At Brimstone, intrinsic NAV is what counts (JSE: BRT)
And it hasn’t gone in the right direction
Brimstone Investment Corporation released results for the year ended December 2024. They start with a note that HEPS was up 51%. To be very clear, HEPS is the single most useless metric you can look at in an investment holding company. Ignore it.
If HEPS mattered here, then why is the dividend flat when HEPS is up 51%? Also, why has the intrinsic net asset value (INAV) per share – the metric that the market uses to assess the share price – decreased by 8.5%?
The problem is that HEPS is highly affected by the accounting policies applied to the underlying stakes. When the percentage held in investee companies ranges from portfolio investments (not even a significant minority stake) through to consolidated investments in which Brimstone has control, HEPS can bounce all over the place as the accounting treatments are so different.
In case you need final proof, the share price is flat over 1 year. That wouldn’t be the case if HEPS mattered.
It’s high time that Brimstone stopped focusing on HEPS and started putting INAV at the centre of its reporting.
Packaging remains the growth area at Caxton & CTP (JSE: CAT)
But not enough to offset the decline in publishing and printing revenue
Caxton & CTP released numbers for the six months to December 2024. Revenue fell by 1.6%, as the company faces the problem of having a legacy side of the business (publishing and printing) and a growth area (packaging). The latter isn’t growing quickly enough (+3.0%) to offset the pressure in the former (-8.1%).
Thankfully, profit is what really counts. With operating profit moving 14.7% higher and HEPS up by 12.3%, the pursuit of efficiencies paid off for them. It sounds like this has included a particular focus on staffing costs and restructures, with staff costs up just 1.4%.
Community newspapers are under the most pressure it seems, with local advertising revenues down 4%. I think that people are now getting their community news through WhatsApp groups and direct comms from local schools etc. I distinctly recall the weekly paper arriving at my house as a kid, which I then read through with my mom in the afternoon. I’m not sure that this happens in households anymore with either parent!
Even at The Citizen newspaper, growth in the legal advertisements was the major source of improvement. It’s extremely tough to convince advertisers that they can get decent return on investment in the newspaper space. It’s sad in some ways, but that’s how disruption works.
CA Sales Holdings flags strong growth in HEPS (JSE: CAA)
The strategy continues to deliver
CA Sales Holdings just seems to get it right time after time. For the year ended December 2024, they expect HEPS to jump by between 23% and 28%. That’s a very juicy increase, achieved through the combination of organic growth and bolt-on acquisitions that the company is so well known for.
The danger of using Earnings Per Share (EPS) instead of HEPS comes through clearly here, as the comparable period included a R123.6 million bargain purchase gain on the T&C Group acquisition in Namibia. EPS is therefore pretty flat for the year because of the large number in the base.
HEPS is the right number to use when assessing true financial performance. On that metric, the company is doing very well.
Exceptional results at Discovery (JSE: DSY)
They’ve earned those smoothies
Discovery had a really great time of things in the six months to December. No matter where you look, the metrics are great.
Normalised headline earnings increased 34% and the same is true for the dividend, so we can tick the box for the cash quality of earnings. Normalised return on equity increased from 12.6% to 15.0%, so that’s a win for capital allocation. The life insurance sector metric looks even better, with annualised return on embedded value up from 12.1% to 19.0%!
Basic embedded value per share is one of the methods used by the market in valuing the company. It increased by 16% to R179.47. With return on embedded value well above the cost of equity, it means that the market is happy to pay a juicy premium to embedded value per share. Discovery’s share price is at roughly R209 per share. The market is therefore pricing Discovery at an effective return on embedded value of 16.3% (19.0% * R179.47 = R34.0993 and then take this and divide it by the share price of R209).
Although things are obviously a lot more volatile when you dig into business unit performance, it’s worth noting that both the Discovery SA Composite and Vitality Composite grew normalised profit by operations by 27%. They are seeing good things happen across the group.
Another notable performance is Discovery Bank, where revenue increased 42% and they are now at monthly operational breakeven.
The share price is up 56% in the past year. The group has had a few exciting times that turned out to be disappointments in the past decade. Is it finally different this time?
A record interim dividend at Harmony (JSE: HAR)
And they still have their eyes on copper
Life is good in the gold industry. In fact, it’s fantastic. Harmony grew revenue in the six months to December by 19% and saw net profit jump by 33%. That also happens to be the growth in earnings, with HEPS up 33%. The dividend story is even better, up 54.4% to a record of 227 cents per share!
