Corporate finance corner (M&A / capital raises)
- Vukile Property Fund is acquiring the Pan Africa Shopping Centre in Wynberg, Johannesburg. The centre serves the market in Alexandra township and has Boxer as its anchor tenant among the 60 shops in the mall. The fund’s focus in South Africa is on mid- to low-LSM shopping centres, so this mall fits that description. The acquisition will be funded by existing resources, so this won’t impact the loan-to-value ratio of 43%. A phase 2 extension of the shopping centre is being planned and demand from new tenants is strong. The sellers include Atterbury Property, which holds a stake of nearly 51% in the property. The structure of the deal is interesting, with Vukile acquiring phase 1 for nearly R415 million now and phase 2 for just over R254 million only once completed, which is envisaged to be the case in April 2024. The price for phase 2 has been estimated based on a capitalisation rate of 9.25%, which means taking the annual net operating income (NOI) and dividing it by 9.25%. The price for phase 2 may differ based on actual NOI once the development is complete. This is a category 2 transaction under JSE rules, which means shareholders are made aware of the detailed terms but aren’t asked to vote on the deal.
- DRA Global has agreed to sell its Australian maintenance and construction business (G&S) for $8 million. This unfortunately leads to an impairment (primarily to goodwill) of between $17 million and $20 million in DRA’s income statement. The company has also withdrawn its underlying EBIT guidance for FY22. G&S is currently loss-making and contributed 20% of group revenue for the year ended December 2021.
- Orion Minerals is trying its best to raise capital to develop its portfolio of base metal assets in the Northern Cape. As market conditions have deteriorated this year, major investors asked for more time to make a final decision. In the world of dealmaking, “more time” is always the enemy as it increases the chances of cold feet. The company has also invited eligible shareholders to apply for parcels of shares with a minimum value of $2,000 and a maximum value of $30,000. Orion has announced an extension of the deadline for that capital raise by one week to 12 August. If you want more information, refer to the company booklet here.
- Heriot REIT is in the process of making an offer to the shareholders of Safari Investments. The company has been engaging with Safari and the Takeover Regulation Panel (TRP) regarding the commercial terms of the offer. The TRP has given Heriot as extension until 12 August to post the offer circular.
- Emira is in the process of making an offer for 100% of the shares in Transcend Residential Property Fund. The Takeover Regulation Panel (TRP) has granted an extension for the distribution of the circular until 6 September.
- Capital & Counties Properties and Shaftesbury are in the process of merging and both companies have now achieved shareholder approval for the transaction. The parties hope to complete the deal by the end of 2022.
- Kibo Energy received £1 million worth of shares from Mast Energy Developments (MED) in partial settlement of a shareholder loan owing to a subsidiary of Kibo. After this share issue, the remaining loan is £1.27 million. The shares were issued at the 5-day VWAP plus a premium of 20%. After receiving these shares, Kibo owns 61.27% in MED.
Financial updates
- Industrials REIT has released a trading update for the first quarter of the 2023 financial year. This covers the three months to June 2022. The fund is focused on UK multi-let industrial properties, which are still enjoying strong levels of demand. Demand for space continues to exceed supply in the UK, which has supported a 27% average increase in rent on new lettings and renewals this quarter. The fund has a low loan-to-value ratio of 26%, which means there is plenty of flexibility on the balance sheet to take advantage of opportunities. Looking more closely at the leases themselves, the average lease signed during the quarter was for 4.6 years and 62% of completed leases were contracted through the fund’s short-form digital “Smart Leases” – up from 53% in the previous quarter. 76% of leases included at least a 3% annual uplift in rent throughout the term of the lease. Portfolio occupancy is stable at 93.7%. The fund also highlights its asset management track record at Hillfoot Industrial Estate, with various improvements driving an anticipated yield on cost of over 26%. The market is cautious though and Industrials REIT is also playing it safer, with only two acquisitions in this quarter and one recent disposal after the quarter. The share price is down 23% this year but has jumped 10.6% in the past month.
