Muneer Ahmed, Author at Denker Capital - Discovering Opportunities. Building Wealth.

Delistings and the changing landscape of the JSE

Claude van Cuyck — Wed, 12 Jun 2024 13:56:04 +0000

Over the last decade we have seen a spate of delistings from the Johannesburg Stock Exchange (JSE), driven by different reasons ranging from management buy-outs to acquisitions by larger multinationals. While delistings often unlock value for shareholders, the dwindling number of listed companies presents challenges for South African investors over the long term. This article explores the reasons behind these delistings, their impact on investors (both positive and negative), and advocates for measures to strengthen the exchange.

This article first appeared in Glacier’s Funds on Friday.

Thirty years ago, at the dawn of our democracy, the JSE was made up of just over 300 constituents. As our young democracy was filled with optimism and growth, this number grew significantly in the boom years and peaked at about 600 listed companies in 2001.

Unfortunately, since the peak, the number of companies listed on the JSE has now dropped to below 300 companies – some of which are dual listed, while some of the fledging companies are uninvestable due to liquidity constraints. In 2023 alone, the JSE had 12 delistings to add to the 13 delistings in 2022. Meanwhile new listings have been few and far between, with three new listings in 2023 and five in 2022.

Figure 1: Number of listings on the JSE

Source: JSE data

There are a multitude of reasons why companies choose to delist from the JSE, including:

bankruptcy;
smaller companies finding the cost and compliance requirements too onerous to deal with and, therefore, seeing more benefit in going private;
management buyouts; and
mergers and acquisitions.

When viewed in isolation, delistings haven’t all been bad for South African investors.

In many instances, these were events that unlocked significant value for shareholders. Often market valuations were so weak, and liquidity in some smaller companies so low, that a management buyout was the obvious choice which shareholders happily voted in favour of.

Below are five examples of delistings in the last few years which have unlocked value for shareholders.

1. Royal Bafokeng Platinum (RBP)

RBP’s platinum mines were hot property, leading to a prolonged bidding war between Impala and Northam Platinum, centred around the acquisition of RBP. Impala, with access to more cash resources, eventually won the fight for RBP, following the withdrawal by Northam. The real winner in the end was RBP shareholders who received a big premium to the fair value of the company. After becoming a subsidiary of Impala, RBP was eventually delisted in 2023.

2. Distell Group

Distell was delisted from the JSE as a result of a corporate restructuring. The main reason for the delisting was the acquisition of the majority of Distell’s assets by Heineken International (the second largest global brewer in the world). On the one hand, it is positive that a global company like Heineken saw the value and growth opportunity in a South African company like Distell, and shareholders received a premium for their shares. However, on the other hand, the transaction removed a good quality business from the JSE.

3. Mediclinic International

Before the delisting, Remgro owned 44% of Mediclinic. The balance of shareholders were bought out at premium by a consortium that included Remgro and Mediterranean Shipping Company (MSC). The deal was eventually concluded at a ~50% premium to the share price pre the announcement of the deal.

4. PSG Group

PSG was a listed investment holding company which was eventually taken private in 2022. PSG always traded at a large discount to its sum of the parts fair value. Management decided that an unbundling of the listed assets and taking the remaining assets private was the best mechanism to unlock value for shareholders. For many years the management team of PSG were vocal about the compliance challenges in the listed space.

5. Alviva

After being undervalued by the market for many years and experiencing low liquidity in the stock, Alviva’s management decided to execute a buy out and the subsequent delisting of the company. In the end the company was taken private at a price of R28, a 45% premium to the 30-day weighted average share price of R19.29 prior to the announcement. Additionally, this buyout represented a 44% premium to the share price on 24 June 2022, when the expression of interest for a potential deal was announced.

While delistings have unlocked value for shareholders, they pose a challenge for South African investors over the long term.

While we conclude that buyouts, such as the ones discussed above, do unlock short term value for investors, in the absence of new listings coming to market the longer-term impact is concerning. In fact, the rate of new listings is more of a concern than the rate of delistings. The dwindling number of listed companies creates the following challenges:

Reduced investment options for South African investors, which leads to less opportunities to diversify.
Less liquidity on the market due to less trading. Figure 2 below shows how trading activity on the JSE has declined in the last 5 years.
The reduced universe of stocks means fewer options and ultimately a weaker overall market with less opportunities to generate outsized returns.

Figure 2: Trade volumes on the JSE in decline

Source: JSE results presentation

As mentioned above, in 2023 there were only three new listings on the JSE and in 2022 there were only five. The highly regulated nature and high listing costs make it an unattractive proposition, especially for smaller companies. Every new listing we’ve seen recently has come as a result of unbundlings, often driven by financial pressures at the holding company level or strategic changes in how they view the unbundled company. Examples of these include:

We Buy Cars, which was a forced listing as the company unbundled from Transaction Capital due to financial pressures at Transaction Capital;
Zeda Car Leasing, which unbundled from Barloworld due to a change in strategic direction at Barloworld; and
Premier Foods, another forced listing, after unbundling from Brait due to the financial challenges at Brait.

