Slasher's coffee beans

Jozi, Jozi. Whoa!!! Stand back from the screens. The thing that amazes me is that the Libyan “situation” is worsening and the Japanese “situation” is hardly better either. But market participants have brushed that aside and in their stride focused on the things that matter for well, errr…. equity markets, namely economic releases and company earnings. And yesterday there was a preview to the US employment data on Friday. The customary US guesstimate ADP report was released yesterday afternoon and was bang in line with the estimates. And it was a great read, the US economy reportedly added 201 thousand private sector jobs for the month of March. Cool. And of course the US labour department will release those numbers an hour before the New York markets open, two thirty our time. Look out for that, the biggest economic release of the month.

So the buyers were back in force, with industrials leading the charge, that index up over two percent. Resources actually lagged the broader index, could you believe, in part hamstrung by the firming currency. The stronger currency attributed to the Reserve Bank governor, who had the night before in a speech in Soweto to the business community, said that inflation was going to be kept in check. In other words, if inflation rears its ugly head, it will be squashed. Hung drawn and quartered. So I guess that is the kind of news that would help anyone.

Plus, on the radar screens yesterday were all the companies with year ends in December having to get their results in before the close of business today. That three month reporting thing. It still amazes me that US companies can release quarterly results so soon. Like clockwork. And I wonder what quarterly reporting would do for our companies? Any FD’s out there with an opinion on that?

Back to our markets, the surge was so strong yesterday that we saw the Jozi all share index squeak back into the green (black) for the year, with the overall level now at 32275 and the market up nearly half a percent. Over in the US it is a different story entirely, with the best first quarter since 1998, and we are not finished as of yet. The S&P 500 is up over 6 percent year to date. Which confirms what a lot of people were thinking already you see, that developed markets valuations, since the beginning of the year, were a little more attractive than most people thought/think. And, more importantly, underscores for me that the recovery is still intact.

Pick ‘n Pay have indicated that the going is really tough out there. They have released a trading statement this morning. And it looks a little grubby. More than grubby. Here goes, read it for yourself and decide: “HEPS and diluted HEPS from continuing operations, between -10% and -25%. Total HEPS and total diluted HEPS (including Score and Franklins), between -15% and -30%. EPS and diluted EPS from continuing operations as well as total EPS and total diluted EPS, all of which include the prior year profit on the sale of properties, between -25% and -40%.”

There is basically two classes of shares with the family still controlling the business. And that my friends, is something that I think might be a problem of sorts. Don’t get me wrong, I think that Raymond Ackerman is right up there with the best businessfolk that South Africa have ever produced. But it is not just me that thinks that they have fallen behind over the last decade. My old market historian (I miss our conversations with him) always used to think that was the case. Slippage, not in a bad way, but when you have been at it for decades the time in gets to be more of a slog, but I speak under an enormous correction. And potential beating of my bottom but people that regard Mr. Ackerman as one of the best, have all the right to be outraged.

And the reasons for lower earnings, include “The adverse effect of a Pick n Pay national labour strike during our peak trading period and it’s after effects;” AND “Cost inflation exceeding internal selling price inflation; and Our continued investment in gross margin.” Margins are getting squeezed and in retail that is just gross. Gross as in not good. But I hear you say (and you are right) better late than never, exploring new territories and repositioning at both the top and bottom of the market. Yes, and time will tell whether this is the right move and whether or not they were late and have to play catch up. Which is good for the South African consumer.

Byron’s beats.

Yesterday an interesting small cap construction company called RBA released its annual results. If you have not heard of them this is how they describe themselves. What better way than a direct quote straight from the SENS announcement. “Established in 1997, RBA is a supplier of affordable homes in Gauteng, Polokwane and Kwa-Zulu Natal. The business focuses on 3 distinct areas: Supplier of traditional bank funded homes, Building of a rental portfolio and providing housing to mining groups. Our business model encompasses the complete property development process viz. the acquisition of land, town planning, project management of services installation, marketing, sale/rental and construction of quality affordable homes”

So now that you know exactly what they do let’s delve into their numbers taking note that they fall under the private building sector. The sector hardest hit within the construction sphere which we know is struggling big time.

The Score Card. Firstly on a positive note, the company managed to increase revenue by 29% mainly due to a significant recovery in the second half of the year. That’s a good sign. However the group did make an overall loss of 4.89c a share which equates to R11.4mil. Yes it’s a tiny company with a market cap of just over R50mil. That said, they have decreased their losses significantly after getting hit hard in 2009 losing R30,7mil. Obviously you cannot calculate a PE ratio when a company makes a loss but the fact that the company trades at 15c means people are expecting the company to turn out some profits in the future.

Investment case against RBA. The company is tiny and not at all liquid. If you buy this stock you are in it for the long haul because you won’t be able to get the shares away in a hurry. It also falls under the hardest hit sector of a struggling industry so it is very risky. Often the smaller companies fizzle away under such conditions because they struggle to get funding. That seems their biggest challenge, getting funding from the banks who are still very cautious about lending, especially in the housing and property industry. Whether they survive or not, that is the risk.

Investment case for RBA. We know the management team pretty well and they are a motivated bunch of guys. They have to be, they have big interests in the company, one of the benefits of a small company where management actually started it. Although they have struggled I think the sector they find themselves in has huge potential as more and more South Africans get out of the poverty cycle and gain the capacity to raise money from the banks. I guess it is one of the small benefits of the recent overboard wage hikes in the public and private sector. Interest rates are at 30 year lows and the market is in a recovery. This shows in their results after a large improvement in the second half of 2010.

Conclusion. It’s risky and speculative as most penny stocks are. One more bad run and they could disappear. Hence as long term investors who stick to blue chips I wouldn’t buy the stock. However if you feel you want a more risky asset which could bring back some fantastic returns it’s one of the small caps I would invest in. They coming off a low base and if they can manage to secure decent funding from the banks and the banks start lending to the consumers they could be perfectly positioned for the South African growth story.

New York, New York. Everything was pretty strong, across the board buying. And explanation lies behind MTN’s heroic moves as of late, the telecom sector in the US was the outperformer again yesterday and for the week is up 5 percent. That explains a lot to me. A bit of activity in the sector that we can’t talk about. You know, the people who make little things to make people live longer, tablets and pills. Doh, just got spam blocked. If you are confused, or do not know what I am talking about, then email me directly. But I am sure you know. All rather cryptic.

Volumes are low though, the suggestions are that people are staying out of the market until tomorrows Non-farm payroll read. But that ADP read did a lot for confidence. Check out the full story here —> The ADP National Employment Report. The full report, over here —> March 2011 ADP National Employment Report has the money line: “This month’s ADP National Employment Report removes any remaining doubt that private nonfarm payroll employment accelerated heading into 2011.”

I was so tired of reading about a jobless recovery and now that I have forgotten when last someone spoken about it, that I don’t pay attention when people talk about a recovery that does not include housing. Because it will come. Anxious? No. What me worry? Nope. I tweeted this morning that I know my shapes and this looks like a V. Do you agree, took a snapshot, here goes:

Looks like a V, smells like a V, you know what, it is a V. So all of those of you talking double dip, check out for the ice cream van and the rubbish tune that follows it around. Good luck with that.

Commodities and currencies corner Dr. Copper last traded at 424 US cents per pound, the gold price just got a serious jolt, is now up at 1432 Dollars per fine ounce and the platinum price also ticked up a bit, last at 1776 Dollars per fine ounce. The oil price is higher, WTI is at 105.39 Dollars per barrel. And Brent is at 115.96 Dollars a barrel. Brent is climbing. The rand is stronger at 6.78 to the US Dollar, 10.93 to the Pound Sterling and 9.65 to the Euro. We are slightly lower here on the last day of the quarter. All about that jobs read tomorrow.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, and Follow Byron
011 022 5440

Jozi, Jozi. Standard & Poors cut Portugal’s debt rating a rung down the ranking tables and Greece debt is now in their opinion (or rating, same thing) junk, as they cut it by two notches to BB-. Double B minus sounds like a good history mark, but when referring to credit Ratings, it is only one rating downgrade away from being in the “highly speculative” and not where the current rating sits “non investment grade” segment. CMA Vision has a great quarterly piece, awaiting the one from the end of this quarter, but here is the one from the end of last year —> Global Sovereign Debt Credit Risk Report.

And you can see on that report that at the end of last year we all knew that already:

That column CPD is the percentage that the country is likely to default. So that is why you get a yield of 12 percent plus on Greek bonds when you buy them today, because you are buying “something” that has a more than even chance of not making good on their bond repayments. And the knock on effect is that the country has had to deal with their funding problems by issuing very short denominated debt. And they have had to be backstopped by big brother Germany and France. The same of course applies to Ireland and to complete the three little PIGs (no big S in Spain as of yet, brow sweating) Portugal just lost their PM as permanent because Parly there decided that austerity was the wrong path to go down.

For the record, it aint all bad, there are some good quality payers out there of course. This is who they are:

So take the markets non reaction to this event because actually this is so last quarter and I knew this already. So thanks for that. In fact as far as I understand it, from the same publication South African government debt is viewed really favourably, in the same sort of light as France. Nice.

Back to the Jozi markets here, which closed strongly higher at the top end of the days trading range at 31718, up 340 points, or just over a percent. Banks were really strong, nearly two and a quarter percent higher at the close. Resources were in line with the rest of the markets, the stocks that really rocked were the likes of MTN, up three and two thirds of a percent to 136 ZAR. And this in the same week where the stock went ex div on Monday of 349 cents, so there has been a really strong move lately. And now trading at a 52 week high. I guess you could draw correlations between the strong share price moves (north) of Standard Bank and MTN and a strong Rand and draw a parallel. You know, foreign buyers.

One of our preferred stocks over here at Vestact, BHP Billiton has started drilling in the Gulf of Mexico again, check the story via the shake my head, I mean Sydney Morning Herald —> BHP Billiton drills deep-water well in Gulf of Mexico. OK, I don’t know why I said that first part when the headline explains it all. I just can’t get over the part that the Sydney Morning Herald did not have the foresight to see that SMH could one day be a Web acronym. Kidding.

And if that was not enough for you, then, this should be BHP Billiton Advances The Olympic Dam Project. Wow. Nearly 10 billion in expansion projects announced at the beginning of the week and add this in. Remember that Olympic Dam is a freak of nature, in terms of its asset base. Tier 1 assets whatever your idea is of that definition. Perhaps it means in a place where there is not as much chance of a war or serious economic shift.

Capitec released results for the full year to December this morning. This company is only ten years old. And they are not resting on their laurels just yet. Aggressive marketing about their low fees and transparency is just starting to scratch the tip of a new iceberg in the form of “the long traditionally banked” to be interested in their service offering. Their primary business is still extending unsecured loans, and in that field they are second to African Bank in South Africa. African Bank has been on our buy list for around eight years, so we have been participating in a theme that we really like. Consumer finance.

Check out what they, Capitec says: “Unsecured lending is a growth segment of the South African banking industry. During the quarter ended September 2010 the total unsecured market, excluding credit card and furniture finance, grew by 58% compared to the same quarter of 2009. By comparison, total lending by all banks in South Africa didn’t grow during 2010 (growth simply matched inflation).” They are right, it is a big growth sector. In fact Paul said, the only really good thing about the unions pushing government for a much higher wage increases, is that it will benefit one of our favourite themes, consumer finance.

The score board. Headline earnings per share increased an impressive 44 percent to 757 cents for the full year, and the dividend payment increased to 205 cents final, brining the full year number to 290 cents, which is a 38 percent increase from last year. The client base swelled to 2.8 million strong, so quite simply more than 6 percent of the countries inhabitants bank or have a banking relationship with Capitec. Wow. Branches swelled to 455 strong, with a workforce of 5331 souls. Which increased by 28 percent, less than the increase for active consumers.

