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The Finance Ghost: The lowdown on ADvTECH, Super Group, Murray & Roberts, Cashbuild and Woolworths

The Finance Ghost: The lowdown on ADvTECH, Super Group, Murray & Roberts, Cashbuild and Woolworths
(Photos: Brent Lewin / Bloomberg via Getty Images) | Unsplash / Annie Spratt | James Sullivan

If there’s one thing investors love to see, it’s operating profits increasing faster than revenues. This means that margins are heading in the right direction, which is great news for any business.

ADvTECH ticked that box beautifully for the six months ended June 2023, with revenue up by a juicy 16% and operating profits doing even better, up 23%. Another tick in the box for investors is the breadth of the performance across the group, with all operating segments reporting an increase in operating profit and an improvement in operating margin. That’s a report card that any parent would be proud of.

This result was driven right from the top, with student number growth across the three education segments. Schools Rest of Africa deserves a special mention here, with student numbers up 10% and operating margin skyrocketing from 18.1% to 24.7% as facilities filled up. The schools business is all about bums on seats, much like airlines. It’s also worth mentioning the pricing power inherent in the business, like in Schools South Africa where revenue was up 13% vs student growth of 6%. The difference is price increases, with a premium school model benefitting from inflation as parents can absorb the increases.

The operating result translated into strong headline earnings per share (Heps) growth as well, up 24%. The dividend jumped by 30%, so even the payout ratio improved in this period.

The group had some cash collection issues at the end of last year after an IT systems change. Although this hasn’t been fully worked out of the system, significant progress has been made. There’s still risk of a nasty surprise for investors though, as the company has a long way to go to normalise the tertiary students debtors balance. This is probably the only blemish on the result.

Super Group indeed

Like ADvTECH, Super Group has reported an increase in operating profit in each of its operating segments for the year ended June. Unlike ADvTECH, this hasn’t translated into an increase in margin. Group revenue surged by 30.6% and earnings before interest, taxes, depreciation and amortisation (Ebitda) grew by 20.8% – a commendable achievement, but one that signals a decrease in margins.

Despite a substantial increase in net finance costs, Heps was up by 23.3%.

Super Group is a great example of a local company that gives your money a passport, as 54% of revenue and 56% of operating profit was derived from international operations in countries like the UK and Australia. This story will continue, with UK transport company Amco being acquired by the group after year end. Substantial debt has been raised for this transaction but the balance sheet remains in decent shape in terms of debt ratios. The Super Group management team is highly regarded and already has operations in the UK, so this acquisition bodes well for investors.

Murray & Roberts is in the rubble

From the sublime to the ridiculous, we now arrive at Murray & Roberts. Once upon a time, in what feels like a land far, far away, a German engineering company called Aton wanted to buy Murray & Roberts for R15 per share. After much to and fro, that offer price was increased to R17. The board was having none of it, refusing to take the bid to shareholders in 2019 as they believed that it undervalued the company.

The share price is now at 58 cents, so shareholders are Just So Happy Right Now, as you might imagine. There’s absolutely no love for this stock on the local market, with every financial update leading to another sharp drop.

In fairness, nobody could’ve predicted the pandemic and the havoc it caused in many industries, construction included. The anger from shareholders is that they were never even given the chance to vote on the R17 offer, with the board deciding on their behalf that it wasn’t good enough. If a board is going to take that view, it better be damn sure that the offer is so cheap that investors should feel insulted.

After reporting a headline loss from continuing operations of 71 cents and a collapse in net asset value per share from R13 to just R6, investors do feel insulted. Just not by Aton. This is now a game of survival, with Murray & Roberts constantly reassuring shareholders that it has a “certain future” – but that doesn’t mean a positive future.

Cashbuild – a few cracks in the foundation

Cashbuild’s management team must be ripping any remaining hair out, with a perfect storm of consumer pressures really hurting the business right now. You just need to consider the consumer thought process that goes into investing in property improvements. It requires someone to (1) have disposable income and (2) believe strongly in the future of South Africa. Maybe another Rugby World Cup win will achieve the latter. Even Rassie and the boys can’t do much about the first problem.

Revenue fell by 4% in the year ended June 2023 and gross profit fell by 8%, so gross profit margin deteriorated from 26.3% to 25.4%. Remember that this is an inflationary environment (selling price inflation of 5.4%), so this means a sharp decrease in sales volumes.

Expenses increased by 5% on a comparable basis. They were up 20% as reported, with a goodwill impairment in P&L Hardware and the impact of looting in the base period.

This drove a 73% decline in operating profit and a drop of 37% in Heps.

The total dividend for the year fell by 42%. It’s worth noting that the final dividend was 51% lower, so this indicates a deterioration in management confidence as the year went on.

And on top of all of this pain, stock levels increased by 12% despite the drop in revenue. Even working capital ratios declined this year, putting more pressure on the balance sheet.

Woolworths – life after David Jones

David Jones is a discontinued operation in Woolworths’ numbers for the 52 weeks ended 25 June. That’s good news for shareholders, as it means that the management distraction with this asset has come to an end and the legacy pain is over.

In continuing operations, turnover increased by 10.6% and Heps by 14.8%. The dividend jumped by a much higher percentage, up by 36.4%.

It’s a sign of the times that the Fashion, Beauty and Home segment was the relatively better performance, with 8.9% turnover growth and an improvement in gross margin. Adjusted operating profit was 21.3% higher.

Woolworths Food is facing bigger challenges right now, with a competitive onslaught from the likes of Checkers and substantial costs of load shedding. Turnover grew 6.3%, which is below internal price increases and even further below inflation. Pricing power is a concern at Woolworths Food, which isn’t helpful when expenses increased by 12.4% to keep the fridges (and the entire store) cold. Adjusted operating profit only increased by 2.9%, saved by an increase in gross margin.

And although David Jones is gone, there are signs that Country Road Group might give management a headache or two in Australia and New Zealand. Full year sales growth was 12% but the second half of the year saw growth of just 0.6%. The focus seems to have been on gross margin, which was 310 basis points higher. This was good enough for a 25.6% increase in adjusted operating profit. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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