Outside of the forced listings, as in the examples mentioned above, we have not seen any new Initial Public Offerings (IPOs) on the JSE for many years. To encourage new listings and to counteract the delistings, it is crucial for regulators to create a more conducive environment for new IPOs. This could involve reducing compliance costs and easing listing requirements.

Figure 3: New listings on the JSE

Source: JSE data

There are currently some iconic South African companies which are the subject of potential takeovers by big international and local players.

Anglo American, the iconic South African mining giant is currently subject to a takeover by Australian mining giant BHP Billiton, which happens to have a secondary listing on the JSE. In the absence of this deal going through, there might be more potential suitors waiting in the wings to buy up their quality assets.
Multichoice is also a hot topic for South African investors with a possible takeover by French media giant, Canal+.
Meanwhile, Telkom has been the subject of takeover talks in recent years with the likes of MTN interested in its fibre assets.

Outside of the three big names currently in active talks, we certainly see the potential for a few more possible buyouts and delistings in the future, especially with some of the deep discounts we are seeing in the small- and mid-cap space.

Listing booms usually occur when the economy and global markets are flourishing.

When the environment is attractive, we normally see private companies come to the listed market, hoping to reap the benefits. We saw this in the run up to the IT boom in the early 2000s and between 1997 and 2000. But when times are tough, the reverse happens. After the bubble burst, there were 290 delistings between 2000 and 2003.

When the environment is challenging, the stronger companies survive, many weaker companies delist, some of the better-quality companies are targeted as takeovers and even good companies end up delisting (some recent examples being Distell, Mediclinic, Pioneer Foods, RBP). Often these companies are bought out at premiums, unlocking value for shareholders.

Ultimately, a revitalised JSE with a diverse range of investment opportunities would benefit both investors and the broader South African economy.

Markets generally move in cycles. Perhaps with an improved business environment in South Africa and relaxed regulations and costs, new listings will once again become the flavour of the month. This will require a coordinated effort from regulators, government agencies, market participants, and other stakeholders to address the various challenges and promote sustainable growth in the market.

Although the local listed universe is narrower than in the past, it still holds great opportunities.

We see a lot of value within our universe of 100 stocks that our SA equity analysts actively cover, with the median stock trading on a one year forward price-to-earnings multiple of 9x and a dividend yield of 4.9%. Historically, these have proven to be attractive entry levels for long-term investors.

Disclosure

The information included above belongs to Denker Capital (Pty) Ltd. The information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. Although all reasonable steps have been taken to ensure the information is accurate, Denker Capital does not accept any responsibility for any claim, damages, loss or expense – however it arises, out of or in connection with the information. The information does not constitute financial advice as contemplated in terms of the Financial Advisory and Intermediary Services Act, No 37 of 2002 (FAIS). Use or rely on this information at your own risk. Consult your financial advisor before making an investment decision.

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Sun International: a Covid-19 recovery story

Muneer Ahmed — Tue, 12 Dec 2023 11:55:53 +0000

Sun International, founded in 1967 by Sol Kerzner, is an iconic South African business which boasts flagship assets such as Sun City, Time Square Casino in Gauteng and GrandWest in Cape Town. When the hospitality industry was severely impacted by lockdowns during the pandemic, we saw this as an opportunity to invest in Sun International at well below intrinsic value. In this article, Equity Analyst Muneer Ahmed unpacks our investment case for the company – looking back and looking forward.

Despite being open for business from June 2020, the impact of the Covid-19 pandemic was felt in the hospitality sector all the way till the end of 2021. The story of the pandemic is well told by now, but the chart below shows the impact of trading on income, month by month, for Sun International. Trading only really returned to some form of normality in early 2022.

Figure 1: Sun International income trend, month by month

Source: SUI results presentation 2021

In our view, early 2022 provided us with an opportunity to invest in a quality business, with a strong management team and solid growth prospects at a significant discount to its intrinsic value – which are all factors we look at as part of our investment philosophy.

Below we cover some of the factors we considered for our investment case.

The company quickly tackled its debt issues, paving the way for swift return to profitability.

An overleveraged balance sheet can be a problem at the best of times. It is certainly not what you want in a business at the worst of times. At the onset of lockdowns (early 2020), the group had gross debt of R12 bn. With no profit to show for the first six months of 2020, debt was a big problem. This was resolved through two important corporate actions:

1. A R1.2 bn rights offer

2. The sale of all their Latin American assets for $160 m. This acquisition had been a drag on returns, so the sale was a welcomed decision.

