Kick the great big fat Greek urn

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Kick the great big fat Greek urn

June 30, 2011 in Uncategorized

Jozi, Jozi. More stone throwing on the streets of Athens yesterday, we watched as the Greek parliament passed the austerity measures. Markets globally were in fact cheering the fact long before the vote went ahead, and it was mainly that a couple of dissenting voters on the ruling parties side had decided to stay the course with Curious George Papandreou. And in fact an opposition MP also said that she would side with George. So there you go, the great big fat Greek urn has been kicked down the road. Now the hard part starts. Tax collection, restructuring, asset sales and attitude, those things all have to change. The attitude part ironically might be the hardest thing to change.

So global markets rallied, we saw the buyers step in and the risk trade was back on. Wax on, wax off. I did see one of my favourite twitter bears, Doug Kass suggest that US and European debt issues were FAR from over. He has a point. But the French are talking to their banks about Greek debt and came to some sort of agreement earlier in the week, and as I understand it the Germans are doing the same. You know, if I were the governments in those places (France and Germany), I would be pointing out to the population which local banks own Greek debt and why we have to help the Greeks out.

Because I am sure that there is bailout fatigue in the larger European economies. BUT, as my hero Jim O’Neill (chairman global equities Goldman Sachs) points out yesterday, only one European country complies with the Maastricht treaty fiscal rules is Finland. With both debt and deficits. But as Paul points out, with Nokia creaking and returning to boot making and wood cutting, the outlook is hardly too exciting for the Fins. Check out a O’Neill piece republished in an online publication called Today: Asian investors to Europe’s rescue?

I loved the money line, because that just about sums it all up: “The inability of the most fiscally challenged countries to have control over their own monetary policies is the specific problem right now, which is in contrast to the situation in Japan and the US. In hindsight, it might have been wrong to have allowed so many countries to join the eurozone so easily. As many of the sceptics suggested back before 1999, it would turn out to be a major error.” How correct he is.

We rocked here yesterday, the Jozi all share closed 434 points to end at 31726 points, up 1.39 points on the day. Excellent. Resource stocks added 1.89 percent on the day and were the real winners. Be careful because calling someone a winner can have a dry sarcastic tone to it and often means the opposite. We saw both Impala Platinum CEO Dave Brown quite simply say that South African mine output will suffer as the talks and rhetoric around nationalisation continues to swirl. And let us not kid ourselves, much of our economy revolves around mining activity. Check it out: South African Demands on Mining Threaten Output, Impala Says.

Quite. And all the while the Congress of South African Trade Unions have upped the ante, this is another Stephen Grootes beauty from yesterday: Malema 2.0, meet Cosatu 2.0. I love the pictures, the two looking at each other, Vavi and Malema with pointy fingers. Pointy fingers always reminds me of some sort of authority. I guess that comes from your school days where teachers pointed at Jones and Finch and the like. Again, I wait for the end of the Congress general council before making any points. Which will be along these lines: S. Africa Won’t Earn More by Owning Mines, Godsell, Spicer Say.

Byron’s beats takes a look at City Lodge.

Firstly let’s look at the numbers so we can we know what to expect. Normalised headline earnings per share were down 17% for the half year so this did not come as too much of a surprise to the market. Basically they are having a similar decrease to what was experienced in the first half of the year. Last year they made R4.55 a share, take away 33% from that and we should expect around R3.05. For a stock trading R65.45 that is a PE of over 20. Looking expensive?

This is more an earnings story, it is a NAV play too. Remember in our recommendation thesis we noted that management valued the replacement cost of their properties at R3.5bn. At this current share price the market values the company at R2.8bn. This means that the stock is trading at a 20% discount to fixed asset value. According to accounting practices however it is a lot easier to write down an asset than to appreciate it therefore on the financial statements these management resale values will not necessarily be reflected.

But why are earnings declining? Because without returns these assets deserve the discount. Remember that this year is comparative to a World Cup year. This event definitely inflated earnings. Not only did it inflate earnings but it encouraged all the hotel groups, City Lodge included to expand their portfolio. This increase in competition came at a time when the global economy was hit by the financial crisis. We are experiencing a slow recovery with an excess in hotel room supply.

What to do with the stock? We remain patient. The business cycle is turning and City Lodge is perfectly geared for this. We are dubbed the gateway to Africa and business people around the world are coming to our shores to seek returns from the ‘final frontier’ of double digit growth. Our tourism industry has also taken a huge boost following the World Cup. The combination of these two factors plus the turning of the business cycle should position City Lodge fantastically going forward. Especially with room capacity increased by 24%.

Murray & Roberts released a business update yesterday. The share price rocked and is having a good time this morning too. Which suggests that the environment is normalising at a relatively low base. The South African power construction contract is huge: “The Group’s order book is steady at about R52 billion, of which about R19 billion relates to remaining works on the South African Power Program.”.

And then of course there is the Bombela payment: “The Gautrain Project is nearing completion and Bombela Concession Company will lodge its arbitration Statement of Claim on or about 30 June 2011 in connection with the Land Deficiencies and related disputes that negatively impacted the contract.” Margins are never going to be amazing in this business: “the remaining work on both subcontracts will deliver a margin within the Group’s published strategic range of 5,0% to 7,5%.” Those are never going to be the greatest margins, but hey, they are what they are and you know what you get (and you don’t complain). If you want to read the rest of the SENS then check it out on the MUR Investors / SENS page.

New York, New York. Visa, another one of our recommended stocks over in New York, enjoyed a great time last evening. Along with Mastercard. And the reason? Well, not because the Greeks are going to stop using cash and move to plastic, but rather that the Federal Reserve changed their minds about the fee cap on debit card swipes. It went from 12 to 21 cents a transaction. “It” being the swipe fee. Check out the WSJ articles titled Fed Softens ‘Swipe’ Fees , and see that five folks votes were all that counted. Four yes votes and one no vote. Visa popped a monster 15 percent to 86.57 Dollars a share. MasterCard popped 11.3 percent to 309.7 Dollars a share. This is good news for shareholders of Visa (and MasterCard), of which we have many. This is a 52 week high for Visa and still some way off the all time high of just over 96 and a half reached in April last year.

Commodity and currency corner. Dr. Copper last traded at 424 US cents per pound, the gold price is slightly lower at 1509 Dollars per fine ounce, whilst the platinum price is also off a touch at 1720 Dollars per fine ounce. The oil price is lower at 94.65 Dollars per barrel. The Rand is slightly firmer at 6.78 to the US Dollar, 10.84 to the Pound Sterling and 9.81 to the Euro. The markets are slightly higher here this morning, but only a bit.

Sasha Naryshkine and Byron Lotter
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by sashan

Feta please!!

June 29, 2011 in Uncategorized

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Jozi, Jozi. Notwithstanding the pockets of violence in Athens, the window beating with blunt objects, the stones being thrown at the police and the kicking away of tear gas by those in makeshift masks, markets globally went higher on the anticipation that the Greeks would make the hard choice and pass a 78 billion Euro austerity vote. The law makers might have a problem actually getting into parliament today, in the morning there was already a couple of hundred folks outside parliament. But yesterday it was up, up and away, the Jozi all share closed 394 points or 1.28 percent better at 31291. Oh goody, now we are only down two and a half percent for the year.

Banks ramped one and three quarters of a percent, the general retail space also tacked on nearly two percent, mobile telecom stocks actually sank half a percent, with the one rung of the ladder up (including fixed line), the telecom index sank 0.45 percent. Perhaps the looming RICA issues weighing on the mobile providers, the deadline for registration is tomorrow. RICA or else your phone gets cut off. Hey, we renewed our contracts here on Friday and we are still waiting for the networks to turn us on this side. Yech.

On the local front there was the ongoing COSATU congress. The congress of the congress. I was seriously thinking of covering the whole meeting, but I think that a summary will be in order. The only thing that left me with a little chuckle was when I read the opening address: Opening address by COSATU President Sidumo Dlamini to the 5th Central Committee, Midrand. The first minute or so of the speech is in recognising certain individuals who head specific organisations. I thought (and excuse me if I am wrong) that socialists are all the same. So surely a greeting starting, “Greetings all equal comrades” would be more apt. Just saying.

Staying with socialists for a little bit here. What does this new round of Greek austerity actually hold for Greeks should it pass? I am not talking about the asset sales, Byron dealt with that in his beats yesterday. I am not convinced that the majority of Greece feels the way that the twenty thousand strong feel. Many have lost their jobs already, unemployment stands at over 16 percent in Greece comfortably above the 9 or so percent this time last year. According to a Bloomberg article I read the tax free threshold is lowered to 8000 Euros from 12000 Euros. And the VAT rate is increased to 23 percent. You might say wow. But that is about the rate across the whole of Europe, so, just getting into line with the rest.

Plus, it seems that 150 thousand government employees are going to lose their jobs. I am tired of socialist rhetoric. This idea that businesses do so well and that the poor worker bears the brunt and that companies continue to make mega profits in times of austerity. Nonsense. Private capital is what creates businesses that hire people. If it is so very easy, then why doesn’t organized labour setup businesses and hire everywhere. And share the profits, come on, I dare you to take business on. So, the people who invented democracy, Greece, have to use democracy to make possibly the most painful decision in many decades. Either implement the austerity measures or return to the middle ages Drachma.

Omnia released results yesterday morning, this is for the full year to end 31 March, so we just got in here in the nick of time. For those of you who do not know what I am talking about, you have three months from closing your books to reporting results, otherwise you would face being suspended from the exchange. Who are Omnia and what do they do? Decent enough question. From their website: “Omnia is a diversified and specialist chemical services company which provides customised solutions in the chemical, mining and agricultural markets.” So now you know, if you did not before.

The numbers. Revenue increased 6 percent to 9.4 billion ZAR, still below the 2009 levels of 11.1 billion ZAR. In fact the company to their credit sticks in that 2009 number, and you get three years worth of numbers. Profits of 451 million ZAR are a monster jump on last year, but 40 million ZAR below 2009. HEPS, that translates to 767 cents per share, no dividend. Reason being of course is that there was a 1 billion ZAR rights offer, you don’t really want to ask shareholders for money and then give it back. On that basis I suspect that there might be a modest dividend this year, and perhaps the next, conditions in their major markets of course key. But I suspect that we will not see the awful business conditions past.

According to a graph in their results presentation Omnia Holdings Limited – Results presentation for the year ended 31 March 2011, South African manufacturing volumes are still only at levels seen in 2006. And we are still around 15 percent lower than the peaks in May 2008 (ironically when the JSE topped out).

I really do like the fertilizer business. I believe that humans will have to come to terms with higher food prices, the total land mass of earth is not going to increase and there are more and more people on the planet. As I once heard, there is no plan B for humans on earth. There was quite a nice slide in the presentation titled: Per Capita Protein Consumption in Select Economies, I hacked it, check it out:

I quite like that graph, because the suggestion is that everyone is going to eat as much as the Americans. Hmmm… I doubt that really, in some cultures eating is not a hobby as it is in others. Nor is it a sport. OK, but Omnia seems to be OK, but nothing exciting. Operating (and net) profit margins have been steady over the last five years. Revenue has grown over 17 percent over the last five years. Sure they were rocked in 2009, but who wasn’t. Sure they have undergone an enormous rights issue, but I suspect this company falls into the category of non exciting and steady. I see a sell and hold rating on the stock, but the stock still looks sort of cheap. Prefer Sasol really.

Byron’s beats takes a look at a mid cap company this morning, the results of Hudaco. Call it 2.8 billion market capitalisation. The stock only normally trades around three million ZAR a day, around 40 thousand shares trade a day.

