In this weeks research feature, Finance Ghost takes a closer look at Anglo America, ARC, Brait and Growthpoint Limited. Collectively, these companies have over 190 000 investors on our platform.
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Anglo American goes green
Show me a way to make money and I’ll show you where to find an investment banker. With a global focus on ESG, there are pools of capital that are deployed under ESG-related mandates. This means that if you can commit to targets like reducing emissions or water usage, you can raise finance at attractive rates.
Anglo American has taken a green plunge with a €745 million sustainability-linked bond. The debt has a financing cost of 4.75% per annum and matures in 2032. The funds are not required to be used to fund green projects, which is interesting. The ESG angle is achieved through the interest rate on the debt being linked to targets on greenhouse gas emissions, freshwater usage and job creation.
If the targets are not met, the rate will rise by 40 basis points per annum for each unmet target.
The irony in this situation is that the bondholders make more money if the targets are not met, which theoretically rewards the ESG-focused investors for a non-ESG outcome.
ARC: someone lift that hurdle!
African Rainbow Capital (ARC) has a performance hurdle that is letting it sail on smooth waters at the expense of its investors. In an investment fund, the fees payable to the investment manager are critical. The performance hurdle needs to be high enough that additional value is only transferred to the manager when there is strong overall performance.
Under the proposed ARC incentive plan (which shareholders need to approve at the AGM), the performance hurdle would be 10%. Although meagre, it’s an improvement from the previous hurdle of 0%!
That’s right, the investment manager of the fund used to earn performance participation shares just by achieving a positive return. It’s no wonder that the share price has been an extreme disappointment since listing. ARC’s initial public offering was in 2017 at R8.50 per share and the share price has now clawed its way back to R6.39 per share, having fallen far lower during Covid.
The base fee under the new structure will be the actual costs incurred by the asset manager plus a margin of 5%. This offers modest upside if the performance hurdle isn’t achieved, which is how things should be. Weirdly, it also gives no incentive to manage costs lower. In fact, it rewards higher costs but putting a margin on top of them!
The proposed incentive structure is better but certainly not perfect. At least the performance is looking better, with the intrinsic net asset value (INAV) per share up by 14.7% in the year ended June 2022.
Significant movements included a sale of Afrimat shares for R740 million and a R362 million injection into Kropz Plc to fund the operational cash shortfall at Elandsfontein. The group invested R56 million in Rain, a modest cheque in the context of Rain investing R1.43 billion in the spectrum auction. With EBITDA of R1 billion in the year ended February 2022, Rain is almost self-funding.
ARC Financial Services, of which ARC Fund holds 49.9%, acquired 37.33% of Crossfin for R415 million and provided TymeBank with an additional R303 million. TymeBank also received $142.5 million from Tencent and other investors, with $37.5 million of that capital flowing into Tyme Global.
Another ARC investment, Fledge Capital, disposed of WeBuyCars to Transaction Capital, achieving a prolific IRR of 78% on that investment.
At Brait, Europe is weighing down Virgin Active
If Brait’s five-year share price chart was someone’s heart rate at one of the Virgin Active gyms, emergency services would be on the scene. Having lost over 92% of its value in that period, the group is now fighting to claw back as much value as possible.
The share price is up 5% over the past year, so it seems as though it might have bottomed out.
In a voluntary market update, Brait reminded the market that Premier is aptly named. The FMCG (fast-moving consumer goods) business has triumphed, with an increase in volumes despite passing input price increases onto customers. Revenue and EBITDA have seen double-digit increases for FY23. Inflationary pressures are being eased by a drop in prices of key commodities.
With Brait preparing Premier for a separate listing, it’s critical to maintain this momentum.
Moving on to Virgin Active, people are paying good money to exercise anywhere but at home after the pandemic. Virgin Active clubs in residential areas are performing well, whilst inner-city clubs are struggling to operate at capacity, probably due to the popularity of hybrid working arrangements.
Europe is a problem though, with an energy crisis putting consumers under pressure and driving up operating costs at the clubs. Here in South Africa, Virgin Active memberships are growing strongly as we have plenty of experience in dealing with an energy crisis.
Brait’s third business is clothing retailer New Look, which has enjoyed a shift towards an omnichannel model. Adding its name to the list of UK-based clothing retailers that are starting to perform a lot better, New Look has convinced Brait to inject another R182 million in a payment-in-kind (PIK) facility that carries a 16.5% coupon. This is linked to a broader funding deal with HSBC for an operating facility.
Managing debt is critical in these businesses, as one never needs to look far to find a retailer that was crushed by debt.
Growthpoint is a useful barometer
As the largest property fund in South Africa, Growthpoint’s vast portfolio acts as a barometer for economic activity and trends across the different types of properties.
For example, a great indicator of South Africa’s post-covid recovery in tourism is Cape Town’s V&A Waterfront, the jewel in
Growthpoint’s crown. Tourists are returning to our shores, with distributable income from the V&A Waterfront increasing from R354.9 million in FY21 to R566.7 million in FY22. The vacancy rate has improved from 3% to 1.6%.
The vacancy rate in Retail has dropped from 6.2% to 5.5%. Industrial has improved from 9.4% to 5.7%. Sadly, vacancies in the Office portfolio have risen from 19.9% to 20.7%. This sector is proving to be a thorn in Growthpoint’s side, with the group asserting that the sector is oversupplied. The effects of hybrid working have likely led to a structural decrease in demand.
Looking at other key metrics, SA REIT Funds From Operations (FFO) grew by 13.7%. The loan-to-value (LTV) ratio has dropped from 40% to 37.9%. Net asset value (NAV) per share increased by 6.7% to R21.58. The dividend per share has risen by 8.4% to 128.4 cents.
The share price is currently R12.74, so the discount to NAV is around 40%. All eyes will be on the office portfolio to see whether there is a return in demand for commercial space.
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Sources – EasyResearch, Finance Ghost.
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