This all happened despite a 4% decrease in gold production, which the company says was planned. They certainly didn’t plan for the gold price to do quite as well as it did, so that part was pure luck.
Earnings were boosted by all-in sustaining cost (AISC) coming in below guidance, although it was 15% higher as the group faced cost pressures. Combined with the lower production, this shows how different things might have been if not for the average gold price received being 23% higher.
If you CTRL-F in their detailed earnings, you’ll find three references to the word “copper” – and I suspect that might be higher by the time we get to full-year numbers. They describe themselves as being “on the cusp of introducing near-term copper” – watch this space!
Solid growth at HomeChoice (JSE: HIL)
You can engage with management directly next week on Unlock the Stock
HomeChoice International has released a trading statement for the year ended December 2024. It looks very strong, with HEPS up by between 20% and 30%.
This puts the range of expected earnings at 371.2 cents to 402.1 cents. With the share price at R28, the mid-point of that range is a P/E of around 7.2x.
There aren’t many companies on the local market at single digit P/E multiples with that kind of growth rate. You have the perfect opportunity to learn more about the company on Unlock the Stock next week. Attendance is free for the management presentation and facilitated Q&A at 12pm on 13th March. You just need to
The long-stop date for the MultiChoice – Canal+ deal has been extended (JSE: MCG)
With MultiChoice under so much pressure, that’s not good news
Right now, there is one thing and one thing only that is propping up the MultiChoice share price: the offer by Canal+. Based on the underlying earnings at MultiChoice, I genuinely don’t know where the bottom would be for the share price in the absence of that offer.
Sadly, due to ongoing regulatory processes, the long stop date of 8 April 2025 for the deal isn’t going to work. Even worse, they aren’t expecting to miss this date by a small margin. With the extension of the long stop date all the way out to 8 October, they are sending a message to the market that things are going to take a long time at the regulators.
They describe this as “ample time” for the fulfilment of conditions. I should certainly hope so!
MultiChoice’s share price fell 4.5% in response to the news, as the market applied the time value of money to the expected proceeds.
Double-digit growth in HEPS is good going at Nedbank (JSE: NED)
A bank this size is beholden to the broader country’s trajectory
Nedbank has released results for the year ended December 2024. It was of course a very strange year, with the first half filled with load shedding and election jitters, while the second half was filled with promises. I’m not sure that South Africa saw much execution of the GNU hopes, especially if you read results from sectors like construction.
It wasn’t an easy year in which to run a bank, so I think that Nedbank’s growth in headline earnings of 8% was presentable. Due to share buybacks, HEPS was up 11% and the full-year dividend per share grew 10%. The other key metric for investors is return on equity, up from 15.1% to 15.8%.
In a country with low growth, the important thing for banks is to keep their costs under control. Nedbank has various initiatives underway to try and achieve this. Despite this, the cost-to-income ratio has crept higher from 53.9% to 55.9%. This is due to revenue increasing by just 4% vs. 8% growth in expenses.
So then how did earnings end up higher? The answer lies in the credit loss ratio, which improved significantly vs. the prior year. Naturally, investors would prefer to see strong growth in revenue, as a solid improvement in the credit loss ratio isn’t something that will be experienced every year.
The net asset value increased 4% to R240.39. The share price closed 2% higher at R291.
Nedbank values the Ghost Mail audience and has given more details on their financial performance in your favourite publication at this link.
Higher debt and far more shares in issue ate up Sea Harvest’s profits (JSE: SHG)
They are calling this their most challenging year since listing in 2017
Sea Harvest Group released results for the year ended December 2024. Although revenue increased by 16% and gross margin improved by around 200 basis points to 26%, that’s the beginning and end of the highlights reel.
Firstly, that revenue number isn’t nearly as exciting as it looks. The increase is thanks to the acquisition of Sea Harvest Pelagic and Aqunion. Adjusting for acquisitions, group revenue was flat. Volumes fell and price increases were enough to offset the impact.
Group operating expenses jumped 20%, with the acquisition and general inflation having an impact here. The improvement in gross profit margin means that gross profit was up 25%, so thankfully they still managed some operating margin expansion here. By the time you go through some fair value and other adjustments to reach EBIT, growth on that line is just 8% and margins went backwards.
