Too cool for school

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Too cool for school

February 29, 2012 in Uncategorized

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“Finance, real estate and business services are 21.2 percent of the overall economy and the largest contributor overall. Next comes General government which contributes 16.3 percent and is in second place, then the wholesale, retail & motor trade, catering and accommodation which is 14.5 percent of the economy. The manufacturing industry represents 13.4 percent of the South African economy, its relative importance has declined over the years.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. A weakening oil price after all the anxiety the day prior and a better than anticipated local GDP read (not too sure that was a core driver of the day) saw the Jozi all share index crack on the pace and get back almost everything that we had lost in the period prior on Monday. The Jozi all share index closed the day just over a percent better to 34214, up 343 points. Resource stocks added nearly one and one quarter of a percent. Banks added the same amount as the overall market, but the real action was in a sector that does not normally attract much of our attention anyhow, non-life insurance. The star of that show was Santam, in a “sector” that it dominates. The stock was up 5.89 percent on the day of the announcement that they will be paying a special dividend of 850 cents per share. They do not need the extra cash. Results themselves were not bad, HEPS were lower than the prior year.

South African GDP registered 2.9 percent growth for the whole year of 2011 and 3.2 percent quarter on quarter, the December one of course. The main drivers of growth were as follows:

“The wholesale, retail and motor trade, catering and accommodation industry contributed 0,7 of a percentage point based on growth of 5,2 per cent;
The manufacturing industry and general government services each contributed 0,6 of a percentage point based on growth of 4,2 and 4,4 per cent respectively;
Finance, real estate and business services contributed 0,5 of a percentage point based on growth of 2,3 per cent;
The transport, storage and communication industry contributed 0,3 of a percentage point based on growth of 2,9 per cent; and
Personal services contributed 0,2 of a percentage point based on growth of 3,0 per cent.”

But I always like to take the table of overall contributions to the economy so that everyone can see the balance. What is quite fun is that our GDP topped 3 trillion Rand for the first time, nominal GDP at market prices. Here goes, Finance, real estate and business services are 21.2 percent of the overall economy and the largest contributor overall. Next comes General government which contributes 16.3 percent and is in second place, then the wholesale, retail & motor trade, catering and accommodation which is 14.5 percent of the economy.

The manufacturing industry represents 13.4 percent of the South African economy, its relative importance has declined over the years. Those four sectors of the economy contribute around two thirds of the total. The “others” include agriculture, forestry & fishing, mining & quarrying, electricity, gas & water, construction and the like. What is always fascinating is that mining & quarrying at constant 2005 prices has not grown in a decade. But as Paul points out, the associated services and manufacturing parts of our economy support the mining industry directly.

I guess we should be happy that the estimates were beaten, of course we could do a whole lot better. And should do a whole lot better. But my comment about the balanced economy is put into context when compared to, say for instance Russia. And even the US, which is largely a consumer driven economy. China, too much reliance on manufacturing. I guess if you scrutinized our economy you might well find that mining is bigger than at face value.

Byron’s beats covers an area that is one of the top priorities of all parents, or at least should be, education. I know that my parents made it a priority and for me it is too. Whilst Independent (private) schools account for only 5 percent of all students in South Africa, enrolment has jumped 76 percent over the last decade. Which leads me to believe that the parents are voting with their feet. BUT, equally there are a lot more young people in South Africa, it could quite simply be a demographic issue.

Here is a reminder

Let’s look at the numbers. Revenue grew by 125% (33% of this was organic) to R166 million while learners increased by 80% to 9308 within their 15 schools (up from 9). Management expect 2012 to be a massive year and hope to own 28 schools by the end of the year. In terms of earnings the company actually made a loss of R7.5 million for the year. This was because of interest expenses due to their massive capital expansion over the last 2 years.

So how do we value this company? The current market cap sits at R1.6bn which means the company trades on 10 times revenue. Margins last year when interest expenses weren’t so high came in at 17.4%. This is very basic but let’s assume the company doubles revenues this year (it’s planning on doubling its schools) to R320 million. Let’s assume they maintain last year’s margins (which they won’t as they plan to carry on expanding) which means they’ll make around R55 million. That puts them on a forward EBITDA valuation of 29. Property plant and equipment is valued at R529 million (a third of the market cap), so at least we have that sort of underpin.

These calculations are just to give you a perspective and do not include the effects of the rights issue. The company is not going to be about earnings for the next 5 years. It’s going to be about growing schools and number of learners. The macro fundamentals are certainly there. The inefficiencies of public education are wildly publicised. Education sits as an absolute priority for most parents in a middle class home. Why I like Curro over its competitor Advtech is that they are targeting both high end and low end income groups. Their school fees are 30% lower than the private school average which means they fall within the grasp of new comers into our growing middle class.

A lot is riding with management and their decisions going forward. They are looking to raise R350 million by issuing over 58 million new Curro shares at a subscription price of R6, a 48% discount to the 30 day average price. It must be noted that the board made this decision in November last year when the stock was a lot cheaper. I still rate this company even though it may look expensive. I think there is a huge gap in the market for cheap private education (they are first movers in this sector) and that there are numerous options for acquisitions. If you are willing to ride the wave I think it is a compelling buy.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The Dow closed above 13000 points! Err… so what? Well it is the first time since May 19 2008, I did not look that up, a WSJ email alert (those things are useful sometimes) told me so in the middle of the night. Hooray then if you are a watcher of levels (13005 was the closing level), I am guessing that all the bulls get excited, and we fall into that category. Optimists by nature in this camp. The broader market S&P added one third of a percent, but the nerds of NASDAQ were where the real action was, clocking a 0.69 percent gain. It is somewhat surprising that markets ended in the green , although a strong consumer confidence number did more to offset what looked like very weak durable goods orders and weak house pricing data. But hey, perhaps that tells you something about the mood, a little more optimistic.

Republican primaries continue to capture the attention of our screens when it is US trading time, to be honest the real deal is more interesting, the GOP nominee against the incumbent. Remember the democrat primaries last time, they were far superior with Hilary Clinton and Barack Obama in a far more closely contested affair. Paul says that my observation about the superiority of the candidates is subjective, perhaps he is right, none of the major GOP candidates grip me. I do think however that Romney will be the ultimate solid candidate that, although rich and seemingly out of touch (his crazy Nascar comments over the weekend), can be the only guy to challenge Obama. But at this stage I still think that Obama will be re-elected. Baring another disastrous economy. And he would then prove that a high unemployment rate historically would be less of a barrier. Plus, Joe Kernen might well fall off his chair, his opinionated stance as a moderator is starting to get on my nerves. More Ross Sorkin please, at least he has a little more humility.

Commodities and currencies corner. Dr. Copper is slightly better at 388 US cents per pound. The gold price is also higher at 1787 Dollars per fine ounce. The platinum price last clocked 1724 Dollars per fine ounce, not managing to close the gap by as much as I would have thought. The reason I make those comments are because all the loss of production at the majors, the uncertainty of Anglo American’s strategy around Amplats and some of the producers higher cost operations. The oil price has bounced a little this morning, last at 106.82 Dollars per barrel for WTI as per the quote on NYMEX. The Rand is firmer in parts, good news for the inflationary outlook, 7.47 to the US Dollar, 11.89 to the Pound Sterling and 10.10 to the Euro.

Parting shot. Yesterday we complained about the high fees of investing. Old Simon Brown from Just one lap suggested that the best thing the fund managers could do for you was at least take you for a spin in their shiny car that sits in the basement. Or let you take the car for a spin. I get what he is saying, and in fact an old Etrade advert (they have good ones) suggested that you check the basement to see what your stock broker drives. In our case (Vestact) my motor vehicle is the newest, a 2004 Polo Classic 1600. Silver one. Not enough on the clock, just shy of 90 thousand km’s. Byron has 103 thousand km on the clock of his 2003 model, Paul’s car has done more than mine and Byron’s put together, 315 thousand km’s. We collectively have done half a million km’s altogether. That is like to the moon and half way back.

Both Paul and I have been having interactions between clients and ourselves where we are horrified to find the high level of fees. This is unbelievable -> MERQ is Too Extreme to be Believable. If, like as in the case yesterday, that your annual fees are close to two and three quarters of a percent, the return relative to a product that will deliver you similar returns is almost half over a longer period of time, a quarter of a century. It amazes me that all the giving away and receiving very little in return. We offer a fantastic service (we like to think) relative to our peers and are far cheaper. A simple tracker fund, in the form of Satrix40 carries an annual admin fee of 0.8 percent of amounts of 100 thousand ZAR or less. 0.45 percent for 3 million Rand, with a sliding scale inbetween the two. I just can’t get a handle on the overall fees, the total expense ratio is much lower, at 0.456 percent. A much better option for passive investors not wanting to own stocks outright.

Sasha Naryshkine and Byron Lotter

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by sashan

Buffett dishes more out

February 28, 2012 in Uncategorized

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“Venezuela has the lowest petrol price in the world, but the highest inflation rate. Strange. Meanwhile, millions of Venezuelans remain in poverty, victims of the power struggles and misguided ideologies of their government.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Slipping a few gears here yesterday, the talking heads on the screens suggested that it was a high oil price that could derail the recovery. We did however see a wonderful interview with Warren Buffett in the afternoon, a CNBC piece, he is always fantastic. The overall market closed 1.14 percent lower to 33871 points, a loss of 389 points on the day!

And for the record, the old guy (Buffett) did not think that high oil prices were too much of a problem. No really. When I hear the Americans complain about high gasoline prices, I often think that they should take a trip around mainland Europe, those prices are crazy high! There is a crowd, according to Wiki, called the German Technical Cooperation (GTZ) who publish gasoline prices around the world. For whatever reason the price of petrol seems crazy high in Turkey, which is just a three and a half hour flight to Riyadh, the capital of Saudi Arabia.

The next eight most expensive places in the world are in Europe, over two and one quarter of a Dollar per litre of fuel. Thanks to all the government taxes. The United States gasoline price is MUCH cheaper than ours! MUCH! And around 40 percent of what they pay in Europe. Of course, because of the lack of high taxes, ironically it is the Americans who are more susceptible to price swings. We are nowhere near as expensive as the Europeans, but still, we are not cheap. But you would expect that, a flight to Riyadh from Jozi is around eight hours, which is more than double the time from Istanbul. Governments and a fuel levy. Why do I use Saudi as an example, well, because in Riyadh you can fill up for 13 US cents a litre of petrol. WHOA! That is less than a Rand a litre. 9 percent of what we pay here. Well, you get less rain there. And more sand. Less trees. And there have never been elections held. Ever. Ironically with such a low petrol price there is very high inflation, which sparked protests and then the monarchy responded with extra benefits for their citizens.

BUT, the lowest petrol rate in the world belongs to Venezuela, 17.3 ZA cents per litre according to this Wikipedia page -> Gasoline and diesel usage and pricing. And then sort cheapest to most expensive, that is how I come to that number of 17.3 ZA cents a litre. Now. Consider this list Index Mundi consumer inflation rate. Venezuela is at the top of that list. Stranger things I have not seen for a while.

