For this weeks research edition, we feature the Finance Ghost who’s one of Easy Community’s loved journalists. In this piece, companies covered include Massmart, Absa, Fortress, Master Drilling, Huge Group and Sibanye Stillwater
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Walmart moves in on Massmart
With a price of R62 per share, the Americans have made their move. Structured as a scheme of arrangement with a standby offer, Walmart wants to buy all the remaining shares in Massmart but is happy to settle for a smaller stake if needed. That’s rather interesting, as it means they clearly see value at this price even if they can’t get rid of all the minority shareholders.
PwC was appointed as independent expert and has already given a preliminary view that the offer is both fair and reasonable. At a premium of 68.7% to the 30-day volume weighted average price (VWAP), that’s not surprising. Massmart’s performance in recent years has been poor to say the least and Walmart kept the ship afloat during the pandemic and the riots.
The team from Bentonville, Arkansas will be hoping that the next decade will be better than the last for Massmart. It’s difficult to imagine how it could be much worse.
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Barclays moves out of Absa
It’s the end of an era – Barclays PLC no longer holds any shares in Absa, walking away from an investment made in 2005. The sale of the remaining 7.44% stake was achieved through an accelerated bookbuild at R169 per share, the result of institutional investors being asked to put in a bid for the shares. It’s difficult to see a shareholder of this size in the open market, even in a liquid stock like Absa.
The price closed last week at over R180 per share. Although such a small stake is clearly non-core to Barclays and there were strategic reasons for selling, recent share price performance has been positive in the banking sector. Absa is up more than 15% this year and the peer group has also performed well.
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Fortress REIT needs to change its name
Ever wondered what happens when a Real Estate Investment Trust (REIT) loses that status? We are about to find out.
The first impact is a change in tax payable, as a REIT is purely a tax structure. It is designed to avoid any tax leakage for tax exempt investors (like pensions funds), provided the fund sticks to a strict set of rules. Due to its dual-share structure, Fortress has fallen foul of those rules and is in discussion with the JSE about loss of REIT status.
This means that Fortress will start paying tax going forward like a normal company, so the yield is far less appealing for pension funds. It is likely that such funds will dump the stock (to the extent that they haven’t done so already), which may cause significant share price volatility.
What does this mean going forward? Well, the jury is out on that. Losing REIT status means gaining significant balance sheet flexibility, which is perhaps not a bad thing in this environment. Instead of paying out almost all its earnings as a distribution, Fortress will be able to reduce debt.
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Thematic investing can work
You’ve heard of buying the shovel in the gold rush, right? In case you haven’t, this concept means that when you like a particular sector, it can make sense to look for a supplier to that sector rather than one of the companies competing at the end of the value chain.
Master Drilling is a lovely example, with the drilling and mining services business achieving headline earnings per share growth of 55.5% in the six months to June 2022. Admittedly, cash from operating activities only increased by 19%, as most companies are currently struggling with the drag on cash from working capital pressures.
The share price is up more than 42% in the past year. Even if the shovels in the gold rush don’t appeal to you, the drills just might!
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A Huge improvement in acquisition strategy
The debacle with Adapt IT was damaging for Huge Group’s reputation, particularly as the company now sees itself as an investment holding company. Losing out to Volaris and getting itself into trouble with the Takeover Regulation Panel (TRP) along the way, Huge went off to lick its wounds and find another opportunity.
Thankfully, such an opportunity has arisen. Huge has announced the acquisition of Interfile Group, with the claim to fame of having built the eFiling system for SARS in 2003. After many had issues with the system in the past week over the provisional tax period, this is perhaps not the best time to be boasting about that track record. Still, with 80% of revenue earned on an annuity basis, this seems to be a solid business.
Huge has already agreed to acquire a 44% stake and is negotiating for a further 31%. When the dust eventually settles, it looks like YW Capital will hold 25% in the business and the executive management team will hold 5%, with Huge presumably holding the rest. The SENS isn’t entirely clear on this.
What is clear is that they’ve paid a decent price here, valuing the company at R100 million based on profit after tax of R27.3 million in 2022. That’s a Price/Earnings multiple of less than 4x for an annuity revenue business.
Let’s hope that there are no hiccups along the way in this deal!
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The Sibanye dip
After a terrible period that included a protracted strike in the gold operations and a flood at the Stillwater mine in the US (that joke writes itself), Sibanye’s share price is down more than 22% this year.
As a favourite among retail investors (and a stock that I hold as well), many questions are being asked. The management team is seeing value at these levels, with substantial acquisitions of shares by CEO Neal Froneman and several other executives as well. Notably, some executives have bought even more shares than Froneman in the latest round of investment!
The outlook in the platinum group metals (PGM) industry is somewhat negative at the moment, though anything can happen. The only certainty when investing in this sector is that prices will be volatile!
When it comes to buying the dip, Froneman and his crew are leading from the front.
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Sources – EasyResearch, Finance Ghost.
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