Jozi, Jozi. We got a second wind towards the closing bell, resources led the charge on a day where the directionless seemed to be this time waiting for the Fed to reveal their next step. It always floors me that “the market” is looking for something next, be it a bond auction from Greece, or weekly jobless claims, or a German sentiment reading from the ZEW institute, there is always something else. It is almost like standing on the platform not wanting to board the train, because you want to read the newspaper a little bit longer. You have to be in, and make sure what you buy is the right vehicle. When I hear investors are looking for this or that, I turn off, because the investors are exactly the opposite, their time frames are weeks, days, hours, minutes and seconds. That is not the sort of activity that we are in.
Session end the Jozi all share index closed at 31343 points, up a percent and a quarter or 384 points on the day. As we said, resources rocked, the sector adding nearly two percent and leading the charge, banks were marginally better on the day, industrials were up as much as the rest of the market, general retailers were slightly lower, ever so slightly. Fixed line telecom, OK, Telkom the only one, that stock was lower on the day. Perhaps the pricing war is starting to get them and their shareholders down. New, much higher data caps kick in October the first. Perhaps that is starting to weigh on the stock.
PPC released a trading update yesterday. As Forest Gump would then say, and that is all that I have to say about that. But that is not the case, yesterday PPC delivered a rather poor looking trading statement: “…. earnings per share and headline earnings per share for the year ending 30 September 2011 are expected to be between 25% and 30% lower than the previous corresponding period.”
Not great, but we are all well aware that we are currently in a deep trough, recent cement statistics suggest we might be starting to bottom, from the release: “cement demand in South Africa improved marginally during the second half of PPC’s financial year.”. But not everywhere, all my friends and family in the Western Cape, time to start building please: “…. cement demand in the Western Cape Province, where PPC enjoys high exposure, continued to lag the rest of the country.”
Another piece of information that you might need: “While a successful price increase during July 2011 will enhance revenues for August and September 2011, the overall pricing environment is expected to remain competitive and this together with ongoing input inflation, continues to present a challenging business environment.” That same old word that crops up when talking about the local economy, challenging. Results are on the 8th of November, and but there is a presentation that we can dissect tomorrow or Friday.
Operation twist is not trying to be a contortionist whilst keeping your left hand on the blue dot, and your right leg at a ninety degree angle on another blue dot, but rather the next Fed program nick name. Or just name. This is how I understand it, Operation twist has been done before, back when another young democrat was in the White House, JFK. Originally it was Operation Nudge, but because of a legendary song (yes it is 50 years old) from Chubby Checker (launched July 1960) the market participants at the time called it Operation Twist. Checker said that the Twist ruined his life, because after that nobody took him seriously, because they did not think he had real talent. But like Wiki says, he actually got adults onto the dance floor, who can’t ignore a ridiculous dance? Most recently the most ridiculous one I can think of is the Macarena and the Locomotive, the Chicken dance. Hey, at least everyone looks pathetic together.
So what does nudge or twist actually do, because the last thing it is intended to do is to make everyone look nerdy and geeky at the same time? Quite simply, without increasing the size of their balance sheet, the Fed will sell their short term government debt and buy the longer end of the curve, 10 year to 30 year debt. The yield curve will then flatten. The longer dated borrowing costs will then be more attractive to business owners and individuals who were not willing to stick their necks out, to jump at much lower longer dated borrowing costs. Question is, those long dated rates are so low as it is, what would the tipping point be, for most people?
There is already a whole lot of scepticism on the program, and whether it would work. The way I see it, getting out of the short term debt that has rallied hard might actually see the Fed make a sizeable profit, and achieve what they need and want, more risk taking and spending by the consumer and small businesses. Thereby boosting the economy short term. As I said before, it is not about the “cheapness” of money, but rather this is a confidence crisis. Once confidence is restored, then you can imagine that folks will be willing to take on risk. The Operation Twist is expected to be announced a little later today, later in the evening our time, around two fifteen in the afternoon in the US, East Coast time. Rates are expected to remain on hold. I can assure you that “investors” will be watching this event as the main event de jour.