The value of loans advanced, was 14.3 billion Rands, a ramp up of 66 percent, with 5.47 million individual loans in total advanced. The loan book is around 11 billion Rand. But wait, the number of individual loans advanced means basically a little under two loans a customer, that is, I guess, just fine. AND, as we mentioned at the time, with reference to ABIL, the NCA (National credit act) was not that bad for them: “The average loan at Capitec Bank in February 2007 was R1,180 with an average outstanding term of 10 months. Today it is R2,617 and 36 months.” Bigger loans, longer time frames. Over that same time the industry has more than doubled, going from 29 to 66 billion, whilst Capitec has increased their loan book by a factor of ten and some change.

So that all sounds completely fabulous. I get the sense that when reading the commentary section, it is aimed at ordinary shareholders, you know, the guy and gal like you and I (pops would be so proud, I did not say you and me). And the reason why I make that observation is that on the business channels, the guys that manage money at an institutional level will continue to drone on about how expensive the stock looks relative to say for instance African Bank. Which is true, even of us. We drone too, a lot.

So what are the concerns? An earnings miss (this is being touted as a slight miss) would stir things up a little too much, and the stock could get a market re-rating. On these fundamentals the stock is much more expensive than the rest of the sector. Plus in real terms the assets (loans advanced) as a percentage of the majors are hardly concerning (to the majors), even if it has grown at breakneck speed. There is a cost in the branch and ATM infrastructure that would continue to rise, even if management have done a good job at containing that. And management are a highly regarded bunch.

But I think that first part worries me too much. In order for the stock to grow into the current multiple and keep up the breakneck speed, that would mean that we would be looking at earnings of around 15 ZAR a share in two to three years time. So over the next thirty months earnings would have to double from here. Which is not impossible, earnings doubled from ’07 to ’09 and from ’08 to ’10. But the stakes are higher now. And the base is that much bigger. I am afraid that down the line there would be a disappointment and I think already you are starting to see this. Tough.

Around the world. I had a fascinating conversation with a client yesterday about Angola and the Chinese. It was prompted by an email interaction after he (let us call him Mr. G) sent us an article about Angola making great strides whilst the former colonial master had hit the skids badly. There is an online version, but it is from a subscription only website, here are the first two or so paragraphs —> Angola’s elite look to clean up in Portugal.

Mr G. After explaining how Portugal had fallen and failed to exploit the colonies like their peers at the time, had this to say about Angola:

“I guess what impresses me though is that there is a real ambition to prove themselves beyond the kleptocracy that has threatened in the past. I guess if they can use Sonangol as the national wealth fund I think they have excellent prospects. The country is desperate for international credibility and hopefully that is the driver for a more open transparent economy. Same oil production as Nigeria, 1/10 of the people. The macro is compelling anyway!”

And then Mr. G and myself had a long telephone conversation about Angola in which he told me all about the Chinese and the Angolans entering into a barter type situation where it is a swap of oil for infrastructure. We will take your oil, we will build you an infrastructure. And then he shared a whole lot of fascinating images with me of the “New Luanda” (Luanda Sul) and the old Luanda, the one you know. There is still a lot of building activity in old Luanda, which you can see in this pictures:

There are some serious building going up amongst the old ones downtown Luanda. And then the friends of the Angolans, the Chinese, next picture:

And this is what the Chinese are building:

See that? Citic built this. A massive Chinese conglomerate.

Amazing hey? Looks like Pleasantville. Always *nice* to see real life pictures of a place devastated by decades long civil war, now seemingly coming right. Huge potential, as Mr. G said.

Byron’s beats. When I saw this come up, I knew Byron would be thrilled. Solar energy. I could tell he was excited.

There is a lot of investment taking place around the world in the energy sector. Sasha has spoken about GE’s purchase of Converteam but we also have some activity on the local front. Group Five said yesterday that they had a possible R5bn solar power plant on the cards. We could see power being generated from the plant in as little as two years.

The project which has actually been on the pipeline for a while now is to be constructed in the Northern Cape where the sun shines almost every day. The first phase looks to produce 150MW but could be upgraded to between 450MW to 500MW. To put things into perspective, Eskom’s Kendal power station (which is its largest) produces around 4100MW. Yes, this solar project is not the biggest power plant but certainly a good start in the right direction. The country has a huge renewable energy plan which has a target of producing 10 000 gigawatt hours by 2013. Renewable energy has also been cited as a great way to create jobs so it will be good to see this being implemented.

Government have also been talking about constructing a huge Solar Park in the Northern Cape which could have the capacity of producing 5000MW. That is a lot more significant and something that needs to be implemented to decrease our reliance on coal.

This smaller power plant however is earmarked to supply certain mines which have not yet been named according to one source. Reuters however say that the energy is going to go straight to the grid. Either way this will benefit the mines greatly because they are such huge consumers of energy in our country and often have to operate under limited capacity because of shortages. In fact many are looking at producing their own electricity and supplying it to the grid. I know Sasol are pushing towards becoming self sustainable, using large open cycle gas turbines which already provide 50% of Sasol’s electricity requirements.

The last question which needs to be answered is who is going to actually own the plant? Is it Group Five, another private company or Eskom. I couldn’t find an answer in the reports I read so I emailed investor relations. I’ll let you know what they say. In my personal opinion I doubt it is Group Five, they are a construction company. I also don’t think it is Eskom either as this would have been stated. If it is a private company (including Group Five) and not the government I think it is great. Outsourcing the grid to the private sector is a great way of helping Eskom with their capacity issues.

New York, New York. Materials and Energy stocks were the champions last night, with the overall indices all closing at the top end of the short range last evening. The reason, you know there always has to be one. Improving global backdrop. Meltdown scenario in Japan gone, even though the contaminant story continues to appear high on the list of headlines. There were a few M&A stories around. Cisco Announces Intent to Acquire newScale

I kind of found this amusing. If you had seen this headline thirty to forty years ago, you would have said, what is the buzz with that? Perhaps you would not have used the word buzz. And of course, only fair, I am talking about Federal regulators propose 20% down payment for best home mortgages. If you want the best rates, then you should stick down a big deposit, not so?

And all this is the face of housing prices falling again. But actually, a little less than anticipated. Check out the Business Insider flash —> CASE-SHILLER: Home Prices Weak Again, As Prices Fall 1.0% In January.

OK, and kind of tied into all of this next piece, a storm about a muni bond crisis. Or as it turns out, there is no crisis, according to these fellows at Pragmatic Capitalism —> THE MUNI BOND CRISIS THAT ISN’T HAPPENING . You see, the wheel turns, Meredith Whitney, diamond turned into, well, not so shiny diamond.

Commodities and currencies corner Dr. Copper trading at 430 US cents per pound. The gold price is at 1420 Dollars per fine ounce, the platinum price is 1746 Dollars per fine ounce. The oil price is lower at 104.35 Dollars per barrel, that is WTI, the one you hear quoted on the wireless is Brent and that is higher at 114.97 Dollars per barrel. The Rand is firmer this morning at 6.83 to the Dollar, 10.98 to the Pound Sterling and 9.63 to the Euro. We have started so much better here today, that the all share is back in the green for the year.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, and Follow Byron
011 022 5440

Jozi, Jozi. A lesson of sorts I guess for the fellows from the extreme left that believe that nationalisation is the answer, the platinum miners were caned yesterday as the Zimbabwean government gazette calling on indigenization, a change of ownership. What is not quite clear to me is the payment process, and I am not the only one who is asking the question. And whether South African companies have a special agreement with the Zimbabwean government, that part is also not clear. I didn’t see any South African officials say that they were outraged with this. Nothing. Crickets chirping. Session end the Platinum miners ended down 2.6 percent, at one stage we were staring at four percent down.

Before you categorize me, don’t, because I am all for empowerment of the masses, especially the ones that missed out economically because they were politically sidelined. There is nothing like a broad based shareholding to allow the company to take care of the day to day running of the business, if you know what I mean. But payment methodology is another thing all together. Expropriation is the worst case scenario for everyone except the politically connected in the short term. In the long run the state and those politically connected do not possess the skills, even if the intentions at the beginning are “noble”.

It is a fact that Venezuela produces substantially less oil now than over a decade ago, in the era pre Chavez. 3.5 million barrels produced in 1998 (oil price of around 12 bucks a barrel!!!) and last year it was 2.3 million barrels, at an average oil price of 71 bucks a barrel. At the higher prices, Chavez is doing his own people a great injustice, if the country could pump a whole lot more.

Venezuela has an inflation rate of around 35 percent. The economy contracted by 2.8 percent last year. Ironically it was the collapse of oil prices in the 80′s that saw Venezuela go from a great South American success story to sharply rising poverty levels. And as such, set the scene for Chavez. Who has been in power since 1999, you know, he is the best guy for the job. In his opinion. Does he have a son that could take over any time soon, because that naturally would be the second best person for the job. He has three daughters, one son and two grand children. There must be some leadership potential amongst that lot.

It is not as if Chavez has done bad things for the rural poor, on the contrary, if you read this, you will change your mind —> Economic policy of the Hugo Chavez government. I still think that private money does better than any public money, no matter where you are in the world. And Zimbabwe does not have the resources. And as such this is politicking. And a very dangerous path. I suspect that if the Zimbabwean government proceed down this path, there will be a flight of private capital.

Cashbuild, one of my favourite smaller companies reported interim results to end December 2010. Just squeezed in before the end of March, remember that as a listed company you have to report within 3 months of the end of your reporting period. I think that this is good practice and all companies, government and private should do this. Be careful, because in these results there is a big BEE charge.

“In terms of a special resolution adopted by shareholders on 6 December 2010, shares to the value of R50 million were repurchased by the company from the Cashbuild Empowerment Trust (“the Trust”). The value realized by this transaction was distributed to the beneficiaries of the Trust. This distribution is reported as a personnel expense in the group interim income statement. The associated transactional costs, including the tax effects of the transaction are also accounted for.”

That is all you need to know. For the purposes of this piece and trying to get a like with like, we will talk about the business without this charge. Although strictly speaking you should include it, but for the purposes of a comparison, we should focus on the continuing business. OK, as far as I can tell, this is a business that has 192 stores, having opened 12 last year off the 180 base at the end of 2009. Which is fewer stores than I thought to be honest.

The score board. Group revenue up seven percent for the six months to 2.986 billion ZAR, gross profits up 17 percent to 664 million ZAR, but operating profits decreased by one percent to 116 million ZAR. The companies cash position grew to 802 million ZAR, which is roughly one third of their market cap. And inventories make up roughly another one third of their market capitalisation. Wow. That is pretty heavy. There is quite a big drop off in earnings per share, in part as a result of dilution. 280 ZA cents worth of earnings per share and 157 cent dividend for the half year. Nice.

The score card. The prospects column suggests that things are improving markedly. Check it out: “Management remains optimistic about the revenue prospects for the next quarter. The first nine trading weeks since year-end have reported an increase in revenue of 5% on that of the comparable nine weeks. It is anticipated that gross profit percentage margins will be under pressure during the second half trading.” That sounds like a good outcome. I like the company a lot. But the size and scale is a bit of a problem. Perhaps they would be a takeout target of sorts. Retail is retail and it is straight forward, perhaps Shoprite would find the group appealing once they have done some more hard yards. I like, but perhaps a little too small.

Around the world. China this and that. You have seen stories in recent days that suggest that there are 65 million empty apartments in China. That would mean, every man, woman and child from South Africa would have a spot to live in China, for themselves. I can’t see my youngest daughter getting by. China’s Remarkable Growth. I loved it, because it was put into perspective of how a decade can change almost everything. Imagine if we fast forward ten years and the Indian economy is much more powerful than we suspect. Or that the recovery in Europe and the US went much better than people think.

Not everyone just makes it in China however, don’t be fooled. By randomness or anything else. Check this out, I know who is going to comment on this story already: Barbie In China. Retail Lessons To Be Learned.

I really, really liked this post yesterday, by a fellow that I follow who is quite bearish, but I really like his analysis. Edward Harrison is his name, and his blog site is called Credit Writedowns. It is titled Thoughts on Austerity and the first piece is a response to Paul Krugman. And Harrison looks at both the short and the long term, you know, kicking the can down the road. In fact Harrison, and the reason why I am actually a fan, offers three solutions. A cold turkey one, the one that tea party types would advocate. Until of course they were not elected because the world fell apart at the seams. But suggests the Glide Path as being the way out.