“Hudaco is a South African group that imports and distributes branded engineering consumables, power tools and security, automotive and professional mobile radio communication products. Its customer base is mainly within the southern African manufacturing, mining, construction, automotive aftermarket and security industries. Adding value to the product sold by offering technical advice, prompt availability and training is a key part of Hudaco`s business model.” That is how they describe themselves, I’m sure you get the just of what they do. As you can see, they should be a decent proxy for the industrial sector. The goods they supply mostly include bearings, power transmissions, diesel engines, security devices and power tools, acting as the middle man between clients and global producers.

They managed to increase sales by 26% and operating profit by 24%. Volumes were the same and the increase was attributable to contributions from acquisitions and a stronger rand. Remember they import so a stronger rand makes their goods cheaper to buy and sell. Interestingly they mention that the Japanese tsunami impacted some of their suppliers but they were all back in production within a few weeks. Japanese efficiency. They have a fantastic profit margin of 39%. Customers obviously willing to pay up for Hudaco’s supply skills and global connections.

Let’s look at the valuations. Headline earnings per share for the 6 months were up 11% to 377c. The stock trades at 8195c so if we assume they manage to double these 6 month numbers we could expect earnings for the year of 754c and a forward PE of 10.8, pretty standard for a company of this nature. An interim dividend of 130c was announced. Last year they paid out 350c, add the 11% growth to that and we could expect 388c. That’s a decent yield of nearly 5%.

Investment case. It looks like a good value play with good margins and growing revenues due to continuous acquisitions. I’m optimistic about the growth of all the sectors they supply to and expect their sales to grow. My biggest concern is where are they going to blow the lights out? How are they going to innovate and change the face of industrial supply in South Africa? I just do not see anything exciting enough in relation to the types of themes we look for.

Prospects, the commentary I was looking for. They feel the SA mining and manufacturing sector lacks infrastructure particularly electricity and rail (Eskom and Transnet, just saying). This is hampering these industries, especially mining houses from expanding and taking full advantage of rising commodity prices. They feel this will result in muted growth over the next five years. They also express concern over nationalisation. If these industries cannot grow, neither can their own business so management are not very positive. Very sadly, reasons for this involve the administration of our country rather than business cycles or economic impacts. Something to ponder.

Yech. Telkom have reached and agreement with Helios in Nigeria over the Multi-Links asset. So this is what is going to happen. Telkom will sell Multi-Links (all of it, not just the CDMA business) to a Helios affiliate for 10 million US dollars. Around 70 million ZAR. Remember that in 2007 they paid 1.96 billion ZAR for a 75 percent stake and then not long after that, they paid 1.224 billion ZAR for the balance. 3.184 billion ZAR turns into 0.0070 billion ZAR. Holy smokes!!!! Worth less than 0.25 percent of the value of the original purchase, so in effect they have lost all the money. But you knew that already, because they wrote it all off anyhow. WHAT A DISGRACE!!!!

In my opinion the main reason for never buying the company (we did not own them willingly in any portfolio), was that they had a quasi government type attitude to their customers and shareholders. Who were 40 percent government. Let us say that they (Telkom) have worked hard at improving customer service. But do this, dial 1023 from your mobile and your Telkom phone and see who picks up first. I dare you.

Christine Lagarde is the new IMF chief. We thought so, she had all the skills, the current European debt problems require a European person, and emerging markets are just going to have to wait. I suspect that the next person to head the most powerful (or thought to be most powerful) lending institution in the world. Augustin Carstens will just have to wait for a while, they were both good candidates, but she is tops. She has said that she will give the BRIC’s more clout, ok, maybe not the Russians, hah-hah. And you know how the world has changed? Nobody even cares that she is a woman, now that friends, is progress. Oh, and the French need a new Finance Minister, Lagarde assumes the IMF top job on July 5. Next week. Five years time, in 2016, Lagarde will be 60 and ready either for a new challenge, or perhaps she is doing a great job.

Commodity and currency corner. Dr. Copper has ticked up to 414 US cents per pound. The platinum price is better at 1708 Dollars per fine ounce, the gold price is also better at 1507 Dollars per fine ounce. The oil price is higher at 93.68 Dollars per barrel. The Rand is firmer as the Greek anxiety abates somewhat, but that all key vote is coming. It is close. The Rand last clocked 6.84 to the US Dollar, 10.96 to the Pound Sterling and 9.85 to the Euro. The facts are simple. Pass the measures and you get the money in the next round. Don’t pass the vote and then you will default.

Sasha Naryshkine and Byron Lotter
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by sashan

Nike doing it.

June 28, 2011 in Uncategorized

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Jozi, Jozi. By mid afternoon we looked like the bulls had been sent to the scrap heap again for the day, but a stronger open on Wall Street meant that we gained momentum all the way through to the close. This is all ahead of an important vote in Greece today, a very important vote I guess, to push through more austerity, and include some serious asset sales. Meanwhile the Chinese premier flits around Europe speaking to the Germans, Angela Merkel today. Wen? Today. No Wen…..! Yes, Wen Jiabao. Who yesterday signed all sorts of deals with the Brits, and kind of waved his hand at British suggestions about his countries human rights record. I guess you need to put your other hat on, how do the Chinese and Wen view the British military presence in Afghanistan. Don’t know, few people in our world ask that question.

Back to local markets here in Jozi, commodity prices continued to take a little pain, the gold price continued its poor showing, along with the rest of the commodities complex. People can stop worrying now, OK? Yes, OK. On the inflation front you can stop worrying. Industrials had a good showing yesterday, collectively up 1.1 percent, powering (sort of) the overall index to 30897, up 216 points or 0.7 percent on the day. Banks closed lower, perhaps the worry of higher capital requirements that started to weigh, even though the Basel III implementation time horizon is still quite far away. All the while the Williams sisters crashed out of Wimbledon, poor ladies, Venus and her new line of tennis clothes, yech, no thanks.

I have seen a couple of notes on Naspers and what most folks expectations are in the coming 12 to 18 months (I know, almost anything could happen), but the ones that I have seen so far are fairly bullish. The main theme is that the valuation afforded to it by the market is wrong, and in due course the market should rerate the stock. Now remember last week when I was disgusted with Remgro for telling me where and what the value is. Here it is not the company telling us (in fact Koos Bekker suggested that he was happy with the valuation of TenCent and Mail.ru in a wireless interview) but rather the analyst community. That, I think is the subtle difference.

Have a look at the Naspers presentation from yesterday, I hacked a nice slide to show you their internet assets around the world, makes for interesting viewing.

And then I promised an overview, but wait, the great investor relations people (Meloy Horn, an ex analyst runs that show) at Naspers have done that already for me. And you. And others. Check out the Naspers group structure via a presentation titled: A leading emerging market multi-media company

Notice that the print assets sit out to the right there. The internet, pay TV and technology assets sit out to the left and are the rump of the business. Don’t count the print assets out, they are still a very profitable businesses, but hey, nothing being bought there. The vision part is pretty simple, but nevertheless important: “Providing entertainment, information, trading opportunities and access to communities and friends wherever the users might be.”

We continue to think that they are undervalued at these levels. Some might say otherwise. We are happy, like the company with their holdings and the pace at which they are growing. And TenCent has been around for a long time, the stock really started to gain traction in the middle of 2007. That is the hard part I guess for many local analysts, too easy to say, oh well that TenCent is overvalued, therefore Naspers is too. But the fact that TenCent has 670 million odd subscribers and their single biggest concurrent user logins topped 137 million users (which is bigger than the whole population of Japan) once, well that is pie in the sky stuff. In fact concurrent users of TenCent, at the height, would be the 10th most populous in the world.

I am going to travel there soon. China that is. I have used TenCent, not really that useful for me because I am not in Beijing or Shanghai. I am here. I get to use pricecheck and Kalahari.net. And have a decoder, which I like a lot. My family likes it too, they all have their favourites.

Byron’s beats take a look at the Greeks and what they can sell in order to shore up the necessary funds to meet the requirements of the next “bailout” funds. Sell it all I say, and make sure that you collect the taxes from these entities. Mindset, mindset, mindset. That is what will change it all.

Not only will the sale of such assets raise much needed funds but once privatised these assets will be run more efficiently and in the long run pay more taxes. Well I’m a capitalist so that is what I believe will happen anyhow. Every Euro raised by such sales will be 1 less Euro needed from other Euro nations.

This all sounds like a great plan but it does not come without its obstacles. Firstly, who is going to buy these assets? Liquidity is always an issue and when you are in a desperate situation you often have to sell your prized possessions at a discount. In fact many of these assets have been up for sale for a while now. With things looking pretty glum at the moment in Europe, cash seems to be king and you would be taking a big risk investing in Greece where austerity is about to be implemented and the people are extremely hostile about policy changes.

You also have a culture there where the people don’t like to pay for services. If you buy the roads or the state energy provider you would have to implement some serious collection systems. I guess if anyone were to do this properly it would be the private sector. If they don’t collect their proceeds they will have no Germany or France to bail them out.

What are the assets worth? The think tank reckon they could raise around 50 billion euro. Half the 100 billion they owe. A few years ago they did a study on Greece’s assets and came up with a figure closer to 300 billion Euro. Unfortunately however an asset is only worth what someone is willing to pay for it so if you are looking at owning a lovely farm on the coast of Greece, now is your time to help European debt and probably get a good bargain at the same time. Although I hear owning land there can be complicated. They better make that easier if they want this to work. Oh and please make sure your employees pay their taxes!

New York, New York. Nike shoes reported numbers last evening, and unlike last time it was a handsome beat. A fairly handsome beat, the stock was up over four percent in the aftermarket and crested 85 Dollars a share, and stayed there, currently 85.27 Dollars. Up 4.47 percent. OK, so obviously Mr. Market telling us that they like it. 124 US cents of earnings for the quarter, which was around 8 cents better than where the street pegged the number. On the Nike investors relations website they are at pains to point out that they are a growth company. I know that. But if you are stuck in America and the consumer is this and that, then you can be forgiven for feeling a bit beat up.

Perhaps you should rather have a look at this sales mix from the release: NIKE, Inc. Reports Fiscal 2011 Fourth Quarter and Full Year Results, and pay attention to the reported future orders bit. Emerging markets up 25 percent, Greater China up 24 percent, versus Western Europe which is up 11 percent and North America which is up 14 percent. Understandably Japanese demand has been weak, and future orders in that geography is down 13 percent. Overall, future orders are up 15 percent. And so, even though in the words of the Nouriel, things feel so bad, they are so bad in North America that future Nike orders are up 14 percent. Come on people.

Margins, margins, margins. Higher production costs ate into those high margins, which fell 310 basis points to a still astonishing 44.3 percent gross. Higher costs on the transport side too need to be passed onto you and I. I bought a Nike running top the other day, and got one for my wife too, they were on sale, I know, cheapskate, but that is the way that I roll. They do not mention Barcelona FC’s magnificent win in the champions league, but do note that football (or soccer as the Americans call it) shirt sales were one category that was lower, for obvious reasons, there was a World Cup last year.

It is still all about the shoes, but the apparel division is growing fast. For the full year the company reported group sales of 20.862 billion Dollars, footwear contributed 11.493 billion and apparel contributed 5.475 billion USD. Equipment (that does include Nike cricket bats would you believe) is just over 1 billion USD. So then, where is the rest of the revenue mix? Turns out, other businesses contribute 2.747 billion Dollars. These other businesses segment include Umbro, Converse, Cole Haan and Hurley. Some you might know well, some you might not know at all. All hip and happening brands, sportswear all through to surfwear. Skateboarding clothing and shoes might not be your thing, but it certainly is lots of others thing.

OK, so why would you buy the company at this juncture? The stock hardly looks cheap, and on a historical basis is trading above the long term average. But, I suspect the massive change in emerging market and specifically Chinese sales is for us something that will transform the business. In China 300 million people claim to be basketball fans, and around 30 million folks watch NBA matches through the season. 30 million people? That is the size of the Ugandan population. And that is I am guessing all because of Yao Ming. So I am guessing that Li Na can have a similar type of influence on tennis in China. The Chinese government want to increase the number of tennis players by 15 percent per annum. Good for Nike and their competitors.