Hey, talking Venezuela, did you see this article the other day? -> Nationalisation in Venezuela – an inside perspective. Written by a pro business type of course, but it makes for very interesting reading. This is the line that got me excited: “The private sector may not be perfect at running enterprises, but the government is worse.” I could not agree more. And towards the end of the article, a conclusion, or one of: “Meanwhile, millions of Venezuelans remain in poverty, victims of the power struggles and misguided ideologies of their government.”

There was of course a wonderful interview with the worlds only lovable billionaire favourite rich old guy, Warren Buffett yesterday, a couple of days after his letter to shareholders. The interview was crazy long, and in fact there is complete and full coverage from this landing page: Warren Buffett on CNBC: I’d Buy Up ‘A Couple Hundred Thousand’ Single-Family Homes If I Could. As you can see from the headline, that is what the greatest investor ever (in the history of everness) thinks. Last evening on Mad Markets, the closing bell version, Paul said he thought that was a bad suggestion, because most tenants are awful he said. Personally I think I was a great tenant, struggling with my landlady prior, how should we say, she seems less than forthcoming at the moment.

What else did Buffett say? Well, he likes Wells Fargo. He bought a few more IBM shares. He owns JP Morgan in his personal account and has high regard for Jamie Dimon. He also revealed that Steve Jobs called and asked for advice a few years back and he suggested that they buy back stock with all their surplus cash. It would have been the right thing to do. He says that JnJ have messed up a lot in the past few years. He also revealed that Berkshire had bought some European stocks: “I bought seven international stocks then. In fact, I may have bought- I put- I put 175 million euros in each, I guess, of eight stocks, and they were all European stocks.”

Nice. And then the answer that tells me everything that you need to know about Warren Buffett and his investing style and how you can replicate that. “I just thought these eight companies were cheap. And they obviously were affected by the European crisis. And in the end those eight companies I bought are going to be there five, 10, 20, 50 years from now. And there may be something else that’s bothering the world 10 years or 20 years from now. There’s always going to be something that’s bothering the world. These companies will do fine regardless of what happens in Europe and there will probably be plenty that happens in Europe.”

Good point. We buy stocks because we like the companies, not the share prices, that is one of the most difficult things to separate for many an investor. Trader, no problem, share price action only. Investor, the quality of the business and what you are paying for it today, what the prospects of the business are, and all of the other valuation metrics. There are many. Those “things” are important. So a trader takes their chances and using leverage can hit home runs (or rotate the strike), whilst someone in the Buffett mould buys good businesses for a long stretch of time. Long after he is gone, Berkshire could still own stakes in some of these European companies. There is always going to be something bothering the world. I like that line.

If you want to read the whole transcript of the interview if you missed it, then start with the first page and follow the links sideways -> CNBC Transcript Part 1: Warren Buffett on Buying Houses and the Next Berkshire CEO. We had a good old chuckle about the next Berkshire CEO. He/she does not know who they are. No idea. But yet Buffett has identified the person. I would say that it sounds like a dictatorship, but normally it is the offspring of the incumbent that somehow seems to be the best person for the job.

Byron’s beats looks at a slimmer and meaner FirstRand, who are doing better thanks to that Steve guy. Steve from {swearword} Bank in the crazy adverts.

“The Group consists of a portfolio of leading financial services franchises; these are First National Bank (FNB), the retail and commercial bank, Rand Merchant Bank (RMB), the investment bank, and WesBank, the instalment finance business. The primary results and accompanying commentary are presented on a continuing normalised basis as the Group believes this most accurately reflects its economic performance. The continuing normalised operations specifically exclude the profit on unbundling of Momentum, the earnings contribution of Momentum and the profit on disposal of OUTsurance.”

That makes my life a lot easier. Let’s look at the highlights. If you are up to date with the social media world and pay attention to various marketing ploys you will be well aware that FNB have been on a massive drive to innovate and gain market share. They were the first out with a smartphone application which is very useful and they have made opening up an account very quick and easy. You’d have to say this has worked. Normalised earnings were up 26% to R5.7bn. This equated to 102c per share with a dividend 44c being paid. The share trades at 2429c and if you annualise these numbers we get a forward multiple of 11.9 and a dividend yield of 3.6%.

When you look at a bank like this I think it is very important to look at each division separately. Here is the segment diversification thanks to their results presentation. I think it’s a good revenue mix.

Interestingly the earnings growth came from FNB and Wesbank whilst RMB actually experienced a 14% decline. “The increase in earnings was delivered through very strong operational performances from FNB and WesBank, driven by loan and customer deposit growth, new customer acquisition, expanding lending margins and robust transactional volumes.”

The FNB division grew earnings by 31% and compromise 58% of overall earnings. This was due to a 5% increase in customers and a 10% increase in transactions. A lot of emphasis is being put on customer growth and less expensive electronic channels. Thank you technology. This is the part of the business I like. There is a lot of potential in the under banked Africa and there is a very competitive race to grasp the up and coming South African middle class.

Wesbank has also done well. We spoke about this last week when we looked at Imperials results. Car sales are blasting expectations and I expect them to carry on doing this. They have also started focusing on unsecured loans which has improved earnings and margins. We obviously like this strategy through our African Bank recommendation.

Like I mentioned earlier, RMB earnings declined by 14% due to weak macro conditions. We are well aware that equities and commodities did not have the best of times in the second half of last year and this is what the decline is attributable to. RMB has a great reputation and is a well run business. I just don’t like the sector. Too much regulation and too cyclical.

It’s a good business with exciting prospects being a well managed bank in a developing market. There are better options out there for us however. We prefer African Bank who remain focused on a market First Rand are trying to grasp. There are still too many moving parts and the investment banking division is not something I would be keen to invest in.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Markets opened a whole lot lower in New York, but managed to rush ahead in the first hour and a half with the broader market and nerds managing to hold onto small gains through to the close. The Dow, the bluest of blue chips slipped marginally by just under a point and a half to end at 12981, again close to a number that is seemingly important, 13 thousand. Most numbers are important, the larger the better if it is your wealth I guess and not your utilities bill. Hah! Financial stocks actually buoyed the market, no doubt the strong gains from what Buffett said, Wells Fargo up 2.82 percent, Bank of American up over two percent, as was JP Morgan, all helping the broader market higher. Amazing the clout that he has, but then after all, he is the greatest investor of our time. Or ever.

Commodities and currencies corner. Dr. Copper is last at 387 US cents per pound, the gold price is also higher at 1775 Dollars per fine ounce, with the platinum price sneaking up at 1709 Dollars per fine ounce. The oil price is ticking higher, last at 108.56 Dollars per barrel for WTI, 122.35 for Brent Crude oil. The Rand is firmer, last at 7.54 to the US Dollar, 11.93 to the Pound Sterling and 10.18 to the Euro. We are much better at the start here today.

Parting shot. There is a French proverb that says that patience is bitter, but the fruit is sweet. I was asked by a kind lady at a television station yesterday whether it was too late to start investing. She is 45, she is sweet. I said no, the sooner the better. Keep your fees low I said. Satrix40 charges one percent per annum I said. More expensive than ourselves, but better for smaller amounts I said. If she works for 15 more years, she will be alright. Not great, but alright. Rand cost averaging will mean that she gets the benefits of lower prices at the end of each month and benefit from the higher prices over time. And she will be able to reinvest her dividends. She will own the market, which most folks are trying to beat.

Sounds like a better idea than to be invested in very expensive unit trusts, where I have just done an exercise, the total annual expense ratio easily tops two percent for vanilla unit trusts. And some more. They eat around half or more of your (now taxable) dividends. And do not forget the initial fees, the maximum initial fee over at Old Mutual (found them first here – Fees and charges) is around 3.42 percent. So my overwhelming question is what and for what service levels are you paying for? No really. Everything is worth something in life and you pay for what you get. When you buy a unit trust, what do you get? Please answer the question, tomorrow we will look at other structured products. Brace yourself, the Minister of Finance is right.

Sasha Naryshkine and Byron Lotter

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by sashan

Discovering Bidvest

February 27, 2012 in Uncategorized

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“The decline in newspaper ad revenues to a 60-year low is amazing by itself, but the sharp decline in recent years is pretty stunning. Last year’s ad revenues of about $21 billion were less than half of the $46 billion spent just four years ago in 2007, and less than one-third of the $64 billion spent in 2000.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We managed to add nearly half a percent on Friday, banks leading the charge after all their more than decent trading updates. Collectively the sector added 2.38 percent to buoy the overall market, the Jozi all share index to 34260, up 152 points or 0.45 percent. Resources ended the day in a slight hole, ever so slightly down. A whole 0.01 percent lower hardly counts, not so? But then again, if you lose by 1 point it feels terrible, not so for Mr. Market though. So close on the first weekend of super rugby, so close for Liverpool fans, they could have felt awful, Paul must be happy this morning, his team from his childhood.

This time of the year it is difficult to get a complete handle and requires some serious extra reading (on top of the extra reading) to be on top of company results and trading updates. I am going to look at results of Bidvest this morning, they have released their interim numbers as folks continue to fight their way through traffic. Humans really need to become more innovative, and manage their time better. That will come in the era of the driverless motor vehicle. Perhaps Bidvest will even sell them.

Let us jump right into these interim numbers, normalised HEPS up 13.6 percent to 613.4 cents per share on revenue that was 15.1 percent higher at 67.3 billion Rand. Headline earnings per share up 37.5 percent to 742.3 cents per share, remember that these results include the realisation of a part sale (half) of the groups stake in the Mumbai airport. That sale yielded nearly 400 million Rand. Earnings per share, which included the impairment of the stake in Comair of 96.7 million ZAR, came in at 710,8 cents per share. I think for the purposes of valuing Bidvest, one should use the normalised HEPS number, there are always going to be trading related issues with a business this diversified.

Net debt increased to 5.6 billion ZAR. Their cash generation (which never lies) is good, operations managed to generate 9.7 percent more cash than at the same stage last year, to 4 billion ZAR before working capital. Bidvest have upgraded their Budget Rent-a-car fleet, that was an expensive exercise. There has been an ordinary dividend of 280 cents that has been declared, which is better by a very handsome 24.4 percent AND a 80 cent special dividend. Somewhere around 600 cents for the year I guess one can expect, if the second half div is hiked by as much as the first half. So, hardly a kings ransom at 172 ZAR a share, with a forward dividend yield of over three percent and an earnings multiple of less than 13 times. To June. Net profit margins are quite low though, but that is the nature of the beast.

More of the valuations metrics that the company finds important, because they are included in the highlights, trading margins were maintained at 4.8 percent. I quite like the opening line of the overview segment where Chief Executive Brian Joffe said that the pleasing performance came off a high base. Nice. I have copied and pasted a few important lines, which gives a divisional breakdown:

“Joffe noted that southern African trading conditions had improved but sectors like light manufacturing, construction and discretionary consumer spending remained weak. Asia Pacific continued to show solid results though Singapore’s performance lagged. Trading in the Australian market remained tough but the business continues to perform well. Bidvest Europe’s results reflected an improvement at 3663 Wholesale which was offset as Nowaco in Czech Republic and Deli XL Netherlands reported lower trading profit. Bidvest Namibia’s growth trajectory continued.”

Brian Joffe then goes on to say that the local construction industry should benefit from governments infrastructural spend, even though the local economic conditions whilst improving, growth is still sluggish. Discretionary consumer spend should improve which is good for both their motor and foodservices business. Let us have a look at a divisional breakdown, which businesses inside of their business is the most important slash profitable.

