Ghost Bites (EOH | Metair | Northam Platinum)

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When will EOH turn a profit? (JSE: EOH)

Even after the rights issue, the group is loss-making

Back in February 2023, EOH closed a rights issue that gave them R555 million to reduce debt. This helped them negotiate a lower rate for all remaining debt, so investors would be forgiven for thinking that the business should be able to make a profit. Alas, despite the decrease in debt, EOH still made a loss in the six months to January 2024 – and not a small one either. The interim headline loss per share was 11 cents.

Those who take the KFC approach to their portfolios of Adding Hope might have believed that the worst was behind EOH, with an ability to at least be profitable in the second half of the financial year. With guidance for the full-year headline loss per share of between 10 cents and 30 cents, it looks likely that the second half was hardly any better than the first half.

And yet here we are, with the share price of R1.82 well above the rights offer price of R1.30. The share price is up 27% this year thanks to the GNU exuberance.

Is it justified? Personally, I prefer not to hold loss-making IT groups with low margins operating in highly competitive markets. Others seem to feel differently, although a 5.7% drop on the day after releasing the full-year guidance suggests that some of the bulls seem to be leaving the room.

Metair swoops in on Autozone and buys itself a route to market (JSE: MTA)

After private equity killed Autozone with debt, Metair is buying it out of business rescue

Perhaps showing my age here, but leveraged buyouts always remind me of the 50 Cent album: Get Rich or Die Tryin’. Basically, a private equity house backs a management team and plugs in loads of debt to help with a buyout from existing shareholders. In doing so, they risk the entire business and the livelihoods of everyone involved, all while putting in a thin equity layer and transforming a legacy business into little more than a venture capital play.

When it works, they make a fortune. When it doesn’t, a business is destroyed. Lovely, isn’t it?

Autozone has been the latter story, with a buyout in 2014 that put loads of debt on the balance sheet at the wrong time for South Africa. The private equity fund in question is Ethos, but all the private equity houses do these types of deals.

How much debt? Well, to give you some idea of the interest burden in the year ended June 2024, Autozone managed EBITDA of R62 million and a net loss of R61 million. They have a balance sheet problem, not a business problem. They managed this level of EBITDA despite being throttled by the balance sheet and unable to invest properly in working capital.

In these situations, business rescue can work really well because there’s actually a business worth rescuing. Metair has swooped in as the hero here, but don’t mistake this for altruism. No, Metair has a plan to use Autozone as a route to market for its car parts manufacturing business and I think that’s a pretty smart strategy. A strategic buyer (like Metair) is almost always a better deal for everyone involved than a purely financial buyer (like private equity).

If you’ve been following Metair though, you’ll know that their balance sheet isn’t exactly a hall of fame candidate either. They’ve just announced the sale of the Turkish business, a disposal that is nothing short of urgent thanks to how much pressure Metair is under. Despite this, they just couldn’t resist buying Autozone for an effective investment of R290 million, with R215 million going to the creditors (Absa being the main one) and R75 million going into working capital. The equity itself is worthless at the moment.

If Autozone’s working capital deteriorates below R344 million as at the closing date, Metair has the right to walk away. This is to protect Metair from a situation where things get even worse before the deal is closed.

Brave stuff from Metair, but I really like the deal. I just wish the Metair balance sheet was in a position of strength for this.

As speculative plays go, this is an interesting chart:

Eskom might have improved, but Northam Platinum still sees value in solar (JSE: NPH)

This is the company’s first major renewable energy project

Although load shedding seems to have been banished to the history books (and long may it stay there), Northam Platinum is still prioritising renewable energy. This isn’t just because of environmental targets and the obvious benefits of renewable energy. There are cost savings to consider as well, along with power supply risks and the possibility of Eskom deteriorating again.

Despite all the pain in the PGM sector at the moment, the business case for this project is strong enough that Northam Platinum is going ahead with a Power Purchase Agreement in respect of an 80MW solar power plant to service the Zondereinde operation. Effectively, they are committing to buying power from the company that will build the plant.

Power is expected to be available from December 2025, with the independent power producer carrying the capex burden for the project.

Nibbles:

• Director dealings:
  • Truworths (JSE: TRU) very cleverly noted that all director sales of vested awards were either to settle tax or rebalance their portfolios. They just don’t give that detail per director. This is very poor disclosure that in my opinion shouldn’t be allowed, as I want to see exactly which sales are to cover tax and which are not.
  • From what I can see, the majority of Discovery (JSE: DSY) directors sold their entire share award. Only a couple of them retained shares after selling to cover the tax. Among those who sold everything are the founders of Discovery, which is interesting after decent results. This suggests that the share price has run a bit too hard.
  • A director of ADvTECH (JSE: ADH) has sold shares worth R309k.
  • The CEO of Hammerson (JSE: HMN) reinvested her dividend in shares worth £2k.

• Barloworld (JSE: BAW) has renewed the cautionary announcement regarding discussions that could affect the price of the company’s shares. Sadly, at this stage, we have no further details on what those discussions could be.

• Chrometco (JSE: CMO) obtained shareholder approval to change the name of the company to Sail Mining Group.

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