The Chinese football association is government controlled and therefore “not great”. Only one member of their national team shows his skills outside of China, in South Korea. Imagine if the Chinese were ready to host the 2026 world cup football. I suspect it might become a reality. And all it would take would be one footballer to capture that population. So we are confident on future sales growth and profitability, the analyst community has the company earning nearly 5 USD for the coming financial year. We can reconvene at Investors landing page, where the conference call will take place for five hours. Holy smokes. I will read the conference call tomorrow and be back with an overview.

Do not forget to watch Paul’s show tonight on CNBC Africa at 20:30 CAT. CAT is Central African Time. It is a fun show. Be sure to send Paul your questions (which you can do normally anyhow) which he can discuss on the show. Send.

Commodity and currency corner. Dr. Copper last traded at 408 US cents per pound. The gold price is slightly better at 1502 Dollars per fine ounce, the platinum price is better at 1689 Dollars per fine ounce. The Rand is also firmer at 10.96 to the Pound Sterling. At 6.87 to the US Dollar and 9.79 to the Euro. Markets are marginally better today. All about the Greeks and what they do tomorrow, so let us expect a holding pattern until then.

Sasha Naryshkine and Byron Lotter
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011 022 5440

by sashan

The Olympics of sovereign debt

June 27, 2011 in Uncategorized

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Jozi, Jozi. We did really well Friday, well let me rephrase that, the bulls did really well Friday, as markets breathed a collective sigh of relief with the Greek debt situation as under control as you could ever expect. When is under control such a bad thing? Well, I guess when your debt to GDP ratio is expected to rise to astronomical proportions. I suspect that it is all about national pride and just looking to host the Olympics of compliance over the next 12 years. With a review every four years. Markets rocked on Friday, the Jozi all share was up 1.17 percent or 353 points to 30680 points, banks up a percent and a quarter, resources (well the ten that count) were up nearly 1.6 percent. And let us not talk about the Sharks this weekend. They would have done better if they swam there, less delays, and after all they are sharks.

This morning there are results from Simmers. Or Simmer and Jack Mines Limited, except the catch is there is hardly anything left in the listed entity, all the mines have been “transferred” to Village Main Reef Limited in what looks like a reorganisation of the deck chairs. Except these are rusty old Japanese fishing boat deck chairs with very little fabric left. Standing room only. So what does Village Main Reef now own? Well, before this, Cons Murch (near where the express Dale Steyn comes from, Gravelotte) and Lesego Platinum, which is close to that, in Burgersfort. They have the IDC as a partner there at Lesego, and plan to ramp Cons Murch up, but I don’t know, really I don’t.

The official line from a SENS release a few weeks back on the Village acquisition of Simmers is in my mind, misleading: “The acquisition of the majority of the Simmer’s assets by Village will represent our third successful transaction in under two years. This will herald an exciting dawn for Village as the company transforms into a mid-tier precious metals player. Now that the acquisition is unconditional we can focus on our strategy of integrating these assets to create cash generative and growth-focused, socially responsible mining entities”.

Operationally Simmers has made a loss for the last eight years, all the way back to 2003. The number of Simmers shares in issue went from 215 million in 2003 to 1.231 billion. Nearly one billion shares issued in 8 years completely blowing you away. All I am saying is what will change. Same (not good) assets, same (rising) cost issues. That I guess is my point, be careful of “new things” which are just old things. Perhaps the Bernard Swanepoel magic will work. Or does he have any magic? Again, I don’t know the answer, but as usual, we will give this a wide berth.

One that we will not be giving a wide berth and that we have been buying recently is Naspers. Results out this morning. Here goes, a Jackie Selebi (copy paste job) from the first few lines:

“The group achieved a solid performance over the past year. Consolidated revenues grew by 18% and core headline earnings were up 13%. These results were underpinned by a diversified portfolio and a strong balance sheet. Major areas of growth were the internet and pay-television businesses.

Worldwide the internet industry continued its expansion from which most of our internet businesses benefited. The resilience of our pay-television operations in an increasingly competitive environment underscores the benefit of quality content, although rising costs place margins under pressure. Our print media business experienced a limited recovery in advertising revenues, whilst the technology business was able to improve margins.”

Excellent. They state the obvious in the commentary: “Recent experience is that internet valuations, in our opinion, have become inflated and good value is difficult to find these days.” Quite, LinkedIn and the valuation been thrown around for Facebook and Twitter and other internet businesses. But they go on to say: “As a consequence, we are focusing somewhat more on growing our businesses organically and on developing new technologies. This may dampen earnings in the year ahead as the cost of developing these businesses are expensed through the income statement. However, we believe this strategy is sound and will stimulate long-term growth prospects.” Could you say that they got in early on some of these businesses? The Naspers magic. Yes, you could say that.

First, the pay TV business. Which added 977 thousand folks to better TV viewing, (thanking the FIFA 2010 event along the way), which saw the segment grow revenue by 19 percent to 21 billion ZAR. Margins lower, because of “cost pressures from growing the subscriber base, higher sport content costs and competition.” Hmmm, those darned football players get paid so much. Torres one and only Chelsea goal so far has cost the club 50 Million pounds. And how much a week?

I read somewhere that Chelsea’s wage bill last year was 172.5 million Pounds. WOW!! Roughly 275 million Dollars. Manchester City had a 133.3 million Pound (around 215 million USD) wage bill whilst third place (and champions) Manchester United are close to their town rivals at 131.7 million Pounds or 210 million Dollars. I counted 34 players in the Chelsea squad, an average of 5 million quid a year for doing what you like. And that my friends is why we have to pay more for satellite TV. But of course bankers and other professionals are overpaid. And when last did you see Lloyd Blankfein in a jockey advert, or as the poster boy for Adidas. Never, but he (Blankfein) is the best at what he does, even if people do not want to pack a stadium to hear him speak.

That pay TV business makes a trading profit of 5.727 billion ZAR. My next question is, what would you pay for a business like that? You don’t pay (i.e. you cannot service your debit order) you get cut off. Pay and watch, awesome. My experience is that the importance on this is (sadly) placed on a higher rating on a monthly basis than any savings. So a growing business in South Africa and on the continent who are unlikely to cancel their subscriptions any time soon, would you say pay 12 times earnings for that? Perhaps? OK, so perhaps a maximum of 70 billion ZAR. A conservative rating, I think, for 4.9 million subscribers across South Africa and sub Saharan Africa. Per customer? 14,286 ZAR a subscriber valuation? 1190 ZAR a month.

Next, what would you pay for the print business? Really, what would you pay for a business that made three percent less than last year, 872 million ZAR. The Daily Sun through to Drum magazine. Would you pay, say, ten times earnings? Call it 9 billion ZAR maximum.

And then there is the most exciting part of their business, mostly TenCent and Mail.ru really, which grew to 3.6 billion ZAR. That grew by nearly 50 percent. What would you pay for that? 15 times earnings? 20 times earnings for a business growing at that click? Let us say 15 times, I get to 54 billion ZAR. In truth the Hong Kong valuation for TenCent is 35 times earnings. The market and the participants give TenCent a market cap of 380 billion Honk Kong Dollars. One Hong Kong Dollar = 0.8866 ZAR. Naspers’ 35 percent stake in TenCent is valued then at 118 billion ZAR. Of course if they had to sell it at the ruling price. A stake that size might attract a bit of a discount, I am thinking.

Mail.ru, relatively small now, Naspers have a direct 29.1 percent stake and believe it or not TenCent owns 7.8 percent. Mail.ru “trades” at 31.32 US Dollars per share. There are roughly 208.5 million GDR’s (Global depositary receipts) in issue, Naspers then should own around 60.67 million shares would roughly be worth 1.9 billion US Dollars. At current exchange rates, that is roughly 13.1 billion ZAR. Again, to get such a big stake away, I presume that with a lack of liquidity there would be a discount. Add only these two internet businesses together and you get over 130 billion ZAR. That is the valuation that the market affords to TenCent and Mail.ru, not me.

So what does the market then afford to the Naspers business overall, here in South Africa? Well, 150 billion ZAR. Again, there are deep discounts applied to these businesses locally. We again apply our minds to this and no doubt you will see more in the coming days, I can feel a whiteboard drawing coming up again. Or, an iPad drawing, yes, that would be a whole lot more reasonable, a series of scriblings on an iPad!! For the record at midday here in Jozi the Naspers share price is marginally higher, just a fraction really, in line with the rest of the market.

This is the first time in nearly 2000 years plus that we have actually cared about Greeks and democracy. Yes, that is completely true. But what is more true is that the very first place to grant universal suffrage (according to Encyclopaedia Britannica Wikipedia) was New Zealand in 1893. So, it is mostly rich white men that “enjoyed” democracy before that. No really, whichever way you dissect it, that is most certainly the case. Anyhow, well the reason that I say that this is the first time that people care about Greek democracy since they invented it, is because the Greek austerity politicking starts today. The debate in parliament starts today. Like I said, this is the first time that Greek politics will be a global topic again.

Moody’s and more warnings on Greece. This time it is about outflows from their (Greek) banks. Seemingly it is safer to hold baked beans and shotgun shells than Greek Euro’s. Hey, I thought all Euro’s were the same, they just had different languages on them, not so? The Bank of Greece issues the notes internally, but the ECB authorizes it. Amazing the way it still works with local treasuries and local central banks, that should be a careful consideration about new entrants and weaning of existing entrants off the existing structure. Again, it all depends on confidence, and at the moment the Greek public has none.

We had a couple of interns here last week, a couple of university students who are clients too (good to save at such a young age), smart guys with multiple matric exemptions. I got them to do an exercise, a fairly simple one, because I wanted to show them what a waste of money a motor vehicle is. So, I told them to take the instalments on their chosen vehicle (I think it was an Audi A5) and at a fixed interest rate (current prime), calculate what their repayments would be over 60 months. And then I told them to check up the insurance repayments on that too, and then to add that into the equation. I told them to ignore running costs, because I figured that any car that they had would fill up and service.

And then I said to them, right, take the same repayments on the vehicle and the insurance payment (which would be a lot for any 20 something year old) and invest it in Satrix. And take the long term returns of Satrix, add in a two and a half percent dividend yield and see what you are left with at the end of the 60 months version. The vehicle “asset” was worth less than a quarter of what you would have in Satrix 40. Amazing. And then I said to them, take the annual yield on the saved amount and you can use that to finance a motor vehicle on a monthly basis.

The question that these two bright fellows then asked me, is if this is so easy and well known, why doesn’t everybody do it? Ahhhh… that my friends is the biggest unknown-unknown of them all. Why indeed do people do this? The reasons are obvious. When you want something, like a car, you can get the finance right now. This is a gripe of mine, because if you were to say offer a portfolio of stocks (closed) right now to someone that they could pay off over the next 60 months and then they could own it outright (you could even factor in insurance, a short position on the ALSI 40) the bank would say nope, not for us. But a car, something that is worth a whole lot less at the end of the period, that is fine to finance. Because it is a consumer issue and not an asset issue.

Byron’s beats takes a look Discovery holdings. One of the criteria when buying a business is to always look for a great innovator in its relevant sector.

Remember they made the acquisition of the Standard Life healthcare division in the UK so we have to look at adjusted headline earnings per share. These are going to be more than 20% higher than the prior period according to the update. This prior period being the 9 months of last year’s financial year. Last year Discovery made R2.78. Assuming they manage to maintain the 20% growth rate we should be expecting around R3.34 for the full year ending June 2011. Trading at R38.14 the company looks cheap. Trading at a PE of 11.4.

I suppose everything is looking cheap at the moment. Although the company has managed to carry on with its earnings growth, market sentiment has done nothing for the share during 2011. So is the market right in thinking that things will slow down for everyone next year? That is the million dollar question I guess. I often advocate that the market is very rarely wrong. But, when it comes to overall sentiment, such instances can create great buying opportunities.

