The Finance Ghost: The market lowdown on BAT, Transaction Capital and Texton

10 Dec 2023

Investors are hoping that British American Tobacco can keep pushing through pricing increases, as those who are addicted tend to cut a lot of other things before slowing down on the smokes.

British American Tobacco (BAT) is all about fancy names dreamt up by ESG-type consultants. The latest is “Building a Smokeless World” — except it’s not going to be smokeless. The goal is to achieve 50% of revenue from non-combustibles by 2035, so the company reckons people will be smoking its products for years to come.

Investors are banking on the same thing. They are also hoping that BAT can keep pushing through pricing increases, as those who are addicted tend to cut a lot of other things before slowing down on the smokes.

South African investors close their eyes to the ESG story as the company is above all else a really useful rand hedge that happens to pay decent dividends. But for me, the risk is that the share price can easily underperform over time, diluting the benefit of the dividend and giving shareholders a below-par total return.

Simply, it doesn’t help to earn a dividend of 9% in a year and watch the share price go sideways. You can do better than that with zero risk in a savings account these days.

We saw an extreme version of this on 6 December, when the share price tanked by 10% after BAT announced a gigantic impairment, linked mainly to recently acquired US combustibles brands. This is a non-cash problem, but it still sends a message.

A rethink at Transaction Capital

When reading the latest update from Transaction Capital, it’s hard to believe that this is the same group that was once the high-flying builder of SA Taxi and TCRS (as it was then called) into excellent businesses, before landing the WeBuyCars acquisition and making a great success of it.

Today, the group is trying to calm the nerves of shareholders by assuring them that there are no cross-default clauses in the operating subsidiaries. It even has to explicitly say that a rights issue isn’t on the cards at the moment.

It’s amazing what a terribly broken subsidiary can do to a broader group. The SA Taxi business is in a terrible condition. Having been slaughtered by macroeconomic conditions and perhaps poor risk management, SA Taxi will be focusing only on used vehicles going forward.

A silver lining is WeBuyCars, which saw earnings drop by only 14% this year. That’s pretty good if you’ve been following what has happened in the used car market. In the second half of the year, earnings were only 4% lower. The other good news is that Nutun (the debt management business that used to be called TCRS) is still doing very nicely, with earnings up by 7%.

Perhaps the most important comment in the announcement is that SA Taxi issues are causing difficulties for Nutun in raising funding, purely owing to reputational contagion within the group. This is the danger of one part of the group going badly wrong.

Transaction Capital is making big strategic moves to address this, with a potential future unbundling of WeBuyCars perhaps on the table.

Minority shareholders? Who cares?

The JSE needs to give serious thought to changing the regulations around rights offers. For the second time in just a few weeks, we are witnessing a rights offer at a price far below the net asset value (NAV) per share, in which minority shareholders are being denied the ability to sell letters of allocation or apply for excess applications.

First, it was African Rainbow Capital (ARC). Now Texton has taken a leaf from that book, although the company goes a step further by even paying an underwriting fee. Where ARC at least plans to invest the funds in its portfolio, Texton wants the cash to be able to reduce debt and invest further in its offshore portfolio, which is really just a funds-of-funds strategy.

This is a poor approach from Texton when the share price is so far below the NAV. The only thing the company should be doing is freeing up capital and returning it to shareholders in the form of share buybacks. Instead, the company wants to raise more capital and squeeze minority shareholders who aren’t prepared to follow their rights.

In my view, the JSE needs to introduce a regulation that forces companies trading at a steep discount to NAV to allow the sale of letters of allocation and the ability to apply for excess applications in a rights offer scenario. In a capital raise, this would make it a lot harder for opportunistic underwriters to take advantage of minority shareholders in companies that are trading well below the NAV. DM

After years in investment banking by The Finance Ghost, his mother’s dire predictions came true: he became a ghost.

This story first appeared in our weekly Daily Maverick 168 newspaper, which is available countrywide for R29.

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A rethink at Transaction Capital

Minority shareholders? Who cares?