The geographical breakdown of the FoodServices division sees Europe as the bulk of revenues, 58 percent in total, but only 35 percent of total divisional profits. The bulk of the profits from their biggest division comes from Asia Pacific, which contributes 46 percent to overall divisional profits and 15 percent of the overall trading profit of the group. But yet it is 17.5 percent of overall revenues. So whilst it is more profitable than the other big foodservices business, it is not the most profitable in the group. Bidvest Financial services is a very profitable business, but surprisingly, one of their more successful businesses is Bidvest Namibia. Namibia crushes the other Southern Africa businesses, in terms of trading profits, I started to wonder how big Bidvest was in the context of the whole Namibian economy. Well, the half year revenues are around 1.2 percent of the entire Namibian GDP. They must be a serious business inside of a relatively small economy, around 2.5 percent. In fact, the annual revenues of the Bidvest group are much bigger than the entire Namibian GDP. Phew.

OK, but why would one want to own a business like Bidvest? There are many moving parts in different parts of the economy, a geographical spread which is quite difficult to grasp and a head office structure that keeps a handle on all of the businesses. There is also the successor issue, I suspect that there is more than enough quality internally. There are loads of quality people there. The margins are low, that has always been a concern here. But, this is a company that for the above reasons attracts many a passive investor. They have delivered year after year, and for the first time in a while look relatively cheap when measured against the rest of the market. They are off our main list, but on our secondary list. From a pure out and out diversification point of view, they are a quality company that would compliment any portfolio well.

Byron’s beats has a look at a company in an industry for whatever reason, people love to hate, but yet without it, we would be found wanting. Insurance of the health and life sort.

Discovery Health, the medical scheme managed to grow earnings by 10% in what is supposed to be a mature market. This division is responsible for 38% of earnings. We really like this sector as medical technology improves and more people enter the income bracket to afford such services. Discovery have been extremely innovative in order to grasp market share from other competitors in South Africa. This will continue as management carry on investing in technological and service innovations. They also have some positive things to stay about the state of the market they operate in which bodes well for the future.

“It is important to state Discovery Health`s belief that our private healthcare system, while having room for further improvement, is excellent, sustainable and an important national asset. This may seem in stark contrast to common views of waste and inevitable decline in the private healthcare system. A rigorous analysis of the facts suggests the opposite. Access to care for those covered by medical schemes is comparable to the best healthcare systems found in developed markets.”

Discovery Life which is the life insurance business and is responsible for 48% of earnings managed to grow these earnings by 12%. Again product innovation and quality services were responsible for this growth as engagement with Vitality in terms of premium calculations helped with pricing. This business is extremely cash generative and what is done with the monthly premiums has a huge impact on earnings. The Discovery team boast a return of capital in excess of 27% since inception. Quality companies attract quality employees as Sasha so often points out.

The Vitality initiative is doing fantastically as members become more proactive and Discovery can track the activities of their members. Not only does it keep members fit and healthy which decreases fatalities and health issues but it also allows for fantastic pricing information.

“The Vitality model is powerful: it creates a virtuous actuarial cycle wherein rewards are used to incentivise the appropriate behavioural change; behaviour change leads to a reduction of mortality and morbidity, thereby reducing claims costs; and the reduction in claims costs ensures that the system remains in balance, and so on. The benefits of this cycle are experienced by all stakeholders: clients, Discovery and society. It is this cycle that Discovery aims to replicate in a number of markets.” So lots of potential to take this fantastic model into China and the UK.

Talking about the UK they finally seem to be gaining some traction, turning a R5 million loss into a R162 million profit. With their vision to build pretty much what they have done in South Africa they reckon there is a lot of potential for scale and profits. It’s always nice to have the international diversification. Inroads are being made with a similar strategy with their 20% stake in Ping An Health in China.

Furthermore, Discovery recently rolled out Discovery insure where expectations have already been exceeded with nearly 8000 policies being written. They see a gap in this market and you would have to back them to implement it properly.

So what do the valuations look like for such a well run company that has very exciting prospects. They made 198c for the half on a share that trades at R48. According to forward earnings expectations they are trading at less than 10. We like the company and back the management to carry on implementing the right decisions. I suppose the biggest risks lies with regulation and the NHI plans. I don’t think that people will sacrifice medical security and again you would back Discovery to stand up to the challenge. A solid buy at these levels.

African Rainbow Minerals, better known as ARM reported half year numbers for the six months to end December 2011. Headline earnings increased 24 percent to 1.94 billion Rand, HEPS clocked 912 cents per share for the half, no dividend is declared in the first half. The weaker Rand helped offset the weaker Dollar prices of their commodities that they sell. They are not an out and out producer, they just manage stakes in some strategic commodities. In fairness, they have really great management who have been able to do this, like many commodity producers have been helped out by a dramatic jump in Chinese demand over the last decade, that has been key to all commodity prices rising.

Most important though, is that their production volumes have managed to increase, that is really the key to any commodity producer. But, when you break it down by contribution to headline earnings, it suddenly becomes apparent that this is an iron ore company. So whilst often the company presents itself as a diversified commodities company, the truth is that whilst iron ore revenues represent 43 percent of group sales (Manganese 18 percent, Platinum 21 percent), the bulk of the profits, almost all are from Iron Ore. The contribution of ferrous metals to the group are 1.974 billion Rand out of a total of 1.944 billion Rand. Huh? Nkomati Nickel and chrome, Coal and Copper all make losses and only PGM’s at 162 million ZAR and Gold (Harmony stake) at 38 million ZAR contribute positively to the overall group earnings.

But, but, but, the copper project in Zambia at Konkola should at full production be in the region of 45 thousand tonnes per annum. That is still a way away though. And the coal assets look like they are also heading in the right direction. But we live in a world of choices. I like the commodities story as a whole, but we would rather be in BHP Billiton for our style that suits our clients, which is both geographically and divisionally diversified.

Parting shot. This is the most eye popping graph you will see today, and it came to me via one of my favourite bloggers, Prof. Mark J Perry on his blogsite Carpe Diem, borrowing the phrase from everyone from Robin Williams in Dead Poets Society. First the picture:

What are those? Well, from his post: Newspaper Ad Revenues Fall to 60-Yr. Low in 2011, the headline tells a thousand stories.

“The advertising revenues have been adjusted for inflation, and appear in the chart as millions of constant 2011 dollars. Estimated revenues of $20.7 billion in 2011 will be the lowest annual amount spent on newspaper advertising since $19.5 billion in 1951, exactly 60 years ago.

The decline in newspaper ad revenues to a 60-year low is amazing by itself, but the sharp decline in recent years is pretty stunning. Last year’s ad revenues of about $21 billion were less than half of the $46 billion spent just four years ago in 2007, and less than one-third of the $64 billion spent in 2000.”

When we talk about paying attention, that is what we mean. Be aware of the trends around you and their investment ability, one way or another. Less old media, more new media.

When we talk about paying attention, that is what we mean. Be aware of the trends around you and their invest ability, one way or another. Less old media, more new media.

Sasha Naryshkine and Byron Lotter

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by sashan

The long tax sax

February 23, 2012 in Uncategorized

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“It sounds much cleverer to be bearish, it makes it sound like you know something about the future that nobody else does. … The reason why the economy does better, businesses do better, people innovate and companies make more money than the previous year (and their share prices go up) is because we are actually optimistic as a collective.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Yesterday for us it was eyes focused on the budget speech and the finance minister, who should we say is very presidential in his delivery. But then again, so was his predecessor, the continuation of perhaps the most important job in the country, at least for now. He does a good job. As Paul pointed out, there was obviously resistance to hiking the personal income tax rate and VAT rate, because those impact on folks immediately, but rather to tinker with almost everything else. Almost everyone seemed to think that the speech was about right, as close to Goldilocks as you can get, I think. Of course the left and right would have enjoyed more wriggling in their direction, but that was not to be, as the minister said, we have to “do more with less”. I personally just want there to be two things, a) accountability and b) better project management on allocation of resources. That is all.

I am not going to rehash the entire budget, because you are probably all “budgeted out” anyhow, so I am going to point you in a few directions to have a decent look at some expert analysis. First, a look at the man himself, Pravin Gordhan, written by one of my favourite journalists that I have met in person, Sipho Hlongwane, written for the Daily Maverick: The man everyone loves to love. Nice work young man, pity about your football team that is having a dreadful run. Arsenal. Keep supporting your team, they always bounce back. Except if you support the same team our more mature driver does, Wolves. Poor him.

OK, back to the budget speech, Fin24 has a whole section titled: Budget Watch 2012. Moneyweb always do a great job with their Budget in a nutshell. BusinessDay leads with More spending, lower deficit: Gordhan silences sceptics. There is more than enough to keep you going for a while there. Or, you can just go straight to the source, read it yourself by downloading 2012 – Budget Speech from the National Treasury website.

For investors however, which we are, there are two important things to note. Capital gains tax and dividend tax. Let us deal with the capital gains tax part first. Straight from the ministers speech: “The introduction of capital gains tax in October 2001 was an important step in broadening the tax base. In order to reduce the scope for tax arbitrage and broaden the tax base further, the CGT inclusion rate for individuals and special trusts will be increased with effect from 1 March 2012 from 25 to 33.3 per cent, and for companies and other trusts from 50 to 66.6 per cent. To mitigate the impact on middle-income earners, the various exclusion thresholds are increased.”

So, first things, the exclusion threshold has been increased: “The proposal is that individuals should be permitted to save up to R30 000 a year, with a lifetime limit of R500 000, in registered savings or investment products that would be free of tax on interest, dividends or capital gains. The current tax free interest income thresholds will be reviewed and possibly phased out as part of this reform.” My question is simple, how do you keep track of the lifetime limit? It is 16 and two thirds years of capital gains. Amazing.

Practical example. OK, say for instance you bought 100 thousand ZAR of stock, and you sell it after three years (the period which it is deemed an investment rather than a trade) for 230 thousand ZAR (it was a very good time), you then have a gain of 130 thousand ZAR. Take 30 thousand ZAR away from the gain, your saving, (provided that you have no other gains that financial year) to get 100 thousand ZAR.

Then take 33.3 percent of that (33,300) to get the carry through to your income tax line. And then it is taxed at your marginal tax rate, we are going to take the top rate of 40 percent for the purposes of this exercise. Your capital gain is then 13320 ZAR. Whereas previously it would have been 10000 ZAR. This is not great for rich people, which most investors are, or are trying to be. The chances of winning the lottery to become rich is about the same as being tossed around by a live Hippo, it is better to get rich saving as much money as possible. More tax on capital gains is like trying to toss you around like a live hippo would. This part deals with capital gains tax, no matter which way you look at it, it is more to pay to SARS when you make a capital gain.

Next, and this is a little more complicated to understand, is dividends tax. This is not a new tax, but rather designed to replace secondary tax on companies. Secondary tax on companies was designed to create different mechanisms to encourage companies to reinvest surplus cash, rather than dole out the lolly back the rightful owners, the shareholders. You can see what my thoughts are on this matter.

Quite simply, this is what the budget says: “The secondary tax on companies will be terminated on 31 March 2012 and a withholding tax on dividends will be implemented on 1 April 2012. This will align South Africa’s tax treatment of dividends with that in most other countries. Pension funds will benefit from this transition as they will receive dividends tax free. The dividend tax will be introduced at 15 per cent.”

