The Finance Ghost: The buzz on Renergen, CMH, Pick n Pay and KAL Group

By The Finance Ghost

7 May 2023

It’s up, up and away for some as others try their best to hold on as they battle economic headwinds.

At Renergen, the profits don’t matter yet, but the geopolitics do.

Although Renergen can now proudly say that it is a producer rather than just an exploration company, the current sales of liquefied natural gas (LNG) are insignificant compared to the long-term story of the Virginia Gas Project, particularly in relation to helium.

Nobody is buying Renergen because of revenue of R12.7-million in the latest financial year; it’s all about the potential as a globally important helium producer.

With uses far beyond the party balloons at your local toy store, helium has strategic importance to the superpowers of the East and West. This makes Renergen vulnerable to South Africa’s political strategies, particularly our highly sympathetic approach to Russia.

The company can only focus on what it can control, something that it is doing rather well. In the past financial year, Renergen has hit several strategic milestones. These include a successful equity due diligence by the Central Energy Fund and credit due diligence by the US International Development Finance Corporation. Standard Bank has also had a good look at the company for debt purposes. Although there is far more capital needed on this journey, this puts Renergen on a solid footing for the next phase in the story: the development of the Virginia Gas Project.

Speaking of capital raising, a plan to list on the Nasdaq means that South Africa’s relationship with the US is important to Renergen. It goes further than just capital raising, as the US is a likely source of significant future demand, particularly with the ongoing initiatives to onshore semiconductor production. This is a direct result of the risks associated with Taiwan and its tensions with China, an ever-present threat to global stability.

The very best outcome for Renergen would be for South Africa to remain civil with both East and West, putting the company in a strong position to sell helium globally.

Has CMH hit the redline yet?

In this environment, you wouldn’t think that selling cars is highly profitable. Although the margins are never exciting in this industry, global supply and demand conditions have been favourable for car prices owing to supply constraints. When you have a fixed dealership infrastructure, that does exciting things for the economics of a business.

We can’t ignore the car hire business. Although it only contributes 7% of revenue, it contributed a whopping 43% of profit before tax. Best of all, it achieved this off a far lower asset base than the car dealership business. Based on my own experience and comments on Twitter, a general loss of trust in Uber’s reliability must’ve helped the car rental business.

What won’t help the dealership business is further interest rate increases. We probably aren’t done with rate hikes in South Africa, so consumer affordability has to crack at some point. Whether or not CMH has finally hit the redline is a popular debate in the local market.

It’s too easy for Pick n Pay to blame Eskom

If you draw a chart of Shoprite vs Pick n Pay over the past year, you’ll see an incredible capitulation in the Pick n Pay price in 2023. Over 12 months, Shoprite is down 4.6% and Pick n Pay has shed over a third of its value.

That shedding is far too easily blamed on Eskom. It’s obviously a disaster trying to run fridges during Stage 6 blackouts, but it’s not as though competitors don’t have the same problem. With a 16.3% drop in pro forma headline earnings per share – a measure excluding business interruption insurance and hyperinflation in Zimbabwe – Pick n Pay is proving that the grocery sector isn’t as defensive an investment as people may think.

The problem is that with thin net margins, a relatively benign change in margins further up the income statement can be worthy of a John Wick movie by the time we reach net profit. In this case, operating expenses are to blame, as gross margin surprisingly increased in the 52 weeks to 26 February. A cost of R430-million for load shedding (net of electricity savings) didn’t help matters, especially at a time when the company is incurring costs under the Ekuseni strategic plan.

Although there are some highlights, such as strong growth in Boxer and the Clothing business as well as the saving of R800-million worth of costs through Project Future initiatives, the reality is that Pick n Pay is losing the battle to Shoprite.

With laser focus on the South African market after being distracted by African markets in recent years, Shoprite has its gloves off and has won the initial rounds of this titanic battle.

To fight back, Pick n Pay is cutting its dividend payout ratio to retain cash for investment in the business. That’s not good news for the dividend going forward, which isn’t doing the share price any favours.

KAL Group puts a PEG in the ground

The artist formerly known as Kaap Agri has managed to grow recurring headline earnings per share at a difficult time in the agriculture industry. The acquisition of PEG, a fuel retail business, has been a major boost here. The company also deserves credit for exceptional cost control, with like-for-like expenses up by 0.4%, and down by 2.0% if we exclude load shedding.

If you need another reminder of the inflationary impacts on the food value chain, KAL Group’s product inflation (excluding fuel) was 12.1%. This puts pressure on volumes and has driven pressure on profits outside of the fuel business.

And of course, adding debt to the balance sheet at a time of rising interest rates doesn’t come for free. Thanks to the PEG acquisition and inflationary pressures on working capital, net finance costs have moved much higher in the latest period. Investors will need to keep an eye on that. BM

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Business Maverick

Has CMH hit the redline yet?

It’s too easy for Pick n Pay to blame Eskom

KAL Group puts a PEG in the ground