Here is how the Fed and government should exit, in Harrisons opinion:

“The Glide Path Solution. Increasing aggregate demand by maintaining government spending while trying to liquidate zombie companies and malinvestment. This would allow the private sector to decrease debt burdens significantly over time through increased savings. It also has the benefit of reducing dependency on foreign sources of capital. The downside is a major increase in government debt, the spectre of big government and a long muddle through.”

And the reason why he advocates this one over the cold turkey one is that people eventually get tired of more stimulus and then GO COLD TURKEY!!! Agreed, get out slowly and when you can. And when you think things have improved.

I hate picking holes in peoples analysis. OK, let me rephrase that, bearish people irritate me. Not because I am wildly bullish all the time, but rather that I like to believe that the equities market will on balance go up more than down, and comfortably beat inflation over a long period of time. And it is the cheapest and most liquid savings mechanism, other than cash I guess. But I said investments and not cash.

In another category all together are the municipal bonds in the US. Which ordinary people are attracted to because of their tax status. Typically tax exempt. Because you cant have your city ask you for money and then on the repayments tax you right? And typically these bonds have the same time frames (or more in some cases) as US treasuries. This puts the whole Muni Bond thing into perspective, it is not a mine field that you might think. And it is written by someone who actually buys them, check it out: Muni Defaults: Whitney and Roubini.

Byron’s beats. This is interesting. It was a piece tweeted last night, I added another sector that I thought might be in the same company as these guys. But that was not on the list yet, but might be in time. Read the piece and then guess which one I added.

Some may call us permabulls because we remain optimistic about the long term growth of the global economy based on human innovation and a desire to get out of the poverty cycle for millions, if not billions of people.

This is not the case however. As equity investors we have the platform to invest in thousands of different companies that form part of and cross over into loads of different sectors. It is our job to suss out the sectors and hence the companies that are not going to benefit from the global trends we have picked up on. So yes, there are quite a few sectors out there that we are bearish about and wouldn’t touch with a barge pole.

What spurred me to write about this theme was this article from financial blogger Joshua Brown which has a look at dead and dying industries. See top of the list, wired telecommunication carriers. Fortunately we have never recommended Telkom and have been buying MTN since inception in 2003. MTN and other wireless operators are of course the reason for the decline in fixed line communication.

Another one that draws my attention is newspaper publishing. I recently wrote that piece on how Google’s revenues are now bigger than the entire newspaper industry. Therefore bearish on printers and long internet companies was obviously the way to go. This is also the case with DVD rentals whereby streaming companies like Netflix and Amazon have stolen their thunder. Obviously the digital camera killed the photofinishing industry and the iPod killed the record store.

All fascinating stories of how human innovation has changed our lives as well as where money is allocated. As investors we have to keep a close watch on the companies we invest in so as not to get caught in such a sector. These things can sneak up on you.

It’s also easy to bring up these themes in hindsight. We still invest in the likes of Google, Apple and Amazon but where are the bad apples not yet realised? No one knows for sure otherwise the stock price would already reflect that the stock is rubbish. We do however stay clear of certain sectors because of the way things are going. We make it no secret that we are bearish on Tobacco, Alcohol and Gaming (gambling) stocks. Not for moral purposes but because the general trend of taxation and governments trying to curb these habits does not bode well for our long term theme.

To conclude this piece I just want clarify that one may be bullish on certain themes and sectors, especially in the long run which excludes short to mid-term anxieties and market sentiments. But that does mean being a permabull. We have the luxury of being selective.

New York, New York. A late selloff across all indices did not represent the days trade if you just glanced at the final scoreboard. With a falling oil price, as well as broader commodities prices being down, that put a drag on the producers of those products. The Nokia price was lifted after the fellows over at Goldman Sachs had changed their mind and had added the stock to the buy list. At the same time, somewhere in the same company an analyst had downgraded Marriott hotels, which plunged 6 percent in normal trading. Yech. I stayed at a Marriott once, it was really cool, nothing special, a bit like City Lodge really.

The biggest corporate news of the day belonged to eBay, who over the weekend announced a buyout of a business called GSI Commerce for a 50 percent premium to Fridays closing price. Whoa!! GSI is a e-commerce and marketing services company that has many of the US well known retailers as customers. Poor CEO of GSI has the surname Conn. Not a massive deal, around 2 billion Dollars. But deals happening, nonetheless in the background at big premiums.

Pending home sales increased more than expected, consumer spending numbers were better than anticipated, which bodes well for GDP growth. Personal income rose by 0.3 percent, which was inline with expectations, whilst the savings rate fell a little, but is still at around that 5.8 percent level. Oh, and there was the small matter of Caterpillar suggesting that they might be looking to move their headquarters away from Illinois, because that state is showing signs of becoming less business friendly.

You might or might not know that there is a swipe charge reduction pending, where congress will actually set the price of the interchange fee on debit card transactions at 12 cents. US of course. In Canada it is apparently zero. And currently in the US it is 44 US cents. But I understand that the coalition to get this through, the political will is waning. And the problem that the US banks face is that this is 30 billion Dollar revenue shortfall. And you know what, I think that when it is law, then you can make a real decision. Because it might not be law.

Commodities and currencies corner Dr. Copper is last at 429 US cents per pound. The gold price is lower at 1412 Dollars per fine ounce. The platinum price is also lower at 1734 Dollars per fine ounce. The Oil price is lower, 103.27 Dollars per barrel WTI and 114.27 for Brent. The Rand is firmer at 6.87 to the US Dollar, 11 exactly the Pound and 9.86 to the Euro. Stocks rebounding here. MTN on a tear.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, and Follow Byron
011 022 5440

Jozi, Jozi. I can and I can’t believe how anxious we get over here. The minute that the President and the Finance Minister announce that they are getting together for a presser in the afternoon on Friday there was much hand wringing. Much. All the way through from Pravin Gordhan himself resigning to who knows what, but anxiety ruled and I am sure that had to do with a selloff of local equities and the currency. As it turned out, it was actually good news, the DG at Treasury has been appointed as Deputy Governor at the SARB. Check out the full Presidency statement —> Statement by President Jacob Zuma on the appointment of the Deputy Governor of the South African Reserve Bank.

A good move all things considered, he is a government lifer and if the deputy governor position at the SARB was vacant, then someone must be appointed, not so? I was pleased for Lesetja Kganyago. But wondered about the empty DG seat at Treasury. And there were some suggestions that the next appointee could be “more leftist”. We shall have to wait on that one. The Chamber of Mines is suggesting that all the political talk could see New boom in resources ‘may bypass SA mining’, in a story from the BusinessDay. Are all our anxieties too much, or justified?

Session end our market had given back a little, closing 51 points down to 31595. Banks were down a touch, just less than the overall market as a percentage. The gold miners got smashed, down 2.1 percent but that was a day after a strong move northwards by Harmony Gold. Resource stocks, the ten that make up the index now, were down around three quarters of a percent. And the biggest drag.

There is a Metorex cautionary out this morning. The stock is up this morning at the get go, as much as six percent at one stage. You remember our piece a few weeks back, Metorex half year numbers to December 2010, our conclusion was that they were too risky. But could result a buyout by one of the majors, perhaps someone who is already active in Africa, you don’t have to go too far to see who. Or it could be one of the shareholders exiting. I don’t know the answer, we will have to wait and see.

The cautionary is one of those vanilla flavoured ones, which tell you very little: “Shareholders are advised that Metorex has entered into discussions which, if successfully concluded, may have a material effect on the price of the Company’s securities.” Take what you want from that.

And then there is some more clarity on indigenization in Zimbabwe, from Aquarius Platinum. Or perhaps less so, the money line from Aquarius, in a SENS announcement suggest that the process is still ongoing: “To this end, Aquarius confirms that it’s Zimbabwean operating subsidiary, Mimosa Mining Company (Pvt) Limited, is engaged in discussions with the relevant authorities in order to establish a position that will be compliant with the Act and beneficial to stakeholders. Further information will be made available as and when discussions have been finalised.”

I guess that tells you that until you hear from us, know that this is happening in the background. I was desperately trying to find the published official version of the Government Gazette, but I couldn’t. When I went to the Indigenisation Documents section of the Ministry of Youth Development Indigenisation and Empowerment website. I wonder why there are no documents, this is big not so? Fear not, Byron found it from his Zimbabwe contact —> Government Gazette Extraordinary. Normally you should pay 2 Dollars for it, it seems.

The one analyst report that I have read suggests that this is like Monday nights meatloaf or stew, this is what they call in Afrikaans a kyk-weer. Having another go, and politicking, because there is SUPPOSED to be an election coming soon, by the end of the year. Someone who I spoke to this morning put it quite simply, maybe it will happen, maybe it won’t (the election) and that South Africa were sort of keen with the stale mate.

The long and the short of it all for Aquarius is that it is 20 percent of production but over one third of EBIT contribution over the next few years, because the mine itself is so profitable. And remember that the other stake holder in Mimosa, the mine in question is Impala Platinum. For Aquarius a full on expropriation would mean that both themselves and Impala would lose out. There is however the small matter of Impala Platinum having the South African government on their side, you know, the agreement between Harare and Pretoria which says South African companies are exempt, provided they go through the DTI. We shall see how this holds.

Around the world I love the way that before the wave of revolution spreading across the Middle East and North Africa that everything was “just fine”. And now that there are protests and violent clashes with pro democracy supporters that we are anxious and worried about contagion. Give me a break, I am still sticking to the line that is suggesting that democracy is good for economic growth. It is, not so? The best recent example of this is undoubtedly South and North Korea. Which citizens are better off?

How has the Russian and Chinese economies done since the liberalisation of their economies? Better or worse? That is my only point. If you are interested in a long and boring paper check out —> Democracy and Economic Growth: A meta-analysis. Once you have read the whole thing and are still awake, take a twenty minute break. OK?

Perhaps the biggest news in Europe has been Angela Merkel’s parties crushing defeat in Germany. Both the “Nuclear issues” and the paying for someone elses problems has caused the electorate to turn to alternatives. De Spiegel reports: Greens Score Big in Key German State. Is it just me (or am I getting old) or does that look like a bunch of teenagers celebrating the victory? It does not look disastrous for Merkel, but the timing of the election seems to have been good for the Greens. This party has slowly been adding votes every election, but is still less than 11 percent of the overall vote.

I am not too sure what to make of the party itself, their aim is to have Germany completely energy self sufficient by 2040. Wow. Solar. In a place that you do not usually associate with sunshine. I can tell you, if my parents lived in Germany, this is the party that they would vote for. I just hope all these guys walk, cycle, or run to work. And you know, the greens could be onto something here, check out this suggestion —> HSBC Economist: Oil Supply May Run Out in 50 Years. Perhaps the Greens “have it right”. All the while: Radiation in seawater may be spreading in Japan. Yech.

I am sure that I regurgitated something without thinking Friday. I said: We learnt that a Tomahawk missile cost 1.5 million US dollars, and for that kind of money you could employ ten teachers for a year. Wrong. Because the piece works out that the average teacher earns 54 thousand Dollars a year. Times 54 by ten and you get to about one third of a Tomahawk. So I have to apologise and say, one Tomahawk missile would employ about 28 US teachers. And I am not too sure what in South Africa. Payscale.com suggests that the South African teacher earns about 14300 USD a year to 27500 USD a year. At the top end of the scale about half of what an American teacher earns. Makes you think doesn’t it.

Byron’s beats.

Teva, our recommended pharmaceutical stock in New York and the biggest generic drug producer in the world announced a Joint Venture with Proctor & Gamble, the world’s largest consumer product maker last week Thursday. The JV combines the two companies over the counter drug businesses with P&G owning 51% and Teva 49%. The agreement makes sense for both companies as P&G look to expand their operations outside of North America and Teva look to further diversify outside of generics production and increase their over the counter exposure.