Now, most folks expected this to be 10 percent and not fifteen percent. So companies will not be paying anymore secondary tax, but the investors will be paying tax on company distributions. You will not have to worry about these with publically listed companies, the payments would/will be made on your behalf. Companies will pay SARS on your behalf. A slight negative, mostly impacting pref shares, but the companies that have issued the shares have said that they will keep the payments at 75 percent of prime. Which is not good for the issuing companies. Anyhow, I agree with Ben Graham on pref shares, they are the worst class of shares. You do not have the protection that the bond holders have and you do not have the upside that ordinary share holders have. And you assume company risk.

So, there you go. The two things that investors have to worry about, both not good, but that is what you get for being rich in a developing country, to pay your share. Because it is much better to be rich and worry about paying taxes, than none at all. Like I said yesterday to a non audience in the office (other than my colleagues), hands up who wants to give up their salary in return for a government grant of that size! Yeah thought not.

Michael Jordaan, the CEO of FNB said on Twitter a few days ago: “Little known budget fact: top 2% of SA population pay R126 billion or 81% of all Personal Income Tax.” I replied: I am sure that the 98% of South Africans who pay the balance of Income Tax (most none) would love to have that “problem”. True, it is much better to be rich and paying income tax than poor and paying very little income tax. On balance, our take away is that the budget is all good, and nobody can feel too aggrieved.

Byron’s beats looks at a relatively new company by South African standards, heck, by any standards, they are turning 6 at the end of this year.

The share trades at R201 so an historic valuation of exactly 10 and a dividend yield of 2.5%. I wouldn’t be too fazed about the dividend yield. The company had some impairments to deal with this year and are also using their cash for acquisitions. A good thing if you are looking for a growth story, especially with their bid for African Iron ore of which they already own 66.6% and are awaiting acceptance from minorities. The cash balance sits at over R6bn so expect more to come in terms of acquisitions and developments of current projects.

Let’s look at the earnings mix which always fascinates me with this company. Profits came in at R7.6bn. R4.4bn of that came from their 19.98% interest in Sishen, 58% of profits. That does not paint the full picture though because the impairments affected operating income. If it weren’t for the impairments operating profits would have equated to R4bn compared to the R2.8bn recorded. Although the Sishen stake is still huge it is becoming less significant as the company grows its operations, what we want to see. Remember last year Sishen was accountable for two thirds of Exxaro’s profits.

The coal business showed some good growth thanks to higher prices and strong international demand. The local market declined due to slow demand from AMSA and Eskom. This is the same thing we saw from Kumba. Net operating profit grew 24% to R3.3bn. Developments in this commodity look encouraging as supply agreements with Eskom and Sasol progress. I like coal, it has a very viable use although I do think the gas industry will provide a better alternative going forward. For now I think demand will be strong.

The mineral sands business netted profits of R1.7bn but this is where the impairments took place with plant and equipment at KZN sands. Here is what is happening with the mineral sands business which I am happy about. This will allow them to focus on better prospects. On 26 September 2011, Exxaro and Tronox announced that New Tronox will acquire Exxaro’s mineral sands operations, which include Exxaro’s 50% interest in the Tiwest Joint Venture with Tronox in Western Australia, along with 74% of Exxaro’s KZN Sands and 74% of Namakwa Sands operations in South Africa, in exchange for approximately a 38,5% shareholding in New Tronox.”

The Zinc business made a loss because of further impairments. In fact they have halted production “because of higher than inflation increases in electricity and maintenance expenses also continued to contribute negatively to the base metals results.” I tough business especially in South Africa.

The company looks cheap and I like the ambitious management. In a world of choices we prefer BHP Billiton (you knew that) but I would not steer clients away from Exxaro.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The winning streak came to an end, like all good things do. It was slightly up at the start of the session, then down in the middle of the morning, another attempt to get it back to break even for the day after lunch, but that fizzled and stocks closed lower. Nerds closed down half a percent worse than where they started, the broader market lost one third of a percent whilst blue chips lost a fraction over one fifth.

Dell got crushed with their meet on earnings which was worse than the prior corresponding quarter. But it is a meet, why the drubbing? Guidance suggests that Mr. Market will only afford PC makers much less than ten times earnings. No really. The company was once three times plus the size on a crazy multiple, so Mr. Market is so worried about the tablet market that Dell’s guidance of exceeding their record last year numbers, 2.13 Dollars a share, well that is not enough. At the current share price, which sold off 5.82 percent to 17.15 last evening, that means that they are 8 times earnings. For one of the biggest names in personal computing you can pay a mere 8 times earnings. Gotcha!

A Zacks report -> Dell Reports In Line had a nice conclusion: “Dell’s focus shift from traditional PC business (low margin business) to high-margin cloud-computing, exposure in the Electronic Medical Record sector, entry into the smartphone business, and high cash generation ability are positives for the company. However, mediocre operating performance and lower cost control measures are concerning.” That entry into the smartphone business leaves me kind of cold, I saw the CEO Michael Dell with one in an interview a while back, he said it was an awesome product. Perhaps he had not used another one. Not sure about the stock, we owned it a long time ago, it really is a tough neighbourhood. But it looks like they are on the right track.

Just underscoring how tough a neighbourhood it is was the numbers from HP last evening, post the bell. They meet on the bottom line, but missed on the top line, sending the stock down over a percent in after hours trade. The guidance was in part the reason for the selloff, the expectations for the second quarter were higher than where the company guided, around 90 cents. This quarter past the company delivered 92 cents worth of earnings on revenues of 30 billion Dollars. Wow. Huge. But here is something interesting, annualize the expectations for the next quarter and the actual earnings from the last quarter and you get to around 360 US cents worth of earnings for the year. The stock closed at 28.94 Dollars. The market affords it only 8 times earnings. Amazing. Similarly, back in the first half of 2000 the company was around three times the size by market cap, the same as Dell. The pattern is recognizable, even for chimps, or is it chumps?

So what is the market telling you about the “old” PC and server businesses? That they are really going to struggle against the tablets, or they are going to become more like utility companies? Or both? I am not too sure, but the only way that these companies could lift their investor attraction higher would be to start paying higher dividends. And in Dell’s case that means getting started, HP at least have that on their side although a 1.66 percent yield is, how do you say, not great?

Be like the three monkeys, but that is what the folks look like that are perpetually bearish, like the see no good, hear no good and say no good. In fact, be the opposite of that! Paul has come to the conclusion that it sounds much cleverer to be bearish, it makes it sound like you know something about the future that nobody else does. This next piece however is good news. The reason why the economy does better, businesses do better, people innovate and companies make more money than the previous year (and their share prices go up) is because we are actually optimistic as a collective. I like this next piece, because it does not lie: Months Supply of Homes Close to Six-Year Low.

As Author Mark J Perry points out: “With the inventory of homes for sale falling back to historically normal levels, it’s another sign that the real estate market is stabilizing, and it’s only a matter for time before we see home prices trending upward.” There is of course a reason why I prefer reading what Professor Perry has to say over the person who will not reveal themselves at Zero Hedge. Do yourself a favour, goto the Zero Hedge website and scroll down the articles. Not a single optimistic one. But yet the collective of the market has rallied from the bottom and doubled (on the S&P) since March of 2009, and “it” remains bearish that the world is ending soon. “It” must have been spanked as a child, perhaps “the Nouriel” was too.

Commodities and currencies corner. Dr. Copper is slightly lower at 380 US cents per pound, the gold price is also lower, but only a little to 1772 Dollars per fine ounce. The platinum price is last at 1710 Dollars per fine ounce. The oil price is still hovering around their recent highs, last at 105.88 Dollars per barrel. The Rand is slightly firmer, 7.69 to the US Dollar, 12.07 to the Pound Sterling and 10.27 to the Euro. We are slightly better here at the beginning. Good thing.

Sasha Naryshkine and Byron Lotter

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by sashan

Big box results

February 22, 2012 in Uncategorized

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WalMart, same price, much higher earnings…. The 2001 annual report tells it like it is, EPS for the full year of 1.41 Dollars per share. So, in a quarter, the last quarter of 2011 they made 1.51 cents per share. But yet, the share price is unchanged over a decade.

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Resource stocks saw us through to the close, with the Jozi all share index closing 36 points to the good, a mere 0.11 percent better on the day to 34142. The Greeks have been saved, or that is how it is being presented to us, there are still many smart folks that are naysayers. As Paul and I pointed out to each other yesterday, they have negotiated 107 billion Euros less debt on their past obligations, are paying way less than the market rate to keep them afloat, how is that throwing good money after bad?

The money that the Greek government borrowed in the past, turns out that was very bad for investors. But being pardoned 10 thousand Euros per person, in the words of Blades, they should be jumping up and down in the streets of Athens. Sadly that is nowhere near the case, because of all the austerity measures put in place, real wages are way down. As are benefits. So even if you pardoned all the debt, the reality for the average Greek citizen is much dimmer than half a decade ago, where nothing could go wrong. Now, well, it looks grim.

Massmart released their 26 week results to Christmas day 2011 this morning. Sales increased by 15 percent to 31.492 billion ZAR, headline earnings increased by 21.1 percent to 895 million ZAR, with headline EPS at 416 cents per share. Thanks to a weaker currency: “The weaker Rand during the period boosted foreign exchange translation gains and we began incurring costs related to the integration of Massmart into Walmart. Excluding these two items, operating profit would have increased by 4.8% and headline earnings by 8.7%.”

The dividend was unchanged at 252 cents, payable on my birthday. You have to figure that out, when you get the payment in your account, remember that it is my birthday, OK? Cash generated from their operations was up a whopping 60 percent plus to 3.58 billion ZAR. Costs are a problem for everyone, up 14.4 percent “as a result of our investments in: refurbished and new stores (space growth of 6.0%); supply chain facilities and capability; and Food Retail; as well as above-inflation increases in local taxes and service costs.”

There are some interesting observations about the state of the consumer: “The trends in the health of the consumer appear to be improving, underpinned by real wage increases and improving employment, but dampened by signs of over-indebtedness within the middle-income consumer.” I suspect this is about the best description that we have seen on the state on the consumer thus far, a little bit less cautious.

But then there are other interesting observations about the regulatory environment, the business landscape in South Africa. “The increasing complexity of the regulatory environment has required an investment in compliance. Given the high costs of compliance, these trends have inadvertently made it more difficult for smaller retailers and suppliers to compete.” See, non revenue generating jobs in compliance, something that regulators think is important, but in my world it does strangle efficiency. I understand that you need to make sure you do business right, by the rules, but it should be taken in the context of the high unemployment rate in South Africa.

Massmart continues: “The underlying cost pressures in services, electricity and transport require a greater investment in productivity gains. This, at the same time as the proposed onerous labour legislation, will put a strain on employment levels and labour relations.” For a second, forget all the opposition to the Massmart slash WalMart deal, because it would force some retailers out of the market. As Massmart point out, the tight labour regulations are enough of a burden on the economy and not allowing job creation. And as the Reserve Bank has told us, productivity is much lower than it has been in years gone by. If I remember the graph well:

And no doubt “things” are not improving from a productivity point of view, otherwise Massmart would not have made these noises. Business is getting a little more vocal about these issues as obstructions to easing unemployment. OK, these discussions aside, because in reality, they solve very little and sound more like a bicker fest.

