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.
Oh dear, we had City Lodge Hotels coming out with a disappointing trading update yesterday announcing that normalised headline earnings per share are anticipated to be between 30%-36% lower than the previous financial year. They don’t go into anymore details other than that results will be released on or about the 12 August where we will get all the details. However it is our job to take this info and analyze it straight away, especially for a recommended stock like 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.