Back to Discovery. Focusing on their South African division management seems upbeat. Total medical scheme memberships surpassed 2.5 million lives. That is very impressive considering the amount of people in SA who cannot afford such a luxury. This was due to low lapse levels and the acquisitions of large closed schemes. Retail assets under management grew to R16.5bn. Discovery Insure was launched during this period and the results of that are yet to take affect but it will be interesting to see how it pans out. When they commit to something, especially locally they normally do it properly so I would expect positive results.

Internationally much focus is on operational efficiency. A lot is still needed to be done for their international aspirations to bear fruit. Scale, relevance and profitability are the main focuses in the UK. Operationalising the JV’s in China and the US is the main focus in those areas. Their international operations have not exactly been successful in the past but again it looks like management are doing things properly this time, they have probably learnt from their previous mistakes.

Investment case. We like discovery, it is not amongst our core recommended stocks but we like the healthcare sector and they have a fantastic management team who have really dominated medical aid locally. I’d say that the biggest deterrent would be their business model as an insurer. Insurance companies are very volatile and although they do well during the good times, can really struggle when things slow down. You need a strong stomach to invest in these companies.

Secondly where is the growth going to come from? In the health care sector the South African market looks quite saturated. The growth will have to come from their international operations and new local products. Whether management can pull these off is what you are banking on. Like I said before, management has a fantastic reputation and you would have to back them to perform. At these levels I would be happy to add to the share if you are looking for something slightly different.

Commodity and currency corner. Dr. Copper last crossed at 407 US cents per pound, the platinum price is lower at 1679 Dollars per fine ounce. The gold price is slightly lower at 1499 Dollars per fine ounce. The oil price is lower at 90.78 Dollars per barrel. The Rand is weaker at 11.01 to the Pound, 6.90 to the Dollar and 9.80 to the Euro. We have started a little better here. Not a lot, but a little.

Sasha Naryshkine and Byron Lotter
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by sashan

Big Ben rings

June 23, 2011 in Uncategorized

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Jozi, Jozi. We never really got out of a hole at the get go here in Jozi, the market ended the day where it started, down 179 points to 30792. Financials and Banks dragged us lower here, most of the major indices were lower except for the gold miners, I am not too sure that you can call them a major as far as earnings go, but by market cap, there are some big names. The gold miners collectively tacked on 1.13 percent. But over five years the story is a completely different one, the all share index is up 49 percent (without dividends, add another 10 or so percent) whilst the gold index is down 19 plus percent over five years. And the dividend flow is laughable. GLD, the gold price in Rand is up 140 percent at the same time. Holy smokes, the Rand gold price has absolutely crushed the gold miners. Wow.

Some background quickly, a client of ours who is involved in the telecommunications industry, as an analyst (I hope I got that right or he is going to kick my butt) has been having a to and fro with me on the prospects of the mobile companies. His contention is that they are nothing more than utilities who see something different in the mirror. They feel pretty like Maria in West Side Story. Who is not a Jet.

Here is the first line, sounds quite encouraging: “The majority of the markets in which MTN operates have continued to show strong subscriber growth despite increased competition. The Group increased its subscriber base by 7.4 million subscribers or 5% to 149 million customers for the four months to 30 April 2011 and has subsequently passed 150 million mobile subscribers across its 21 operations.”

But, “Group revenue improved only marginally mainly as a result of the continued strengthening of the rand against the USD and increased competition. Due to political unrest, operational performance has been impacted negatively in Cote d’ Ivoire and to a lesser extent in Yemen and Syria.” I guess the best part is that the currency seems to have found a level, and has been less volatile this year when measured against ’08, ’09 and ’10.

Margins. Perhaps the most important part when talking about these businesses: “Margins in the majority of MTN’s key markets remained robust. This was primarily due to the benefit of ongoing cost control and efficiency initiatives despite the negative impact of inflationary pressures and higher fuel costs. However, margins are under significant pressure in markets experiencing high levels of price competition.” That is in their least mature market in Nigeria.

In the most mature part of their business, in South Africa, where MTN says that data continues to gain momentum, “EBITDA margin continued to show a healthy trend upward mainly due to lower selling and distribution costs and to a lesser extent the containment of network operating costs.” Right. So unlike Telkom (who have a far greater data contribution), MTN’s margins are increasing in this “mature” market.

As ever, we watch this theme, the argument that they might become simple struggling utilities does hold weight. This argument is given a whole lot of substance with the Indian example. But I suspect that India and Africa are different beasts.

Anyone ever heard of a stock market to GDP ratio? The overall value of the market compared to your economic output in that specific country. The reason why I ask is because the FT was suggesting that Brazil and Peru’s markets were around 80 percent, applying that ratio. I suddenly started to wonder to myself, well, what would our ratio be and is it actually comparable? The US long term average according to this FT blog was around 80 percent, so the suggestion was that those markets were expensive, because of the risks involved with investing there. Stay with me, this has a conclusion.

The oldest and best investor (because the scoreboard says so), Warren Buffett actually says that this is one of the best ratios that he knows. Equitisation ratio is the short name, equities to GDP. So, the lower the ratio then the cheaper the market, and equilibrium is about 80 percent as I could gather from the article and from the Buffett comments. But how would this apply in South Africa? The reason why I ask, is because there are quite a few big ticket listed companies which are listed here but their major operations are not here. But I guess the same applies to the USA and the United Kingdom. Especially the UK, how many mines do Rio Tinto, Xstrata and BHP Billiton have in the UK? So then, should that be counted in YOUR exchange? No I think.

I am guessing then that better examples (nowadays) are smaller less liquid exchanges, with fewer or no multi nationals. The immediate examples are perhaps exchanges like Ghana, and perhaps Peru is a good idea. At a larger scale perhaps a country like Thailand. Perhaps even much better and bigger examples are the Shanghai Stock Exchange and the Bombay Stock Exchange. Or not. I would say that in a global context that perhaps this measure is not what it used to be, as companies everywhere try and capture new territories.

Byron’s beats He takes a look at Avusa results. A tale of two cities when you have a look at Naspers performance. And for the record, in our trading fund we are short the stock. Disclosure.

It’s good to see a company like this improving earnings. It means that companies are optimistic about the consumer and are happy to advertise their goods. Let’s take a closer look amongst the divisions to get a better feel. In the media segment they managed to grow newspaper advertising by 10%. Interesting, I haven’t bought a newspaper in 2 years. The Times is making good in roads and made its first full year profits. Magazine preformed profitably while digital did well but profits were affected by investments and capital expenditure.

The retail sector performance was interesting. Exclusive Books was disappointing. Unfortunately Amazon is eating their lunch (Kindle) and now with iPads and other tablets taking off I think their business will certainly struggle. Sad, but that’s how it goes. To counter this they have opened up an Avusa online store which sells their products via the website. This has shown decent growth from a developmental stage. Van Schaik, the academic book retailer increased in sales. Obviously more youngsters going to university every year. Good sign. For our country that is.

The entertainment sector which mostly includes Nu Metro made a loss. Again, probably a victim of technological innovations with streaming and pirating keeping people at home and watching the latest releases on their laptops.

Lets’ look at the numbers. The stock trades at 2425c and a historical PE of 13.8, sounds expensive to me. But remember on the 28 March Avusa received an expression of interest to acquire the entire issued share capital from a consortium represented by those private equity guys, Capitau. This news shot the share price from R20 to R24. So the stock is trading at a premium. This looks like it could be on the ropes because the due diligence date has been missed. We’ll have to wait and see what happens with that.

As an investment I think the company has some interesting assets but I would not buy the share. They are involved in too many industries that are reaching their twilight. Newspapers, magazines and books are getting cannibalised by Kindles and iPads. Companies like Netflix and Amazon are making it a lot easier to watch movies on your HD Blue-Ray system in the comfort of your own home. The online businesses have potential but I don’t think SA has a big enough population to support real revenues. They will have to expand internationally like Naspers did. To conclude, stay away, especially at this inflated price.

New York, New York. OK, what did Ben Bernanke say and what does he plan to do, himself and the FOMC that is. Second part, over the next three to four meetings the FOMC plans to do absolutely nothing, they are going to watch the data like you and I. Like I said yesterday to my colleagues, there was never a QE3 ship built, so the likelihood of more monetary stimulus was never going to take place. Likely to hit an iceberg. The opening line teed you up for the tone of the statement: “Information received since the Federal Open Market Committee met in April indicates that the economic recovery is continuing at a moderate pace, though somewhat more slowly than the Committee had expected.”

Information received? Yes, from all of their districts, and plus all of the data that we have been watching, some of the employment data recently has been very average. There are of course some “stuff” that is as the last FOMC statement said was “transitory”. Going to pass in time. Inflation is not really that much of a problem, in the long term. They used that line, extended period of time for interest rates. But, like we always say, central banks are watchers of the data and “will monitor the economic outlook and financial developments and will act as needed to best foster maximum employment and price stability.”

Here are the revised growth projections from April this year

I am starting to wonder if the Japanese effect was a whole lot bigger than everyone actually thought. Initially. The impact was supposed to be a month or two. I suppose we are in the rump of that now. In fact Chinese PMI this morning hit an 11 month low, indicating that they could be experiencing the same sort of transitory factors. Of course, in classic central banker speak, almost anything can happen next: Bernanke Leaves Door Open to Easing.

What happened thereafter is that the market sold off, I guess no more Fed stimulus for the time being. So there, the so called QE2 ended and we did not fall off the cliff. Markets sold off aggressively at the end, in the last hour and closed comfortably at the lows of the day.

Stuff you thought you knew. This is awesome, check it out, via the Business Insider and pointing towards the LA Times. The headline is Electricity-strapped Japan alters work hours, wardrobes. Amazing, no ties, no suits, dimmer lights and government employees getting to work an hour earlier and leaving an hour earlier. Amazing what can change if everyone works together.

Commodity and currency corner. Dr. Copper last traded 407 US cents per pound, the gold price is slightly lower at 1545 Dollars per fine ounce. The platinum price last clocked 1730 Dollars per fine ounce. The crude oil price is last at 94.12 Dollars per barrel. The Rand is last at 10.88 to the Pound Sterling (getting smashed at the hint of more QE in the UK), 6.78 to the US Dollar and 9.70 to the Euro. Across the East markets are lower, the Fed downgrading growth is having an impact here in Jozi. You know, “transitory”.

Sasha Naryshkine and Byron Lotter
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by sashan

The empire strikes back

June 22, 2011 in Uncategorized

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Jozi, Jozi. Some relief for the folks who are long, the equities market anticipated that the Greeks would get over the first hurdle and the feeling is that the EU have finally pulled together with a plan. Even if it is more than a band aid, and looks out over a couple of tough years, it is a plan. SABMiller had a bad day, because they are going to have to pay up and a lot at that to get Foster’s, the stock was down nearly three and a half percent yesterday. Resource stocks bounced back hard, up nearly 2 point 2 percent, driving the Jozi all share index to 30971, up 344 points or 1.12 percent on the day. That is the good news.

The bad news is that as we head downhill to summer having passed the longest night of the year, the overall market is down just over three and a half percent for the year. There certainly have been a lot of speed bumps this year, the still ongoing Middle East and North Africa tensions. Laughably, Qaddafi passed Libya’s budget yesterday, which consisted of long pyjamas, classic Ray bans and dates for him, and some “other stuff”. No, kidding, but the passing of the budget was to show that he was in control.

The other bigger hiccups have been the ugly Greek debt problems again, last evening curious George Papandreou survived a confidence (or non) vote, getting all the support from his parties 155 out of the 300 parliamentary seats to say yes to more George. The next tricky part is passing a budget with more austerity and that includes asset sales of public assets, which will no doubt anger the unions more. This is a wonderful summary from the WSJ: Don’t Believe These Greek Myths.