Divisionally a picture tells a thousand words:

The underperformance (and glaring against the other divisions) of Masscash was described as follows: “Despite a good sales performance, trading profit declined as a result of our investments in growth, price and capacity as we build the Cambridge and Saverite brands and supply chains.” But on balance, nice to see from all of the divisions, and a ramp up in the food division.

So my conclusion here is that the stock looks stretched, in exactly the same way that Shoprite does. But we prefer the diversity of Massmart. We like the management team too, you might well say that they are overpaid, perhaps the WalMart culture might see them reign that in. But, you get what you pay for in life. And you cannot doubt the quality and ability of the team.

Byron’s beats looks at a South African classic. We miss Bill Lynch the founder.

So where did the growth come from? Again we had great sales from the new vehicle market. Fascinating. This has been the trend amongst the whole industry. I guess the emerging middle class are buying new cars. It seems to be a priority. Announce your arrival with a new car. Remember that article I included about the Kumba employment benefits plan. Car sales sky rocketed when employees got their hands on some extra money. Hence car sales grew 14% for the half which was already off a high base. This in turn had a good impact on the companies finance division with products sold generating a reliable annuity income.

Logistics also did well both here and in Europe which is a good proxy for both markets. They are strategically situated in the export powerhouse German steel market which is benefiting from a weaker Euro. However they do mention that things are slowing down on that side which is to be expected. The German economy did decline slightly in the last quarter.

Locally they say that volumes do remain under pressure with the construction sector still really slow although volumes in steel, bulk food, chemicals and food still remains strong. I have a feeling that construction will pick up as that cycle has lagged the consumer spending one. Tourism is still quite slow with the car rental business struggling. This cycle is also taking it’s time because it is a global issue, not just locally. I also get a feeling this is turning as we have seen with hotel occupancies.

From a valuations perspective the company still looks cheap even after their fantastic run. They made 1370c last year and now 756c for this half. At R140 a share you are getting a forward multiple of well below ten. The company is in acquisitive mode and has the gearing capacity to carry on buying. The economy is strong in Imperials world and they are making the most of it. We tend to stay away from such companies because of their cyclicality but I do think these guys have a good future.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Most of the excitement was about the Dow Industrials having touched 13 thousand points for the first time since May 2008. Never mind the Greek solution, that is old news in market terms already. We can view that as a speed bump in the rally this year. As the same WSJ email alert (yes, they still exist such things) suggests, we are still miles away from the all time high: “The average remains off its all-time high of 14164.53, which it hit on Oct. 9, 2007.” The early rally fizzled in the late afternoon and blue chips slipped below 13 thousand to end at 12965, up 0.15 percent, whilst the broader market added less than a single point to end flat at 1362. Still a long way from the all time high of October of 2007. The nerds of NASDAQ lost about the same percentage that the broader market gained, to close down at 2948. Reminder, the NASDAQ all time intraday super duper inflated high was 5132.52, reached on March the 10th in the year 2000. A mere two thousand points plus to get back there.

There were corporate results yesterday in the form of WalMart numbers. That did miss the estimates of Mr. Market or Wall Street, and as such the stock sold off nearly four percent. And in the aftermarket the stock fell a little further to be under 60 Dollars a share. The description of WalMart just boggles the mind, and that is just before the numbers themselves which sometimes are unbelievable: “Wal-Mart Stores, Inc., (NYSE: WMT) serves customers and members more than 200 million times per week at more than 9,700 retail units under 69 different banners in 28 countries. With fiscal year 2011 sales of $419 billion, WalMart employs more than two million associates worldwide.”

Contrary to what labour unions might think, WalMart employ more people than, well…. labour unions. But let us look at these quarterly results, and not worry about the ongoing battles between the two. EPS from continuing ops included a benefit from “tax matters and real estate transactions”. And came in at 151 US cents per share, exclude the benefits of 7 cents and the 144 cents was a cent shy of expectations. Net sales were 122.3 billion Dollars, an increase of 5.8 percent from the comparable quarter. But this was also short of expectations by around 1 billion Dollars.

These results were also for the full year to end December, EPS clocked 454 US cents for 2011. So, at 60 Dollars a share you can buy the worlds biggest retailer for just above 13 times earnings. The company yields 2.43 percent as at the close last evening, better than a US ten year treasury. The stocks all time high was 8 Dollars more a share 12 years ago. But you bet that the stock is a lot cheaper now than it was back then. For the full year, guidance is between 4.72 and 4.92 Dollars a share, at the top end of the range that is just over 12 times forward. Here are the divisional sales for the quarter and the year, notice how the Walmart international sales have grown strongly in Dollar terms. What has not however is that local US sales have been stodgy, growing at a lower rate than GDP. Not great.

This next one, segmental operating income, shows you why folks pay up for Massmart, including WalMart.

Profits at Walmart international are growing at 15 percent plus for the quarter, over ten percent for the last year. Again, this underscores the willingness of foreign participants in our market to seemingly overpay for local retail assets that are growing at a much faster pace than back at home. Ironically, at the same time, folks like us sitting in emerging markets are saying the opposite, heck these big ticket stocks are dirt cheap. I think in part, both sets of investors are correct. WalMart at these levels are very attractive.

Over ten years the WalMart share price is completely flat, up a mere four cents on close to close over a decade. They have of course continued to pay a dividend through all of this share price inaction. The 2001 annual report tells it like it is, EPS for the full year of 1.41 Dollars per share. So, in a quarter, the last quarter of 2011 they made 1.51 cents per share. But yet, the share price is unchanged. I know that there is a lot to be unexcited about in an American context, but I suspect that they could well be very compelling at these levels. I said that already. There is of course the small matter of Amazon.com and the online retailers. Of course WalMart have that too.

Commodities and currencies corner. Dr. Copper is last at 380 US cents per pound, higher on the day. The platinum price is last at 1690 Dollars per fine ounce, the gold price is last at 1754 Dollars per fine ounce, off a little. The oil price continues to look strong, not good for you and I as consumers, but not a bad thing for owners of Sasol and BHP Billiton, last at 105.75 Dollars per barrel. The Rand has firmed a little ahead of the most exciting day for economists of the quarter. 7.72 to the US Dollar, 12.12 to the Pound Sterling and 10.22 to the Euro. We are slightly lower here at the get go.

Sasha Naryshkine and Byron Lotter

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by sashan

Telkom getting touched on their studio!

February 16, 2012 in Uncategorized

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. European finance ministers finally got it yesterday. They cancelled their physical meeting and instead held a conference call to discuss the next round of Greek funding. The Germans do not seem too worried and have prepared for a default of sorts in Greece. The Greeks, well they say that these delays are playing with fire. I am going to side with the Mediterranean folk here. I thought that they had done enough. Ironically it was a day of European GDP, France recorded a marginally positive number, Germany a marginally negative number, both ahead of anticipated. The overall European GDP read (quarter on quarter) showed 0.3 percent contraction, again better than anticipated. Sweden grew at 3.4 percent. What is that about? A lower base? Sounder footing? Perhaps these things and many more. Our market, having opened strongly, fizzled towards the end of the day, we closed 22 points in the red on the Jozi all share index. Miners were the problem, all of them, diversified, platinum and gold, the overall sector sliding just shy of a percent. Oh, and for the record, Implats has started rehiring on Tuesday, the workers that they fired earlier in the month.

Telkom stock continued to slide to a 52 week low, down a percent and a quarter. You have no doubt heard the news, that Telkom are appearing in front of the Competitions Tribunal, for their alleged anticompetitive behaviour. The Competitions Commission has recommended to the Tribunal that Telkom be fined a whopping 1.2 billion Rand. This is eight and a half percent of their current market cap. Which is even a large sized acquisition, let alone a fine. The problem is that the answer that Telkom Senior Counsel gave is right, that should such a size fine be dished out, it would have a catastrophic impact on the South African economy.

But that is because Telkom were never allowed any real competition. Barking up the wrong tree, ICASA in all their wisdom would have curbed monopolistic tendencies from the quasi government institution, if they had encouraged more fixed line entrants. Our internet bandwidth speeds would be much faster and efficient. For a nice summary of the story, check out the TechCentral piece: Telkom pleads for leniency in competition case. Government have not done their stake any justice, and that stake might be worth a lot more. And that stake kind of belongs to all of us, right?

What do you think that the Koreans from KT Corp are thinking now? Cheaper price, larger stake, or what I think they are thinking, walk away. There must be a lot of folks that are waiting for this outcome and circling. Can you think of other such cases when a dominant, rephrase almost monopoly fell from grace? I mean, they are still in our everyday lives, but someone could pick them up for very little. Relative to the installed infrastructure that exists, old or not, can you think of such a case?

We saw results from one of our recommended stocks yesterday after, City Lodge reported their interim numbers to end December 2011. Reminder, the group has 52 hotels with 6440 rooms across four different brands. They opened two new hotels during the period, the Port Elizabeth Town Lodge and a City Lodge in Hatfield. There are some encouraging signs at last, we were aware that the general backdrop for the hotel industry was improving, but this confirms that. Occupancies rose ever so slightly from 59 to 60 percent. What the group points out, is that the corresponding period (six months to end December 2010) included two weeks of World Cup trade. City Lodge say that their hotels continue to gain market share and wait for it: “…the last quarter of calendar 2011 produced stronger occupancies than in the same months a year earlier, the first time that this has happened since early 2008.”

Costs have been contained, with operating costs per room increasing only 5.4 percent, even though electricity costs per room sold increased a whopping 17.3 percent. But, this electricity increase “is well below the official tariff increase and reflects the success of the various energy saving initiatives introduced by the company over the past year.” See, companies innovate and save money.

Normalised headline earnings rose 10 percent to 96.6 million Rand, this translated to 223.8 cents per share. The dividend payout ratio of 60 percent means that the interim dividend translates to 135 cents per share. If you annualise both numbers (I know you shouldn’t) then you get close to 450 cents worth of earnings per share and 270 cents of dividends. With the stock at just over 72 ZAR a share, that means the yield is 3.75 percent and the earnings multiple is 16 times. Hardly the best metrics in the world, but let us flesh that out.

What you do also get as a shareholder however is the property underpin. At the end of every financial year the directors give their replacement cost of the property portfolio, because they own most (not all) of their sites. On their balance sheet however property, plant and equipment is valued at 1.1 billion Rand, around 35 percent of their market cap. In the note section in the full year numbers, we come across this line: “Net asset value is calculated using the depreciated historical cost of buildings and not the director’s current estimated replacement cost of R3,6 billion.” The current market cap is just shy of 3.1 billion ZAR. If someone alone wanted to buy the property assets, that is more or less what they could pay.

The group states in the outlook that they are not currently building any hotels, but are always on the lookout for opportunities to increase their domestic footprint. Here is something exciting, the group have for the first time ventured into the rest of Africa, just over the border in Gaborone, or just Gabs as my Bots friends used to call it. Gabs. The Town lodge (two star no frills) is expected to open in December and is expected to cost 61 million ZAR. And expect more of these announcements, the company says as much, they are exploring other African countries. I suspect Mozambique (Maputo), Zambia (Lusaka), Kenya (Nairobi), Ghana (Accra) and Nigeria (Lagos and Abuja) would all be on their near term horizon. Although the company hardly looks cheap at these levels, the price trades under the property replacement cost, the business is well run and has a history of very good dividend flow. We continue to be in accumulate mode.