Branded over the counter products are a great business. They are much cheaper than generics as they don’t require an expensive doctor’s appointment and a prescription to acquire. The companies will also push to get certain prescription drugs to be switched to over the counter drugs, Teva have more than 1500 products in their portfolio which could potentially be switched.

To put things into perspective, Shlomo Yanai, Teva’s CEO said that the deal could add up to 50% on last year’s over the counter sales of $650 million. The agreement is still subject to regulatory requirements but they don’t expect any speed bumps as the deal does not have many competition implications. The JV will be based in Geneva Switzerland.

Most analysts seem happy with the deal. The combination of Teva’s manufacturing expertise and P&G’s great marketing abilities looks good for the JV’s chances of success. The over the counter market is worth $200 Billion a year and the market is somewhat fragmented in terms of supply. There seems to be room for a big player to arrive and to combine the economies of scale of these two production giants seems like a no brainer.

People in the likes of Brazil and India where families are getting wealthier will be spending more and more money on health care, especially on over the counter products. Health care is one of the first sectors to benefit from an increase in general wealth as it is a priority. We like the sector as you know and I like the fact that Teva are pushing to meet their 2015 revenue target of $31bn. Although I am a huge fan of the generic business, I like the fact that they are diversifying into a new space as generic margins have been under pressure. The drug making business can also be very reliant on one or two patents so now that Teva will have access to brands such as Vicks, they are decreasing their risk.

New York, New York. Half full or half empty? Or just plain old empty. RIM certainly has some loyal clients, the maker of the Blackberry handset was caned in normal trade Friday, but the writing was on the wall afterhours Thursday as results which looked at face value not the problem, but rather the outlook was what disappointed. But tell me, how bad does this look? “For the full year fiscal 2012, RIM expects earnings per share to be in excess of $7.50 fully diluted. Revenue for the first quarter of fiscal 2012 ending May 28, 2011 is expected to be in the range of $5.2-$5.6 billion. Gross margin percentage for the first quarter is expected to be approximately 41.5%.”

The stock fell 11.23 percent in normal trade to now trade on fundamentals (historical) of less than 9 times earnings. And forward at around 7.6 times. What is the market telling you then? That, like Nokia, they are losing out to Apple? Perhaps. The fellows over at Apple added 1.9 percent. And trades at a hefty multiple to RIM, at 17.9 times earnings.

Don’t read this if you are a pessimist. According to Deutsche Bank, via the Business Insider website there are 2 Signs That A Massive Acceleration In Hiring Is Coming.

I am thinking that the Americans are ignoring one strong point on why they have been losing out to China and the like, on a manufacturing level. Sure, they still have a massive manufacturing base, but that has been falling. Methinks it is simple, the corporate tax rate at 35 percent is just too high.

With the world being a whole lot more dynamic with the advancement of technology (a lot of which comes from the Americans themselves), the stories that big corporations are paying little tax in America might just get Washington DC to rethink this rate. For example, read this NY Times story about GE —> G.E.’s Strategies Let It Avoid Taxes Altogether

The gap needs to close, with Irelands 12.5 percent rate, companies just cannot ignore that. And the US needs to realise this. So cut the fat at Washington DC and help companies create jobs. Lower the corporate tax rate. And stop firing missiles. Poor President Obama faces a tough time today —> Obama to speak on Libya, hold education town hall.

I absolutely loved this, a piece published by the Fed, but the views are not that of the Fed, but rather their employees. Check it out, it is basically telling Americans to stop whinging and that they are much better off now than in the 1930′s. And that they are rich. Perhaps that is why I liked it. Here goes, titled: Surveying the Aftermath of the Storm: Changes in Family Finances from 2007 to 2009.

What I found astonishing is that humans are good at seeing what the state or lay of the land is likely to be. The very last graph, which suggests that the next five year in 2009 (so through to 2014) would be better than the last five years (back to 2004). Most respondents across all groups believed that it was so. Whereas the opposite was true in 2007. Here is the last piece:

There we go, even people know the “truth”.

Commodities and currencies corner Dr. Copper last traded lower at 433 US cents per pound. The oil price is also lower at 104.87 Dollars per barrel for WTI and 114.93 Dollars for a barrel of Brent. The gold price is lower at 1419.5 Dollars per fine ounce, the platinum price also lower at 1732 Dollars per fine ounce. The Rand is also weaker at 6.89 to the US Dollar, 10.99 to the Pound Sterling and 9.67 to the Euro. We are selling off here in Jozi, even though US Futures are higher. The platinum stocks including those with Zimbabwean assets are heavily hit.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, and Follow Byron
011 022 5440

Jozi, Jozi. We knew the rates decision was coming here where local is lekker. Not quite taking place in Jozi, but halfway between the capital and the biggest economic hub in Africa. Of course I am talking about the MPC delivery of their decision and outlook. All the while India were just edging the Aussies out. Lots of Indian fans amongst the neutrals yesterday, I could tell there was little time for the Aussies. That is what happens when you are at the top. And for the first time since 1996 there will be a new cricket world cup champion. Wow, that was a long time ago.

If you are looking for the complete MPC announcement: 2011-03-24: Statement of the Monetary Policy Committee. There are the unknown knowns, the oil price and the currency. Give me a forecast for the year, and I bet you that my weather report for June will be a whole lot better.

Back to Jozi markets however, as we waited for the most important cricket match in four years the markets were full of green too. Which in accounting terms “is in the black”, I get a little tired with that old expression from market commentators, but hey, it is what it is. So don’t get too excited OK about the colours?

The Jozi all share had tacked on 432 points to 31647 by the close of business. The banks added three quarters of a percent, retailers lagged with a half a percent gain, whilst the new Resi 10 (dropped 10 don’t care about you stocks) added 1.7 percent. Platinum stocks added nearly 1.4 percent. The telecommunications index was flying, up 2.6 percent, courtesy MTN which added 2.9 percent and trading at a 52 week high. The last day to qualify for the MTN dividend is today. Perhaps that had something to do with it.

But the biggest single stock news, or in fact lack of news was Harmony Gold which soared to 98.40 ZAR, up nearly 12 percent. I was called by a journalist and asked if I knew what the reason was. I must be honest here, I stumbled my way through it and suggested that the night before in New York there had been a spike in their share price in New York. As the day went by it became apparent that there was a lot to do about their Papua New Guinea asset. Which when I spoke to a mate a while back, he was sceptical that Harmony could raise enough money to expand on their share of the project in question.

Of course the gold price also hit an all time high, close to 1450 Dollars a fine ounce. But the hurrah actually came about from a report that the Royal Bank of Canada put out saying that Gold Fields could take the South African assets of both groups and unbundle it and then the international one would proceed. As you can see in the Bloomberg piece —> Harmony Gold Rises the Most in Two Years on Takeover Speculation, Harmony CEO, Graham Briggs has said this is speculation. To be honest, I still maintain the line that both companies are NOT investment grade. Ouch.

So let us get this right, this is a research analyst who thinks it is a good idea? And that sends the stock up nearly twelve percent. Awesome, thanks for that. Alec Hogg interviewed the RBC analyst last evening on his show, if you are interested, here is the transcript —> Harmony’s road ahead, amid analysts’ talks of consolidation or splitting up.

So “big stuff” happening at BHP Billiton, a real company that makes investment grade (meeeooooww), with the company announcing that they are doing a few things. First things first, as per their website a big iron ore expanision —> Further Growth at Western Australia Iron Ore.

The skinny is that JV with Rio never went ahead and BHP always had these plans. This 7.4 billion US Dollar upgrade (of which BHP have the lions share, they will have to contribute 6.6 billion) includes railway infrastructure, the mines themselves, equipment, “port blending facilities” amongst other things. There is actually a massive allocation at Port Hedland, and this expansion will nearly take them to that point. Maximum quota.

And then there is a massive coal expansion, in central Queensland —> Bowen Basin Metallurgical Coal Expansions. Less exciting than iron ore but does go hand in hand. Half of the 5 billion Dollars is at BHP Billiton and their shareholders expense. Tally up and we are at 9.1 billion Dollars.

And then add on the last part, Expansion of Hunter Valley Energy Coal. The smallest of all the deals. But if you add the 400 million Dollars here to the 9.1 billion before you get to 9.5 billion US dollars. This is HUGE. But because it is not an acquisition, will get very little airtime. Or less, should I say. I guess that this is part of the strategy that we saw announced at the half year stage, focusing on building the portfolio from within rather than through bold acquisitions. Tried that, didn’t work out quite the way Marius Kloppers saw it.

Around the world Yes, an earthquake in Mynamar and Thailand did little to ease the nerves over the recent tragedies in Japan, but everyone seems to have ruled out worst case scenario in Japan. Even though this morning there seems to be highly radioactive water in one of the reactors, that is a very bad outcome. What do you do with highly radioactive water?

We learnt that a Tomahawk missile cost 1.5 million US dollars, and for that kind of money you could employ ten US teachers for a year. Phew, sounds like a lot of waste, not the teachers part, rather the missile. Warren Buffett was in India being followed around by the American press, as he looks to make acquisitions there. Methinks someone is going to try explain cricket to him, and his line will be, I don’t understand it, but I am interested anyhow.

At the same time Buffett said to CNBC that the Euro’s Collapse Is Not ‘Unthinkable’. More interesting are the 8 Unusual Things I Learned From Warren Buffett by James Altucher. An awesome read.

Those Buffet comments about Europe are as new estimates of aid for Portugal range from 80 to 99 billion Euros. Bloomberg is dubbing the Euro, the Teflon Euro. Indicating that of course that you-know-what does not stick. Well, my answer is always, you know why, until the Spain situation gets worse, the periphery economies are too small. I tweeted the other day that the Portuguese economy was the same size as Egypt and half the size of Sweden, so why should we care? But at the top end of the range, the aid would be approximately 60 percent of their annual GDP. Yech.

But according to Reuters (or their source) this is unlikely to happen too soon —> Portugal unlikely to seek immediate EU bailout – source. Even as Portuguese borrowing costs went up, the Irish ten year has spiked above ten percent. The FT have a nice graphic of the Spanish Credit Default Swaps Plummeting in Iberia. Euuuwww.

A quick picture flip through of Libya and Bahrain is what you need to get you up to speed —> Libya and Bahrain In Pictures. The Economist has a nice piece on Libya titled: Where will it end? Hopefully with that mad colonel with his crazy clothes and Top Gun Raybans living with Mr Potato Head Chavez. That was ugly, but hey, I have nothing nice to say about Qaddafi and the normal rule of thumb (if you have nothing nice to say…..) does not apply to him.

The US Hotel industry is reporting a daily rate increase, probably off a low base —> STR: U.S. ADR on the rise. Good news on the ground. More good news on the ground includes The Business Insider graph of the day: Here’s More Proof That The Fed Didn’t Create The Commodity Boom.

Byron’s beats. Two things here, a Clicks trading update and then the massive hikes on coal transportation, effective tomorrow.

Clicks group out with a trading update yesterday which suggested an increase in earnings of 20% to 25% for the 6 month period ending 28 February 2011.

I’m not going to go into too much detail about the company because I wrote about that on the 19th of Jan when they released a trading update about a 16% increase in turnover. If you are interested in seeing that, go onto our website, put in Clicks’ share code CLS at the top of the home page. Then click on reports and you will see what we have recently written about the company. It is actually a fantastic feature (self punt) and applies to all the companies we write about. Give it a go.

So let’s just dive into the numbers. In the comparative period, 6 months up until Feb 2010 they managed R1.02 in earnings. A 20% increase on that would be around R1.20. But the company has been growing fast, what does this mean on a yearly basis? For the year ending 31 August 2010 clicks made R2.11 therefore R1.11 for the very latest six months. So it looks like the company is managing a 10% growth rate every 6 months. Assuming they maintain that they could be looking to earn R1.32 for the next 6 months and R2.52 for the year. I know this is a very basic analysis but I find it is a nice way of putting a trading update into perspective.

