This week: banks’ strong run and Blue Label’s complex plans to refinance Cell C
Has banking run too hard?
Last week Standard Bank released results for the year to December 2021 that reflected a solid rebound in performance, with an increase in return on equity from 8.9% in 2020 to 13.5% in 2021. Based on the latest net asset value (NAV) per share of R124.93 and a price of R173 per share at the time of writing, Standard Bank is trading at a substantial premium to NAV of 38.5%.
Absa also reported on the same period last week. Deposits grew by 12% but gross loans and advances only increased by 7%.
Return on equity was 14.6% – a stronger result than Standard Bank! With a NAV per share of R156.41 and based on a price of R185.93 per share, the premium to NAV is 18.9%.
Banking shares had a strong run last week. I remain cautious based on cost-push inflationary pressures on consumers and a likely outcome of lower interest rates for longer. To give an idea of how important interest rates are, Absa noted that net interest income would improve by R600-million if interest rates increase by 100 basis points.
Another roll of the dice with Cell C
Blue Label Telecoms doesn’t have a fantastic track record with acquisitions. That’s about the kindest way I can describe a strategy that has hurt shareholders over the years, ranging from forays into India to an ongoing infatuation with Cell C.
The Blue Label share price has had a solid run recently but is down more than 66% over the past five years.
Cell C managed to achieve a profit before finance costs and forex losses in the six months to November 2021, so the new strategy of variable costs rather than fixed costs (owning the infrastructure) seems to be working. The balance sheet is unsustainable, with secured lenders owed about R7.3-billion by Cell C.
Through an exceptionally complicated recapitalisation structure, Blue Label will raise R1.6-billion in funding from financial institutions through an airtime purchase transaction, which places an obligation on Blue Label to repurchase the airtime over a 24-month period in equal instalments. Cell C’s creditors will be offered 20 cents in the rand using funds from Blue Label.
There are many other elements to the transaction. In summary, Blue Label is giving Cell C another significant punt and is taking some big risks along the way. The company will hold 49.3% in Cell C once all the steps are completed.
Perhaps the mergers and acquisitions stars will shine brighter for Blue Label on this occasion than in previous attempts to grow inorganically.
EOH gets 5x ebitda for units’ sale
EOH hasn’t received much love from the market this year, with the company’s share price down more than 28% and trading below R5 a share.
The problem for EOH is that the company simply hasn’t kept up with the debt. Any progress made in disposing of businesses has been eaten up by interest, which means that an eventual equity capital raise is likely.
There is some respite for shareholders, as EOH has announced the sale of four subsidiaries (collectively called the Information
Services business) for about R420-million. The earnings before interest, tax, depreciation and amortisation (ebitda) multiple for the sale is about 5x, which isn’t exciting.
This is a Category 1 transaction under JSE rules that will require shareholder approval to implement. I’m not sure that shareholders have much of a choice really, as EOH’s balance sheet requires urgent action.
Property: mind the (NAV) gap
Updates from Resilient and Hyprop on 17 March served as reminders that not all retail-focused real estate investment trusts are created equal.
Resilient is considerably larger than Hyprop, with a market cap of more than R23-billion and exposure in Europe through Lighthouse. A portion of that stake will be unbundled to shareholders as part of efforts to narrow the discount to NAV. With a loanto-value ratio of 28.8% that is stable and serviced by cash flows in a portfolio that has enjoyed the return of shoppers to malls, Resilient’s traded discount to NAV is only 11%.
Hyprop’s market cap is about R11-billion and the fund is having a much tougher time than Resilient thanks to its balance sheet. The loan-to-value ratio is still dangerously high at 41.5%. Despite having significant overlap with Resilient in terms of market exposures, Hyprop’s traded discount to NAV is much higher at more than 45%.