Trick or treat! đź‘» In this week's article with Finance Ghost, here are some spooky stock stories:
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Afrocentric is a classic M&A strategy for Sanlam
In the world of mergers and acquisitions, a common rationale for a deal is to acquire a product that fixes a blind spot. The thinking is that it is easier to buy something that already exists than take the risk and spend the time required to build it from scratch. If you’ve ever heard of technology companies being “built for sale” through focusing on the product rather than monetising it, you’re dealing with a company that is aiming to be acquired with this rationale in mind.
When it comes to Afrocentric, Sanlam sees the company as an attractive source of affordable health insurance and medical aid products that can be sold through Sanlam’s distribution network. An additional benefit is cross-selling other Sanlam products to the Afrocentric client base.
To make this happen, Sanlam hopes to acquire between 36.9% and 43.9% of Afrocentric’s share capital through a partial offer mechanism. In conjunction with another transaction, Sanlam is looking to hold between 55% and 60% of Afrocentric (and no more than 74.9%). As excess tenders are allowed (the ability for shareholders to try and sell more than their proportional share of the offer), it’s unclear exactly what percentage Sanlam will hold.
The offer price is R6 per share, which drove Afrocentric’s share price up to R5.25. The price differential is being driven by the partial nature of the offer, as there is no guarantee that a shareholder’s entire stake can be sold. This makes it difficult for arbitrage traders to close the gap between the offer price and the traded price.
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Murray & Roberts dishes out a beating
If you are short of Halloween costume ideas, you could always dress up as the Murray & Roberts share price this year.
As blue Mondays go, Murray & Roberts shareholders got the full experience this week. Watching your investment shed a third of its value in a single day is a revolting experience and one that I’m glad I wasn’t part of in this case.
For the six months ending December 2022, Murray & Roberts expects earnings to drop by more than 100%. In other words, the group will once again be loss-making. This is only part of the problem.
The much bigger worry is language like “especially acute” working capital pressures in the Energy, Resources & Infrastructure platform. This spooked the market in a way that makes any ghost look tame, with fears that the construction company’s balance sheet may be in serious trouble.
This is a perfect example of the importance of position sizing and diversification. Terrible things like this happen from time to time in the market. The trick is to avoid complete catastrophe for your portfolio by spreading your cash over many investments.
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Sirius levels of pain for investors this year
Sirius Real Estate’s share price is the victim of a crazy valuation coming into this year, having lost more than half its value in 2022. As I always say, you need to be extremely careful of property funds trading at a premium to book value.
When it comes to banks and property funds that carry assets at fair value, there needs a compelling reason why the group should be greater than the sum of its parts i.e. why it should trade at a premium to net asset value. A small premium can be justified where return on equity is high. A large premium is almost always dangerous.
Sirius does a great job of actively managing properties and extracting value from them, which is how the large premium to book was justified by investors. Even then, it was simply far too high.
Investors would’ve noticed that the group occupancy rate has fallen from 85.3% to 84.4%. As Sirius is focused on industrial properties (the darling of the pandemic), any slowdown in rental demand will be watched closely. The company explains that this is the historical trend for the first half of the financial year, with occupancy expected to increase in the second half of the year.
In positive news, like-for-like annualised rent rolls are up 2.4% and 4.1% in Germany and the UK respectively. Sirius hopes that portfolio valuations will come out higher at the end of September once results are finalised, driven to some extent by rental growth but also by yield compression.
The balance sheet isn’t telling such a great story, with weighted average cost of debt up from 1.4% to 1.9%. As more facilities are refinanced, you can expect this to increase further. The latest refinancing was done at 4.26%. The days of cheap debt are over!
In this environment, betting on yield compression is brave.
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Steinhoff is a lesson in capital structure
Bucking the trend in Europe, Steinhoff’s pan-European discount retailer Pepco grew revenue by 17.4% on a constant currency basis. If we look a little deeper, European business PEPCO was 28.7% higher and UK-based Poundland could only manage 5% growth. It’s not hard to see where the growth is coming from.
This is a story of store expansion, with the PEPCO format expanding its footprint rapidly. This puts pressure on a balance sheet, with Pepco’s net debt increasing by €228 million year-on-year to €1.43 billion.
There’s still no clear exit plan for US bed retailer Mattress Firm. The group has been ready for an IPO since March 2022 but market conditions haven’t been favourable at all. Steinhoff says the group is “exploring strategic options”, which may mean a private equity exit instead of a listing. We just can’t be sure at this stage how Steinhoff will extract value.
The problems in the group don’t lie in the underlying operations. The issue is the balance sheet at group level, where Steinhoff is still drowning in debt. The company is engaging with lenders about restructuring and extending the facilities. With a share price that has lost over 63% of its value this year, the market doesn’t seem to think there is much meat left on the carcass of this group.
We are heading towards the 5th year anniversary of the accounting scandal that broke in December 2017, causing Steinhoff to lose almost all its value.
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Tongaat: too big to fail?
With Tongaat suspended from trading on the JSE due to its currently financial challenges, all that the market can do is read the announcements and wait for more news about the company.
The board has approved a restructuring plan that will now be presented to stakeholders. The balance sheet is unsustainable in current form and the restructuring plan will need to address both overall debt and liquidity challenges.
After a proposed capital raise from Magister Investments fell through, Tongaat doesn’t even have enough working capital to get it through the all-important milling season. The group is working with banks to try and increase its facilities.
Although there is much uncertainty here, it seems unlikely that banks would allow Tongaat to fail. There are too many billions at stake here.
In the stock market, things such as the above-mentioned happen from time to time in the market. The trick is to avoid complete catastrophe for your portfolio by spreading your cash over many investments. Here's a podcast where the ghost also covers topics like: