Industry News: Ethos Capital, Sasol, Africa Oxygen

Ethos Capital Battered by Covid-19

Private equity is the shining star of the investment world... usually. Covid-19 really showed the world flames when it blew several big businesses out of the water and brought the tightest industries to their knees. Surprisingly (not really, but let’s say that just for effect) – one of our biggest private equity firms recently took a major hit.

Quick Run: What is private equity? So basically, you get investment banking – the guys who deal with putting companies onto exchanges like the JSE, and extracting companies that are already listed on exchanges. They raise capital within the exchanges. Private equity then becomes self-explanatory. These guys get companies out of exchanges and deal with companies not listed on an exchange (which is funny when the private equity firm is listed). Their capital raising is called “private placement”,– where the shares are not sold through an exchange but rather directly to a select group of investors.

For their financial year ended on 30 June 2020, Ethos Capital reported an estimated Net Asset Value per share (NAVPS) of between R6.60 and R6.70. This represents a drop of between 41% and 42% from last year (the figure was R11.34 at 30 June 2019). Part of the decrease in the NAVPS was due to a Rights Offering (covered in A Little About Restructuring) which added 100 million new shares and diluted the NAVPS by R1.59 at the time. But that’s just about 35% of the drop explained. The other 65% is due to the Covid-19 pandemic. It severely affected companies in Ethos’ portfolio in terms of short-term profitability and resulted in a sharp drop in most valuation ratios.

Africa Oxygen Results Prove to be Refreshing

In a world of high percentages of drops in results, Africa Oxygen Ltd (Afrox, as you may know it) drew out very refreshing financial results for their half-year ended 30 June 2020. They reported a 10.2% drop in revenue compared to their half-year in 2019. This figure is 7.5% when we account for Liquified Petroleum Gas price changes. Earnings Before Interest and Taxation dropped 26.5%, seemingly as a result of a relatively increased cost base and lower sales volumes. Disclaimer: Okay, admittedly, they did not do too well in the earnings per share side, but still quite good compared to some of the terrors we’ve seen, if you ask me. Their basic earnings per share dropped 30.5%, and Headline earnings per share dropped 31.5%. Operating cash flow did increase by 3.5% though. That was a light in the middle of the tunnel.

The drop in performance is mainly due to lower sales volumes across the segments of the business, due to lockdown restrictions that shut down plant operations. Some parts performed well, especially the healthcare-oriented segment (Remember the story about ventilators? That’s it). But the business will likely regain power in the coming months. In the meantime, sitting on more than a R1 billion in cash puts them in a strong position to seek out opportunities to restore themselves.

Sasol Parts Ways with Air Separation Units

“Well, I’ll be damned. The prodigal son returns” – remember when Tony Stark said this line when he saw his Mach 42 suit make a return in the battle at the end of Iron Man 3? I was so happy. And yes, Sasol is our prodigal son. Back in the headlines with good news.

To recontextualise, Sasol is in the middle of a restructuring… in the middle of a global pandemic. This restructuring plan includes letting go of non-core assets (assets they do not really survive on basically) and also selling stakes in some of their core assets. And I let you have it, they are doing very well so far.

Sasol recently concluded negotiations with Air Liquide Large Industries South Africa (Air Liquide) to sell 16 Air Separation Units and associated businesses to Air Liquide for R8.5 billion (plus R5.25 billion) and expects tax obligation of between R2.1 billion and R2.3 billion. Air Liquide will pay the whole amount in cash, with the deal being led by the international investment bank Merrill Lynch (Bank of America Merrill Lynch, as known to the world). With that said, the deal is yet to receive approval from the Competition Commission, the SA Reserve Bank (since the transaction will be settled in US Dollars) and is subject to other terms fitted into the agreement.

Sasol will use this money to pay off some of its debt, most of which is related to the Lake Charles Chemical Project. They have already been actively rebalancing their balance sheet, by selling off their petrol station assets to the Central Energy Fund [of South Africa] and selling a stake of the Lake Charles Chemical Project. So far, they are on a good path, and we will be observing them as they go along.

Another good path you can observe, is the Finance Gym’s journey on the road to 100% financial literacy that will enable economic freedom in South Africa. You can keep up by subscribing to the newsletter, and following the Facebook and Instagram pages for updates on the various insightful blogs that include the Industry News Monday posts. Until next week, stay financially sound.

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Author: Nkanyiso Nyawose

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