The stock trades at R41 and a fairly demanding forward multiple of 16.2. Compared to the other retailers, that is pretty standard and quite expected for a company growing earnings 10% every half. It must also be noted that this 20%-25% earnings growth comes off a 16% revenue increase so a clear sign that the company is improving margins and becoming more efficient. If you follow the link I mentioned above you will see that I like the business model of the pharmacy and the company as a whole.

Transnet announce tariff increases for the transportation of coal. This could be as much as 30% and is obviously not great for coal miners around the country. Or is it? The reason for the increase is to improve transportation services to coal miners who have been struggling with transportation issues for ages because of Transnets inefficiencies. I bet if you asked the miners themselves they would be happy with the tariff if Transnet did in fact improve their services.

Transnet plans to spend R110bn over the next 5 years on expanding and improving their rail network, ports and fuel pipelines. The funding has to come from somewhere. I’m all for direct taxes whereby the group benefitting from the service pays for it. Wait, that sounds a lot like the private sector? Let’s not get started on the privatization of public enterprises, I’m sure you are well aware of our capitalist thoughts on that via Sasha’s constant rants.

And now a fantastic piece that was written by a client, in response to my ramblings in the piece Massmart WalMart unions mangle. Here it is and please tell me what you think about this commentary:

I am tearing myself away from the cricket to write this.

I read your Walmart comment with interest. I then looked to see what I could find that might paint a different picture. I won’t say I found anything conclusive, but there were two pieces in Business Day that gave the other sides’ view.

And I think there is a genuine worry about employment. But, what is more of a worry is that the only real solution around the unemployment worry seems to elude ANC & its partners, or does it ? Solution clearly is for local manufacturers to manufacture on a scale that enables them to compete internationally. When they can do that, then it pays Walmart to buy local production and save import transport costs. I am going to stop short of suggesting how local manufacturers become global players, but incentives to investors to create the required scale points in the right direction – those incentives have been thoroughly aired, so I will not repeat.

The ANC etc seems to favour the uncompetitive small scale local producer option. I wonder if that model can work well in the long term ? Perhaps, it is a short term solution ? Was not Whitey Bassson suggesting that he had been favouring local producers but would now change to the cheaper import solution so as to compete with Walmart ?

Is it possible to compete internationally in the manufacturing field. I have heard argument that that is not possible.

In that case is the economic model that protects local small scale production a viable model ? If not, then as many commentators are fond of saying, “stick to your knitting”.

That raises question: “What is SA’s knitting ?”

Well, I have read frequently enough in recent times that this is a massively resource rich country. So is not “mining” where our knitting lies ?

And so should not every spare ounce (gram) of energy be focused on encouraging mining ? And should not everything possible be done to incentivise exploration and mining, including the appropriate infrastructure ? Would not this direction yield enormous employment opportunities in other fields not just mining ?

Have I got this hopelessly wrong ?

What do you think about these views? Send me a mail if you agree or disagree with these views, OR, if you know the answers to these questions from Mr H, lets call him.

Commodities and currencies corner Dr. Copper is trading at 441 US cents per pound. The platinum price is last at 1742 Dollars per fine ounce, the gold price at 1434 Dollars per fine ounce, both prices lower from their recent highs. The Rand has also weakened as markets have slid here a little. To the US Dollar it trades at 6.87, to the Pound at 11.08 and to the Euro at 9.74. The oil price is trading at 105.81 Dollars a barrel, that is WTI. Brent is at 115.4 Dollars per barrel.

The most important thing today, other than the cricket is another US GDP read. Around two thirty this afternoon.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, or Follow Byron
011 022 5440

Jozi, Jozi. The bulls were back. There were other things happening in the background, we learnt about the Fukushima 50, brave souls who had worked tirelessly to turn the power back on. As far as I understand it five have died from radiation exposure, so we have better recalibrate yesterdays stats. That would hardly put a dent in the overall picture though, but it will be the most heart wrenching story you will read today. Check out how quickly the road was rebuilt, astonishing!!

And then there was the small matter of waiting for the Portuguese austerity vote, turns out the parliament did not like it and the prime minister promptly resigned last evening —> UPDATE: Portugal PM Resigns After Austerity Plan Is Rejected. Perhaps the Portuguese PM can work along the lines of the more famous Socrates: “I know that I know nothing”. Yip.

At the same time as the Portuguese rejected cuts this way and that, the Brits had their budget day with Gideon George Osborne delivering a tough but “hear-hear” from his side budget. You know, blame the other dudes, that is easy. Poke fun at them, always makes you look better, at least in the short run. We found ourselves chuckling with all the hecklings and hear-hears. What fun it must be to be a Brit politician!!

The Economist had a good go at explaining the budget —> Sound and fury. My only take was in response to Osborne’s call to see Britain with the most educated and flexible workforce was that the Germans are going to have to “get dumb”. Kidding. And then Bloomberg had a go too, also very good —> Osborne Cuts 2011 U.K. Growth Forecast to 1.7% in Budget.

Check this out from the Huff post —> Countries With The MOST College Graduates (PHOTOS). So perhaps George should be aiming to beat the Russians for education. Paul said something along these lines that the weather is so bad in Russia that there is nothing better to do than study forever. It is perhaps subsidized too, no doubt.

We had a fairly benign inflation read on the local front, but worries that the higher prices of oil would filter down everywhere, transportation is going to get more expensive and so will food. So if you think that we are at the bottom of the rates cycle, you know what, you are probably right!! I learnt two facts about mobile phones, there are three times as many smartphones activated a day than there are babies born and there are more people with mobile phones than there are with toilets, globally. That kind of makes sense the second one, but it is sad nevertheless.

Yes, and the Egyptian market opened with much fanfare and back slapping and then was over as quickly as the Pakistan West Indies match, check out the FT bit —> Egyptian shares plummet; trading suspended. Ag shame, try again today. The smarts suggest that there is a good thirty percent down from the reopening, so that suggests that today is going to be limit down again, not so? Probably.

No inflation nation. That is us, not the UK, who seem to be in more of a pickle at face value. I am well aware of the British resolve and to paraphrase Winston Churchill post Dunkirk in that famous speech: “we shall never surrender, and even if, which I do not for a moment believe, this Island or a large part of it were subjugated and starving, then our Empire beyond the seas, armed and guarded by the British Fleet, would carry on the struggle, until, in God’s good time, the New World, with all its power and might, steps forth to the rescue and the liberation of the old.”

Eeerrr…..that never happened, so the Brits never had to worry about a thing. An inflation release here yesterday by the fellows over at StatsSA suggested that we might have to worry a little later in the year. Here is the latest release —> Consumer Price Index – February 2011. Increases in health and transport. Transport, thanks to a 26 cents per litre in the petrol price, brace yourselves for more coming in that department.

But really, there are only three categories that you must worry about, namely (and their subcategories included) Food and non-alcoholic beverages – 15,68%: Processed, Unprocessed, Bread and cereals, Meat, Fish, Milk + eggs and cheese, Oils and fats, Fruit, Vegetables, Sugar + sweets and desserts, Other food, Hot beverages and Cold beverages. It is hugely hilarious that Meat has a weighting in the basket of nearly 8 times that of fish. Yip, South Africans sure do enjoy turning a chop or two.

And then there is the category Housing and utilities – 22,56%, consists of Actual rentals for housing, Owners’ equivalent rent, Maintenance and repair, Water and other services and Electricity and other fuels. So that is more important than food you see, and because there have been low interest rates, this category is not adding much to the overall number. The biggest component of the sub segment, Owners’ equivalent rent only increased 3.9 percent over the last year. Electricity and other fuels is only around 1.9 percent of the overall basket, but has ramped in recent years. The index base of 100 in 2008 has been blown away and is now 167 for that sub segment. Feel like installing that solar geyser?

OK, and then the last important segment of the overall basket is Transport – 18,80% which includes Purchase of vehicles, Petrol, Other running costs and Public transport. Amazing that segment is so high, but you know, South Africans love their cars. So add those three up, and you get to 57 percent. It matters you see what happens to these three. And I guess of course the MPC will have to stick their hawkish cap on this afternoon. Consensus is of course for no change, 21 economists surveyed said that there would be a chance of rain later this afternoon. I mean no rate change. Paul pointed all his followers on Twitter to this great blog piece, which is about interest rates and central banking —> THE PSY-FI BLOG – Revisiting Volcker – Central Banking Psychology. Very interesting in a nerdish kind of a way.

This next piece is the only link you must read today, if you are only going to read one, OK? OK. This is a piece that Paul pointed out that the WSJ investments guy, Jason Zweig who Tweeted quite simply —> “should investors ever buy bank stocks?” And then he pointed us to a paper titled Banks: Expensive at Every Price. WHOA!!!

It is an interesting read, you must have a go. My take away is that banks will always be around, they have to be and are hugely important. And regulators attempts to thwart banks from taking outlandish risks will fall short. That will happen. I think in a South African context that this paper is perhaps unfair. We have a great banking regulator. Our banks are conservative. Our most high profile banking disaster was over a decade ago when Saambou fell over. Just after Unifer. Just a couple of years after BOE was muscled into the Nedbank stable. That was the last time we had an “A2″ bank wobble.

I loved the one paragraph and read it carefully if you do not read the whole thing:

“Shareholders in banks exist at the mercy of governments and Central Banks. Governments have a vested interest in keeping the banking system “healthy” (let’s face it, a contracting banking sector is hardly a vote-winner). To that end, banks’ shareholders are greatly subsidised. Their ‘size zero’ equity buffer is supposed to fill depositors with confidence they can absorb loan losses. History has shown such buffers to be hopelessly inadequate at times of crisis.

Wow, powerful stuff. I guess the other argument could then be used, oh, OK, well if there is always a backstop, then it makes it a better investment, not so? The conclusion is also not entirely convincing, but I agree with the general argument. And as you might know, around here we are not huge fans of big banks.

Byron’s beats. More construction stocks. This time about a darling turned not quite dog, but starting to look less darling.

Another construction stock really struggling in a tough, tough environment, Basil Read out with a trading update yesterday which suggests a 5% – 15% decline in headline earnings per share for the period ending 31 December 2010. I suppose in the bigger context that is not such a bad outcome when you look at the likes of Murray & Roberts who have had to take big write downs because of aggressive accounting policies.

I remember when I first started out in the investment game and the likes of Basil Read and Esorfranki were still bringing in great earnings yet traded on extremely low multiples of 5′s and 6′s. I couldn’t understand how these shares traded at such a discount to their current earnings and dividend yields. Yet fast forward 3 years (yes I’m still a newbie) and I now understand how accurate the market was at predicting this construction slump. I guess you have to trust the masses in this kind of situation. Just like in that game show ‘who wants to be a millionaire’. The contestant always got the answer correct after using the ‘ask the audience’ lifeline and following the consensus. Chances are the masses are right. Not always and that is where you can pick up great discounts but there is always a reason for a large discount.

The score sheet. Back to the numbers. In the update Basil Read importantly reminded us of the acquisition of TWP, the civil and structural design and engineering company who also have significant dealings in the mining industry. The group issued 37.3 million shares as part of the payment for the company so earnings will be somewhat diluted. Readjusted this means that earnings could come in 30 to 40% lower. To assess the current operations of the company we need to look at the undiluted numbers however.

Last year the company reported earnings of R3.33 so a 10% decrease should see around R3 in earnings. On a diluted basis we could see earnings of around R2.15. The stock trades at R10.51 so still an extremely low multiple of 5 diluted and 3.5 undiluted. The market still thinking there are tough times ahead.

Investment case against Basil Read. Low margins, cyclical earnings and an unpredictable customer in the form of the government. When the global crisis hit, the big players such as M&R and WBHO had big global contracts in places like the Middle East cancelled. This meant that they had to come back to SA and focus on the local market. This meant that things got even more competitive and small margins got squeezed. Not great for the smaller players like Basil Read.

Investment case for Basil Read. With that said, there could be a buying opportunity here. The stock is out of favour yet in the construction sector the company has been one of the better players. With an order book of over R8bn and huge infrastructure spend coming up they could be well positioned to pick up earnings in the next few years.