- EOH is trading below R5 per share, so I’m very happy that I got out of the way in the mid-R7s. The problem is that the company couldn’t sell its assets quickly enough to deal with the debt, so too much of the value ended up going to interest rather than capital. The company has now released a pre-close update for the financial year ending 31 July 2022. After the disposals of Sybrin and Information Services Group, EOH has R1.33 billion in gross debt (a R500 million bullet facility maturing in April 2025 and a R832 million bridge facility maturing in April 2023) and R540 million in gross cash. With interest rates on the rise, this is still a major problem. The proceeds from the sale of Network Solutions and Hymax SA will reduce the debt by another R100 million. On top of this, there are still two legacy issues – one relating to the Department of Water and Sanitation and the other with SARS in relation to a PAYE dispute. At group level, gross profit and EBITDA margins are expected to be consistent with the first half of the year. Looking deeper, NEXTEC had a tough second half of the year in its Infrastructure Solutions Business, with a significant negative impact from supply chain issues and delays in large projects, mainly in the public sector. The iOCO segment had a decent second half of the year in line with the first half, which isn’t ideal as the second half is normally stronger than the first half. Again, the hardware business was hit by supply chain disruptions. Despite best efforts with the existing businesses and a plan to save R60 million in costs, the reality is that EOH is going to need to do something more to fix the balance sheet. Here’s a clue of what might be coming:
“The board and management continue to assess the group’s capital raising options and expect to announce its capital raising plans alongside the release of its year end results.”
EOH pre-close update, 29 July
- Astoria Investments has released quarterly results for the three months to June 2022. Over the past 12 months, the net asset value (NAV) per share increased from $61.49 to $69.23, an increase of 12.6%. Because of the sharp change in the exchange rate, the rand increase over that period is 28.5% and the latest NAV per share is R11.31. The share price closed 6.5% higher on the day of results at R5.70, an approximately 50% discount to NAV that is typical of investment holding companies. Investments in the portfolio include Outdoor Investment Holdings (owner of Safari & Outdoor and related businesses), RECM and Calibre preference shares (giving exposure to Goldrush), Trans Hex Group (a diamonds business), Leatt Corporation (protective equipment for motorsport and leisure activities), ISA Carstens (a tertiary education business focused on health and wellness) and Vehicle Care Group (financial and related services in the used vehicle trade). The Afrimat holding was sold to fund the purchase of shares in Leatt Corporation. Astoria has also withdrawn its cautionary announcement and given details of an investment of $5.5 million for 25.1% of International Mining and Dredging Holdings, a group involved in marine and offshore mining and exploration, including vessels focused on marine diamond mining off the coast of South Africa and Namibia. There are important synergies here with the Trans Hex business.
- MTN Nigeria, a critical investment in the MTN Group, released results for the six months to June 2022. Mobile subscribers increased by 7.6%, active data users increased by 13.2% and fintech subscribers skyrocketed 87.3%, admittedly off a much smaller base than the other categories. Service revenue increased by 19.9% and EBITDA grew by 22.1%, so there was further expansion in the EBITDA margin to 53.6%. The cash followed the earnings, with the interim dividend up 23.1%. Here’s the interesting thing though: capital expenditure is up 67.1% due to the rollout of the 4G network. Because of such extensive investment, free cash flow fell by 14.3%. MTN expects this scenario to normalise in the second half, benefitting free cash flow for the remainder of the year. With net debt to EBITDA of only 0.6x, the balance sheet is strong enough to cope with this. MTN is down 19% this year despite having strong operating momentum.
- Ellies Holdings has released results for the year ended 30 April. Revenue fell by 10.8% and EBITDA plummeted by 148.8% into a nasty loss of R37.1 million vs. a profit of R76 million in the comparable period. The headline loss per share is -7.13 cents vs. headline earnings per share of 9.19 cents last year. Needless to say, there’s no dividend. The group was unable to deliver R119 million worth of orders due to unavailability of stock, which is a function of a weak balance sheet rather than major supply chain problems. To put even more pressure on working capital, Ellies is diversifying its revenue away from MultiChoice to solar, smart homes and water infrastructure. At this stage, Ellies hopes to rectify the balance sheet by “decreasing costs while simultaneously growing revenues” – certainly easier said than done.
- Luxe Holdings is one of the most obscure companies on the JSE, with a market cap of just over R62 million and a portfolio of jewellery businesses. There have been many changes to directors and the company has now acknowledged that some transactions in the prior periods were not accounted for in accordance with IFRS. There’s never a dull moment at Luxe. Considering the latest trading statement is based on previously published numbers rather than correct numbers, I’m not sure how much weight can really be placed on them. For what it’s worth, headline earnings per share (HEPS) is expected to be between 31.49 cents and 39.52 cents, a swing into the green from the prior period’s headline loss per share of -80.3 cents.
