MARC HASENFUSS: A rout to tout

Investors who have missed the thrill of a right royal market rout would have certainly got their jollies early on Monday morning, when sentiment deserted the cryptocurrency market in droves. I’m still a bit too wary to get overly excited about a 20% drop in mainly alt-coins and those silly meme tokens.

I did take another tipple on Ripple. But for the most part I was largely distracted by recurring fantasies about a 20% dip in any number of my favourite small caps.

Well, with the Orange Menace shooting wildly from the hip, who knows what might possibly shake out on the equity market this year.

Merafe, my favourite junior miner, did give me pause for thought after its chrome pooling and sharing venture with mining giant Glencore announced a serious business review. The difficulties in the global ferrochrome market — which the venture seems to think won’t improve soon — has already prompted the shutting off of certain furnaces. This will result in a “significant reduction” in Merafe’s ferrochrome production. The announcement blitzed the company’s share price over 20%.

A couple of things to consider here. Merafe has a strong balance sheet, with a substantial heap of cash, which will help in what will be a trying period for at least the medium term. Glencore, rooted in commodity trading, knows a thing or two about commodity cycles as well as the intricacies of supply and demand. Perhaps an opportunity to watch for further weakness?

For the record, I remain firmly ensconced in Sasol and have added, ever so slightly, to my position in Reinet — which might be cash flush at just the right time.

One share I wish I had snapped up in bucketloads when it was in the lower R60 band in mid-2023 is consumer brands business AVI. Lately rivals Tiger Brands and Premier have hogged the spotlight, but AVI remains my firm favourite. The latest trading statement for the six months to end-December might not look that appetising, with sales in the core food and beverage segment edging up only 3% to R6.9bn. 

The Entyce segment — strong in tea and coffee — pepped up 8% to R2.62bn, but Snackworks — Bakers biscuits and Willards chips — dipped 1% to R3.07bn. The fashion segment — footwear and personal care — endured an ugly period, with sales down 6.9% to R1.59bn. I&J — hake and abalone fishing — increasingly looks out of place in AVI’s portfolio. It hoisted sales 3% to almost R1.2bn.

Shareholders in Sea Harvest, which also dabbles in hake and abalone and reports final results next month, might pay attention to AVI’s comments on I&J, most notably those pointing out that selling price increases and the weaker exchange rate were partially offset by lower fish sales volumes driven by a poorer catch mix and catch performance. The abalone category was affected by lower selling prices and weaker demand in key Asian markets.

The key attribute at AVI is its ability to manage volume and pricing. The trading update notes that consolidated gross profit margin improved over the prior year’s, “underpinned by sound cost control, improved manufacturing efficiency and increased selling prices to recover rising input costs”. The bottom line is an expected gain of 8% and 10% in headline earnings to between 404c a share and 412c a share. That could mean an interim dividend of about 220c a share, which should keep shareholders satisfied.

Still, there might be niggles. While there were a number of extraordinary issues affecting the fashion segment in the trading period, the footwear retailing hub looks increasingly out of step. The business might well fit better in a higher-end fashion retailing conglomerate such as TFG or Truworths, if either were willing to stump up a price acceptable to AVI.

Speaking of deals, small investment counter Astoria detailed the terms of the sale of its 49% stake in health and wellness academy ISA Carstens, which has campuses in Stellenbosch and Pretoria. Astoria will let go of its stake for R71m (factoring in a loan repayment of R4.2m). This is not an insignificant deal for Astoria, which carries a market value of just R515m. It’s not the worst of exits either. Astoria paid about R29m for its 49% stake in ISA Carstens and took on a R15m loan in December 2020. The investment was valued at R73.5m at June 30 last year and at R67.7m at the end of 2023. ISA’s NAV as at December 31 2023 and its net profit after tax were R88.1m and R10.1m respectively.

What Astoria intends the ISA Carstens proceeds to be for is not made clear. Would it look to increase its stake in gaming business Goldrush? Or rather try to average down its cost of investment in Leatt Corp, the US-listed maker of protective gear for extreme sports enthusiasts? Quite possibly it might be more prudent to buy back its own shares, which trade at a deep discount to the last stated NAV of R14 a share.

Just some housekeeping to conclude. The FM has decided to publish a fortnightly column on directors’ dealings and significant share buying by institutions, entities and individuals. If anything in this regard piques your interest, you are most welcome to contact me or Antoinette Steyn (steynAS@fm.co.za).