As a result of these actions, the balance sheet was in a much stronger position once trading resumed after mid-2020. This swift action to reduce debt and rightsize costs in the business was positive for our view on the management team. With debt at a more manageable level, we were comfortable buying the stock.

Once operations returned to some form of normality in 2021, the business returned to profitability very quickly with a break-even performance in the first half of 2021 and reporting a small profit for the full year. Despite revenue being well below pre-pandemic levels, a significant portion of the forced costs cut during the closures became permanent reductions. We saw this in many South African businesses with the pandemic forcing management teams to think differently about their business’ fixed cost base. The result of this is margins now trading ahead of pre-pandemic levels, as displayed in figure 2 below. Save for loadshedding costs, 2023 would have shown further margin expansion.

Figure 2: Group operating margin

Source: FactSet; Denker Capital estimates

Although a highly regulated industry is often considered a risky investment, in some cases, like this one, it provides a competitive advantage.

A government issued license is required to operate a legal casino and these aren’t just handed out freely to anyone who asks. To give an idea of how difficult it is to get a new casino license, Tsogo Sun, Sun International’s big land-based competitor, has been fighting for more than 10 years to move its existing license in Caledon closer to the City of Cape Town. Notwithstanding this competitive moat, it is extremely important to always be aware of the regulatory risks surrounding the industry.

Evaluating the strength of the management team is a key element of our investment process.

Despite some poor capital allocation decisions in the past, most notably the acquisition in Latin America, the new management team has done a good job controlling costs in the business, fixing the balance sheet issues, and delivering on growth targets. Recent leadership appointments at key assets, like Sun City, has resulted in a very strong turn around, while Sun Bets is the new growth engine with the right people at the wheel.

The performance of Sun City (performance history in the chart below) is a great example of the work management have put into turning around a historically (even pre-pandemic) underperforming asset. 2023 is expected to be the best year on record for the renowned resort.

The presence of strong board members ensures renewed capital allocation discipline.

Figure 3: Sun City earnings before interest and taxes (EBIT) (R’m)

Source: Company information, Denker Capital estimates.

Sun International was a late entrant into South Africa’s online gaming market but has experienced substantial growth since making it a strategic priority.

The land-based casino operators have been arguably slow to move into the online space in South Africa. Growth here has been exponential. The online market is now dominated by the likes of Betway, Lotto Star and Hollywood Bets with Sun International (SunBets) the fourth largest player.

Sun International has had an online presence since 2017 but it only became a strategic priority in 2021. Since then, the growth has been significant. They guided the market well in terms of reduced margins as they spent most of the revenue growth on customer acquisition (via marketing). This is a majority fixed cost business so there is significant opportunity for margin expansion as revenue grows. By the end of the first half of 2023, they reported an impressive EBIT margin of 29.5% – which shows how profitable the business has been this year.

Despite the aggressive growth over the last three years, Sun Bets still only has a 4% market share in the online space. The management team is targeting a 12% market share by 2026 which, if successful, would make this a R1.3 bn business. If they achieve their stated target, this will make the Sun International online business more profitable than any of their land-based casinos. In the first 18 months since communicating this strategy, they have delivered ahead of targets.

Figure 4: Sun Bet’s revenue and EBIT

Source: Company information, Denker Capital estimates.

In our view, their competitive advantage would be to leverage the strength of the Sun Brand in capturing market share in the online gaming space. While they do participate in sports betting, this is not their area of focus from a customer acquisition perspective. That space is too competitive and other players (like Multichoice as the big newcomer) probably have a competitive advantage over Sun International.

We initially invested in Sun International in early 2022 when it was trading significantly below our assessment of its intrinsic value.

The debt issues were very close to being resolved, lockdown measures were being meaningfully relaxed and gaming revenue was clearly improving (as reported by provincial gaming boards). Our investment case was therefore premised on a quick turnaround in earnings, with the share trading on a forward price earnings multiple of around 7x. This was a big discount for a highly cash generative business with growth opportunities in some segments.

As with any good investment opportunity, there are risks.

In our view, there are two important major risks for Sun International in the medium term:

1. As mentioned above, Tsogo Sun has applied to relocate its Caledon casino to Somerset West. This is important, as GrandWest Casino is currently the only casino in the greater Cape Town region. We do expect a new casino in Somerset West to have a negative impact on numbers. Hearings still need to be held on the matter before the gaming board approves this so, in our view, this is a two-year timeline in a best-case scenario for Tsogo Sun.

2. The pending Tobacco Bill banning smoking in public spaces. Smoking areas are popular in casinos and a smoking ban is expected to negatively impact footfall. There is massive pushback against this bill from various industries so it should be some time before it comes into law.