Now we get to the bad news. Net finance costs increased by 24% thanks to higher levels of debt after the acquisition. This is obviously a much higher jump than the growth in EBIT, so headline earnings fell by 37%.
It gets worse I’m afraid. Due to the large number of additional shares in issue, HEPS tanked by 45%. If you adjust for a once-off gain on purchased loans is the prior year, the drop was 17%. The dividend has tracked HEPS lower, down 45%.
Here’s another metric that is well worth noting: South African catch rates are at historical lows and down a whopping 30% vs. 2020 levels in the second half of the year. Pricing increases helped, but couldn’t protect margins in that part of the business.
Is there a silver lining here? Cash from operations probably fits the bill, with a positive swing of note in working capital. Despite higher interest charges, cash from operating activities was much higher at R774 million vs. R450 million in the comparable period. With net debt up by R334 million, they could do with another period of strong cash generation.
The oceans are unpredictable things. This makes it difficult to provide an accurate outlook on the business. One thing is for sure: catch rates desperately need to move higher.
Shoprite keeps eating everyone’s lunch (JSE: SHP)
And don’t make the mistake of ignoring their up-and-coming banners
At this stage, it doesn’t surprise the market when Shoprite releases incredible figures. It’s practically the expectation, which is a dangerous recipe for a share price. After all, investors make the most money from a positive surprise in the market. When something is priced for perfection, the risk is that there’s a disappointment.
Much like the broader retail sector on the JSE, the Shoprite share price is taking a breather right now. Down 9.3% year-to-date, the return over 12 months is just 3%. This is despite a set of numbers that just saw group revenue up 9.4% for the 26 weeks to 29 December 2024 and diluted HEPS up 9.9%. The interim dividend increased 6.7%.
For Shoprite to keep growing off this base is not straightforward, which is why investors are now experiencing single-digit returns. Although the grocery business at Shoprite clearly has room to keep winning market share from its competitors, Shoprite isn’t sitting back and hoping that this will be enough to keep driving growth. They have worked hard on introducing new store formats, like Petshop Science which has grown from nothing to 129 stores. Sales for the interim period were up 56.9% in that business. This strategy is in contrast to the approach taken by the likes of Woolworths, where they went the route of acquiring Absolute Pets instead.
If we dig a bit deeper, we find Supermarkets RSA with growth of 10.4%. Like-for-like sales increased 6.1% and customer visits increased by 4.1%. Some of Shoprite’s competitors can only dream of growth in volumes like this.
In the higher margin side of the business, Checkers and Checkers Hyper grew sales 13.6% and those famous Sixty60 scooters saw sales growth of 47.1%. Petshop Science, Uniq and obviously Checkers Outdoor are reported as part of these numbers. The group is building an incredible dataset of its customers thanks to the Xtra Savings card. As they add more specialist stores, the data will keep getting better.
Shoprite and Usave increased sales by 7.1%, so there’s a considerable gap between this business and the premium offering. The positioning of Checkers has proven to be a masterstroke.
Supermarkets non-RSA was a drag on growth, up 4.1% in rand terms and contributing 8.6% to group sales. Other operating segments also didn’t grow as quickly as the supermarkets business, up 6.2% and featuring a notable performance by OK Franchise of 8.8%.
In terms of trading margin, a 20 basis points increase in Supermarkets RSA was enough to offset the pressure in Supermarkets non-RSA, so group trading margin increased by 20 basis points to 5.7%. The daft approach in modern accounting rules is for lease costs to be excluded from trading profit, as the charges on leases are instead found in finance charges. This is why finance costs were up 28.3%, with the cost of the group’s expansion coming through on that line.
I have yet to meet a single person who likes the way leases are now treated for accounting purposes. Not one.
The second half has a tough base to grow against. The comparable period saw 10.1% growth in H2 and although sales in the first few weeks are ahead of last year, I doubt they will manage much more than mid-single digit growth vs. that base. Then again, Shoprite certainly keeps delivering!
WBHO shows that construction can make money (JSE: WBO)
How does a 30% increase in the interim dividend sound?
The construction industry has claimed many investor scalps. It’s not uncommon to see a complete collapse, often due to one or two really bad contracts. Thankfully, WBHO looks like the class captain in the sector, with all the important metrics heading in the right direction.
