Capital Appreciation hit by poor profitability in the Software division (JSE: CTA)

Thankfully, the Payments division is doing extremely well

If you just looked at the revenue line and nothing else, Capital Appreciation’s numbers for the six months to September would look lovely. Revenue increased by 10.4%, with great underlying drivers like 13% growth in the terminal estate (the number of POS devices out there). Alas, group EBITDA fell by 3.1% and thus the EBITDA margin fell by a nasty 260 basis points to 18.6%. Sadly, you can’t just look at revenue.

The culprit is the Software division. It grew revenue by just 2.4%, with 9.7% growth in South Africa and an 18.6% decline in the international segment as a large contract reached maturity. This is nowhere near enough revenue growth for the underlying cost base, with Capital Appreciation insisting that they need to retain the skilled staff for when revenue picks up. We’ve been hearing this story for a while now. If the skills are so rare, shouldn’t work for them be flying through the door? With the Software division now in a loss-making position, this approach surely cannot continue for much longer. They note improvements to the sales pipeline and an expected recovery in profits in the next year or so. Let’s hope so.

The net result is an 8.3% decline in HEPS to 5.96 cents. The group increased the payout ratio, so the interim dividend is up 5.9% to 4.50 cents. This is despite cash from operations only coming in at R11.6 million, way down from R159.9 million in the comparable period. It seems that receivables were settled after period-end and that much of the investment has been in inventory, with current demand for devices giving Capital Appreciation the confidence to increase the dividend despite earnings pressure.

This financial year isn’t going to be a pretty one for Exxaro (JSE: EXX)

Core metrics have headed in the wrong direction

Exxaro has released a pre-close update ahead of the financial year-end of December. It paints a picture of a group struggling with a difficult market for its products.

For example, the average benchmark API4 Richards Bay Coal Terminal export price is expected to be down 12.5% year-on-year. The iron ore fines price is expected to come in 11.6% lower. On top of this, sales volumes are down 2%. When prices are volumes are down, you can’t expect happy news.

At least there’s plenty of firepower on the balance sheet. With capital expenditure coming in 11% lower than last year, that’s given some relief in a tough market. The group had R16 billion in net cash at the end of October and intends to retain cash of R12 billion to R15 billion, which suggests that there will be dividends for shareholders despite a difficult year. Time will tell.

Fortress has revised its distribution guidance higher (JSE: FFB)

Revised guidance for FY25 reflects adjusted 14.7% year-on-year growth

Fortress Real Estate has a directly held logistics portfolio of R20 billion in South Africa and Central and Eastern Europe, a South African retail portfolio of R10 billion and a stake in NEPI Rockcastle of R16 billion. This gives you important context for the update released by the company dealing with the period since June 2024.

The logistics space continues to enjoy strong demand by tenants, with 75% of current developments already pre-let. On the retail side, like-for-like tenant turnover of 4.5% is decent, although certainly not spectacular. At least October looked better, with sales up 6.5%. This gives Fortress some confidence heading into the festive season.

Still, the narrative throughout the announcement suggests that Fortress’ heart lies in the logistics portfolio. It’s therefore not surprising that proceeds from the disposal of non-core properties have been mainly recycled into logistics developments, along with some strategic retail redevelopments and extensions. They have locked in proceeds of R746 million since year-end and there’s another R257 million in properties held for sale. The office portfolio is squarely in the firing line for potential disposals, which is to be expected when the vacancy rate is up at 27.9%!

Although the industrial portfolio barely gets a mention, the joint portfolio co-owned and managed by Inospace saw net operating income growth of 15% year-on-year. This comes after achieving growth of 17.5% in FY24, so that’s a demanding base and a really impressive result.

With all said and done, the important update is that distributable earnings guidance for FY25 has been revised higher from 146.99 cents to 147.80 cents. This represents 14.7% adjusted year-on-year growth, which is great. The adjustments relate to the way in which the NEPI Rockcastle shares were used to sort out the dual-class share structure.

With 45% share price growth this year, life-after-REIT is going just fine for Fortress.

Lighthouse isn’t the only group that has noticed Iberia (JSE: LTE)

That’s the beauty of capitalism – great opportunities attract competition

Lighthouse Properties has released a pre-close update dealing with the period ending December 2024. It’s been a busy year for the fund, particularly thanks to recent acquisitions in Portugal and Spain – collectively known as the Iberian Peninsula or Iberia for those of you who didn’t take geography. Wikipedia tells me that the technical definition actually includes a tiny part of France as well, although nobody really means that when they say Iberia!

