The Finance Ghost: The market lowdown on property valuation changes and Pick n Pay’s slog

14 Jul 2024

There’s good reason to believe that sentiment has changed and underlying property valuations are on the up, while Pick n Pay is after R4-billion in fresh equity capital to dig itself out of a deep hole.

Sirius — the sign of the cycle?

The property sector sure looks interesting over the next year or so. Not only are the yields appealing thanks to depressed valuations, but there’s also good reason to believe that sentiment has changed and underlying property valuations are on the up. If that is true, then net asset values should also increase and property funds will have more valuable assets against which to borrow from banks. And, as rates start to come down, so too does the cost of borrowing.

One of the ways to test sentiment in this sector is through capital-raising activity. Naturally, the best companies will be able to raise earliest in the cycle. A healthy capital cycle is one in which the capital flows to good opportunities. As the FOMO kicks in and investors get greedy, they start allocating capital to moderate and eventually poor opportunities. The bubble then bursts and the whole process starts again.

The property sector can give you great returns, provided you don’t jump in at the wrong point in the cycle. Sirius Real Estate is certainly one of the better funds on the market and has proven this once more with a strongly supported capital raise of £150-million.

This raise comes just months after Sirius raised a similar amount in November 2023 for acquisitions in the UK and Germany. Once again, the intended use of proceeds is for acquisitions in those countries and a pipeline of assets has already been identified. It’s also worth noting that it raised debt in May 2024. As funds tend to operate in a target debt-equity band to drive returns, it’s likely that we will see another debt raise after this successful equity raise.

I am very happy with my property exposure at the moment, especially since I hold property ETFs in my tax-free savings account. Thus I earn the juicy dividends (as well as any capital gains) without paying any tax on them.

Pick n Pay: a capital raise for the wrong reasons

When companies raise equity capital on a public market, it’s usually for healthy reasons, such as to fund an acquisition opportunity. This is especially true in favourable market conditions, which is why capital raises and IPOs are used as a barometer for the level of investment activity in the economy. Of course, there are examples of companies raising capital for far less enjoyable reasons, and Pick n Pay is the latest example.

The retailer needs R4-billion in fresh equity capital to dig itself out of a deep hole that was created through years of allowing Shoprite (and others) to gently devour its core market share. It sounds like a fortune, yet Pick n Pay managed to generate a trading loss of R1.5-billion in the last financial year. It would be silly to assume that the losses have magically turned around, although the lack of load shedding over the past few months will certainly help.

A retail turnaround is a slog of note. CEO Sean Summers knows this, which is why he was clever enough to negotiate a share-based award of 4,000,000 shares where only 25% of them vest based on financial targets. The rest relate to operational structures and finding a new CEO in the next few years. He should bank 75% of that award.

As for the Ackerman family, they are supporting this rights offer by following their rights up to R1.01-billion. That’s a big cheque to write, especially for such a struggling business, but it’s hard to see how Pick n Pay would have got the capital raise without the support of the founding family.

The capital raise is underwritten by a few banks and they’ve structured the rights offer in such a way that the underwriters should end up with very little or nothing, which is exactly what they hope will be the outcome. Banks want to lend to retailers, not hold shares in them. DM

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R35.

Categories:

Tags:

DM is much better if you are signed in...

Business Maverick

Sirius — the sign of the cycle?

Pick n Pay: a capital raise for the wrong reasons