Revenue for the six months to December 2024 was up 10% and operating profit from continuing operations was good for 15%. HEPS from total operations jumped by 19.5% and the dividend was the best news of all, up 30% to 300 cents per share!
Future earnings are of course driven by the order book. This increased 7% in the period, which does look a bit light relative to earnings growth.
Here’s a fun fact for you: in Gauteng, data centre projects contributed 21% of revenue, commercial offices were 52% and residential work was 16%. Sadly, Gauteng as a whole suffered a contraction of 11% in building revenue, while coastal regions were up 19%. It says something about the trend of where people are living and working that office and mixed-use developments contributed 42% of revenue derived from the Western Cape. In the Eastern Cape, the only activity seen by WBHO has been industrial and warehouse developments.
On the roads and earthworks side, revenue in South Africa was up by 25%. Mining and energy sector projects contributed 43% of local revenue, while road projects were 41%. Water infrastructure was just 6%, which is a larger worry in our country!
In case you’re wondering whether public sector problems are unique to South Africa, hopes of an upswing in public spending by the new Labour Government in the UK have not materialised and WBHO’s UK business has been negatively affected. In practically every country, politicians are heavy on promises and light on delivery.
Overall, a solid set of numbers that support the 42% increase in the share price over the past 12 months.
Nibbles:
- Director dealings:
- The executive of the main subsidiary at Lewis (JSE: LEW) who has been selling shares recently is at it again. The latest disposal is of shares to the value of R2.45 million.
- Mustaq Brey, non-executive director of Oceana Group (JSE: OCE) and of course the driving force behind Brimstone (JSE: BRT), bought shares in Oceana worth R1.2 million.
- A couple of Kumba Iron Ore (JSE: KIO) directors and the company secretary sold shares worth around R16 million. Although they relate to old share awards, the announcement isn’t explicit on whether this is only the taxable portion.
- One of the executives of Vodacom’s (JSE: VOD) South African subsidiary sold shares worth R1.3k.
- Acting through Titan Fincap Solutions, Christo Wiese bought R12.2k worth of Brait Exchangeable Bonds (JSE: BIHLEB). This is pocket change on that side of the fence – literally. To give you an idea of how much ammo is flying around in the Titan stable, Wiese also restructured his stake in Collins Property Group (JSE: CPP). The ultimate beneficial ownership hasn’t changed, but we are talking about a shuffling of chairs to the tune of R864 million!
- Labat Africa’s (JSE: LAB) new IT-focused strategy has been given a boost by the acquisition of a 51% stake in Ahnamu for R25 million, payable mostly (R20 million) through the issue of Labat shares at 10 cents a share. That’s a premium to the current prevailing share price. R5 million is payable in cash. This is a hardware distribution group, so that’s a pretty tough way to make money with paper thin margins. I have to believe that there’s a typo in the announcement, with profit after tax for the acquired business meant to be R7.8 million rather than R78.8 million. The net asset value is R64 million. If it is indeed R78.8 million, then Labat did the deal of a lifetime.
- Supermarket Income REIT (JSE: SRI) has achieved very little liquidity on the local market. They also have an old-school management structure in the form of an external management company that is now being “internalised” at great quote. This used to be an issue on the JSE, with property executives enriching themselves in the process. At this UK-based REIT, the management company will be paid out £19.7 million, funded by proceeds from the recent sale of a Tesco store. With cost savings of £4 million, they are effectively achieving a yield of 19%, which is better than any of the other capital allocation opportunities they have available. Still, such structures should never have been allowed to exist.
- Telemasters (JSE: TLM) is back under cautionary, with the two largest shareholders having received an expression of interest from a B-BBEE company to acquire their shares. There are a bunch of conditions attached, including the raising of funding it seems, so this is by no means a done deal. The proposal is for due diligence and negotiation of documents to be concluded by the end of March. That sounds extremely ambitious. The relevance to other shareholders is that if a deal does get done here, it would trigger a mandatory offer to all shareholders at the same price.
- It’s the end of an era (or is that an error?) at Transaction Capital (JSE: TCP), with the name set to change to Nutun Limited (JSE: NTU) from 26 March.
- There’s another name change on the local market – a subtle one, but perhaps therein lies a clue. Dipula Income Fund (JSE: DIB) is changing its name to Dipula Properties Limited with effect from 17 March.