We believe the above risks are appropriately priced into the Sun International investment case. We do continue to monitor developments around these matters closely.

Despite the social concerns associated with the gambling industry, such businesses, like Sun International play a crucial role in mitigating larger social problems.

Considering the social ills that are associated with the gambling industry, a business like this is always red flagged as an ESG ‘no-no’. In our view, it is always important to consider the alternative. In the absence of large, regulated, tax paying gambling businesses like Sun International, the illegal gambling scene would thrive, which would result in an even bigger social problem. The larger leisure businesses pay significant taxes, in addition to contributing financially towards responsible gambling initiatives.

While the recovery story for this business is now complete, we think there is still growth potential.

We see growth particularly in the online business. Today the discount may not be as wide but Sun International still trades at attractive levels and management are clearly delivering on key strategic objectives. With the valuation metrics remaining attractive we continue to hold Sun International in the Denker Sanlam Collective Investments SA Equity Fund and the Denker Sanlam Collective Investments Equity Fund.

Muneer Ahmed

Disclosure

The opinions expressed above are those of the participants and do not necessarily represent those of Denker Capital. This information does not take the circumstances of a particular person or entity into account and is not advice in relation to an investment. Please do not rely on any information without appropriate advice from an independent financial adviser. The value of investments may go down as well as up, and past performance is not a guide to future performance. Denker Capital is an authorised financial services provider in South Africa (FSP number 47075). The opinions expressed are not guaranteed to occur.

This information does not constitute financial advice as contemplated in terms of the South African Financial Advisory and Intermediary Services Act of 2002 (FAIS Act). Use or rely on this information at your own risk. Independent professional financial advice should always be sought before making an investment decision as not all investments are suitable for all investors.

The Manager of the Denker Sanlam Collective Investments SA Equity Fund and the Denker Sanlam Collective Investments Equity Fund is Sanlam Collective Investments, a registered and approved Manager in Collective Investment Schemes in Securities. The Manager does not provide any guarantee with respect to either the capital or the return of a portfolio. These are equity funds, which means prices will go up and down. Collective investment schemes are generally medium- to long-term investments. Past performance is not necessarily a guide to future performance, and that the value of investments may go down as well as up. A schedule of fees and charges and maximum commissions is available from the Manager on request. Collective investments are traded at ruling prices and can engage in borrowing and scrip lending. The Manager has the right to close the portfolio to new investors in order to manager it more efficiently in accordance with its mandate. Funds that hold assets in foreign countries, it could be exposed to the following risks regarding potential constraints on liquidity and the repatriation of funds: macroeconomic, political, foreign exchange, tax, settlement and potential limitations on the availability of market information. For more information visit https://www.sanlaminvestments.com/.

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Meet Muneer Ahmed, the newest member of our SA equity team

Muneer Ahmed — Tue, 19 Apr 2022 07:28:23 +0000

Muneer Ahmed joined our South African equity team as an analyst earlier this year. To get to know him a little bit better, we asked him a few questions.

1. What attracted you to a career in financial markets?

In high school I participated in a stock picking challenge. I was fascinated by the idea that you could own a share in some of the largest companies in the country. I later realised that there are people out there who actually do this as a career and I wanted in.

2. What do you enjoy most about your role?

I enjoy this role because there is always something to learn. Markets are always moving and changing. Even the most experienced portfolio managers – at least the good ones – will admit to learning something new about the markets every day. The market has a way of humbling those who disagree with this.

3. What about the Denker Capital team, philosophy or process have you enjoyed most so far?

Investing for the long term. The research process is thorough, which provides the team with a better perspective and picture of the business we are investing in, which is the basis for higher conviction decisions.

4. If you had not become an equity analyst, are there any other careers that have always interested you?

I love sports, so I would like to say a career in sport but unfortunately talent was greatly lacking in that area. If I hadn’t become an equity analyst, I probably would have had a long career in the corporate world.

5. What does your role at Denker Capital entail?

My role entails analysing stocks for potential investment opportunities so that we can create wealth for our investors.

6. On a personal level, what do you enjoy doing outside of work?

Outside of work, you can find me on the golf course. I love the space and fresh air and challenge of a great round of golf.

For more about Muneer, view his profile on our website.

Disclaimer

The information in this communication or document belongs to Denker Capital (Pty) Ltd (Denker Capital). This information should only be evaluated for its intended purpose and may not be reproduced, distributed or published without our written consent. Because there are risks involved in buying or selling financial products, please do not rely on any information without appropriate advice from an independent financial adviser. We will not be held responsible for any loss or damages suffered by any person or entity as a result of them relying on, or not acting on, any of the information provided.

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