Byron’s beats looks at one of my favourite places to shop. Except when you check out and your kids ask for tasty treats everywhere.

Woolworths

Group sales grew by 11.4% with the festive season really pulling through. They also got their pricing right, managing to increase profits before tax by 26.8% and headline earnings per share by 34.6%. This was due to better tax rates and share buy-backs implemented by management. Food grew by 11.7% which was ahead of the market. Margins also increased to 25.2%. This means that customers are convinced that paying a premium for Woolworths food is worth it. You know, the whole argument that it lasts longer therefore you throw away less. Plus it is healthier apparently and health is a priority these days. They have created this image and the food more often than not, lives up to expectations. That is vital.

Clothing grew by 10.1%. In South Africa this increased by 11.2%. This includes the Country Road brand. In Australia the Country Road brand was not so successful contracting 2.4%. I’d suspect that the overall Country Road asset is still doing well. They brought it in from Australia and that is why they still operate it there. It is doing well here however which I suspect creates an overall net gain. That’s purely an opinion though. Margins in the clothes division grew from 42.9% to 44.3%. Again the Woolworths premium is justified.

Valuations. They made 135.7c a share. Annualise that and we get 271c. The stock trades at 4195c a share and a forward PE of 15.5. Pretty much in line with the rest of the retailers and because of this good growth we see the earnings actually growing into what used to be an elevated share price. The dividend announcement has been delayed until April but these guys usually pay well so I’d expect a good cover.

Prospects. I’m starting to get irritated with companies who have, for the last 3 years been blowing the lights out yet are constantly bearish about the overall economy. Take Tiger brands update yesterday as an example. So many companies are saying that conditions are extremely tough yet they managed to grasp what is left of the weak consumer and grow exceptionally. I say its rubbish. The consumer is strong, stop blowing your own horn. Here is what Woolworths have to say about their prospects, falling right into the category I just mentioned above. “We believe that economic conditions in South Africa will remain constrained. However, trading for the first six weeks of the second half of the financial year has been positive, and we expect sales growth to be broadly in line with the first half.”

There is no mention of African expansion but they are implementing this, mainly with the clothing. I like the theme of aspirational consumerism and management are getting their products very right in both the clothing and the food department. We still like Woolworths at these levels.

Discovery released a trading statement yesterday, ahead of results that will be published a week today. The group suggested that normalised earnings are expected to be between 15 and 25 percent higher than they were in the last six month comparable period to end December. There are once off accounting entries that confuse matters. Discovery are happy with the normalised earnings measure.

Want to be confused by all the moving pieces, as a result of the Standard Life Healthcare transaction and their increase of their shareholding in PruHealth and PruProtect? Read this then: “As a result of the one-off accounting impacts described above, the prior period Headline Earnings and Earnings were also abnormally impacted and should not be used as a basis for direct comparison to the current period’s results. Notwithstanding this, shareholders are advised that Headline Earnings per share is expected to be between 55% and 65% higher than that of the prior period, while Earnings per share is expected to be between 15% and 25% lower than the prior period.”

The stock traded up over a percent to close at an all time high of 4748. A 28.1 billion Rand company. And a gentle reminder that this business is only 20 years old, and has only been listed since 1999, during that listings boom. And one fellow who has made himself fabulously wealthy in that time is the chief, Adrian Gore, who owns just over nine percent of the company. Good for him, Byron saw him running the other day past his house, says that the guy is in great shape. I guess he has to be. We will see him next week and confirm that!

Impala Platinum released six month results to end December this morning. The group says that they have had a “Good operational performance in a difficult operating environment.” I agree, their results look better than Amplats. “The period under review has seen a reversal of global economic conditions driven primarily by the worsening Eurozone crisis. The downward pressure this has exerted on prices has been somewhat ameliorated by the weakening of the rand resulting in gross margins decreasing only marginally.” Ameliorated? I could write at school, but my grammar and vocab were very average. The word ameliorate means “to make better or more tolerable”. Gotcha!

Headline earnings increased by 67.8 percent to 3.47 billion Rand, basic earnings per share improved by 66 percent to 573 ZA cents per share. The dividend declared for the first half was 135 cents per share. Costs. An important part for us. Unit cost per platinum ounce produced increased 9.9 percent, as a result of higher wages and higher input costs. Production at their own mines was unchanged at 738 thousand ounces, but there was a massive decline in third party and toll treatment (not their production) resulting in gross production being 11 percent lower to 846 thousand ounces for the first half. Safety related stoppages (Section 54 notices), which are highlighted more and more by the underground mining companies, resulted in Impala Rustenburg “losing” 33 thousand platinum ounces. I am not sure what the answer is.

At the risk of sounding completely callous, if we shut the highways and byways every time someone lost their lives the country would suffer immeasurably. Just saying. It is very dangerous to drive on our roads and also to be a low paid worker risking your life going over two kilometres underground. I wish COSATU would take the same approach with the public transport infrastructure, I am sure many of their signed up members use the roads daily. Mining is a very dangerous business. Make safety a priority and if anyone blatantly breaks safety rules, make that a dismissible event. I suspect harsh, but like Lead SA’s Yusuf Abramjee indicated in a tweet yesterday where they used heavy handed tactics on school kids arriving late for school -> “Lavela Secondary: 700 learners late on Mon. MEC and @lead_sa intervenes. Tue: 27 late. Today: 15 late. What do the few critics now say?”

In the market overview segment, this was quite interesting: “If ever any doubt existed about fundamentals being the only drivers of PGM markets, then 2011 provided ample evidence that the actions of the investment community proved more influential to our metals’ fortune than demand alone.” Does this mean that people selling platinum ETF’s and platinum coins (and small bars) had more of an impact than the autocat manufacturers? The short answer is definitely yes, that is what this line means. In fact if you read a little further you can see that platinum jewellery demand (7 percent higher) and automotive demand (5 percent higher) was offset by a reduction in investment demand.

Palladium was even more impacted: “Automotive demand grew close to 10% for the year, but the combination of a half a million ounces net redemption of metal from Exchange Traded Funds (ETFs), together with the re-emergence of Russian destocking left the market in a significant surplus.” Amazing how there are some changes simply because the Russians (who are crazy doing this “destocking”) and investment types flip and flop. And impact the whole market.

You know our view on Impala Platinum and the sector as a whole. Impala have their, what we referred to in the ex president Mbeki era as “challenges”, in Zimbabwe and Zimplats, plus also the rising costs are worrisome. We like the emissions control story and suspect there are many more steps still to be taken to reach full control over dirty emissions. Whilst we like the prospects for the platinum price, we do not like all the issues that the sector faces. We continue to encourage clients to get into the diversified miners, who have smoother earnings.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks slid from lunch time on, reversing some really good gains in the broader market and for tech stocks specifically. Apple slid below 500, even as Goldman stuck a price target (for what it is worth) of 600 Dollars a share. The Greek stumble after they have passed their austerity measures over the weekend, with the European finance ministers cancelling their meeting yesterday certainly spooked the market. There was a little bit of corporate news, no, a big piece of news. Kellogg’s and P&G reached a deal, whereby Kellogg’s would buy Pringles from P&G for a whopping 2.7 billion Dollars. This now makes Kellogg’s the second biggest snack maker (of the savoury kind) behind PepsiCo. I think that this makes lots of sense for P&G, I always thought this business did not quite match. P&G stock price closed up a little relative to a market that fell at the end.

Commodities and currencies corner. Dr. Copper last traded lower at 375 US cents per pound, the platinum price is down at 1610 Dollars per fine with the gold price last at 1718 Dollars per fine ounce. The oil price is last at 101.19 Dollars per barrel. The Rand is weaker as Mr. Miyagi says Risk Off Daniel-san! Last at 7.85 to the US dollar, 12.30 to the Pound Sterling and 10.21 to the Euro. We are quite a lot lower here today. The Greek situation is spooking everyone again. Ah well….. time to buy cheap quality companies.

Sasha Naryshkine and Byron Lotter

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by sashan

A tale of two airlines

February 15, 2012 in Uncategorized

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. I don’t know why, but I always find the market report piece, the very first paragraph the hardest to write. Perhaps it is because of our investment style. Perhaps it is because too much is made of the day to day events and movements in equity prices. Trying to get to grips with why this single event impacted on global markets on a specific day, that is not the way to go about investing. I am often bemused with comments made that investors are doing this today, and then the next day, investors are doing the opposite we are told. No, investors have a long term plan. Traders, their job is to make money and wrestle the market robots or algorithms (algos). This is not what we do.

So, as Paul said to a client, the only drama in Europe is Champions League, what he means is that in a number of years we will remember the Greek debt restructuring event like we remembered Dubai. Or Iceland. Or Ireland. At the time it was very important. It does not detract from the sad human element attached to the austerity measures and the impact on society, that is evident and just now starting to be well documented. Comments like, the Greeks must pay, whilst having some substance often do not tell the full story. Perhaps the lessons learnt will be passed down through the generations, pay your fair share, make sure your fellow country person does too.

Our market closed near the morning lows yesterday, after having done ever so well to claw back to above the thin red line. Those resource stocks dragged us lower over the course of the afternoon, mostly the dual listed heavyweights, Anglo American and BHP Billiton. Aspen traded at an all time high, it certainly was a day for the A’s, Apple had clocked up 500 bucks the prior session in New York. Is it rude to say that we could not really be bothered with DRD’s results? We are looking for companies with reliable and steady earnings, not patchy records and billions more shares in issue than in the recent past. Perhaps the worst is past the once mining giant, but we have more than enough choices here in the mining space, no time to be scratching around in the errr…. dirt so to speak.

Tiger Brands released a trading update yesterday that coincided with their AGM, which made for more than interesting reading. “The trading environment continues to be characterised by the slow recovery of consumer spending in the domestic market and rising cost inflation, resulting in an overall market volume decline in the categories in which the Company operates.” Does not sound too great for a company’s stock price that is up nearly 37 percent over the last 12 months. The stock is flirting with the all time high, which is just shy of 260 ZAR. The share price closed up three quarters of a percent yesterday at 250 ZAR on the nose. This is one of the great investment successes in South African recent history. And excuse me for saying this, but there is nothing overly wow about the company. Baked Beans. Jam. Bread. Flour. Rice. Maize meal.

But wait, back to the trading statement: “The trading performance for the four months ended 31 January 2012 is reflective of this market contraction, although the power of the group’s basket of leading consumer brands continues to strongly underpin the group’s performance. Net sales have increased due to improved price realisations, thereby minimizing the impact of the volume declines on operating margins.” The way I read this, some smart operational moves have seen margins maintained. And when producing food, with a very small margin of error, growing and maintaining margins is key. The rest of the continent in their grand expansion plans has looked robust (I smell the coffee) and the weaker Rand (for the last four months since their year-end) has helped their export business. Not so much in the last few weeks.