Other serious hiccups this year have been the debate in the US about the debt levels there, and there is currently a whole lot of talk under way to reduce the levels of spend, and how to collect more. Our view is that at least they are talking about it, which is more than I can say a year ago.

And of course the most obvious problem so far this year, the Japanese earthquake and tsunami, nobody is quite sure what the medium term effect was on the global economy. Perhaps the aftershocks for the global economy are still being felt. But these challenges are not insurmountable, there are always worries, the recovery has for all intents and purposes been much faster than we thought. All those massive inflationary concerns have somewhat disappeared. I said to Byron this morning, I miss all the market monkeys talking about a double dip and pending inflation, that was more fun. Because so far, they are wrong!! And I miss Nouriel saying stuff like, well it is going to be so bad, that it is going to feel like a double dip. Yeah, thanks for that Nouriel.

Anyhows, Remgro released results yesterday, this is for the full year to end March 2011. The headlines that I saw that grabbed me the most was, Remgro, still smoking without BAT. Quite, HEPS up over 17 percent to 811 cents per share. Remember that Remgro are in the middle of changing their year end and are expected to only pay their final dividend when they report for the 15 months to June, and that dividend payment is expected to be in November. Please do not patronise me and say that the intrinsic value is 136.12 ZAR per share when the stock trades at 110.59 ZAR a share. Are you telling me that the balance of the market are dumb to apply a 20 odd percent discount to your implied NAV? I guess that is what you are telling market participants.

My point is, if you have taken the time and effort to buy companies in the equities market, why buy a company that buys companies? You can diversify yourself, rather buy Exchange Traded Funds if you want diversification. Of course there are some interesting stakes in Remgro that you cannot buy in the open market, that could or could not be interesting like Total or Unilever SA, Tracker, SEACOM or even Air products. But those are really small compared to their value in Medi-Clinic, Distell and Rainbow Chickens. They have sold their 13 and a bit percent interest in Nampak at the end of last year, we have in the history of this business never wanted to own Nampak.

Other listed entity stakes include RMB Holdings, RMI Holdings (gained through the unbundling) and FirstRand. I could own those in the market if I wanted. Why entrust your market investing activities to the brains trust of someone else, that sounds like absolving yourself of the responsibilities of paying attention to individual stocks. My idea of a diversified business is BHP Billiton.

If you look at the Results Presentation for the twelve months ended 31 March 2011 on page 28, you get the following summary:

By my tally from earlier this suggests that 39 out of the 69 billion ZAR worth of the assets are listed. And to be honest, only the small media and tech interests are about all that excite me. No thanks, this might be an old favourite but industrial conglomerates in my mind should be more like General Electric.

The debate about nationalisation rages on. But this time the empire (so to speak) strikes back. There are several stories in some of the major local publications having a look at what business is saying to the calls for nationalisation. Paul was great on his show last evening (what, you missed it, what is your excuse?) where he reminded the ANCYL that nationalisation is more likely to lead to greater job losses.

Byron will discuss this in his beats (just now), we are urging you to read the following pieces, first Michael Bleby in the BusinessDay wrote Mines, land grab plans a bad idea says business. The passing shot is telling, we can’t live in a void for the next 18 months. I had a look at this recent South African Reserve Bank Monthly Release of Selected Data for May 2011 where I have picked out the money supply graph. NOTHING is happening this year.

A lack of confidence on the part of individuals and businesses, or is it just where we are in the cycle? Perhaps both. OK, another view is Stephen Grootes (a rugby coach at school once said: “I have no favourites, I hate you all equally” – mine is I like you all equally) in the Daily Maverick who writes the following: Nationalisation: The capitalists strike back. A brand new article on Mining MX makes for good reading: Malema challenges Shabangu on mines. So, prepare the mine psychologically, because there aint going to be any money.

Do not forget the human element in all of this, and this is illustrated beautifully by Political Editor of the Mercury, Jabulani Sikhakhane in an article titled: Dancing in tune with the youth. And all the talk that is worrying business (and clients I will have you know) is as a direct result of a gap in government on the issues of the youth.

The root of the nationalisation calls of course is the ghastly unemployment rate we have here. These types of populist views would appeal to someone with no job, few skills and to be frank, even fewer prospects. Sounds all rather bleak, but these problems are solvable. Paul forwarded this to me, it really is worthy a read through, even if you just have a look at the executive summary. Check out a A fresh look at unemployment from the Centre for Development and Enterprise. Yeah, you will feel a little depressed. But there are solutions. Question is, do you think the very powerful unions will agree?

Talking about the all powerful unions, do you see where NUM and Solidarity are starting out with their various wage negotiations? Costs are mounting against our miners and I am convinced that we are losing out to the rest of the world on the commodities boom. Remember the Citi report that suggested ex-energy we were the richest country of them all? Yes? Well, then why according to the earlier SARB report are we mining at levels comfortably below 2005? Check this out:

What you are looking for is that line volume of production. Gold mining is at 62 percent of what it was in 2005. And you know why, lower grades and higher costs. But the rest of mining? Starting to creak, just at the point where we should be flying. Sad face this side, that is for sure.

Byron’s beats looks at what the landscape might look like, post the nationalisation of mines and banks. Phew, lots of sad faces littered around here today. For the record we suspect that it is just posturing, I am not too sure that it has been well thought through. For the record I used to keep a huge pile of Zim Dollars on my desk, someone was kind enough to give us a 50 billion Zim Dollar note, that could buy you a whole chicken egg. 32 US cents = 50 billion Zim Dollars.

And to be honest if I were hungry, uneducated and literally living off the skin of my teeth like so many in this country are, I’d also be attracted to what the man has to say. I’m sure, in those tough situations, hope does not come around often and any slight chance of a better life would get my backing. What other choice do I have? Wait for the long process of capitalism to maybe benefit my grandchildren while I starve? No, I’d rally behind our modern time Robin Hood and so would you.

However, I can almost say with certainty that nationalisation of the mines and the banks will do the exact opposite of eradicating poverty. This is what I believe will happen if such policies were implemented. First and foremost we would lose almost all foreign investments. Who would want to invest in our country if there is a great chance assets will be seized without compensation? This would cause the Rand to spiral (see Zimbabwe) as people, local and foreign, send their money out of the country. In turn this would cause uncontrollable inflation which would render all the money the poor already have almost useless. You see, the rich would have the facilities to send their money overseas. The poor won’t.

From there the brain drain will start escalating. Mines and banks are not easy to manage and require years and years of experience and advanced skills. The government may own them but they will have no one to manage them. Whoever they convince to stay would have to get their salaries in dollars. Now, because the mines and banks are not being managed efficiently, their production will start to slow, profits will decrease and so will their requirements for labour.

At this stage, government cannot retrench workers. The whole point of this operation was to provide employment so if anything, they should be hiring more. This means that government reserves will have to back stop the mines which are slowly losing money because of decreasing profits and increasing inputs. But where are these reserves going to come from? Our credit ratings will be junk. That’s a fact. The rest of the world do not approve of such governance. Maybe we could get some money from Venezuela or North Korea. Wait, they have none.

It will slowly occur to the forces that be, that they will have to start cutting employment and people will start being entrenched. I hate to sound cynical but history tells us that the people on top will be living the high life while this all takes place. By now unemployment is increasing uncontrollably. The people who were previously supported by social grants will see those slowly decreasing to an eventual halt. This is because government will run out of money. Schools will start losing funding while at the same time, children are pulled out of school to help support unemployed families.

I’m not saying this will happen immediately, there may be a couple of years of bliss while current production facilities and reserves are utilized. But give it a few years and disaster will strike. These repercussions will multiply and have further negative impacts socially and economically. Who will suffer? The poor. The wealthy will leave or get sucked into high powered jobs because government will be desperate for their skills. The poor will be left to squander for what is left of a country that had so much potential. I’m not making this up, it’s happened before and it will happen again. We live in a global village where cooperation and team work is vital to survive amongst other nations. If the rest of the world do not agree with your thesis and are not willing to do business with you, you will be crushed. It is now a global effort of unity.

That’s why this situation is so scary. In the long run by voting for Julius Malema, the masses are only shooting themselves in the foot, like turkeys voting for thanksgiving. But in truth if I were in that situation, I’d probably do the same.

Commodities and currencies corner Dr. Copper last traded at 409 US cents per pound, the gold price last traded at 1546 Dollars per fine ounce. The price of platinum was last at 1744 Dollars per fine ounce, a barrel of oil (the price) was last at 93.85 Dollars. The Rand is slightly weaker at 6.74 to the US Dollar, 10.89 to the Pound Sterling and 9.71 to the Euro.

What gives today? Well, the biggest event at an international level is undoubtedly the FOMC statement. Where to next for Ben “the measured” Bernanke and the gang? Indeed. On the local front we have seen a CPI read this morning: Consumer Price Index – May 2011. An acceleration of inflation, above expectations, the read was supposed to come in at 4.3 percent, instead it jumped to 4.6 percent. We have started lower here, perhaps on the reality on the Greek debt mountain.

Sasha Naryshkine and Byron Lotter
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011 022 5440

by sashan

No bloody thank you!

June 21, 2011 in Uncategorized

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Jozi, Jozi. We tried hard, like that little train trying to get to the top of the hill, there was a brief flirt with positive territory on the day, but eventually we settled back to close slightly in the red for the day. The Jozi all share index closed at 30627, down 41 points or 0.14 percent. Industrials had a decent enough day, up nearly two thirds of a percent, banks down exactly the same amount as the overall index whilst resources were the biggest drag, down 0.6 percent. And that is all that you need to know about that.

No bloody way mate. Dr. Foster’s have rejected SABMiller’s 10 billion US Dollar bid, saying that the price is too low. But, us Africans have thick skins and SABMiller have indicated that they are going to continue along their merry way and continue to chase Foster’s. Check out the WSJ piece this morning: SABMiller Pursues Foster’s.

Foster’s sounds like Frosty, so therefore it must be an attractive asset. No, there must be another reason. When I do a search for Foster’s on Google, I get the search result with this description of the company: “Grab hold of a Foster’s Oil Can and raise a toast to Australia, the land crocs, roos and man-size beer. Foster’s, Australian for Beer.” Then I checked out the investor relations website for more details, as Aussie as you get mate: Approach Rejected.

Foster’s are looking to demerge their wine interests from the beer making assets, announced at the results in February this year. At the half year stage all did not seem too well, EPS down 7.7 percent, profits down 7.5 percent with sales 6.6 percent lower. And you want more? What is Bill Lawry commentating here, they might sell VB, but are they from Victoria? Although to be fair, the prior reporting period was a very good one. Some serious debt there at Fosters, with gearing around 67 percent, most of it coming due in 2015 and after, although debt levels have been reduced recently. Is this worth chasing? What is so awesome about their brands?

Foster’s have half of the Aussie beer market and 71 percent of the cider market, according to their last investor presentation. The premium beer segment seems to be growing strongly in Aussie, but this is a global theme. The company operates in 45 different countries. Here are their Beer brands which includes brewing and distribution agreements on those brands. Some decent ones.

So, what has the official line been from SABMiller? It goes like this: “The proposal to acquire Foster’s is in line with SABMiller’s strategy to create an attractive global spread of businesses, with a focus on developing strong and successful brand portfolios. Australia has a strong, wealthy and growing economy with consistent long term population growth in key demographics, and is well positioned to benefit from continued economic growth in Asia. Australia has a profitable beer market in which Foster’s is the leading brewer with 7 of the top 10 beer brands, a national distribution platform and scale production.”

And are going to proceed and engage the Foster’s board. SABMiller is down two percent as I write this, telling you that folks think that they are going to overpay. Perception. I do not know what the answer is, and what the time horizon is, but overpaying is never a good idea. Check out a recent FM article titled Cold gold. So perhaps overpaying for beer assets because they do not often present themselves, is just something that SABMiller shareholders must live with.