Conclusion. Like I’ve said before, the construction stocks will start improving before the fundamentals. Just like the shares dropped before the earnings did. When is the bottom? That is the hard part. We prefer to stay out of the speculative game and seek long term growth trends to buy into. Therefore I would not be buying these shares.

Commodities and currencies corner Dr. Copper is trading at 443 US cents per pound, the platinum price is 1750 Dollars per fine ounce. The gold price is last at 1439 Dollars per fine ounce. The oil price is last at 106.66 Dollars per barrel for WTI and 115.50 Dollars per barrel for Brent. Libya, one word, trading at highs last seen in September 2008. The Rand is steady at 11.21 to the Pound Sterling, 6.93 to the US Dollar, 9.79 to the Euro. Markets have started better here this morning. Stocks are better. A European services PMI read is better than the economists thought. Markets this year overall down two percent midday March 24, makes you think, right?

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, or Follow Byron
011 022 5440

Jozi, Jozi. We were closed yesterday, reflecting on the events all of 51 years ago now, the Sharpeville massacre. I would guess that you would have to be at least 65 to remember the event clearly. If you have a story of what you felt at the time, let us know, we can publish it. The consensus is that the killings and events following Sharpeville was a turning point in our history. Don’t forget, just remember to make sure it does not happen again. Righto, lecture aside, the closed markets yesterday here and Japan too, it was Vernal Equinox Day as far as I can tell. Session end on Friday the JSE closed at 30677, down 0.13 percent.

Today there is a strong bounce back, in part the anxieties of a full on melt down in Japan has subsided, and strangely in part foreigners attacking Libyan pro Qaddafi targets. Strange but true, the Americans standing by this line that the mad colonel must go. Question is, where? And perhaps more frightening, a point that that Paul made, what are the pro democracy protestors in Saudi or IRAN thinking? No really. Saudi would be better supported by the West for obvious reasons.

But Iran. That is a strange old one. If Wikileaks suggestions are correct, like Libya, the other regional powers have little time for Iran. Seemingly. And if the Iranian protests went viral, how would the same parties attacking Libya then react if the UN decided the same would apply. That is the key you see, would the same apply? I guess both Russia and China would have a whole lot more to say about Iran.

The biggest M&A news in a long time took place over the weekend. The announcement over the weekend tees up AT&T to take over T-Mobile in the USA for a price tag of 39 billion Dollars. Wow. According to Bloomberg data, the valuation then afforded to T-Mobile USA is nearly 29 times earnings for the 34 million subscribers. This will make AT&T the biggest mobile subscriber in the USA, with 130 million after the deal. Folks who might be benefactors include one of our recommended stocks, Apple, with a whole lot of new potential clients. Some say that this deal might take as much as 18 months to conclude, there would be serious regulatory hurdles to jump over.

I checked out that the average US pre paid client uses around 60 Dollars a month whilst the average post client uses 84 Dollars a month. If you used a simple 50/50 blend of pre versus post paid clients you get to around 77 Dollars ARPU. Which is nearly 10 times more than MTN gets for a subscriber in Iran. And you can bet that the average consumer in the US would worry little if they had one month which they spent more than the previous month. That is seemingly from this piece, my ARPU data —> A Hidden Upside of the AT&T, T-Mobile Deal.

I found another graph, quite interesting, indicating that data ARPU’s in the US are lower than you think, and that data will overtake voice in the middle of 2013, check it out:

This graphic comes from this article, read it, because that notion of ex growth will be thrown right out of the window —> Mobile data still exploding, and hello to yet another mobile OS.

But let me get that right, 39 billion Dollars for 34 million customers. So, per customer around 1150 US Dollars. When you put it that way, it does not sound a lot. But when you say 29 times earnings, that sounds like a lot. Perhaps too much. And the winners look like perhaps the shareholders of T-Mobile and not necessarily the customers. There is a more cynical view from a blogger type who suggests nobody wins (other than the two sets of shareholders), check it out —> In AT&T & T-Mobile Merger, Everybody Loses. Time will tell. The regulatory bumps are many. We shall see.

The reason why I highlighted this deal was twofold, one, in the developed world deals of size and scale are happening at hefty premiums. Indicating that the market participants from business to investment bankers to shareholders think the timing is right. Second, and closer to home, I wanted to highlight the fast growing data market. This article from one of the sources that I used suggests caution, but at the same time is deeply optimistic about data in the future —> Behind the numbers: Will mobile data really explode? I think the short answer is very definitely yes.

Byron’s beats

This morning PPC, Vestact’s favourite construction stock came out with a trading update that looked less than impressive. We knew this however as the construction sector continues to struggle. The trading update stated that PPC expect more than a 30% decrease for the first half of their financial year compared to the previous six months ending 31 March 2010. According to the update, industry figures for cement were down 6.5% from October 2010 to February 2011. Again we knew this as we get these figures sent to us monthly and relay them onto you via this update.

The Score Sheet. Let’s have a look at the numbers. If the earnings are down 30% from the first six months of last year then we are looking to expect around 79c a share. In March 2010 PPC reported 115c for the 6 months. So annualise that revised number and you get around R1.60 for 2011. PPC now trading at R24.90 (down 4% today) trades on a forward PE of 15.5. Probably considered fairly expensive compared to the other construction stocks. There is good reason for that however which includes high margins, price makers and a fantastic dividend cover. Full earnings for last year came in at R2.11 which means the 6 month earnings for the Period up until September 2010 was 96c. So you can see a constant decline taking place.

Investment case against PPC. When is the bottom going to hit? How much longer can you hold the stock while earnings and the share price take strain? Private sector construction spend is struggling. The government are not paying their bills to the construction companies and building has slowed down exceptionally from the good old days of 2007. Increasing competition from foreign cement producers also poses a concern.

Investment case for PPC. Building will never go out of fashion. Government are looking to spend R800bn on infrastructure. They also plan to use this infrastructure spend as a main driver in job creation so expect these plans to be implemented. The economy is growing and rates are low. Private sector spending will increase at some stage. PPC have fantastic margins compared to the builders and are in a very strong position in terms of market share, dominating the Western Cape and Gauteng.

Conclusion. The market tries to predict the future so expect construction stocks to start picking up before the data starts pointing to a recovery. That’s why timing the market can be so difficult. We prefer to remain patient and hold onto our stocks through thick and thin. We know the construction sector is cyclical but as long as the long term trend is up, which we believe it will be, we are happy to hold onto PPC. As Warren Buffet often says ‘’Be fearful when others are greedy, and be greedy when others are fearful.’’ With that said we are looking at the stock very closely and if we are unhappy with the long term prospects of the company, we will inform clients accordingly.

New York, New York. Stocks rocked as the aforementioned anxieties about Japan eased. I guess in the bigger picture that is a whole lot more important than Libya, even if that sits in the background weighing on consumers minds. And I say consumers and not the other oil producers, in particular Russia, who must be thinking that the good times are rolling again. They be having it, check out the crazy Direct TV adverts on Youtube, but be pointed towards the “Opulence, I has it” one. If that guy is not a Vlad Putin wannabe then I don’t know. And talking Vlad Putin, the supreme ruler Prime Minister of Russia has clashed publically with pawn President of Russia, Dmitry Medvedev. Medvedev actually said Putin’s comments were out of line. And you thought Medvedev had no backbone? Enter presidential elections next year.

Session end the Dow closed 178 points to the good, the broader market S&P 500 added 19 and a bit to 1298 whilst the nerds of NASDAQ added 48 and a half to 2692. Over half way back to the all time highs, which was woefully overvalued, back in March 2000, 11 years ago sports lovers. Caterpillar rocked, BHP Billiton could place the single biggest ever order of heavy machinery to develop Olympic Dam down under.

There was some “billboard advertising” as someone put it, with Citigroup doing a 10 for 1 stock consolidation. Reducing the number of share in issue from 29 billion to 2.9 billion. And they are going to pay a dividend of one cent (post the consolidation), which puts their yield as the third worst inside of the S&P 500 companies, who do pay dividends. The yield is negligible, but a start of sorts is better than none whatsoever. The risk on trade meant that the Dollar sold off, that is just the way that it works I guess. Oh, and Meredith Whitney said in a CNBC interview that she was feeling a whole lot better about the bigger picture. No, you are not hallucinating. Check it out —> Meredith Whitney an Optimist? What’s the Catch?

Nike reported afterhours Thursday, we ran out of time Friday to have a proper look. Sadly the numbers clearly disappointed the market. A few things here, first an earnings miss of 4 cents to 1.08 USD per share for the quarter. And then an inventory rise, by 18 percent to 2.5 billion USD. The second part was seen as a poor showing. So even if the company gets really excited about a record quarter, the rising inventory and earnings miss is a little troubling. But let us not get quarteritis, and flip flop from one quarter to the next.

Why do we own the stock in the first place? The category that Nike falls into is aspirational consumerism. Or, as we have decided to shorten it to, “a bling stock”. Check out from the last annual report, a graphic that shows how Nike sales are expanding outside of the US, quite quickly:

So, a lot has changed over the last five years, just from a revenue point of view. This time though, prices are rising. The cost of transporting their goods around is rising. The input costs, cotton and labour are rising. Nike has some awesome sponsorships and make the most amazing shoes and apparel. As a customer I have never been disappointed and you pay for quality. At fifteen times forward we are suggesting for a growth stock of this nature the price is good. And don’t forget the 31 cents a quarter dividend either, which puts them on a dividend yield of 1.7 percent, hardly a Kings ransom, but look on the bright side, better than Citi.

I agree solidly with this analysis and see this as a buying opportunity —> Long-Term Investors Should Look At Nike (NKE)

Commodities and currencies corner Dr. Copper last crossed at 429 US cents per pound. The gold price is last at 1428 Dollars per fine ounce, the platinum price is off its best at 1740 Dollars per fine ounce. The oil price has ticked up again, the NYMEX WTI May 2011 contract last traded at 102.92 Dollars a barrel. The Brent May 2011 contract last traded at 114.96 Dollars a barrel. The Rand is firmer as the risk on trade takes hold, last at 11.28 to the Pound Sterling, 6.90 to the US Dollar and 9.83 to the Euro.

A hot inflation read just came out of the UK, this has scuppered a rally of sorts, even though we are comfortably up here still. For the day, if not still down three and a half percent for the year.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, or Follow Byron
011 022 5440

Jozi, Jozi. There was a whole lot being thrown at us yesterday, markets were up and down, there was a futures closeout and a whole lot of volume. And there were still lots of results being thrown at us, the two biggest ones were Gold Reef and Cipla Medpro. We shall have a look at those two in a moment.

There was of course a whole lot of watching of the Fukushima, the power is expected to be restored today. We hope. Because what that will mean is that water can be pumped into the reactors again, and what that means is that the temperatures will decrease dramatically. The helicopter water drops can stop and order can be restored. And perhaps expats can return to Japan. OK, but for the time being there is still a real chance that worst case scenario could and might still come to bear, but the Japanese are seemingly on top of the case.

Not on top of the case and the other major global story making news is that the UN have declared a no fly zone over Libya and will intervene now. NATO step forward. Wow, that might take another week for those guys to mobilise, by that time the rebels will be toast. Maybe. Poor buggers are feeling left out, two weeks ago the situation looked dire for Qaddafi, now he looks like he will be squashing well organised opposition TO HIM. There would be a certain irony to the Arab league sending troops to squash Qaddafi, when back home stirrings are being suppressed. Any way you look at this, it is having another big impact on oil markets.

Results from Gold Reef Resorts, for the full year to end December released yesterday. Post these results there is a company changing event. The merger between themselves and Tsogo will see 14 casinos and over 14,400 rooms in the group. And of those 14 casinos, they will own a controlling stake in 13 of them, and a minority stake in only one, in Queenstown. MonteCasino of course will be the big one. The number of Gold Reef shares in issue balloons from 276.5 million to 1.096 billion shares, with the new big shareholders being Tsogo (and by extension then HCI) and SABMiller. This is a definitely a tuna eat shark deal. I am not sure what the combined entity is going to be called. Perhaps Gold Sun or Tsogo Reef.