The Tiger trading statement concludes: “Despite the difficult trading conditions, headline earnings per share is expected to show satisfactory growth for the year ending 30 September 2012 as compared to the 2011 reported earnings.” Now what is in an interpretation? Satisfactory? The analyst community have that pencilled in at just shy of ten percent earnings growth. Which still means that on a forward basis the stock trades on 14 and a half times earnings. The tricky part as ever to work out, or estimate, is where should the price be right now, based on projected growth of around 14 percent per annum for the next three years. That would mean that in roughly 30 months, at the current share price levels, the earnings multiple would unwind to just 11 times. Which would please some old timers no doubt. Problem is that it is 2012, early in the calendar year. Still, we buy the story. The stock is not wildly expensive. And the quality of the company always attracts talent, I will always maintain that. The opposite is true too.

Byron’s beats checks out a business that has been listed since 1988 but has been around since 1969. When Paul was three, I wasn’t born. When the Beatles were close to breaking up, that was 1969 baby.

System wide turnover increased 16% for the 6 month period to R1.84bn. R946 million of that was from group owned stores which increased 23% while R898 million came from franchises which grew 10%. This equated to trading profit of R271 million or 21.4c per share which is up 22% against the previous period. Historically their second period is usually quite similar/slightly less than the first period. I’d feel comfortable annualising this period’s earnings to get a decent valuation. The stock trades at 520c and a forward valuation of 12.1. We also need to note that the company has a R1.3bn property underpin and are sitting on R904 million in cash (it is a very cash generative business).

So why has the company been doing so well when we know how hard the sector has been hit, especially private housing? It is a similar story to Cashbuild. The suppliers have been fine because people have concentrated on renovating existing homes rather than building new ones. Italtile have situated themselves in all the relevant markets with 64 CTM’s, 41 of which are franchised while 15 of them are actually situated in seven other African countries. They even have 8 CTM’s in Australia but that is a tough market to crack. There are 13 TopT stores which are predominantly situated in previously underserviced emerging market areas and then there are 8 flagship Italtile stores around the country.

Prospects. They tick all the boxes. Strong management team chaired and run by the founder Giovanni Ravazzotti. Remember the extremely tragic plane crash that claimed the lives of a few execs, including the past CEO, Giovanni’s son Gianpaolo. They are expanding up in Africa, strong financial position, attractive valuations and strong fundamentals for growth in their sector as the South African consumer gets stronger. They still seem bullish for the next 6 months. “Despite indications that the economic environment is likely to remain restrained over the forthcoming six months, the Group is satisfied that growth is sustainable. This outlook is based on management`s conviction that the market continues to afford expansion opportunities to determined retailers.” On that basis I rate the stock a buy. Unfortunately the liquidity is shocking, over 53% is still held by the founders. A good thing for vested interests, a bad thing if you want to trade the stock.

Two separate announcements from local airlines yesterday. One, Comair with a proud history and a recent management shuffle, probably courtesy of large shareholder Bidvest (thinking out loud here) and the other from state owned (that means we are all shareholders, right?) company SAA. I remember a client of ours who worked for the company for a number of decades and his comment was that since he started working for SAA, he could not remember a year where they were actually profitable. I cannot verify if this is true or not, but I will take his word for it, we all had a chuckle. Or should we chuckle? Surely 4 to 6 billion Rands that the state entity is asking for could be better used elsewhere?

I quote from a BusinessDay article titled SAA needs extra R6bn from state as costs bite: “SAA chairwoman Cheryl Carolus insisted in Parliament yesterday that the R4bn-R6bn required was not a bail-out for mismanagement or for “going wild”, but to fund SAA’s future growth.” Just a reminder, the difference between 4 and 6 billion Rands is 2 billion ZAR. The market cap of Comair is 783 million ZAR. So, by using a rough figure from the seemingly never ending pot of money, Carolus is saying that the difference between what SAA needs at the bottom and top end of the range is roughly two and a half times the entire market cap of Comair.

Comair unfortunately registered a loss, something that is not rare for the industry, but quite rare for the group. Very rare. Through all of the tough times over the last five years, Comair have made a profit. The very latest SAA annual report on the DPE Annual Reports 2011 website link is for 2008/2009. Hmm… SAA lost money in ’06/’07 all the way through to ’07/’08. Whilst Comair were making money. Even before restructuring costs. This cost is to you. The ordinary citizen. So if Comair made a loss because of a tough operating environment, then you can bet your bottom dollar (Rand) that SAA will do worse. SAA reported a combined profit of over 1.2 billion Rand for 2010 and 2011, but this year, as the article suggests SAA would probably be in a loss making situation. Probably? It is tough for everybody in the space.

How does Comair see the future? The short term? Prospects look more than a little sour, but having done the hard yards on costs: “We remain of the opinion that the high oil price and a weak global economy will prevail for the foreseeable future. Airlines that do not substantially reinvent themselves will not survive in this new environment, as demonstrated by the failure of a number of airlines globally in the first weeks of 2012.” They offer an equally compelling service, a better service in my opinion. But you see the point that I am trying to make? Public money does not sweat as hard as private money. Ever. Nor is it more efficient. Almost never as efficient. As a capitalist (pig with tendencies perhaps) I will support the private entities. It might sound unpatriotic, but then again, so is using hard earned tax money to continue to bail out dithering state entities, who seemingly don’t get that the pot of money has a bottom.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks ramped up in the last half an hour of trade in New York, perhaps that old phenomenon of the institutional investors and the robots getting caught up in the same updraft helped. An updraft is always better than a downdraft of backdraft. Good movie, made me NOT want to be a fireman. Too much fire. The Dow managed to just squeak into the green basically with the last few swipes of the tape, nerds did too, tech stocks closed half a point (a whole 0.02 percent) in the green. The broader market, weighed down by financials and basic materials just could not flop over onto the green side. Look, it was whole lot better than being down three quarters of a percent with half an hour to go.

Commodities and currencies corner. Dr. Copper is slightly higher on the news that the Chinese are committed to the Eurozone. Of course they are. As a long time friend (I have a few) pointed out yesterday Europe as a whole is a huge economy, but China more than takes up any slack offered by the Europeans. Just this morning we have last quarter GDP numbers from some major European countries, and if this is the worst of it, I will take minus 0.7 percent for Italy last quarter, minus 0.2 percent for Germany and a surprise slight 0.2 percent growth in France. Not so bad. The copper price is last at 383 US cents per pound. The gold price is 1726 Dollars per fine ounce, the platinum price is last quoted at 1633 Dollars per fine ounce. The oil price is higher at 101.62 Dollars per barrel. That is WTI light sweet crude as per the NYMEX quote. The Rand is mixed, 7.71 to the US Dollar, 12.10 to the Pound Sterling and 10.20 to the Euro. We are slightly better here at the start. Which is always good!

Sasha Naryshkine and Byron Lotter

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by sashan

Swipe, swipe, ka-ching!

February 14, 2012 in Uncategorized

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Strange isn’t it? The world demands Athens does more, the Greeks must do this and that, to “save the Euro”, and when the austerity measures are finally agreed upon, we all cheer. Global markets rock. Whilst outside the Greek parliament, Athens burns yet another time. Both figuratively and literally. You could argue in the end it was the right thing to do, but a bitter pill for the ordinary Greek person, that is for sure. And in the end we were talking about 3.3 billion Euros of cuts.

But as we said last week, 150 thousand civil servants (1.36 percent of the overall population of Greece) will lose their jobs. Minimum wage will fall 22 percent to 560 Euros a month. 300 million Euros will be lost in pension cuts. I am not sure lost is the right word. The reaction is different I guess, depending on who you are. I for one am mixed, glad that they got the job done, glad that the alternative is much worse. An orderly or disorderly exit from the single currency would be even worse for the ordinary citizen, or that is the way that I understand it.

Global markets cheered, and so did we, up 314 points on the Jozi all share to close at 34207, up just over nine tenths of a percent on the day. Banks rallied over a full percent, resource stocks added nearly one and a half percent. Telkom was a noticeable loser, the company is not quite what it used to be with a stake in Vodacom, 67th place overall in the market cap ranking tables now. Smaller than Nampak, Spar and this tells a story, smaller than Capitec. Discovery is nearly twice the size of Telkom. I tell you, the government of South Africa with their nearly 40 percent holding in Telkom have not done us proud.

There used to be a time when you could talk of Telkom, MTN and Vodacom in the same breath, MTN is over 17 times larger than Telkom and even Vodacom is more than 10 times bigger than Telkom. Put differently, a six percent move in MTN is the entire market cap of current Telkom. Private versus sort of public? Yip. Oh, and don’t get me started on that dividend issue. People used to hold Telkom for the dividend. Now, well, it is not so secure and MTN and Vodacom have much better yields. Better management. Better businesses. Perhaps this is the turning point for Telkom, but I still maintain that the Koreans are going to walk away, and that talks are not progressing as well as we are lead to believe. Or are told. Just my little hunch.

Meanwhile overnight the fellows over at Moody’s have been busy, cutting the ratings of six European countries. And placed three rather large ones on a negative outlook, including the UK and France. Those rating lowered, if you care much, are Italy, Malta, Portugal, Slovakia, Slovenia and Spain. Find Slovakia and Slovenia first time on an unmarked map of Europe, tell me without looking what their GDP’s are (the same for Malta, I know you can find it on a map), and I will buy you a cup of coffee.

You can find the full release here: Moody’s adjusts ratings of 9 European sovereigns to capture downside risks. What I guess is worrying is that Angela Merkel might well be looking for a new friend soon, there are French elections soon, check out this line that I picked out: “The ongoing deterioration in France’s government debt metrics, which are now among the weakest of France’s Aaa-rated peers.” Sounds bad for Mr. Sarkozy. As we always say around here though, you have to be up against someone really special (Francois Hollande in fairness is no Bill Clinton) and he is leader of the Socialist party. Far left, the Left Radical Party.

These reports are very detailed, but I still think reactionary, sophisticated bond holders would almost certainly do their homework long before investing in these sovereigns. I think that whilst the outlook seems poor, almost anything could happen. A European manufacturing renaissance. I am all for higher Chinese wages, that means we can all compete. How long before the Chinese switch to serious consumers themselves? It is happening, perhaps the various beautiful spots across Europe will be owned by Chinese interests. That should unlock some wealth. That is of course not what Moody’s are worried about, they have a much shorter term bigger problem on their minds. And anyhow, Moody’s are late, the others have done this already. Where have they been?

A set of results that we missed yesterday, Anglo American Platinum, reported full year numbers. Headline earnings per share, well telegraphed, fell 29 percent to 1365 cents. But, as the release says: “Headline earnings per ordinary share excluding the once-off accounting charge for the broad-based community economic empowerment transaction (R1.07 billion), the US$10 million donation to the Tongogara district community in Zimbabwe and other once-off costs increased by 8% to R20.94 from R19.35 in 2010.” So, we would be closer to 21 Rand worth of earnings. Still, is that enough to justify a 548 ZAR share price? The forecasts suggest earnings will top 30 ZAR a share this year, and be perhaps as much as 50 ZAR a share in 2013. So, that is why the share price trades at these levels.

For me there are a few issues, production levels are not what they should be. They have missed targets time after time. But management have acted accordingly, and although in a country where there is a high unemployment rate job losses are always ugly, this makes for better reading for shareholders: “We reduced our labour force from over 85,000 employees and contractors in 2008 to 58,000 in 2011, an appropriate level for our production base.” However, the opposite would be true too, if costs were contained, there would be more people employed on all of our mines. So, I think the call from President Jacob Zuma last week in the State of the Nation to Eskom to keep electricity costs lower than anticipated, that must be music to big mining’s ears.