Since June, Lighthouse has acquired a mall in Portugal for €177.8 million and one in Spain for €168.2 million. In both cases, the net initial yield after transaction costs is 7.2%. On the disposal front, Lighthouse sold Planet Koper in Slovenia for net proceeds of €47 million after the settlement of €21.8 million in debt.

After these deals, the Iberian portfolio now comprises six malls and contributes 81% of Lighthouse’s direct property investments. This looks set to increase, with exclusivity to acquire a further mall in Iberia (expected close in 1Q25) and negotiations underway for another mall. Lighthouse notes that there is more competition for these acquisitions now. Although they don’t say it bluntly, this could put the brakes on the Iberian expansion strategy if they can’t get malls at attractive prices.

How are they paying for this? Well, there was a huge R1 billion accelerated bookbuild in September, with shares issued at less than a 2% discount to the NAV per share. Holds of 73% of shares elected to receive the interim dividend in scrip rather than cash. On top of this, Lighthouse sold its remaining Hammerson shares for around £100 million. There’s also a new 5-year debt facility of €76 million that will become effective in December. The group takes advantage of every possible source of capital out there, as it should.

Looking at performance by country, the Spanish portfolio saw sales growth of 8.4% for the nine months to September, way above the 1.5% inflation rate. Portugal managed sales growth of 3.9%, above inflation of 2.6% but certainly nowhere near as lucrative as what we are seeing in Spain.

The situation isn’t nearly as promising in France, where sales fell 0.5% for the period. The biggest economies in Europe are having a tricky time at the moment.

Of course, what really matters is the distribution per share. Guidance for FY24 is 2.50 EUR cents per share. They expect strong distribution growth in the coming year if the current deals on the table close. The year-to-date share price performance is just 4.5% though, impacted by the strong rand and the way the market tends to react to significant capital raising activity.

Nibbles:

• Director dealings:
  • Regular readers will know that the founding shareholders of Discovery (JSE: DSY) regularly enter into collar transactions to hedge their exposure as part of funding arrangements. Due to the recent performance of the share price, a few tranches have matured at spot prices above the strike price on the call option, hence the directors are forced to sell. The latest sales by Barry Swartzberg come to a whopping R155 million! Remember, this is a forced sale rather than a reflection of the director’s view on the Discovery share price.
  • An associate of a non-executive director of Afrimat (JSE: AFT) sold shares worth R10.2 million.
  • A prescribed officer of Thungela (JSE: TGA) sold shares worth R2.6 million.
  • A prescribed officer of Capitec (JSE: CPI) bought shares in the company worth R1.7 million.
  • The ex-CEO of Italtile (who is still on the board as a director) has sold shares worth R783k.
  • A director of Boxer (JSE: BOX) has bought shares worth R496k at a price of R65.00 per share. Here’s another example of a Boxer director happy to buy shares at the post-IPO price.

• Coronation (JSE: CML) announced that its B-BBEE transaction has fulfilled all conditions precedent and will now be implemented, with shares issued to the trusts on 3 December.

• Those who are happy to accept further shares in Vukile Property Fund (JSE: VKE) in lieu of a cash dividend can do so at a price of R18 per share. This is a 2.2% discount to the spot price on 2 December and a discount of just 0.04% to the 30-day VWAP.

• Following the passing of Tito Mboweni, Accelerate Property Fund (JSE: APF) has announced that James Templeton has been appointed as interim chairman of the board. He also already been on the board since February 2022.

• The circus that is Kibo Energy (JSE: KBO) continues. The latest is that the company has now terminated the term sheet for the proposed reverse takeover, instead deciding to complete and publish the audited accounts to December 2023 and June 2024. This will enable the suspension of trading from AIM to be lifted. They will then look for an alternative project portfolio to proceed with a revised transaction. The arranger of the reverse takeover, Aria Capital Management, has agreed to put a loan facility in place for Kibo with multiple potential tranches of £500k. They have had to revise the existing loan facility with Riverfort accordingly. I genuinely don’t know how much equity value (if any) will be left in this thing once the corporate restructuring is completed and the mezzanine funding providers have been paid.

• Labat Africa (JSE: LAB) is still catching up on its financial reporting, hence the release of a trading statement for the year ended May 2024 after the release of one for the year May 2023. Whichever year you look at, it all looks pretty bad with headline losses as the theme. The loss for FY24 was -3.74 cents, which was at least better than the loss of -7.19 cents in FY23.

• Crookes Brothers (JSE: CKS) is moving its listing to the General Segment of the JSE, joining the many other small- and mid-cap companies to have done so in search of less onerous listings requirements.