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The Finance Ghost: Markets panic, Mustek grows revenue and Woolies’ online sales soar

The Finance Ghost: Markets panic, Mustek grows revenue and Woolies’ online sales soar
The author argues that the dramatic recent increase in oil prices affects oil-importing countries directly and will feed into all other prices through rising input and transport costs. (Image: Adobe Stock)

Russian roulette on the JSE: When news broke of the horror story in Ukraine, traders dug around on the JSE for Russian exposure that they could hit the 'sell' button on. They found it primarily in Barloworld and Mondi, while also dishing out pain to the likes of Spar and NEPI Rockcastle for exposure in neighbouring Poland.

My view is that if the war spreads to Poland, we have far more to worry about than our portfolios, so I used the opportunity to buy shares in Spar. Barloworld and Mondi have direct and substantial exposure to Russia, so their stories are a little different.

Barloworld generated 20% of its revenue from continuing operations from Russia in 2021. Its Russian operations are sufficiently funded for now and customer contracts are executed with reference to USD, so there is some protection against the Russian currency collapsing. It’s a small comfort, though, as a liquidity and economic crisis in Russia would obviously significantly hurt the business.

Mondi generated 12% of group revenue and 20% of underlying earnings before interest, taxes, depreciation and amortisation from Russia in 2021. As Mondi carries debt on its balance sheet, the impact of those earnings disappearing would be even larger on net profit.

The market panicked early on Barloworld and Mondi, applying substantial valuation haircuts to the Russian earnings. At the time of writing, Barloworld is down 31.5% year-to-date and Mondi is down 24%. Punters are eyeing them up for a bet on the conflict subsiding and sanctions on Russia being eased. Either way, both companies have suddenly become risky plays.

Strong profits, deal activity in tech

Mustek has been a beneficiary of the supply chain shortages in the aftermath of the pandemic, posting revenue growth of 12.5% in the six months ended December 2021. Gross margin jumped from 13.9% to 16.2%, reflecting the pricing power that the company enjoys in a time of constrained supply of information technology hardware. This drove a 17.3% increase in headline earnings per share. At the time of writing, Mustek’s share price is up nearly 14.5% year-to-date.

Another recent information and communications technology industry winner is Alviva Holdings, which posted a 54% increase in revenue in the six months ended December 2021. That includes the Tarsus acquisition, without which the revenue growth would have been 20%.

The need to carry higher levels of inventory during supply chain uncertainty (as Alviva is a distributor) impacted financing costs, as the business became hungrier for working capital. This situation should normalise as supply chains recover. Alviva is up 23.6% this year.

Capital Appreciation Limited (Caprec) is blazing a mergers and acquisitions trail, announcing two significant deals. The first is a South African group called Responsive, an application developer that has done work for top names in the financial services industry. The price is R48.68-million, settled partly in cash and partly in shares (a structure that brings some hope to JSE-listed companies wanting to do share-based deals). The second deal is an R8.5-million ticket price for a 20% stake in Regal Digital, a Dutch company that operates in all the buzz words (Web 3.0, non-fungible tokens, blockchain and SaaS). Caprec’s share price is up 6.7% in 2022.

Yes, online food is here to stay

The Woolworths result was full of tough numbers linked to lockdowns and general challenges in the business. There were some silver linings, such as Australian disaster David Jones paying a special dividend of AUD90-million back to the South African mothership.

The numbers that really stood out for me were related to online sales growth and revenue contribution.

The Fashion, Beauty and Home (FBH) segment in South Africa now generates 4.4% of its revenue online, as those sales grew 19.2% in this period versus the comparable period. In Woolworths Food, online sales shot up by 55.8% and now contribute 3.1% of divisional sales. I don’t think it will be too long before Food overtakes FBH in terms of online contribution, a stunning example of how a sector can experience a sudden change in consumer trends.

The great unbundlings

The Stellenbosch investment holding companies are finally taking steps to address their discounts to underlying value.

Zeder is handing the keys to its 42.2% stake in Kaap Agri to shareholders, a significant move, as the stake is 21.8% of the sum-of-the-parts value of Zeder.

The huge news is that PSG Group looks set to be delisted, with the board considering an unbundling of almost all its assets. This includes controlling stakes in PSG Konsult and Curro, a 34.9% stake in Kaap Agri (subject to the Zeder unbundling), a 25.1% stake in Stadio and a 47% stake in CA&S (see page 20).

This marks the end of an era on the JSE. DM168

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for R25 at Pick n Pay, Exclusive Books and airport bookstores. For your nearest stockist, please click here.

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