Phantom Shares: Construction | Property | Long4Life

Phantom Shares is my weekly summary of the more interesting stories and themes from the prior week on the JSE. It is first published in the Daily Maverick 168 newspaper on a Saturday and then in Business Maverick each Monday. It is reproduced here with the permission of Daily Maverick.


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Is Sepp Blatter president again?

Back when FIFA was running South Africa in the build-up to the 2010 World Cup, construction stocks were booming. Cranes dominated the skylines and exuberance filled the streets. Construction companies enjoyed a brief honeymoon period before crashing down to earth in the aftermath of the event.

In our so-called “lost decade”, construction was almost a lost cause. There were high profile business collapses and shares performed terribly. Cyclical stocks are no joke and nobody in the construction industry was smiling.

Fast forward to 2021 and suddenly the frowns have turned upside down. Hot off the press is an updated trading statement by Raubex, reflecting HEPS growth of between 125% and 140% vs. the six months to August 2019. The 2020 period is useless for comparative purposes, as it included the worst of lockdowns and Raubex made a loss, like most other businesses did.

Infrastructure projects are all the rage not just in South Africa, but in Australia as well, which is great news for Murray & Roberts. The mining industry is also on a charge and the downstream impact is excellent for engineering services businesses.

To add to the happiness, government has now kicked out imported cement for public infrastructure projects. The market cheered the likes of PPC and Sephaku in the process, hoping that this would be a major source of revenue for them.

While those companies may get a bigger slice of the public sector action going forward, it’s worth remembering that competitor AfriSam counts the PIC and Phembani among its shareholders. Investors in the JSE-listed cement groups should be cautious about attributing too much value to the public sector projects when AfriSam is almost guaranteed to have a seat at that table.

The great property lowball

In a scenario that appears to have more related parties than the average wedding, RMB Holdings has received two seemingly cheeky offers for most of the properties left in the group. The holding company holds non-controlling stakes in these assets, a situation which is difficult to exit without being a desperate seller to the parties controlling those assets.

Offers totalling R1.8bn have been received for properties with a net asset value of R3.1bn. Sometimes, funds trading at a discount to net asset value are trading much closer to fair value than people think, although the accounting values in property funds are supposed to approximate market values. It’s unclear at this stage how the board of RMB Holdings will proceed, but the market has shaken its head in disgust with the share price down 13% after the announcement.

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B-BBEE sale and leasebacks

Logistics property funds have had a wonderful time in the past year. As malls and offices emptied and associated REITs ran for cover, investment funds with a property mandate didn’t have much left to choose from. As e-commerce picked up and the defensive nature of logistics properties became apparent, the money started to chase funds like Sirius and Equites.

Equites has positioned itself cleverly to be able to do sale-and-leaseback transactions that come with a B-BBEE sweetener. The fund has created a joint venture with the Eskom Pension and Provident Fund, which allows corporates to sell properties to the venture and lease them back with the benefit of procuring from an empowered entity in the form of rental payments. Not only does this have benefits for the capital structure and return on capital ratios of listed operating companies, but it does good things for the B-BBEE scorecard as well.

The first deal in this joint venture is the DSV property in Kempton Park. It will be acquired for R2.05bn on an initial yield of 7.68% and with a planned loan-to-value (LTV) ratio of 30%.

Will Long4Life still have a life?

Brian Joffe’s project to keep him busy after Bidvest has had a difficult time in our market. JSE investors are far less friendly towards investment holding companies these days, valuing them at hefty discounts to net asset value.

The approach taken to deal with this issue is to implement share buybacks, which theoretically helps to close the value discount. The problem is that liquidity gets even worse as the shares are mopped up, which then exacerbates the discount.

It’s a frustrating situation for the likes of Joffe. Since 2019, Long4Life’s weighted average shares in issue decreased from 875.2 million to 636.6 million. The effect of this decrease in issued shares of around 22% is that HEPS is turbocharged. Despite all the challenges of lockdown and supply chain issues for some of Long4Life’s businesses, HEPS has grown 55% since 2019.

This HEPS increase has been achieved with revenue at similar levels to 2019. When there are fewer shares in issue, each investor’s share of that revenue (and associated profit) is higher.

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