- Investec released its Basel III disclosures as at 30 June. This is the banking regulatory framework that measures the amount of equity a bank needs to retain on its balance sheet. It is a highly complicated assessment that requires intricate calculations of risk-weighted assets as the basis of the calculation. Investec’s balance sheet is healthy, with a 14.6% or 14.2% common equity tier 1 ratio depending how you treat unappropriated profits. Our banking system is world-class and remains in good health.
Operational updates
- Glencore released its production report for the first half of the financial year. The company notes that when the financial report comes out during the next week, it will reflect the benefit of “buoyant energy markets” – that’s obviously a great sign, especially as the production numbers themselves weren’t great. Five commodities improved year-on-year and five dropped. The big winners were cobalt (up 40%) and nickel (up 21%), with the losers being gold and silver (both down 21%). In terms of full year guidance, copper has been decreased by 5% based on geotechnical constraints at Katanga along with other operations challenges. The share price closed over 3.3% higher on the day.
- MC Mining has released an update for the quarter ended June 2022. Although coal production at Uitkomst was 7% lower year-on-year, the important news is that around 22,170 tonnes of coal were at the Durban port at the end of June for export. This has been made possible by the sales and marketing agreement with Overlooked, announced by the company on 28 July. Total sales volumes were far lower than the comparable period, with high grade metallurgical coal and thermal coal volumes down by around 66%. The company notes that Uitkomst didn’t receive a single order this quarter from its largest customer. The shift to export is clearly a strategic necessity and could prove to be lucrative, as the export prices are much higher. This quarter also saw the appointment of a few new directors (excluding ex-finance minister Nhlanhla Nene) and the raising of equity and debt capital. The share price went parabolic recently, climbing over 170% in July before calming down from R3.80 per share to R2.88. That’s a drop of 24% in a casual reminder of the dangers of buying a parabolic chart (one that suddenly shoots to the moon).
- Montauk Renewables has announced the filing of a provisional patent application for a new acid neutralisation technology. Before pregnant women with heartburn celebrate too quickly, I’m afraid that this relates to acidic condensate produced when wastewater is removed from the biogas conversion process. The company explains that the acid does expensive damage to processing facilities and equipment. The classic alternatives of two Rennies or some Gaviscon appear to be safe for now.
- Mantengu Mining has been suspended from trading since July 2016. In the latest quarterly update, the company reminds the market that the acquisition of Langpan Mining Co has become unconditional and that the effective date was 27 July 2022. The company has applied to the JSE to have its suspension lifted.
Share buybacks and dividends
- British American Tobacco is still busy with its daily share buyback programme.
- Adcorp Holdings repurchased 0.66% of its shares in issue between 15 July and 18 July for an aggregate value of nearly R4 million.
Notable shuffling of (expensive) chairs
- Altron is looking for a new company secretary and has appointed a company (FluidRock Governance Group) to act as interim company secretary. The legislation makes it possible to appoint a company to this role rather than an individual, which is why there are companies that provide company secretarial services.
- Similarly, York Timber has appointed Kilgetty Statutory Services as company secretary of the company. The difference is that this appointment isn’t on an interim basis.
Director dealings
- Rudolf Fourie is retiring as the CEO of Raubex Group and has sold some shares as “part of his retirement planning” – nearly R72 million worth of shares! Some retirements are far more comfortable than others. He has retained a stake in the company worth over R62 million.
Unusual things
- Marcel Golding has taken the executive reins at Rex Trueform at a time when the group is clearly planning more deals, with the most recent example being the acquisition of a property from Spear REIT. The latest news is that Geomer Managerial Services (GMS) has been appointed as an advisor to Rex Trueform. Golding is a director of and shareholder in Geomer, so this is a related party transaction. The agreement will run until either 1 July 2024 or the payment in aggregate of R14 million in advisory fees, whichever happens sooner. Valeo Capital has concluded that the terms of the agreement are fair. Of course, there’s a difference between “fair” and “acceptable to investors” in terms of governance.
