely change the nature of the portfolio in Europa. They are at term sheet stage with a 150 day period of exclusivity. Europa Metals’ shares are suspended from trading while they work through the conditions to figure out if there’s a deal. For now, it’s a game of wait and see.

• Hyprop (JSE: HYP) announced that GCR Ratings affirmed its long-term and short-term credit ratings with a stable outlook.

• Sasfin (JSE: SFN) still needs to send out the circular for the take-private and delisting of the company. They received a dispensation from the JSE for the 60-days rule but they don’t expect to miss it by much, with the circular expected to be out by 1 November.

• Copper 360 (JSE: CPR) has appointed Ferdinand Nel as CFO with immediate effect. The current CFO, Stephan du Plessis, will become Commercial Director.

• Oando (JSE: OAO) expects to publish its 2023 annual financial statements before 1st November, bringing an end to a process that had delays to an acquisition and the related audit work.