Corporate finance corner (M&A / capital raises)

• Emira Property Fund has previously offered to acquire 100% of the shares in Transcend Residential Property Fund and Emira has now released its offer circular. This is a general offer rather than a scheme of arrangement, so the circular is sent out by the offeror (Emira). The offer price is R5.38 based on a “clean price” i.e. excluding distributions, which is a 10.5% premium to the 90-day volume weighted average price. Transcend is utterly illiquid, with Emira reminding shareholders that less than 0.44% of Transcends shares have traded in the last six months. The premium is relatively low because large shareholders have no other obvious ways to realise their investments. Based on irrevocable undertakings received by Emira, it should achieve a stake of least 63.46% in Transcend. The offer closes at midday on Friday 4 November.

• Due to Northam Platinum’s intervention in the Competition Tribunal process regarding Impala Platinum’s offer for Royal Bafokeng Platinum, there is yet another delay to the process. The previous longstop date of 26 September has been written off and Implats hasn’t provided another date. This is because the Competition Appeal Court has clarified the scope of Northam’s participation as an intervening party, leading to Implats requesting a pre-hearing to determine the further conduct of the merger hearing. This is a perfect example of how long an acquisition can really take, particularly when it becomes ugly among competitors.

• Although there’s no deal just yet, Dipula Income Fund is preparing for action. After simplifying the dual-share capital structure, the board now wants to replace the memorandum of incorporation (MOI) and increase the authorised share capital.

• A major shareholder of Telemasters (L Pieton) has reduced his stake to 8.96%. The announcement was triggered as he moved through the threshold of 10%.

Financial updates

• The biggest news of the day was the release of financial results by Shoprite for the 52 weeks to 3 July 2022. Although the announcement kicked it off by saying that they are proud of the result, the market still gave Shoprite a proper klap – down 7.5% on the day! This is despite the dividend increasing by 10.3%, a strong reminder of the dangers of a stock being priced for perfection i.e. trading on a high multiple. On a comparable 52-week basis, the South African supermarkets grew sales by 12.6%. Selling price inflation was 3.9% for the year in South Africa and 5% in the second half of the year. Shoprite and Usave make up 52.8% of the segment and grew by 7.2%. Checkers and Checkers Hyper grew sales by 9.1% despite two Hypers remaining closed after the riots. The LiquorShop business contributes 7.2% of sales and increased by 44.5% vs. a base period with many restrictions. The Xtra Savings loyalty programme became a monster in record time, now boasting 24.7 million members. No growth percentage was provided for Checkers Sixty60, other than confirmation that it is still growing. Looking beyond the core Supermarkets RSA segment, the Supermarkets non-RSA segment grew by 12.9% and Furniture was only 0.7% higher, both on a 52-week comparable basis. The OK Franchise was up 7.5% and the pharmacy businesses both grew by an undisclosed percentage. Gross margins were maintained at 24.5%, an impressive outcome in this period. Expense growth was 10.7% which is why I think the market got a fright. We aren’t used to seeing a negative trend in operating margins at Shoprite, with trading profit margin down from 6.1% to 6.0%. HEPS was 7.8% higher, which doesn’t adjust for the extra week of trading in the comparable period.

• Metair Investments released a trading statement for the six months ended June 2022. It really has been a tough time for the company, with hyperinflation accounting applied to the business in Turkey (an exceptionally complicated framework) and operational challenges in South Africa like the floods. When added together, HEPS is expected to decrease by between 71% and 76%. The good news is that the energy storage segment is still doing ok, although volumes were lower in Romania and South Africa. The bad news was in the automotive components vertical, with the semiconductor shortages hurting Ford as a key customer and the floods literally shutting down Toyota South Africa’s operations for months. A business interruption claim of R360 million has been accrued and R150 million has been received thus far. Somehow, the share price is only slightly down this year.

• Attacq has released a trading statement for the year ended June 2021 and the share price closed 9% higher in appreciation, though I must point out that the bid-offer spread is wider than the entrance to Mall of Africa. Distributable income per share is expected to be between 61.8 cents and 63.6 cents, an increase of between 32% and 36% vs. the prior year. This is significantly higher than the guidance given when interim results were released, thanks to generally improved trading conditions and lower costs associated with the offshore investment holding structure. The payout ratio is expected to be between 75% and 85%. The share price closed at R6.37. This is one of the property recovery plays in my own portfolio.

• Bowler Metcalf has released financial results for the year ended June 2022. Although revenue grew by 6% with flat volumes (i.e. the full uptick was based on price increases), operating profit fell by 10% and HEPS was 9% lower. The company attributes this to an incredibly difficult trading period and is looking to the future, like with the relocated Cape Blowmoulding plant and the acquisition of the SkyePlastics business. The final dividend of 27 cents per share is 16% lower than last year.

• Advanced Health has released a trading statement for the year ended June 2022. The headline loss per share improved from 6.82 cents to 5.89 cents, an improvement of 13.6%.

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Operational updates

• NEPI Rockcastle has officially concluded its journey of migrating into the EU. It was quite a process and plenty of lawyers made money along the way, as the company first had to migrate to Luxembourg before moving to the Netherlands. A new director has been appointed who is familiar with Dutch law.

Share buybacks and dividends

• Between 29 August and 2 September, Prosus repurchased shares worth $214 million.

• Based on the general authority granted in September 2021, Invicta has repurchased shares worth over R108 million at an average price of around R27 per share. This represents 3.6% of shares in issue at the time the authority was given, so the remaining authority is for 16.4% of share capital. The current share price also happens to be R27!

• Lighthouse Properties is paying a cash dividend of R0.2492111 per share with a scrip dividend alternative that works out more favourably for shareholders than the cash dividend based on my calculations. This is typically the case, as companies prefer shareholders to accept the scrip dividend so that cash can be retained in the entity.

• Capital & Regional will be paying a dividend of R0.49425 per share, which comes to R0.3706875 after UK withholding tax and SA dividends tax based on the double tax agreement. There is a scrip dividend alternative that enjoys a less onerous tax calculation.

• Reinet has confirmed that its gross dividend will be R4.7656 per share, payable on 21 September.

• British American Tobacco, Glencore and South32 are still busy with daily share buybacks.

Notable shuffling of (expensive) chairs

• The company secretary of African Equity Empowerment Investments (AEEI) has resigned. A replacement will be appointed in due course.

Director dealings

• The Chairman of Tharisa has bought shares in the company worth R1.47 million and the CEO followed suit with a purchase of almost identical value.

• Directors of Old Mutual have climbed into the shares in a big way. The CEO was good for more than R3.25 million and four other directors put more than R3.57 million in the pot in aggregate.

• A director of a subsidiary of Stadio (AFDA – the film school, in case you were curious) has sold shares in the company worth R1.06 million.

• Des de Beer has purchased shares in Lighthouse Properties worth nearly R400k.

• A director of Thungela Resources has acquired shares in the company worth nearly R300k.

• Three directors of a subsidiary of Blue Label Telecoms have sold shares in the company worth R1.77 million, R1 million and R273k respectively.

Unusual things

• I honestly don’t know when last I saw one of these: a company announcing a lease renewal that is also a related party transaction. A division of Hudaco (Dosco Precision Hydraulics) has renewed a lease in Edenvale for a property that is held by a company called Dufomo, in which the CEO of Hudaco has an 82% stake. The company has been in these premises for over 18 years. Merchantec Capital was appointed as the independent expert to conclude whether the lease renewal is fair. I’m sure they spoke to a few property experts, as most corporate financiers (myself included) have no idea whether a lease would be considered fair or not! In any event, the determination is that it is indeed fair to shareholders of Hudaco.