First published in the Daily Maverick 168 weekly newspaper.

GameStop’s stratospheric ascent this month has been driven by WallStreetBets, a community of retail investors and traders with a chat room on social media platform Reddit.

The “crowd trading” community decided to take on large US investors who were betting that shares of a number of companies would go down. They targeted irrationally over-shorted, buying them in small numbers at increasingly high levels until, eventually, they squeezed the hedge funds out of the stocks as they cut losses that ran into billions of dollars.

GameStop wasn’t the only target, with other companies including Nokia, Blackberry and AMC Entertainment, among others, surging too. This week alone, GameStop climbed 400%, taking gains this year to more than 1,200%. AMC Entertainment quadrupled in value on Wednesday.

The stocks started coming back down to Earth on Thursday, however, as market regulators including the Securities and Exchange Commission were called on to investigate potential market abuse due to the bubbles that had been created.

They’ll probably fall further as the WallStreetBets traders exit their positions and more rational investors take a closer look at the companies’ fundamentals. Like other brick-and-mortar retailers, GameStop has been seriously affected by Covid-19.

That’s the case with Musica too. The pandemic has accelerated a shift that’s been long coming, with fewer customers able or willing to visit stores that are situated mostly in shopping centres.

So, it’s hardly surprising that Clicks is closing the music and entertainment retailer it acquired in 1992 when people still bought CDs and video games. It says it has been operating in a declining market for several years due to the global shift to the digital consumption of music, movies and games. It has already closed 19 stores since the start of its 2021 financial year, with the remaining 59 outlets set to close as their leases expire over the next four months. Fortunately, staff at the stores that have been closed since September have been absorbed into Clicks’ expanding health and beauty store network. It hopes to do the same with as many of the remaining staff as it can.  

 Cashbuild benefits from DIY demand

South Africans may have fallen out of love with visiting stores to buy CDs and videos in favour of digital downloads, but there’s almost nothing to replace a weekend visit to your local hardware store. That’s clear if you look at how well they’re performing despite increasing strain on consumers, rising unemployment and general despair at the state of the economy.  

A trading update from CashBuild this week resulted in its shares climbing 20% over the course of five days. Sure, it’s not quite the same as the sensational rally that GameStop has enjoyed, but it is backed up by fundamentals.

The hardware and building materials retailer grew revenue by 21% over the six months to end-December – perhaps as the boredom of lockdowns and curfews drove more customers through its doors. With many of us still working, studying and entertaining at home, DIY projects are finally being tackled.

Cashbuild isn’t alone. Last week, Massmart reported a stronger sales performance in its home improvement and DIY categories. Pepkor’s The Building Company, which it’s busy selling to Cashbuild, has also done well. And Italtile says its first-half profit will be at least 25% higher. It too says the work-from-home trend has boosted demand for home improvement products, with lower interest rates and payment holidays supporting spending. Some of the cash previously used for transport and recreation has also been rediverted into our homes.

 Ascendis receives new debt antidote

Ascendis Health, the pharmaceuticals and healthcare group that has fallen dramatically from favour over the past few years after a debt-fueled acquisition binge, has been sent back to the drawing board to rethink its degearing strategy.

Due to debt that dwarfs the value of its equity, the group’s creditors rather than its shareholders currently have the upper hand. An emerging consortium of lenders may now scupper its plans to sell its Remedica business – which may be a blessing in disguise as Small Talk Daily research analyst Anthony Clark describes the Cyprus-based pharmaceuticals business as its “crown jewels”.

After receiving an unsolicited bid for Remedica just over two years ago (which subsequently fell through) Ascendis still planned to sell the business in an attempt to reduce its debt. It’s a big earner though, contributing more than half of the group’s international revenue last year. Other lenders, including banks owed money by Ascendis, might be happy for it to take the quick and easy way out by selling assets no matter how profitable they are, but a senior facilities agreement (SLA) they made Ascendis enter at significant cost last year may have left them powerless.

Under the SLA, Ascendis needs the consent of more than two-thirds of its lenders for major corporate actions, including asset disposals. And London-based investment firm Blantyre Capital and investment fund L1 Health, which holds more than a third of its debt and can therefore veto any decisions, would prefer it to take a different approach to recapitalising itself and reducing debt to a sustainable level – perhaps including a sizable rights issue.

Debt aside, Ascendis’s prospects appear fairly positive. Several of its businesses make and supply drugs and treatments that are in increasing demand due to Covid-19. It has medical equipment companies that supply personal protective equipment and provide hospital equipment including ventilators and respirators. This week, the SA Health Products Regulatory Authority (Sahpra) was reported to have approved the controlled compassionate use of Ivermectin to treat patients with Covid-19. It’s contained in Ivermax, an antiparasitic remedy for livestock in Ascendis’s Animal Health portfolio.

Clark believes Blantyre and L1 Health’s alternative “lends a more supportive and strategic narrative into the restructuring and evolution back to growth for Ascendis”.

“This will not be without some sacrifice,” he says.

The sacrifice may come from shareholders as any rights issue would be material. With a debt pile of about R7-billion and a market capitalisation of about R380-million, he says Ascendis is in a daunting situation. It may need to raise up to half its debt in fresh equity. This could bring Blantyre and L1 Health in the back door as significant equity holders if they underwrote the rights issue and existing shareholders didn’t take up their rights.

“Blantyre and L1 Health clearly see the value in holding the key assets of Ascendis together, recapitalising and resetting the business towards a growth path,” says Clark. “The old lender consortium (seemingly) just wanted a break-up.”

A more cynical view came from an observer on Twitter. He’s not sure these Ascendis lenders are white knights. More like opportunists trying to gain a cheap entry point to the shares. DM168

This story first appeared in our weekly Daily Maverick 168 newspaper which is available for free to Pick n Pay Smart Shoppers at these Pick n Pay stores.