Corporate finance corner (M&A / capital raises)

• Huge Group has announced the acquisition of Interfile Group, a solid business with 80% of its revenue earned on an annuity basis. The group offers operational and hosting services, transactional services (bill presentment, SMS, email and payment), call centre services, consulting services and maintenance services. At its core though, Interfile is a software company that implements business process solutions for clients including government departments, municipalities and private sector organisations. The claim to fame is that Interfile built the eFiling system for SARS in 2003. Over the last five years, Interfile has paid dividends of over R65 million. There are synergies with certain Huge Group companies like Glovent Solutions. YW Capital, an equity advisory and investment house, will be coming on board as the new empowerment partner. YW Capital has an investment portfolio that exceeds R450 million. Huge will acquire 30% from Msemu Investment Trust for R30 million and 14% from Aloecap for R14 million. An agreement is being finalised with Gurb for a further 25% and with the founder of the business for 6%. Ultimately YW Capital will hold 25% in the business and the executive management team will hold 5%. This values the group at around R100 million vs. 2022 profit after tax of R27.3 million, so that’s an attractive deal for Huge at a Price/Earnings multiple of less than 4x! It’s certainly a…huge step forward from the Adapt IT debacle.

• Altron is in the process of selling Altron Document Solutions to Bi-Africa Investment Holdings. One of the conditions is an approval from the Zimbabwe Competition and Tariff Commission. In a surprise to absolutely nobody, the deal is being delayed because that approval is outstanding. The deadline for fulfilment of conditions has been extended from 31 August 2022 to 28 February 2023.

• Although it didn’t come out on SENS, Barclays Plc announced on the LSE that it will be selling its remaining 7.4% shareholding in Absa through an accelerated bookbuild. This means that institutional investors will be approach to take up the stock. The bank is doing well at the moment, so there should be solid demand.

• Tradehold shareholders have approved the disposal of its interest in Moorgarth Holdings to Moorgarth Group Holdings for £102.5 million.

• Impala Platinum has acquired a further 0.47% in Royal Bafokeng Platinum, taking the total holding to 38.86%.

• Yet another executive of SilverBridge Holdings has accepted the offer from ROX Equity Partners of R2.00 per share. The closing date for the offer is 23 September.

• Afristrat’s problems just seem to be going from bad to worse. With the shares suspended from trading on the JSE, the company can’t go ahead with acquiring a distressed loan asset pool of $5 million in exchange for the issuance of shares. The deal is off.

Financial updates

• Woolworths released results for the 52 weeks ended 26 June 2022. It’s an unusual one, as the Fashion Beauty Home (FBH) segment has a good story to tell year-on-year and the Food segment reported a decline in profits. The group level result is a combination of South Africa and Australia where lockdowns were terrible for the first half of the year, so group turnover growth of 1.7% isn’t a very helpful metric. The more useful number is 4.9% growth in the second half of the year. The market definitely noticed the balance sheet recovery, with Woolworths moving from net borrowings of R1.1 billion to net cash of R229 million. This was achieved through a strong working capital performance, capex discipline and cash received from all underlying subsidiaries including David Jones. This supported a whopping 247.7% increase in the dividend. Looking deeper, FBG grew full year turnover by 5.4% despite trading space declining by 4.5%, so Woolworths is focused on trading density (sales per square metre). Gross profit margin in this business expanded by 210 basis points to 47.6% and operating margin moved from 8.4% to 11.9%. In Food, sales were up 4.2% and price movement was below inflation, reflecting price investment by Woolworths. Gross profit fell by 50 basis points due to growth in online sales, supply chain costs and price investment. Full year profit fell by 3.9% with an operating margin of 7.3%. In Australia, the focus is on the second half of the year where David Jones grow turnover by 2.6% and Country Road Group grew by 9%. The share price closed 4.8% higher on a day when the market was very jittery, so that’s a solid outcome.

• Discovery released a trading statement for the year ended June 2022. The group talks about a “pivot to growth” and that was reflected in headline earnings growth of between 70% and 80%, although core new business annual premium income only increased by 6%. The huge increase in profit was in Discovery Life as the pandemic gently fell away, with the most impressive core business growth in Discovery Health with 20% and VitalityHealth with 27%. Discovery Insure was severely impacted by adverse weather and recorded a loss. Pressure in the Chinese investment market drove a reduction in profitability at Ping An Health Insurance. Discovery Bank put in a “strong performance” although very few details are given. Full year results will be released on 7th September and will be very interesting. The share price has fallen 15% this year.