OK, so that is the background to the new entity, this reporting period excludes all of that. It will be quite *nice* to see how big a contributor Monte is, I know you always got an indirect view through HCI and SABMiller, but this will be a direct view. Monte touts itself as Gautengs biggest entertainment destination. Now if Gauteng is the biggest contributor to the South African economy and the South African economy is the biggest in Africa, then this combined group own the biggest entertainment complex in Africa.

The score sheet. Revenue was 2.211 billion ZAR, the net gaming win was 1.5 percent lower at 2.033 billion of that. Profits for the year were 21 percent lower to 293 million ZAR, which translated to per share of 101.6 cents. The stock trades at around 15 ZAR. But all that is history. What is the combined entity going to make? Net gaming win for the six months to end December at HCI was 1.961 billion ZAR. So basically HCI’s gaming win is double that of Gold Reef. But the hotels segment from HCI had sales of over 1.7 billion ZAR for the whole of the 2010 financial year, to end March 2010. And contributed 184 million ZAR in profits to HCI. So the combined entity will also have this.

There are 37 Casinos in South Africa according the Casino association of South Africa. Of which they represent 35 of these. The five owners that they represent are the two entities we have just chatted about, Tsogo and Gold Reef, the other three are Peermont (which was taken private), Sun International (listed) and London clubs international (Emerald Resort and Casino on the Vaal).

As the body points out: “In the 2010 financial year, gambling in South Africa experienced a Gross Gaming Revenue in excess of R16.2 billion, of which casino gambling accounted for R13.5 billion. By any measure this is a massive quantum of consumer expenditure, which yields very considerable tax revenues to provincial and national economies.” BUT. BUT. There are those (ourselves included) that think that revenue should be spent more productively. And, what about the single stock futures market (snigger)? So casino revenues last year as a percentage of the entire “gaming” (not so fun to lose all the time) market locally is 83.3 percent. The balance is low payout machines, the ponies, sports betting, that sort of thing. Have I missed anything here?

The Gold Reef fellows say in their report: “Overall the year was challenging with consumer disposable income being impacted by high levels of household debt and increased utility and municipal charges. Despite this, the recent improvement in retail spending statistics is indicative of increasing consumer confidence and potentially further economic recovery in the medium term.”

Consumer confidence? What? So people have to start feeling better about the odds being stacked against them, in order to head back off to the slots? They should rather refer to consumer stupidity, pointless squandering was down this half and hopefully “users” will get more stupid in the next half. The British Author Samuel Johnson is credited with saying: Gambling is a tax on stupidity. Quite.

The report card. They seem to be very good at what they do. Gambling for me, especially in a South African context is going to be viewed more and more as not helping the poor make progress. Recent moves by Treasury to tax winnings at the source, starting at 15 percent might not really discourage people yet. And I know that it is quite a good revenue stream for Treasury. And that the industry does create jobs. But so many better things could be done with the money. And likewise as an investment, I think you can do better things with the money. Government intervention and higher taxes on the “gaming” industry are no doubt going to rise. We will continue to avoid.

Cipla Medpro reported numbers yesterday. These were for the full year to end December 2010. Lets dive in with the score sheet. Revenue up 15 percent to 1.447 billion ZAR. Headline earnings per share of 44.2 cents could have been a whole lot higher if there was not some currency “intervention”.

Check it out: “The 2010 annual results have been achieved despite significant non-cash IFRS adjustments relating to forward exchange contracts (FECs). As a result of the strong Rand/weak US Dollar at 31 December 2010, an unrealised loss on FECs of R44,7 million was debited to the income statement despite a gain being recorded in the accounts at 30 June 2010 of R22,4 million and an unrealised loss of R24,7 million at 31 December 2009.”

Now I understand the good intentions of trying to smooth earnings by taking these Forward Exchange Contracts. I don’t like it when the company tries to monkey with something outside of your control. And also, why make a song and a dance about the relationship with Cipla India? I mean, would you and do you get excited about your main supplier? Do you see Spar telling everyone how wonderful the guys over at Tiger Brands are? We like the sector, but we way prefer Aspen. Cipla seems like more like a distribution business to us, even though that is not entirely fair.

Byron’s beats Newspaper advertising revenue. You would expect the trend to show that it is getting worse and not better, but Byron shows that it is a little more alarming than you think. Like we say in the office, this notion that newspapers are dead is nonsense, those fast enough are just changing their model.

Sasha drew my attention to an interesting piece in the Wall Street Journal which pointed out that newspaper advertising has sunk to a 25 year low. Clearly the internet has completely crippled the industry. Newspaper ads were at this very same level in 1985 with $26 billion dollars being spent on ads last year. $25bn was spent in 1985 and if you adjust that for inflation it equates to about $49bn today. So in real terms the industry has actually halved. So far this year revenue is down 4.7% from last year. So why is this happening? Why buy a newspaper when you can buy an iPad and get the newspaper’s app. As an advertiser you would have been looking to shift your attention from print ages ago. It’s no secret that the internet is the present and the future. As a good comparison let’s look at Google’s advertising revenues.

Last year Google’s advertising revenue was $28bn. Yes, that one company brought in more revenue than the entire newspaper industry. Google have been responsible for 20% of the growth in worldwide advertising over the last 15 years. In fact without Google web advertising growth has been pretty flat. I think that is because Google have completely dominated the industry and without them someone else would have done it. Check the graph below which I got from this interesting article which talks about advertising since Google’s IPO —> Has the growth in online advertising flat lined since Google’s IPO?.



These are the kind of trends that us as investors need to pay close attention to. Firstly we need to decipher which industries are dying so as to not put money in them. So for example we would not invest in Sappi (even though they make paper for magazines – Sasha) because we feel iPads, Kindles, emails and the internet are going to decrease the use of paper going forward. Then we’d have to pick up which trends are going to grow and where this money is shifting to. This would obviously have meant investing in Google when it listed at $85 in 2004 (below the price expected – Sasha), now trading at $561.

That was the past though. We are still strong believers in Google and would still be buying at these levels. Where to for online advertising from here? I’ve mentioned before that I believe Facebook and Twiiter have a lot of potential in this sector. What I really wanted to point out however is how our world changes and evolves so quickly. My Grandparents still buy the newspaper everyday but I can guarantee you that when Tablets become household goods, that newspaper on your coffee table will become a device that you can read your daily news, video conference call your mate in Australia and compose a song in five minutes with.

I am really looking forward to Byron’s greatest hits. They no doubt will include tracks like, “Take me to your Twitter” and “Facebook, my first love”. Or not.

Commodities and currencies corner Dr. Copper last at 427 US cent per pound. The oil price has picked up on the Libya crisis. 102.18 Dollars per barrel is where it is last. That is WTI. Brent is 115.11 Dollars a barrel. The gold price is last at 1415 Dollars per fine ounce, the platinum price is 1714 Dollars per fine ounce. The Rand is weaker at 7.06 to the Dollar, 11.37 to the Pound Sterling and 9.96 to the Euro. And the Chinese have raised the reserve ratio for their banks again. I saw that housing prices were going in the right direction —> Property prices dip in China as measures bite. Seems bad in the short term, good in the long term.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, or Follow Byron
011 022 5440

Jozi, Jozi. Do we need this much news on the nuclear reactor? I guess the short answer is yes. In the society that we live in nowadays, the need for up to minute news grows more and more every day. Twitter kept people informed. Tweets during the quake, during the tsunami, Japanese users on Twitter are many. In the aftermath there were and are people on the ground to follow.

I think the short answer is that yes, we DO need to know about the nuclear reactor at Fukushima. This is as old Donald Rumsfeld would say an unknown-unknown event. Because this time last week we had absolutely no way of knowing about a potential nuclear disaster in Japan. No way. We were all focused on Brother Leader murdering his own people. That is blunt, but true. And more sad but true is the that the name Fukushima-shi is loosely translated to good-fortune island. Wow.

Back to our markets yesterday, the Jozi all share index recovered as the Japanese markets made a strong comeback. We closed at 30612, up 418 points in total. That translated to 1.4 percent better. Phew, this volatility must be seeing the traders making/losing bucket loads of money. And….today is futures closeout. So, roll or sell, or buy back those contracts, long or short.

Talking of this trading stuff, I was browsing through the Amazon.com bookstore in the stock investing sub segment and there were books titled like, “Day trade your way to riches” and “Technical analysis trades to millions”, stuff like that. I thought to myself, this stuff should be in the fantasy fiction, and not under investing. I swear to you, I couldn’t find anything decent to read. Must have been jaded, I am sure that there are books I should be reading, but the enormous amount of news and blogs I read were seemingly better quality. Perhaps I should start reading economic papers. That is right, that should put me to sleep.

OK, so the Japanese markets closed down nearly two percent this morning. It was four percent lower at one stage earlier in the session, but also almost break even with less than an hour to go in the session, around 14:30 in Tokyo. Amazing. So you would be expecting the Yen to be getting absolutely caned right now, not so? Wrong. Sorry. The opposite is in fact happening. In fact the Yen to the Dollar cross was at the best ever point in the session.

A massive spike to around 76.50 Yen to the US Dollar will not make sense at face value. In the aftermath of the 1995 Kobe earthquake, the Yen lost over 20 percent of its value quite quickly. But this is serious, these are redemptions that are flowing back to Japan. So, redemptions of overseas holdings need to buy Yen on the way back in, not so? Correct. These are and ARE NOT the famous Mrs. Watanabe investors. The collective group of retail investors, considered to be Japanese housewives that have serious global investment clout.

In part the reinsurance and insurance guys are repatriating money too, this is what is impacting the Yen. Remember that a strong Yen is awful for the exporters, which is companies like Toyota, Nintendo, Sony and the like. It is good for inflation that the Yen is strong. Inflation and Japan, I am not sure you can associate the two.

Byron’s beats One of our recent additions, Naspers, owns a large stake in Hong Kong listed Tencent. Tencent released results yesterday after the market in Hong Kong.

It’s tough out there for these technology stocks that have done so well in the last few years. It seems that reporting results that are in line with consensus is not actually in line with consensus as consensus is actually an expectation to beat consensus. Get it? Sounds unfair not so? Tencent reported fourth quarter results for 2010 which were in line with consensus and the stock has dropped around 10% in Hong Kong today.

The Score Sheet. Revenue was up 50% year on year slowing down from 55% in the third quarter whilst net income (in other words profit) was up 46%. Management was cautious in their consensus however, stating that margins would be under pressure in 2011.

Remember that Naspers own 35% of this company who have a current market cap of $51bn. That equates to $17.85bn, 81.5% of Naspers market cap, now sitting at $21.9bn at current currency conversions. Amazing. You see how Naspers is potentially being undervalued. And you see why the Naspers share price follows the Tencent price so religiously. Our market is up 0.5% so far today and Naspers is down 3%.

The Tencent stock closed at 216.8 Yuan and made 4.43 Yuan for the year, trading on an extremely demanding multiple of 49. Earnings are expected to be around 6 Yuan next year however so a forward multiple of 36 is afforded. The dividend was increased from HK$0.4 to HK$0.55. This will increase Naspers’ cash flow substantially. Around HK$353 million will be paid to Naspers in fact. That equates to R318 million. It’s a small dividend cover but the company is growing extremely fast as you can see.

Investment case against Tencent. Like i said. The stock trades at an extremely demanding multiple. That is why the Naspers stock does not reflect the full value of their Tencent asset. I don’t think investors here fully understand the business and the potential it has.

Or they don’t believe Tencent can grow its earnings enough to justify its share price. The company also expects revenue growth to slow down this year. Who can blame them though? Revenue grew 76% in 2009. But I guess the share price has very high expectations. Management talk of margins slowing down will also ward off investors. Let me just remind you that margins now sit at 67.8%.