Unresolved. Ultimatum. Those are the two words that you need to know about Greece. The European finance ministers met last evening and even though there were some giant steps and some positive noises and a conclusion of sorts, for Greece the issue of funding remains unresolved. Here is the timeline and this is what you need to know. First up, Curios George the third Papandreou faces a confidence (or not) vote in parliament today. And if successful then proceed to step two. Step two is for the Greek lawmakers to approve more austerity and asset sales. Once done, step three will be to receive the 12 billion Euro payment. The IMF are adamant on step two, otherwise step three is a no go. And all this needs to happen before July the 15th. Otherwise, the Greeks will default.

The WSJ has a good take on what the Greeks must do in order to get the funds. Read more here: EU Links Greece Aid to Budget Cuts. The European Stability Mechanism (ESM) and the European Financial Stability Facility (EFSF) are acronyms you must learn. As far as the politicians are concerned, the new steps implemented to change the fund dynamics are pretty interesting. More guarantees from the members, longer time frames should potentially put folks minds at rest and no preference for bond holders. Confused? Don’t worry, take a longer harder read through this FT piece: Debtors hail changes to EU rescue fund.

Still confused? I need to then find a picture. First things first, George needs to pass the test today. And the unions in Greece are teeing up for more protests, including the union that works for the company that provides electricity to 90 percent of Greece, Public Power Corporation or PPC for short. Easy to remember that one. Check it out: Greek power union calls strike action. In the dark, that is something that we were used to, so far I can count two disruptions at home.

I quite liked the NEWS ANALYSIS: Malema’s radical talk unsettles business piece in the BussinessDay this morning. Because the truth is, as much as we sit here and debate what hold the ANCYL has over the NEC of the ANC (acronym heaven) and whether or not the radical plans to change the constitution change economic policy will ever come to fruition, the fact that we are debating this means that people worry.

Because if the plans to seize mines, banks and land without compensation ever went ahead, well you know what happens next. There is a flight of capital and skills. And no credit available to grow businesses. I lived in a communist state as a teenager in Mozambique and have seen hard core socialism fail the masses. At that stage Mozambique was the poorest place on the planet, at the time the average contribution to GDP per capita was less than 30 US Dollar per year. Sis. I would love for anyone out there who has an opportunity to interview the ANCYL to ask the simple questions, once you have nationalised mines and banks, seized all land, what are you plans thereafter? Because the answer will be to give everyone a job. The next question must be, how?

My constitutional fallback (well, everyone’s actually) is Pierre de Vos, who’s blog is worth subscribing to. Read his latest piece titled Julius, you don’t need to change the Constitution. He is right in many aspects and will always (always) touch a few nerves here. Still, Miriam’s point is echoed by not only BUSA, but also clients of ours, saying that they are not hiring, because they are feeling uncertain about policy and labour. And that is the real world response. Tell us about your experiences, we will publish them anonymously.

New York, New York. Stocks reached a level that finally everyone was happy to step up to the plate and buy. I am starting to get the sense that the bad news has been baked in the cake. If the expectations are for the S&P 500 to have 97 Dollars worth of earnings, then what does that mean with a forward earnings multiple of less than 13 times. I was having a look at some of the stocks in the healthcare sector and some yields are four percent plus. You would rather hold that on a global diversified business than government bonds? Of any sort? Let me run through a list with the dividend yields and you can quickly look at what you might, or might not want to own, big companies with market caps in excess of 110 billion US Dollars:

Royal Dutch Shell plc (ADR) 4.96 percent, Petroleo Brasileiro SA (ADR) 4.42 percent, AT&T Inc. 5.65 percent, China Mobile Ltd. (ADR) 4.34 percent, Pfizer 3.95 percent, Vodafone Group Plc (ADR) 5.55 percent and lastly Intel 3.92 percent. Just a reminder, the US two year note yields 0.39 percent. Wow. And the ten year note yields 2.96 percent. Wow. Go figure, but all of those businesses might have many challenges, but then again so does the US treasury. Fear.

Byron’s beats You could title this, “Can’t see the wood for the trees”. I agree with Byron’s conclusion. As for feeling sorry for John Paulson, don’t. He is still worth a bomb.

What makes this even more interesting is that John Paulson, the famous hedge fund manager who literally made billions of dollars during the financial crisis and a guy I have praised and written about before, was Sino-Forests largest shareholder with 34.7 million shares to the value of nearly $600mil. Yesterday, the Globe and Mail, a Canadian newspaper (the company is listed in Toronto) published a piece confirming Muddy Waters research after doing their own interviews with Chinese government officials, local business operators and forestry experts.

Since yesterday’s newspaper report John Paulson has now sold all of his Sino-Forest shares causing his hedge fund performance to plunge 13% this month alone. Many people are now calling him a one hit wonder and a fluke. I would definitely beg to differ. He managed to make fantastic returns in 2010, following the crisis plus he has the guts and backs himself enough to put a large amount of his own personal money into the fund. One bad year does not define a career.

This story interests me not because of a hedge fund manager. I think it’s fascinating how companies like Muddy Waters look for fraudulent companies, research them and then expose them. It falls under the checks and balances of a free market system. Not only do you have the regulators checking up on these companies but you actually have profit driven research companies and hedge funds who seek to short such companies and make money out their wrong doings. It’s unethical to want a company to fail but it plays an extremely important role in our free market system.

When you have a profit driven company doing such research you know they are going to do things properly. It can get complicated however. Major stand offs between the whistleblower and the company being exposed occur. Once an allegation is made, the whistleblower with a short position may have the wrong incentives to bad mouth a company who denies such allegations. This is what David Einhorn and his Greenlight fund do so well. In fact he wrote an entire book called “Fooling some of the People all of the Time” which describes in detail, a massive standoff between his Greenlight fund and a company called Allied which lasted over a decade. It’s a good read if you have the interest.

At the end of the day these types of stories confirm our thesis of sticking to the big blue chips and sticking with what you know. Everyone loves a success story and the potential benefits of investing in something small that will soon become something huge. But you need extensive time and research because cases like these, especially in foreign countries with inconsistent regulatory systems, do happen. Even if Sino-Forest are in the right at the end of it all their name and their share price will be tarnished.

Commodities and currencies corner Dr. Copper is higher at 410 US cents per pound, the gold price is also higher at 1543 Dollars per fine ounce. The platinum price is also better at 1739 Dollars per fine ounce. All improving, as is the oil price, last at 94.19 Dollars per barrel. The Rand is firmer at 10.97 to the Pound Sterling, 6.78 to the US Dollar, 9.72 to the Euro.

What gives today? There is a German sentiment reading, and as the Germans are the biggest economy in Europe, I suspect this whole Greek debate has felt like a prod in the ribs, uncomfortable. Later this afternoon, around four our time there is a existing home sales read in the US, the expectations are for an annualized number in the region of 4.78 million residential sales. There is on the local front the Reserve Bank’s quarterly bulletin if you are interested in that sort of thing. Statistic South Africa will release their Quarterly Employment Statistics report to March 2011, which should be interesting.

And of course today is the winter solstice. At 18:16 local time (South Africa) we will be the furthest from the sun, as far as I understand it. Check it out, from Wiki: “The winter solstice occurs exactly when the axial tilt of a planet is farthest away from its star, depending on the polar hemisphere of reference. Earth’s maximum axial tilt to our Sun during a solstice is 23^o 26′. More evidently from high latitudes, a hemisphere’s winter solstice occurs on the shortest day and longest night of the year, when the sun’s daily maximum position in the sky is the lowest. Since the winter solstice lasts only a moment in time, other terms are often used for the day on which it occurs, such as midwinter, the longest night or the first day of winter”.

Excellent, downhill to summer here. What is also good news for those that are long is that markets have rebounded this morning, a little more clarity on Greece is giving us a step up. All about the confidence vote today, that is for sure.

Sasha Naryshkine and Byron Lotter
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by sashan

Less speak in Greek please

June 20, 2011 in Uncategorized

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Jozi, Jozi. As there continues to be a lack of certainty about Greece and their future funding methodology we continue to run on a treadmill looking sideways. Try it, or even better, don’t try it, it might be more than a little embarrassing. It could be downright dangerous. One eye on what is happening on a small part of the global economy, but with great implications for the rest of the periphery states, and the other eye trained in on a bigger problem, the plans to overhaul spending and pay down the debt that has piled up in the US. I suspect that in the coming weeks we will have reached some sort of consensus, both sides will agree to lift the debt ceiling with concessions on entitlements. And big spending will have become responsible spending.

Time to turn the free flowing taps of military spend lower. The marine corps should rule the military, they only cost 4 percent of the overall budget. It does not take a genius to work out where savings need to come from. Check this pie chart out and let me know (don’t think politically now you see, that is the trick) where you would start cutting:

OK, so entitlements and military spend must be cut, I would say military spend, something that nobody ever talks about. Just send those people home. America is surrounded by a sea on both sides. And Canada to the north. So perhaps it is time that after nearly two decades as sole super power to go back home and focus there. That is what I would do.

But hey, back to markets Friday, we closed off our worst levels, but still slumped below 31 thousand points on the Jozi all share at 30669, down 331 points on the day. Banks were off around 0.4 percent, general retailers were up over half a percent. Dragging us lower were the all important resource stocks, down nearly one and a half percent as metal and energy prices continued to sell off around the globe on the worries on Greece.

The “other matter”, Greece. A slippery matter indeed. The Greeks are technically bust. And the prime minister faces a confidence (or lack thereof) vote this week, I think tomorrow. The longest night slash day of the year, depending on which hemisphere you are in. It could turn into the night of the long knives for George Papandreou, who has actually called for this vote. Democracy working in the place that invented democracy. And, the ancient Greeks invented things like plumbing, staircases, gears, levers, canal locks, urban planning amongst many. Pity that they did not invent and implement fiscal discipline, that would have been good.

In fact, should third generation prime minister Papandreou win this vote and proceed with more cuts and asset sales, then he would want to go to the core of the problem, not to fix the debt problems. Check out what is next in the Bloomberg piece titled Europe Fails to Agree on Greek Aid Payout. A looming referendum of sorts, IF he wins this vote. For the time being of course, a lack of confidence means that equity markets go nowhere.

OK, those two problems that I will leave you with here, one of my favourite bloggers made a valid point about the richness of the Americans compared to the Europeans. You will be amazed, check it out: How About Europe Learning from Mississippi? Interesting, don’t you think?

And then ending off, a comment at the bottom of a blog about the Greek debt problem. And how perhaps this problem is slightly overblown. I loved this: “What does servicing the Greek debt (0.8% of EU GDP) equal relative to the $16.1Tn economy of the EU? And if 96% of that debt is held by EU members (ala BIS 2010 stats), isn’t it just recycling within the borders of the ECB ? Mountains out of mole-hills?”

Byron’s beats Stef Stocks, what a company. Listed 3 August 2007 and raised roughly 350 million for the company and 115 million vendor placement. I remember this one being “oversubscribed to the max”. In a matter of weeks the price had popped 76 percent from the first quoted price. Amazing. But from the lofty highs of nearly 27 ZAR in early November 2007, the stock plunged to 6 ZAR in March 2009. Eish. Now, having doubled (and a massive Stocks acquisition, let us point out, post the listing) the stock closed at 13 ZAR Friday. Byron has a look at a recent acquisition announced today.

Today Stefanutti Stocks announced the acquisition of Cycad Group Business, a specialist pipeline and refurbishment contractor for R298m plus R8m for its related properties. The business who have been around for a while now, over 22 years in fact, managed to report an operating profit after tax of R61m in 2011. At a purchase price of R298m, that values the company at historical PE of 4.9. Cheap even for a construction company.

