The Finance Ghost: Afrimat and Ascendis — capital raises for different reasons
Companies list on the JSE for several reasons, with a major driver being the allure of tapping the market for capital when needed. Not all equity raises are created equal though, with Afrimat and Ascendis Health providing the perfect contrast this week.
Afrimat is one of the best companies on the JSE, with a great track record of delivering value for shareholders. The company is pushing forward with two major projects (the Gravenhage manganese project and the Glenover phosphate, rare earths and vermiculite project) and needed to raise equity capital to supplement the existing balance sheet.
After initially saying it would raise 5% of its market cap through an accelerated bookbuild (around R430-million), the raise was increased to R680-million based on demand from the market. There were plenty of institutional investors who lined up to grab shares at a 7.2% discount. Although even Afrimat needed to entice investors with a discount, this was a successful capital raise that was completed in just one morning on the JSE — the power of being listed!
Ascendis also starts with the letter “A” and is also listed on the JSE. That’s where the similarities to Afrimat end, particularly when it comes to track record. Ascendis has been a mess when plotted on a long-term chart and has been through an incredibly tumultuous period of management changes and predatory lenders who use debt as a hook to get their hands on the operational assets.
There’s nothing wrong with this in my view — if you don’t want predatory lenders in your business, don’t break your balance sheet. Ascendis announced a fully underwritten rights offer to raise R101.5-million to pay off debt and recapitalise the business. Calibre Investment Holdings is the underwriter, earning a 2% fee along the way. The rights offer price is above the current share price, suggesting that the group isn’t unhappy about the shares landing in the hands of the underwriter.
When a company is performing well and supported by the market, a capital raise can take the form of an accelerated bookbuild (like Afrimat) through which institutional investors are invited to apply for shares. When things are rough, a rights offer is the right approach as not many people would’ve lined up for a small helping of Ascendis shares and certainly not at anything close to the traded price.
Retail: food vs clothing
Pick n Pay is looking much stronger, with a long overdue strategic move to imitate Shoprite by giving the stores different branding depending on the target LSM. In the revamped stores, sales growth has been 18% which is exceptional. In the 18 weeks ended 3 July, sales increased 10.7% year-on-year and selling price inflation was just 5%, well below 7.1% CPI Food. Producers are getting squeezed, which is why I’m bearish on companies like Tiger Brands. Notably, Pick n Pay Clothing grew by 17.1% as that business keeps winning market share.
Shoprite gave an update for the 52 weeks ended 3 July and didn’t even bother with adjusting for the riots. When group sales are up 11.9%, you don’t need to try patch things over with “adjusted” or “maintainable” earnings. The furniture business took a knock from the unrest and put in a flat performance, while the supermarkets business grew strongly.
Woolworths released an update for the 52 weeks ended 26 June and things aren’t good in Woolworths Food, with slower sales growth (4.2%) and price increases of just 3.5%, as the group struggles to make its food more expensive than it currently is. Competition is really biting hard now. The rest of the business has been doing poorly in recent years and is starting to turn a corner, with a solid increase in sales despite a decrease in trading space, driving margins. Even David Jones and Country Road posted (modest) sales growth. Woolworths remains in a difficult space.
Looking briefly at clothing retailers, Truworths posted sales growth of 6.6% on a comparable 52-week basis which caused a buzz in the share price, as Truworths trades on a low multiple. The major positive news was a change in fortunes at UK business Office, which grew sales by 14.2% in GBP despite reducing trading space. The Foschini Group released a trading update covering the first quarter of FY23 (a very different period to Truworths’ announcement) and reported impressive retail turnover growth of 16.3%.
Pepkor’s Brazilian adventure looks very exciting. Grupo Avenida is up 51.6% in constant currency in the latest quarter, with an expectation that it will contribute 2% of group sales this year and 4% next year. Shareholders are ready to samba! 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 countrywide for R25.