The EFSF law passing (supposedly) next week Thursday in Germany is the other event you must look out for. Or not, if you just care about Ashton Kutchner and Charlie Sheen, that is also fine too. What is the EFSF? The EFSF stands for European Financial Stability Facility, which gives you a great idea of what the company (registered in Luxembourg and owned by the EU states) actually does. Fancy that, registering the company in Luxembourg. Because of the constitutional ruling last week, the right channels are now being taken by the German government. Letting the elected officials decide.
Philipp Roesler (or is it Rosler with a umlaut on the o) was interviewed by one of my favourite market anchors, Sylvia Wadhwa (say it Vad-vaa) in a CNBC exclusive yesterday. Who? Well, Roesler is the vice chancellor of Europe Germany. Amazing guy and story really, read it at Wiki: Philipp Rosler. Amazing! Roesler back pedalled on comments that he had made last week in which he suggested that Greece should default, now he is all for a unified Euro and they will succeed. Quite right, that is the prerogative of politicians, to change their minds. Anyhow, Roesler said that he thought that vote would pass comfortably and then the EFSF could continue doing its work, keeping the periphery countries “afloat”.
I quite liked this analysis of the Euro currency and the Euro zone from the Pragmatic Capitalism website: A FISCAL UNION FOR THE EURO – SOME LESSONS FROM HISTORY. It is something that we have been suggesting might actually happen, and strangely be fast tracked by the crisis. Useful insights into a complicated union.
Byron’s beats has a look at a company that would have rewarded you handsomely over the years. Once known as Rembrandt. And some amazing engineering of the businesses, well done to the Ruperts of yesteryear and present. Think of Richemont, Remgro, Venfin, British American Tobacco, Reinet Investments, which have come out of the Rembrandt group. Have I missed anything?
We had results yesterday from investment holding company Remgro. This one is slightly complicated because they have changed their yearend so these results are actually for 15 months. This makes valuations a bit difficult. Firstly and most importantly, let’s look at the group structure so we know what we are analysing. Check out this link from the website. See that through Remgro, we get exposure to financial services, diversified industrials, media, mining and technology. In truth however Industrial contributes 47.2% to earnings whilst financials contribute 46.9%. The rest are fairly insignificant.
Because the periods are not comparable I’ll just give you the earnings numbers without percentage comparisons. For the 15 month period headline earnings per share came in at 1082c. They do give us the 12 month results which came in at 788c compared to 690c from the previous period, growth of 14%. In terms of valuing an investment holdings company, the rules are different. Investors look at the intrinsic value of all the companies under management. According to management, this came in at R135.97 a share. The stock trades at R114 a discount of 16.1%. This means that the sum of the parts is worth more than what the market is valuing the company. Is this a buying opportunity?
Investment case for Remgro. People who like the stock like the instant diversification. By buying the stock you are putting your faith in management to make the right decisions and the right allocations. Many people also believe in the Rupert factor. Johan Rupert who is the Chair has a knack for making the right decisions at the right time. You also gain access to some assets which are not listed and which you would not normally be able to invest in. You are getting all of this at a discount to NAV.
Investment case against Remgro. 75% of all their earnings comes from listed companies. If you like their mix why not just buy these companies on the market yourself? Not only do you avoid the Remgro management remuneration but you also have the choice of hand picking which ones of their asset mix you like. For example they have a stakes in Nampak and Distell which are companies we would stay far away from. As asset managers we prefer to make those allocation decisions ourselves. Plus if you are looking for the Rupert magic you can buy Richemont shares where he is CEO. Lastly, if you don’t have the funds to get that instant diversification, rather buy into the Alsi 40. Cheaper fees and more diversified mix. Hence we feel they deserve that discount.