The acquisition will be funded by a combination of current cash resources and external borrowings so no direct dilution for shareholders. However warranties ‘typical to a transaction of this nature’ have been issued. This could cause a slight dilution in the future. Steffanutti have a market cap of R2.4bn. This is a big acquisition for them, 12.5% of their size. They have been one of the rare construction companies who have managed to excel/stay alive during the recession. These tough times really do separate the boys from the men so it’s good to see one of the success stories remaining pro-active.

The rational for the acquisition makes sense to me. We are all very much aware of the water issues in Johannesburg stemming from old infrastructure and breaking pipes. Gas also needs pipes and as homes become more environmentally aware, gas infrastructure is going to need improvement. In the announcement they talk about pipeline construction as a big future benefactor of government infrastructure spend and this acquisition will leave them well positioned to benefit. Service delivery, especially in Johannesburg is becoming more and more exposed so you would expect such government expenditure to happen sooner rather than later.

On top of this the two companies have done a fair amount of work together in the past and a combination of the two business cultures should complement each other well according to management. Alfred Smith who is a founding shareholder and current CEO of Cycad Group will now work for Stefanutti for at least 2 years. All in all, it looks like a good acquisition. As with all of these things, only time will tell but I think it’s great to see some activity amongst the construction sector which has been fairly quiet of late.

Paul was quoted in Bloomberg as having said the following: “Anyone who says this is just the rumblings of a madman and can be ignored, is being naive. There could be a shift in ANC congresses which elect future leaders. It will have its impact in time.” He is of course talking about the ANC Youth League conference, which ended over the weekend with a couch throwing contest. Sorry, cheap shots, let us rather stick to the basics here. First, if you are up to it, read the Address by ANC President Comrade Jacob Zuma at the 24th ANC Youth League National Congress.

I agree with this line, in fact it would be hard to find any South Africans who do not agree on this: “Today, many young people yearn for economic emancipation, equality, justice, peace, better education and prosperity.” Yip. This speech however does not necessarily reflect the views of the ANCYL president, when the subject of land comes up (do a search, 8 matches), there is no talk about the seizing land for no compensation.

I am going to get all Rumsfeld about this one. There are way too many unknowns in leading up to the next ANC conference at the end of next year. There are some good pieces on the conference out there, the Daily Maverick has a nice wrap (written by Sipho Hlongwane, who we have met and chatted to a few times, nice chap) of the closing speech: ANCYL conference day 4: Malema waves a big new stick. From the same publication take a look at a Stephen Grootes piece: Malema 2.0: Time to get worried.

The short term plan in order to achieve some of the economic policy put forward by the league is to change the constitution. That would be the only way of expropriating assets. And that would require the ruling party to win at least a two thirds majority. For private money this sort of rhetoric is not good. This means people place “things” on hold. I am not too sure about your business, but if you have feedback on your suppliers and customers, feel free to share them. And your own views, whether you think that this talk is good or bad. The official line from the leader of the opposition in the country is interesting, a tweet over the weekend which Byron alerted me to: “I have rec’vd a tweet tsunami re Julius Malema. My response is: don’t worry. He will be a catalyst for the political re-alignment SA needs”. What I find devastating is that Helen Zille uses a Blackberry. Did she not see that the stock was down 21.45 percent on Friday? I am sure she has more important things to do.

It is the start of the Paris air show. So what? Well, you know what, because global travel impacts on all of us (I would presume that everyone who reads this message has flown multiple times), you should actually care. The talk of the town is the rain. No, I am kidding it is pouring, but folks are either talking about the Airbus A320, the New Engine Option (NEO) one, or they are talking about the bigger cousin that clipped a stationary object. Embarrassment.

No but seriously, the A320 NEO would reduce per seat fuel burn by 13 to 15 percent. WOW. But only due for delivery in 2015, the first one, no Rolls Royce engines as far as I could see to be perfectly honest. Did you see this: Paris Air Show: “Hypersonic” jet to travel from Paris to New York in 90 minutes. So far away though. I guess the biggest trick for the manufacturers of engines and aircraft are the costs of travel.

Is it really expensive to travel from here to New York and pay only 12 thousand ZAR (roughly 1765 US Dollars) on an SAA flight in August? I managed to dredge up rates on the Titanic, in 1912 prices: Cost of a ticket (one way) First Class (parlor suite) £870/$4,350, First Class (berth) £30/$150, Second Class £12/$60 and Third Class £3 to £8/$40. In modern day 2010 money according to my inflation calculator that would be 97004 Dollars for the parlor suite, 3345 Dollars for a berth first class ticket, 1338 US Dollars for a second class ticket and 892 US Dollars for third class. On a flying machine, the LZ 129 Hindenburg (the one that burnt) ticket from Frankfurt to New Jersey in the US cost 400 US Dollars in 1936. Which is 6225 Dollars in 2010. Now, you non-stop half a day flight seems like an absolute bargain, not so?

Commodities and currencies corner Dr. Copper is flat at 410 US cents per pound, the gold price is slightly lower at 1537 Dollars per fine ounce, the platinum price was last at 1740 Dollars per fine ounce and the oil price has fallen back to 91.71 Dollars per barrel. The Rand is weaker at 6.81 to the US Dollar, to the Euro weaker at 9.69 and lastly 11.01 to the Pound Sterling. We have started like the rest of the world, lower and slower. AND, the market is down nearly five percent for the year here.

Sasha Naryshkine and Byron Lotter
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by sashan

South African Coal and Oil Company (Sasol)

June 15, 2011 in Uncategorized

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Jozi, Jozi. We started really well, but faded in the second half of the day, after lunch really. And we closed just in the green here in Jozi, the all share index finished off at 31229, up 52 points or 0.17 percent. Resource stocks got some buyers involved, ending up one percent, financials and industrials closed down around four tenths of a percent. There were some strong moves north from Exxaro (+3.67%) and Palabora Mining (+3.99%), the 6.6 billion market cap company that few folks ever talk about. Probably because Palabora’s finest export is Dale Steyn. No, that is not it, probably because Rio Tinto owns 57.7 percent and Anglo American owns 16.8 percent. So those two giants own nearly three quarters of the company. I must be honest, at face value the stock looks cheap, and the forecasts look excellent. And warrants a little more investigation.

Byron’s beats He has the best look at the Sasol newsletter that I have seen all day. I mean all week. Or month.

here is the link

She starts off by looking at the financial position of the company which is in good shape following cost management and enhancing operational efficiencies. Obviously Sasol are heavily influenced by currency and commodity fluctuations. A stronger rand is not good because it decreases the cost of oil for our government and therefore the price that Sasol can sell their petrol. In fact every 10c gain costs Sasol R550m. But at the same time an increase in the oil price is fantastic for Sasol. We all know what the oil price has been doing this year. Overall the increase in the oil price has trumped the increase in the rand resulting in an overall increase of 27% in fuel prices. She also reiterates progressive dividend policy, great for shareholders.

Sasol are bullish on the oil price in the long run. We agree. Unkown unknowns like the unrest in the Middle East are going to happen but in the long run the fundamentals will sustain the price above $100. As far as the Rand is concerned, well it will probably remain strong for as long as interest rates in developed markets remain low. By the looks of things, this is going to be the case for the next few years.

Things in their chemical business also look bullish as demand for polymer (plastics) should start overtaking the supply capacity assuming there is no double dip. We do not believe there will be a double dip so such a convergence should be good for margins. Now the part I am interested in, their Synfules division. Capacity utilisation has improved from last year having produced 1.9 million tons of saleable product for the latest quarter. Last year the figure was 1.8mt. For the year so far they have produced 5.3mt compared to 5.5mt last year but remember the large maintenance shutdown they had to do in the first half of the year. Looking at these figures you would expect full year production to be pretty similar to last year. So add the 27% increase in fuel prices to a similar production number and, yes you guessed it, a 27% increase in revenue!

Their GTL division is improving production performance with most of the focus on their Oryx operation. It is their first and only fully operational GTL project so its success is vital for the future of their GTL business. Daily production averaged 25 600 barrels per day but in the month of May they managed 32 000 bbl/d, 99% of capacity. Hopefully they can keep that up.

She mentions their acquisitions in Canada which I spoke about on Monday so I will not cover that again but it involves their GTL expansion. These projects will take time, years. But we are patient and invest for the future. On that topic the Uzbekistan GTL joint venture is nearing the end of its feasibility study so hopefully we will get a decision soon on that one. This has been going since December 2009.

Obviously the environment got a mention. They are happy to cooperate with the South African government in their reduction of Greenhouse Gas Emission objectives. Sasol have an extremely strong position in the eyes of the government. They provide our country with fuel we should not actually have. In fact they save the South African government R40bn a year in foreign exchange. This means that a balance needs to be found between the environment and developmental needs of our country. Christine Ramon says that Sasol are more than willing to integrate their policies with governments, hence the push for GTL.

It’s amazing how little she actually talks about Coal to Liquids (CTL) only mentioning the progress of the Indian project. Don’t get me wrong, CTL is an integral part of their business and the volumes are much better than the GTL projects. It is also vital that the current CTL projects remain in operation. It just does not seem a big part of their future growth anymore.

All in all a very informative report. The stock already reflects the increase in earnings we expect from the fuel price. That’s because its daily moves literally follows this indicator. Looking forward however we should expect fantastic future growth as the oil price remains strong and Sasol increase their capacity.

A pretty badly taken trading update from Naspers yesterday, Byron said this morning, well, what did they want, thirty percent? Let us regurgitate the official release: “We expect core headline earnings per share to be between 10% and 20% higher than the comparable period’s 1 426 cents. Shareholders are reminded that the board considers core headline earnings an appropriate indicator of the sustainable operating performance of the group, as it adjusts for non-recurring and non-operational items”

Results are expected on the 27th of June. We watch these closely of course, as I said the markets did not take kindly to the update, but we would tend to be sucked in by the squid agree with Goldman Sachs, the discount to NAV is where the short term juice is. There would be many detractors, and in fact the reason why the discount is applied in the local market is simple, analysts out there do not believe the valuations in Hong Kong and London. The stock was down just over two percent. As we have said before, this is in part an NAV stock (so you have to strip the parts out) and it needs to attract a different valuation. Nevertheless, this is slightly disappointing. We will have more when the numbers hit the screens.

This is not a very big company, but deserves a look anyhow, for the main reason that there is a massive shift in the shareholders because a large asset is going to be injected in, in due course. We are talking about Sentula Mining, or one of my favourite share codes, SNU. Ssssnnnnnooooo!! And the asset we are talking about is Shanduka Resources. Shanduka Resources? They are mentioned 11 times in the release, there will probably be more detail at the results presentation today no doubt.

Listen up, here goes: “The number of new Sentula ordinary shares to be issued to Shanduka Resources of 626 905 938 in exchange for its shareholding in the assets of Shanduka Coal and Kangra Coal, is based on a valuation of R2 066 million and following their issue, on the effective date will constitute 51,9% of the issued share capital of Sentula.”

Shanduka group will be the major shareholder here in the “new” Sentula. And Glencore is the operator of Kangra coal as far as I understand it. Strange that there is very little detail on Kangra. On the Shanduka website, there is about as much as I can find:

“The export division represents a transfer pricing mechanism between the contract prices received for export coal and the prices paid to the mining operations. Kangra owns 2.3% (equivalent to 1.7 million tons per annum) throughput entitlement at the RBCT.

The mining operations produce approximately 3 million tons of coal per annum, of which approximately 2 million tons are exported through RBCT and the remainder being sold into the local market. A further 300 000 tons of entitlement is obtained through the sale of coal to Glencore. The export production is sold through two traders, namely Glencore and AMCI, and prices vary according to spot thermal coal prices.

The Savmore operation has a mine life of approximately 10 years and the Welgedacht operation has underground potential for a further 15 years. Additional mine life may be obtained through the acquisition of Anglo Coal’s Glenfillen reserves which are contiguous to Savmore. Kangra’s local production is mainly sold to Mondi, which is used for their paper mills. This represents approximately 90% of Savmore’s inland production of +/- 600 000.