• Murray & Roberts has released results for the year ended June 2022. Revenue increased by 36.5% to R29.9 billion and EBIT was over 30% higher at R705 million. The order book is slightly lower year-on-year but “near orders” (which the company describes as having more than a 95% chance of being secured) skyrocketed from R11.1 billion to R60.4 billion. Although continuing HEPS jumped from 16 cents to 58 cents, net debt is higher (R1.1 billion vs. R0.7 billion) and there is no dividend. The Energy, Resources & Infrastructure platform boasts by far the largest order book in the group. In stark contrast, the Power, Industrial & Water platform remains loss-making. Overall, the company is happy with the group order book and notes that operating margin is expected to improve from FY24.

• Trellidor released an updated trading statement for the year ended June 2022. The previous update was released on 6 July and noted that due to the Labour Court judgement and related provision of R32.1 million, HEPS would be down by at least 50% vs. the prior year. There were plenty of other challenges in this period, leading to a 1% drop in turnover and a reduction in trading margin due to raw material and freight inflation. The company notes that steel prices increased by more than 80% in the past two years and that supply chain constraints have persisted. The original trading statement didn’t tell the full story, as HEPS is expected to drop by at least 95% and may even slip into the red. HEPS in the comparable period was 40.80 cents and the Labour Court judgement is a 24.9 cents per share impact, so the rest is attributable to the far more worrying operational issues that aren’t about to disappear. It’s never nice to see a company taking such a tough knock.

• Aspen released its results for the year ended June 2022 and the market approved, with the share price nearly 6% higher in late afternoon trade. This is a classic example of grinding out a great profit performance despite tepid revenue growth (just 2%). Normalised EBITDA from continuing operations was up 11% and HEPS from total operations increased by 31%. The dividend is 24% higher at 326 cents per share. Make sure you read the operational update further down in Ghost Bites that deals with the news of a ten-year vaccine deal with Serum Institute of India.

• Motus released results for the year ended June 2022 and fell 4.4% on the day, so that’s not ideal. The amount of leverage in this result is something to behold, with revenue only up 5% and HEPS up by 72%. Here’s an interesting one though: free cash flow from operations actually declined by 18.1%. Despite pressures on cash flow from working capital requirements, the dividend is 71% higher at 710 cents per share (of which the interim dividend was 275 cents). Based on the closing price, Motus is trading on a dividend yield of 6%. Net debt to EBITDA is only 0.8x, so the balance sheet remains strong. South African vehicle sales have been better than predicted and Motus increased market share from 20.2% to 22.4%. Motus maintained market share in the UK despite sales in that market falling by 18.2%. Share was also maintained in the Australian market, which fell by 2.1%. For context, the SA operations contributed 66% of group revenue and 81% of group operating profit.

• Cashbuild released results for the year ended 26 June 2022. Revenue fell by 12% (despite selling price inflation of 7.2%) and even the gross margin came under pressure, dropping from 26.9% to 26.3%. Thankfully, operating expenses also fell by 13%, so operating profit was down by 16% in a result that could’ve been a lot worse. HEPS is down by 33%. Of the 36 stores that were looted, 28 have reopened, 3 were permanently closed and 5 are in the process of being rebuilt or possibly closed. Trading conditions remain challenging, with revenue down 3% year-on-year in the six weeks subsequent to period end. A final dividend of 677 cents per share has been declared, taking the dividend for the year to 1,264 cents. After closing 8% lower at R226.99 per share, Cashbuild is trading on a trailing dividend yield of 5.6%.

• Mustek released a trading statement for the year ended June 2022. The period ended in the worst way possible, after founder David Kan sadly passed away in May. HEPS is expected to be between 15% and 25% lower than in the comparable period, coming in at between 331.36 cents and 375.54 cents. For context, the 2019 result was HEPS of 139.32 cents, so Mustek is still running way ahead of pre-pandemic levels. The share price is up more than 80% over 3 years and is still in the green in 2022, a commendable performance.

• Clientele Life has released results for the year ended June 2022 and has put in a solid performance, with the dividend 9% higher at 120 cents per share. This stock trades based on dividend yield, with a share price of just R11.50 (and thus a dividend yield of 10.4%). Everything is managed tightly, so insurance premiums up by 1% for the year aren’t an issue when operating expenses fell by 6%. HEPS increased by 12%, driven mainly by 15% increase in net profit in Clientele Life.