Investment case for Tencent. It’s hard for me not to be bias towards this stock. I love the sector. Look at those margins. Their business model is fantastic. They make virtual stuff and sell it for real money. Online gaming is addictive and is becoming a huge part of society. If you are not involved you are just not with the programme and hence the multiplier affect takes its toll.

That is why they have more subscribers than Facebook with over 650 million. How are they going to grow these earnings? They plan to make some significant investments in their online games, messaging services and social networking. They have to remain on top of their game. The industry is evolving and growing so quickly and you cannot be left behind. They have a big enough subscriber base so they need to improve their services so as to suck in the cash. They’ve done it before so I back them to carry on.

Conclusion. Buy Naspers. You are getting this fantastic company at a discount. Naspers is down today so what better time to get involved if you haven’t already.

New York, New York. Apple was a noticeable decliner. And you can attribute this to the “situation” in Japan. You must remember that the grid, the electricity grid is not still fully restored and there are businesses in the affected areas that will not be able to get online and producing for a long, long time. Apple met what the media are calling, a rare downgrade from buy to hold, market participants sold the stock off over four percent. The reason for the downgrade is not exactly associated with Japan, but there is a connection.

They come from an analyst called Alex Guana, who works at JMP Securities. Are you kidding me, this sounds like Vin Diesel from Marlin Stanley. Nah, I am kidding, just giving this guy a rev, I saw a lot of the Apple lovers having a go at this poor guy. Give him a break. JPM might not be JPMorgan, but I am sure that he knows his stuff, and good for him going out on a limb like that. Here is a WSJ piece —> JMP Analyst Downgrades Apple, Cites Asian Manufacturing Partner.

The anxiety is about the guys that produce a lot of the parts for the iPhone, the guys who own Foxconn. Foxconn of course are the fellows in mainland China who have that massive factory, and not the guys who dislike Rupert Murdoch. You know, Fox Con…. Guana says that you must pay attention and not get lulled into a false sense of security around the stock and the company. Still, not a single sell yet on Apple. Myself, I still see a lot of upside for Apple.

Commodities and currencies corner The copper price was last at 423 US cents per pound. The platinum price is lower at 1688 Dollars per fine ounce, the gold price last at 1401 Dollars per fine ounce. The oil price has started to tick up again. Bahrain. WTI last at 99.68 Dollars per barrel. Brent is at 112.42 Dollars a barrel. The Rand is weaker at 7.06 to the US Dollar, 11.40 to the Pound Sterling and 9.90 to the Euro. We are lower, US futures are higher, the reactors in Japan at the nuclear power station are still touch and go.

Sasha Naryshkine and Byron Lotter
Email us
Follow Sasha on Twitter, or Follow Byron
011 022 5440

Jozi, Jozi. Oh dear, not another day like yesterday. We briefly dipped below the 30 thousand mark on the Jozi all share, but closed up shop a bit better than that. Still, we were down 685 points on the day and the Jozi all share ended at 30194. That is down 2.22 percent. The same Japanese anxieties had spread to Europe, where the Germans were down nearly 5 percent at one stage. The day of rage in Saudi last Friday did not even register. The Saudi’s for the record have been helping the royal family in Bahrain. My opinions of royal families is very dim, I have no idea where this comes from, it is not my parents, perhaps it is my high school history lessons and talking about Louis the fourteenth of France. Perhaps.

Paul emailed me a magnificent piece which was all over the web about the timeline at Fukushima. The piece is written by an MIT research scientist, a PhD scientist who is named Dr Josef Oehmen. By his peers in person, behind his back, hey, I have no idea, but we all had nicknames for lecturers at varsity. Here goes, from the MIT department at which the good professor works —> Modified version of original post written by Josef Oehmen.

The first bit explains how the plant actually works. The second part is where you must pay attention, how well the plant was actually built and what it could stand. Ironically it was not the earthquake that totalled the plant, but rather the tsunami thereafter that washed the backup diesel power generators away. And then the battery power only lasted so long and by that time the diesel generators driven in did “not fit”, something about the plug. Amazing.

So it all came down to humans again, not the nuclear power plant itself. Even though the plant was and is 40 years old (should rather just say was, the thing is toast really) the measures were pretty good. Reminder, this was the worst ever earthquake measured in Japanese history. There is amazing stuff on this website, impress your friends whilst you watch sport, turn a chop or over dinner this weekend by reading all the interesting stuff here —> Explanation of Nuclear Reactor Decay Heat.

Three big sets of results yesterday, the one that would be closest to us would no doubt have been the JSE results, for the 12 months to end December 2010. Ja, no well. What can you call the JSE? A service provider or a monopoly? We all need the exchange and we need the exchange to have the very best people available, because it is kind of like a wicketkeeper, the less you notice them, the better the job they are doing no doubt.

You only notice them when they miss a stumping or a run out, or drop a catch. Otherwise they are always in it, no time out at fine leg. Strangely, these are often seen as national assets, stock exchanges, I am not too sure why. Surely the very best folks for attracting listings here don’t have to be South Africans. Often, folks who move to a country are better advertisements for that country than the locals, who have too many gripes.

As the JSE says in the results presentation, this sums up why you need a good wicketkeeper: “It is becoming clearer that, in a globally competitive environment, markets with strong regulation, solid infrastructure and thriving institutions will be better positioned to attract sustainable capital flows. The recognition by the World Economic Forum (WEF) Global Competitiveness Report 2010 – 2011 that South Africa’s securities exchange regulation is the best in the world reflects our transformation from a single product equity exchange to a well regulated, fully horizontally and vertically integrated exchange, now recognised as one of the world’s leading exchanges.”

These are the flows in last year, we know that this year things have changed a little: “Foreign investors continued to increase their holdings in JSE equities (2010 net inflow: R36.4 billion; 2009: R75.3 billion) and grew their net investment in the interest rate market to R58.6 billion.” Governor of the central Bank, Gill Marcus did allude to this, quite often last year. At the first meeting of the reserve bank this year, the suggestion was that there was quite a big unwind.

Last thing, management changes afoot at the JSE, out with chief Russell Loubser, who retires this year and in with deputy CEO Nicky Newton-King. Loubser has been running the business for the better part of fifteen years, and has taken the business from the paper based settlement systems to the electronic settlement. Imagine having to nowadays wait for your certificate after a purchase and delivering your certificate after you have sold. Imagine.

And also the trading systems have changed over that time too, electronic trading moved off the floor in 1995 and went electronic. There was a shift away from the JSE trading system, JET to the London trading systems, I think in 2002. In fact at the time I remember that some old brokers were so used to the black, red and green trading systems that the new screens at the time replicated the trading colours. Human beings are funny things.

The scoreboard. Revenue was higher at 1.255 billion Rand and profits for the year were 378 million Rand, both marginally higher year on year. That translated to a basic earnings per share (EPS) number of 445 ZA cents per share. Or basic of 407 ZA cents per share. A dividend of 210 cents per share was declared. Quite a profitable business really. The stock trades at 66 and a half ZAR today, taking a fair beating, down 5 percent, the fundamentals look a little stretched with a dividend yield of 3.1 percent and an earnings multiple of over 15 times.

The London Stock Exchange trades on an earnings multiple of 21 times. The Deutsche Bourse trades on 23 times earnings. The CBOE trades on 26.6 times earnings, the NYSE Euronext trades cheaper than these at 16.7 times earnings. The TMX group which own the Toronto Stock Exchange is cheaper than the JSE, 14.4 times earnings. So I guess the JSE is justifiably cheaper than their developed market peers, but at the same time not expensive.

The score card. Which is different from the scoreboard remember? Reasons not to own the company include size and scale. They are top of the pile in a closed market. Where is the growth? Unless of course the JSE buy regional exchanges (which is part of the plan) and become the bourse for Africa, well regulated and well traded and a better place to raise money for development.

The Africa Board might start to attract a little more attention as soon as folks feel the need to be pushed. But then again we are competing on a mining level with the London Stock Exchange. And the Toronto Stock Exchange. Where one would think the levels of trust are far higher, just because. I guess then you have to be cheaper and offer a quality product comparable. I am just not sure how easy that all is when making the decision to list somewhere. I think whilst the JSE is a monopoly, friendliness to business in South Africa is still not what it should be, in my opinion, it should be way higher. You would then attract these opportunities and create jobs. Because contrary to what a whole lot of high levels government officials might think, it is business that creates jobs, lasting ones. No thanks, we won’t own these in the core portfolios.

And then there were half year numbers from small technology group, EOH holdings, for the six months to end January 2011. Strange reported period, January/November, don’t you think? First what do they do? Ten years ago it would have been acceptable to just say to your mates, oh well, they are in IT, you know. That is as good a description as you would get back then. But nowadays, you need something better. So, as per their SENS release, I am going to try and shorten the description of what they do. “EOH operates as an integrated business in the areas of consultancy, technology and outsourcing and offers a wide range of solutions across all major industry verticals.”

The last bit, Outsourcing, would get Byron going here. Except he is away with his family at Sun City, looking at animals and doing research on why gambling is a stinky business. Not the second part, but he loves looking at animals. I don’t mind every once in a while, Paul prefers looking at urban areas. Technology is a theme we really like here at Vestact, what about EOH then?

The scoreboard. Revenue for the six months to end January came in 44.8 percent higher to 1.139 billion ZAR, profits were 54.6 percent higher to 70.1 million ZAR. That translates to earnings per share of 96.4 cents per share. Cash and cash equivalents of 228 million Rand. The company has a market capitalisation of 1.464 billion ZAR and the shares trade at 17.60 ZAR. So on an earnings multiple of less than ten times. That is cheap by any stretch of the imagination. Who do I compare them to though?

They have done really well over the last five years, the company has steadily grown. This half year revenue is more than it was in 2009 for the whole year. Equally the EPS number for the half year is the same as the full year in 2009. Wow. The dividend for the full year last year was 36 cents. That is pretty weak, but at least they pay one.

The score card. We quite like the management team, they are seemingly tops. We quite like the fact that they are looking to expand and get more government business and grow into the rest of the continent. We quite like the fact that they have aligned themselves as capturing those looking for cloud based solutions. I think cloud computing at a “high” level will prove to be the winner. Accessing data on everything from your handset to your tablet and sticking it back to access it again on access it back on your desktop/laptop.

I kind of like it, I must be honest. The push into more government work could ramp revenue if not margins over the coming years. It could be one to watch. The problem I guess, and that to some extent has been addressed, how to grow. Africa is a target. That could potentially be good, if not filled with too many potholes. In short, I like.

New York, New York. Stocks ended comfortably off their worst levels for the day, but still walked away feeling a little tender. Well, more than a little tender. Still, we are looking at two month lows for the S&P 500, so everyone long is feeling more than a little uneasy about life. And I can tell you, we have all become nuclear experts. Like I said yesterday, I hope we do not become experts on the Saudi Royal family next week. And I hope we just become experts on Middle Eastern and North African democracy. That is my wish.

The only real notable gainer was NetFlix, up 8 percent. I am guessing that a few shorts got squeezed out. Goldman Sachs upgraded them and had a 12 month price target to 300 Dollars, the stock ramped up to 217 USD ot there abouts. The fellows over at the Business Insider put together a nice piece —> Netflix Is Beating YouTube To Win The War For Consumer Mindshare. Well done to everyone over the age of fifty for signing up and liking it.

Commodities and currencies corner Dr. Copper is higher at 417 US cents per pound. The platinum price has also headed higher to 1707 US Dollars per fine ounce. The gold price is also a little higher at 1399 Dollars per fine ounce. The oil price is up again, last just above 110 Dollars a barrel, for Brent Crude. WTI crude is trading at 98 and a half Dollars per barrel. The rand is trading weaker at 7.01 to the US Dollar. 11.28 to the Pound Sterling and 9.78 to the Euro.

Things have stabilized. Japanese equities have soared through the morning into their close. We have started better. But, and this is a big but, it is still uncertain about that nuclear power station. But remember, read that part at the beginning first.

Sasha Naryshkine
Email us
Follow Sasha on Twitter
011 022 5440