Kangra employs approximately 600 staff, 10 of which are located in the Parktown head office”

Their LinkedIn profile (Kangra) also has very little detail, check it out: Companies – Kangra Coal (Pty). Anyone know a Portuguese guy (or is he Brazilian?) by the name of Ramon in Piet Retief? Anyone?

In the first public Glencore quarterly report yesterday, they had this to say about their South Africa coal operations: “In South Africa, the Shanduka coal operation is currently not mining at the Leeuwfontein and Lakeside Collieries (both on care and maintenance), accounting for the reduction of 22% in overall coal production compared to the first quarter 2010. However, export sales were more moderately down over the comparable period from 496 kt to 445 kt, due to lower rail availability.”

Does not exactly sound good now, does it?

The numbers, revenue up 10 percent, HEPS up a lot to just over 16 cents per share, the CEO is very excited about these results. The share price, well, that is doing “not so well” this morning. Or, was not doing so well this morning, on relatively light volume. Turns out that the stock is well off its worst and has already attracted four times the normal volume. BUT, it is futures closeout today and that could mean almost anything. A speculative investment at best, having been dragged through the mud backwards and now waiting for a complete overhaul, shareholders might be in for a whole lot better times ahead!

Stuff you thought you knew. This is amazing. Read it, it is going to take you five minutes, BUT, you must read it. It is an abbreviated version of the main piece (which is a subscription piece only) from my favourite “China guy”, professor Michael Pettis, titled —> How to become virtuous and save more. Which I think that everybody wants to achieve that is!! Save more, spend less. Ironically, it is good to spend, but it is also good to save. So rather be the person living next to the Jones’ than be the Jones themselves. Talking of which, I am seriously thinking of downgrading to a teeny weeny dinky motor vehicle (second hand of course) because all I do is drive to work and back. And then I use my wifes car on the weekend.

Commodities and currencies corner Dr. Copper last clocked through at 415 US cents per pound. The gold price is lower at 1519 Dollars per fine ounce, the platinum price is also lower at 1789 Dollars per fine ounce. The oil price is also lower at 98.86 Dollars per barrel. The Rand is weaker, 6.81 to the US Dollar, 11.09 to the Pound Sterling and 9.75 to the Euro. We have started weaker here this morning, but by lunch time (avocado and pickle sandwich) stocks are better. Not enjoying lunch are people in Greece. They are protesting.

Sasha Naryshkine and Byron Lotter
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by sashan

Labour. Not of love.

June 14, 2011 in Uncategorized

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Jozi, Jozi. They are all coming out of the woodwork!! In the last three or so sessions of business TV, I have seen Meredith Whitney talking about municipal defaults (yes again), “the Nouriel” talking about a perfect storm in 2013 (30 percent chance of this and that) and then yesterday I saw the guy that I actually like a lot, even though he is bearish on the US recovery, Dave Rosenberg. I will say this for Rosenberg though, he has vested interest, unlike the other two bears before him, he actually makes money decisions on behalf of real clients. His firm is Canadian (so is he), he moved from the US to Canada. An economist in Canada takes an interesting look at all of the goings on around us —> Doomers and Humpers.

Hah-hah, it is quite funny that all the bears come out of the woods and tell you that everything is going to fall apart again. I almost get the sense that all the talking heads are so scarred (and scared) of the events of ’08 and ’09 that it is difficult for some to feel optimistic about the future. Sure, the US housing market is still in the toilet, let us be frank. The unemployment (official rate) is at 9 percent. There is uncertainty about Washington DC’s next moves about the size and scale of government debt, that is really out of control. But government jobs are being shed slowly in the US, whilst private employment is coming back. This jobs recovery is fragile. Remember this graph:

See that part at the right, where it starts to pick up, after an awful period. Awful. Give it time. Problem is, as GOP members scramble to throw their hats in the ring, the Democrats have to grapple with the economic issues. I must admit, as much as I like Barrack Obama, I quite like one of the GOP candidates who is fiscally savvy, and has a good track record, a chap called Tim Pawlenty. Most people think that it is Mitt Romney’s to lose. And there is a new person, who is smarter than Sarah Palin (who isn’t – ouch!!), she is Michele Bachmann. And then of course Ron Paul, who is a veteran politician. Or just call him Mr. Tea Party. There is some stuff that is appealing and other stuff that is not appealing about him. Free market type. Perhaps that is not needed now. Oh, there was another amazing image that Paul sent me, that I have not shown you yet, here goes:

All the major crises that we lived through over the last forty years. There are many. 23 of them. And see what the S&P 500 has done since then. So the moral of the story, in a recent presentation that we did, which you can download here, which ends with that slide —> The world according to Vestact. Look, it is not high powered and went along with a lot of talking (and excludes the last few slides – what to buy now), but you get the basic picture.

Local unemployment numbers yesterday, the release by Adcorp, lacked any Ayobaness. Employment and international labour market competitiveness decline. You don’t even have to read the rest of the short piece just to be depressed again. What are the reasons given for our slip and the labour market just not getting better? Well, perhaps this fell into the category of I knew that already, but here goes: “South Africa’s labour laws and regulations are now the 7th most restrictive out of 139 countries in the world. According to a survey of the world’s 1 000 largest multinationals, restrictive labour regulations are the 4th most problematic factor for doing business in South Africa.”

I unearthed this gem from 1998: Sacob worried about ‘restrictive’ labour laws. Yes, 1998. So this is not “new” news. Look at that, a presidential jobs summit on October 30, 1998. What!!! OK, but who are the seven countries worse than us in terms of restrictive labour laws? I suspect that the Adcorp report is referring to this report: The Global Competitiveness Report 2010-2011. In which case that must be new, because the 2010-2011 report suggests that for “Labor market efficiency” we rank 97th out of 139. I swear, but in the report, page 302 (if you downloaded it), you will see what I am talking about.

HOWEVER, when that pillar seven (Labor Market Efficiency) is broken down further, and we are much worse on specific issues. These, remember, are all measured against 138 other countries, 139 in total. We score horribly in the following sub sections:

Cooperation in labor-employer relations: 132
Flexibility of wage determination: 131
Hiring and firing practices: 135

I suspect the report is referring to that first point, indicating that labour relations are awful. BUT, is that as a function of that other category, hiring and firing (or none of both really)? Which is even worse!!!

Poor Greece. The fellows over at Standard & Poor’s have suggested that Greece cannot meet its obligations and will default, as soon as the next 12 months. The official line from the release (Long-Term Sovereign Rating On Greece Cut To ‘CCC’; Outlook Negative) reads as follows: “The downgrade reflects our view that there is a significantly higher likelihood of one or more defaults, as defined by our criteria relating to full and timely payment, linked to efforts by official creditors to close an emerging financing gap in Greece.”

But wait, it gets worse, because if the short term was no good, neither is the medium term: “Greece has heavy near-term financing requirements, with approximately 95 billion Euros of Greek government debt maturing between now and the end of 2013 along with an additional 58 billion Euros maturing in 2014.” I guess it is safe to say that Greek is toast. Although, this morning they managed to raise 26 week money, 1.6 billion Euros at a rate of 4.96 percent. And the credit default swap markets are suggesting something slightly different, that the country will default in the next two to three years. Check it out:

What are the ECB to do? They can’t keep throwing money at the problem. If Greece goes, the bond market is telling me that Portugal and Ireland will be the focus of the “bond vigilantes” next. You could either call them vigilantes or you could just say that they take their chances like everyone else. They really do. So, I am not suggesting it is necessarily a bad thing if the pack of wolves turn to these countries next, they could equally be wrong and then in a bad position. For Greece and the EU this is a case of stuck like super glue, too bad.

Stuff you thought you knew. This is sort of worrying —> Wave of Unrest Rocks China. Why? Just because of the sheer size of China. If this sort of thing gets traction then Beijing central will have to do something serious. And that doing something serious could mean absolutely anything from cracking down to more reforms. The mystery of Chinese politics still remains, for me and I guess many investors around the world.

Stuff people don’t tell you —> U.S. Manufacturing Profits Set New Record in Q1. Warning do not read this if you don’t like good news. 144.5 billion USD worth of US manufacturing profits!!! Astounding. Annualise that, 580 odd billion of US manufacturing profits. WOW.

Byron’s beats I just bought another pair of running tights. The way I figured, nobody is going to see me at 5 in the morning huffing and puffing in the cold, it is much better to be in bed that time. But my husky dog loves it and it is “good” for me. And that has a little to do with the next piece, the listing (well exit mechanism really) of Holdsport.

Since delisting in 2000 the company has grown from 6 stores to 51 today, compromising 33 Sportmans Warehouses and 18 Outdoor Warehouses. In 2006 Ethos, a private equity group bought a majority stake from Nedbank and Vestacor for R681 mil when the company was still named Moresport. Interestingly Massmart was blocked by the competition commission from a possible takeover bid before Ethos got involved. (Sasha – that happened in April 2006, just over five years ago)

CEO Kevin Hodgson explained that the listing was not to raise money but because Ethos had reached their time horizon and wanted out. I wouldn’t look at this as a negative, Ethos stated that the investment had a time frame of 5-7 years and it was time to realise their gains. It’s what private equity companies do, they need to liquidate at some stage and I wouldn’t view this as an exit due to a lack of future growth.

As for the future, it’s always hard to tell with IPO’s. Sometimes it’s best to let things settle and then evaluate the company based on their first few earnings reports. Looking at it from an outside point of view I’m fairly indecisive. I like their business model. South Africa is a sports mad nation with a fantastic climate and an amazing landscape with vast opportunities to explore. As more and more people enter the realm of the middle class they are going to want to get active.

Sports and physical activities are also growingly important lifestyle choices as the awareness of healthy living and longevity get engraved in our society through mass media consumption. It falls under our theme of aspirational consumerism. People will strive to buy that paddle ski and hit the waves before work every day, or purchase that mountain bike and carve through the dirt roads of the Magliesburg with your mates on Saturday.

My biggest worry is the intense competition that already exists. Plus the introduction of Walmart which just so happens to be the biggest retailer of sporting goods in the world. I guess Holdsport would claim a niche market with personalised services but at the end of the day this is already offered by your Pro Shops, Cape Union Marts and your local sports store. It’ll be tough out there and they are going to have to be on top of their game. What is going to be their advantage over the others? Maybe turn the store into an experience in itself, like a theme park. Remember when Sportsmans Warehouse first came onto the scene with putting greens and basketball courts, well that’s not so cool anymore, get innovating.

Just a simple question, are we supposed to beware the return of something that was listed before. I can think of a few examples, but perhaps this is just a case of management looking for an exit mechanism for their biggest shareholder. I heard in the interview yesterday on CNBC Africa, with chief Kevin Hodgson, that he said it would be business as usual, they would open two to three stores per year. If I heard right, it is only coming a lot later in the year. The good thing about new listings and coming back to market, is that companies are fine about where we are in the cycle. And that is a good thing.

Commodities and currencies corner Dr. Copper is slightly higher at 408 US cents per pound. The oil price, Nymex WTI, last traded at 97.06 Dollars per barrel. The gold price is flattish at 1518 Dollars per fine ounce, whilst the platinum price is 1793 Dollars per fine ounce, lower. The Rand is weaker at 11.09 to the Pound Sterling, 6.76 to the US Dollar and 9.75 to the Euro. We are slightly lower here at midday.

Do not forget to tune into Paul’s show on CNBC Africa “Mad Markets”. At 20:30 tonight on channel 410 on the satellite. If you did not send through questions for the show, then remember to either send them to Paul or even better tweet him on @Paul_Vestact. Come on, get involved and interact, I promise that you are only going to learn more. Not less, and that friends is evolution of sorts.

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

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