On a different note but concerning the same company, Remgro have offered to buy a 22% stake in Grindrod, the diversified shipping company. The structure of the deal is interesting. Basically Grindrod needs to raise money to fund new projects they are involved in. They are raising this through a rights offer to share holders. But instead of the offer being at a discount, it is at a premium to the current price. Remgro will subscribe for 133.3 million shares and assuming shareholders don’t want to buy new Grindrod shares at a premium (which is a given) Remgro should get most of these shares. Grindrod is not a company we particularly like. Although we are optimistic about global growth, the shipping industry is too cyclical and extremely competitive. Again this reiterates why, in a world of choices, we stay away from Remgro.
New York, New York. Yo-yo stocks last evening, not the yo who wants to know type, but rather the kids (and adults) toy that is attached to a string. Why am I telling you, that is dumb. The graph last night actually looked strangely like the most prized of all Cape Town possessions (?) Table Mountain. Sort of, sadly slipping away at the end of trade. Of course every Capetonian owns a piece of the mountain. Session end the Dow Jones managed to squeak into the green, the broader market S&P 500 closed down nearly one fifth of a percent, whilst the tech stocks slid by 0.86 percent.
Oracle results after the bell last evening seemed most pleasing. This is a company that I admire, their software is top class, and it is something that you use more often than you think. Many a website database uses their software, not cheap mind you, but you can’t doubt the quality. Enough of that, let us check the results out. These results were for the first quarter of their fiscal year. Revenues were 12 percent higher to 8.4 billion USD, with new software licences growing 17 percent. Basic EPS was 36 US cents a share, the dividend was six cents. After hours the stock is trading three percent plus higher to 29.29 Dollars, around in the middle of their 52 week trading range. Earnings estimates for the current financial year are just over 2 Dollars worth of earnings, and the following year around 240 cents worth of earnings. Pretty decent, so the current valuation is not that bad.
The commentary part suggests the change in strategy (they have been buying businesses over the years) is starting to pay off: “By moving away from low-margin commodity hardware and focusing on high-end servers, we increased our hardware gross margins from 48% to 54%. Our strategy to grow the profitable parts of our hardware business is paying off.”
Is this a particularly appealing place to be invested? Part of me says yes and the other half says no. Oracle compete with Microsoft, Intel, SAP, IBM and HP, those are mean competitors. They have an amazing software business, with four different types of licences that are able to for most business pockets. They also have a stunning hardware systems business, with servers running on their SPARC microprocessors. And then there is their services business, which consists of the old, consulting and the new, the cloud. A nice spread of businesses.
Oracle was founded exactly a year to the day after the Soweto uprisings of 1976, by Larry Ellison. Who pays himself too much money, after all he is a huge shareholder, why pay yourself so much? Agree or not? Surely the dividend must be enough for Ellison, he owns 21.8 percent of the company or 1,178,771,328 shares (as at 15 August) with a market value at yesterday’s close of 30.786 billion Dollars. That is a quarterly dividend check of 70.7 million Dollars, why would he possibly need to pay himself about that much a year? Ah, he can do what he wants I guess.
There is a load of cash on hand, 13.1 billion Dollars cold hard cash and 18.5 billion Dollars worth of marketable securities (liquid securities convertible to cash immediately) on their balance sheet. Ready for deployment. So that is nearly 635 US cents out of the 2929 US cents price. In the pre market of course. So, I guess they will continue to press hard into new territories (they have just opened a new facility in India) and continue with these smaller acquisitions along the way.
Commodities and currencies corner. Dr. Copper last traded at 377 US cents per pound, the gold price is higher at 1811 Dollars per fine ounce. The platinum price is last at 1788 Dollars per fine ounce. The oil price is 86.58 Dollars per barrel. The Rand continues to weaken, 7.77 to the US Dollar, 12.17 to the Pound Sterling and 10.63 to the Euro. We are being propped up here by the Rand, we are higher again. Hey, I am not complaining. Look out for that FOMC statement later.
Sasha Naryshkine and Byron Lotter
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