• DRA Global has released results for the six months to June 2022. Revenue is down 16.2% and the company has swung into a loss. The net cash balance has fallen from A$118.4 million to A$72.5 million. Although there is no dividend, the company did manage to complete the share buyback programme. The core businesses in the EMEA and AMER regions are performing well, with APAC anticipated to become profitable in the second half of the financial year. Fixed-price contracts in the APAC region have been a major drag on profitability and their terminations are being commercial resolved. On a headline earnings level, the group recorded a small profit in this period, down 83%! The share price is down more than 40% this year.

• Anglo American has announced the rough diamond sales value for the seventh sales cycle of 2022. It has come in at $630 million, slightly below $638 million in the sixth cycle. Usual seasonal trends mean that the next few cycles will be affected by the temporary closure of polishing factories for the Diwali holidays.

• Randgold & Exploration Co Limited has released financials for the six months to June 2022. The numbers are a little pointless, as all the cash is sitting in investment funds and there has been significant expenditure on litigation. There are currently no operations.

• African Bank has a CET1 ratio of 38%, which means that the bank is exceptionally well capitalised. It’s no wonder that this bank is on the acquisition trail, having risen from the ashes. This equity buffer is around three times higher than where banks usually operate.

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Operational updates

• In addition to the financial results dealt with above, Aspen announced a collaboration agreement to manufacture and make available four Aspen-branded vaccines for Africa. Before you panic and wonder why anyone cares about Covid vaccines anymore, you’ll be pleased to learn that these are routine vaccines (pneumococcal / rotavirus / polyvalent meningococcal / hexavalent) which means that people still want them. This is a ten-year agreement with Serum Institute of India, the world’s largest vaccine producer. Aspen will manufacture, market and distribute the Aspen-branded vaccines across most of the continent, excluding certain markets where parties already hold rights to these vaccines. With 99% of vaccines in Africa currently imported, Aspen anticipates receiving grant funding from the Bill & Melinda Gates Foundation and the Coalition for Epidemic Preparedness Innovations (CEPI) to support African regional manufacturing capacity.

• Karooooo (the owner of Cartrack) is clearly excited about the milestone of 1,600,000 subscribers, releasing an announcement that this number has been reached. The results for the second quarter are in line with “management’s expectations” and results will be out on 12th October.

• Delta Property Fund released a voluntary pre-close update for the six months ended 31 August 2022. The group has been focused on disposing of non-core assets, which are largely vacant. 26 assets have been earmarked for disposal with an aggregate value of R767 million. During the period, disposals worth R259.2 million were executed. The proceeds are used to reduce debt. The vacancy rate of 33.9% is enormous and will only improve to 32.1% based on the disposals already agreed (property transfers are underway). It gets worse the more you look, as month-to-month leases are 12.3% of the total. The disposal of the non-core holding in Grit Real Estate Income Group is also a priority. This disaster of a fund has lost 94% of its value over 5 years.

• Rebosis Property Fund has announced that Phahlani Mkhombo and Jacques Du Toit have been appointed as the joint business rescue practitioners of the company. In reality, they are now in charge of the group.

Share buybacks and dividends

• In the past few months (other than during closed period), Super Group repurchased shares worth R741.5 million. This represents 6.7% of issued share capital.

• Both British American Tobacco and South32 are busy with daily share buybacks.

• Glencore is also back at it, with a repurchase of around £17.65 million.

Notable shuffling of (expensive) chairs

• Ms Dimakatso Quocha has joined the board of African Media Entertainment, bringing with her extensive experience in the ICT and broadcasting sector.

• DRA Global has appointed Michael Sucher as CFO, having been the Acting CFO since May. He has been with DRA since 2021 and held previous roles at BHP and South32.

Director dealings

• A prescribed officer of Harmony Gold sold R8.1 million in shares all the way back in MARCH and the company has only announced it now due to an “administrative oversight” – this attention to detail (i.e. lack thereof) might explain the recent financial performance.

• A director of a subsidiary of Stefanutti Stocks has acquired shares in the company worth more than R91k.

• A director of Equites Property Fund has pledged further shares as security for a loan from Investec. Many people don’t realise that directors in listed companies are often sitting with leveraged positions, especially in the property sector.

• A director of a subsidiary of RFG Holdings has disposed of shares worth over R381k.

• A director of a subsidiary of Renergen has sold shares worth nearly R175k.

• A director of Redefine Properties has bought shares in the company worth around R1.29 million.

• A prescribed officer of Adcorp has sold shares worth around R1.7k. I hope he doesn’t spend it all at once.

Unusual things

• None!