Costs are important, because in our view the platinum miners might continue to be squeezed in the same way that the gold miners have stumbled. Amplats suggest that they should be able to contain costs to between 14000 to 14500 Rands per fine ounce.

The only big difference from the gold miners is that the platinum producers are dominant. Amongst the gold miners, no major producer accounts for more than 5 percent of the whole market of global production. Anglo American Platinum accounts for nearly 40 percent of the globes production. Amazing. So, if something goes wrong with one of their mines, or that of Impala or Lonmin, then as you can imagine, the platinum price could spike. Like it did back at the beginning of 2008. There is a certain irony in that. Remember the bumper earnings on lower production with much higher platinum prices? Perhaps if we have a bitterly cold winter the same would (could) apply if Eskom creaked.

We continue to prefer the diversified commodity producers, single commodity stocks earnings are too volatile. And the one that we steer clients money towards is BHP Billiton. And in fact BHP Billiton this morning have announced a MAJOR INVESTMENT AND RESERVE INCREASE AT ESCONDIDA. Cast your mind back to the results at the beginning of last week, when we spoke about the fall off in profits from this operation specifically. And how, it was actually the swing between what would have been marginally lower earnings, and what would have been very good earnings, had the operation delivered the same performance as the year prior.

In life however, that is why there are many ifs and buts, no use in talking about the past as much as focusing on the future. And as you can see from this announcement this will result in much higher production at their 57.5 percent owned Escondida copper mine (roughly ten percent of world copper output), but these projects are longer dated. The facility, which will replace the current facility, but will only become operational in the 2015 financial year, and will cost BHP Billiton 2.6 billion Dollars. Their share of course. Rio (30 percent share holders) and a Japanese consortium headed by Mitsubishi (the balance) will pay the rest. If there is one mine that I had to go and visit, I would not mind seeing this one! This is a good long term investment in one key commodity that we like a lot.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. In a session where much of the focus was on the US budget, and Barrack Obama seemingly (on his own not at all) wanting to tax rich people more. Some part of my family, who lives in the US, feels that the rich are not paying their fair share. I always revert back to the argument that you cannot create wealth by dividing it. Even if you take more from those who have more, that does not in the long run help with revenue collection. Because, and I always say this, rich people have choices. Sounds terrible, but it is true. The second most read, and fourth most commented on WSJ article titled Obama Seeks New Taxes on Rich deals with the story, read it if you must.

Still, markets cheered the Greek solution, and all the major indices rose, Apple shares crossed 500 Dollars a share for the first time, closing at 502.6 Dollars a single share. With a market cap of 468 billion Dollars. Oh, and 100 billion of that is cash and cash equivalents. Nice work if you can get it. And a not so expensive looking valuation of 14 times earnings. It turns out that everyone wants one, an Apple everything. Heck, my youngest at four years old knows the difference, simply because of the quality, you cannot fool her.

Byron’s beats looks at one of the most profitable businesses I know. And a company that impacts on you every day. It has something to do with the heading of the piece.

CEO Joe Saunders had the following to say. “Visa’s core businesses drove a strong start to fiscal 2012. We achieved solid financial and operational performance as we continued to benefit from the secular shift to electronic payments. Consumers’ desire to use our products is evident in the strong growth we see outside the U.S. and the resiliency we are seeing in the U.S. in the wake of debit regulation. We remain intensely focused on further growing our international business, partnering with financial institutions, merchants, technology providers and governments, At the same time, we are moving forward on our innovation strategy and are working side by side with our financial institution and merchant clients to deliver the products and solutions that best drive our mutual success.”

There is no doubt in my mind that this is a fantastic business but sometimes good businesses can still be too expensive. The stock trades at $112 and a historic PE of 29. The company is expected to make $5.95 this year, $7.17 in 2013 and $8.25 in 2014. These high expectations puts the valuation at 13.5 times 2014 earnings.

I feel this company deserves its higher rating and wouldn’t be surprised if they beat these earnings expectations. Their business model is that good. No credit risk like the banks, exposure to a strong global consumer and a shifting revolution in the way we purchase our goods. They are also innovating and will be at the forefront of new payment methods like mobiles and online banking.

How is this for a phenomenal statistic. Payment volume through Visa’s amazing systems amounted to $971bn, up 13% on the prior period. Let’s say they manage to grow this figure modestly each quarter this year, they will end up processing around $4 trillion. That is like processing the equivalent of Germany, South Africa and Sweden’s entire GDP put together.

In terms of growth, like most of the big multinationals we’ve been looking at, it is coming from the developing market. Especially in terms of debit transactions which is still a fairly new concept in the developing world. The US which is still responsible for 55% of all Visa transactions is still maintaining good growth off such a high base. Here is the geographic breakup.

The share price is up 50% in a year and trading at all time highs. This shouldn’t deter you, Apple was also trading at all time highs in 2009 at $200. They’ve recently breached $500. We like the company and feel the share price still offers good value. Happy to add.

Commodities and currencies corner. Dr. Copper last traded at 379 US cents per pound, off in recent days. The gold price is last at 1717 Dollars per fine ounce, the platinum price is lower at 1636 Dollars per fine ounce. The oil price is the only one creeping up in the right direction, off a little today at 100.68 Dollars per barrel. I almost said per fine ounce. Ha ha! The Rand (new nickname please, the Madiba or something more quirky, the Qunu would be too difficult) is weaker at 7.72 to the US Dollar, 10.20 to the Euro and 12.14 to the Pound Sterling. Eish, we have started lower here today. Thanks Moody’s.

Sasha Naryshkine and Byron Lotter

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by sashan

This market is cheap

February 9, 2012 in Uncategorized

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We did alright, in fact we did really well, stocks rallied here in Jozi to close back above 34 thousand points. The Jozi all share added three quarters of a percent, or 252 points to end at 34226. Half a percent or so away from the all time high, reached last week. Byron and I have Greek fatigue, every time there is a new flash up on the screen about a potential final deal, or the final document is here, or a solution is imminent, I will stick with the age old saying, seeing is believing. I don’t mind even seeing via Skype, really I don’t. What we are waiting for is for Greek officials to sign off on reforms ahead of getting a second large international bailout. Perhaps bail out is generous, because that suggests the ship is still sinking. Maybe it is a salvage operation now, the human tragedy of the story perhaps has not been told enough, unemployment sky rocketing, wages are going to be cut and the economy is expected to contract by as much as 5 percent.

The agreement will see 150 thousand more jobs shed in the public sector by 2015. Wages are expected to go down by 22 percent for those who earn the most, 35 percent for the youth, poof, overnight you are earning one third less. Yech. And expectations of a wage increase are the stuff you read in fairy tales, it is not expected until the unemployment rate falls to 10 percent. The IMF still say that Greece’s wages are too high, much higher than their fellow EU strugglers, Portugal and Spain. Yeah, but that is what people become used to. Now that I have put the outcome for the masses in front of you, you can imagine why politicians are taking time. They see the cliff too, politically that is. Greece still has not decided. The inventors of democracy are taking strain through the democratic process.

Byron’s beats takes a look at the first mobile service provider in this country. Strange to think that when I was still at school we had never seen a mobile device, let alone heard of this company. Ah well….Vodacom trading update time.

Data revenue impressively increased by 23.8% with a 41.2% increase in active data customers to 13.8 million. That is 26% of their client base and growing fast. Staying on this topic and what would have driven data consumption is the increase in smartphone users. 655 000 smartphones were activated during the quarter resulting in an overall figure of 4.8 million users. It’s big but still a lot of room for growth. I don’t doubt that this will snowball as smartphones become cheaper and more accessible.

From a regional perspective, the South African market again proved to be solid. Revenue grew 5.6% boosted by more customers, high voice revenue and good performance on data. Subscribers now sit at 31.7 million, up 25.4% for the year. The biggest negative was the decrease in ARPU’s which was down 14.6%, R140 a client. I’m not too worried about this to be honest. The industry is shifting. With so many more clients, ARPU’s are bound to decrease. Services like BBM and WhatsApp are also shifting the industry but making communication more accessible. It’s the same story everywhere these days. Give clients free services and the money will come via different avenues, look at Facebook and Google. Where will this money come from? Our thesis has always been with data consumption.

Their international operations showed even more growth. This includes their operations in Tanzania, DRC, Mozambique and Lesotho. Revenue grew 45.2% and now constitutes 20% of group revenues. Data revenues grew 135.4% as the appetite for internet grows. Surprised that people in these countries want access to the awesomeness of the internet? Of course not, and the base is still low.

Unfortunately the update does not cover profits. I have a feeling margins will decrease as the industry gets more competitive and ARPU’s decrease. As long as the increases in customers and data consumption makes up for this, the industry will be fine.

So is the stock a buy? I think you know my answer here. I like the industry, I like the company but we prefer MTN. Vodacom has a market cap of R150bil. That is R283 per subscriber. MTN have a market cap of R256bn and have 159 million subscribers. That is R161 a subscriber. Yes MTN subscribers should be worth less than Vodacom subscribers due to political risks and the sophistication of the South African market. But don’t forget that MTN still have 20 million subscribers in SA and a whole lot more potential for penetration and new subscribers.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks in New York started heading down the wrong route, but bounced back to close marginally in the green, the broader market S&P 500 nearly registered one quarter of a percent gain on the day. Nearly. Nearly clocking 1350, but falling just shy. Sometimes one needs perspective on these moves, you might well argue that the market levels seem elevated from what you can remember. In March of the year 2000, back when some of the cool handsets did not even have a colour screen, The S&P 500 went as high as 1527, the October 2002 lows were 800 points. There was a steady ride all the way back to 1561.8 on October 12 2007, around when banks started reporting big losses related to their mortgage operations. And then March 6 2009 was the bottom, 666 was the intraday low back then, the market turned. And since October 2007, well, this is the highest point for the broader market. Now what an index does not tell you however is the valuations, the historic average price to earnings multiple of the S&P 500 is 15.7 times. Historic.

The most expensive recent year on record was 2008, when you paid 60 times historical earnings. Yes, historical reported numbers. 2010 was the cheapest year in an age, historically though, still more expensive than the historic mean, only just at 16.4 times earnings. So what are the expectations for last year? For the full year, we are nearly through all of the reporting of course, expectations are for around 93 Dollars for the full year 2011. And 99 Dollars for the full year 2012. So, on a forward basis, this market is trading at 13.6 times forward earnings. Forward earnings are, how do you say, not always reliable? If the S&P 500 companies collectively clock 93 Dollars worth of earnings, then at 1350 the index trades at about 14.5 times earnings. So, a discount historically.

What is quite interesting though, and my conclusion is coming, is that on a historic basis, this is the cheapest that the market has looked since the mid nineties. Surely that is worth noting. It tells me two things, either the forecasts are too optimistic, or market participants are too cautious. I suspect that market participants are too cautious. Fear not, because a big S&P 500 entrant is coming in the form of Facebook. That should make the index look more expensive. In the office we are not entirely sure, but this bit from an S&P document suggests Facebook will not be an S&P 500 constituent until the second half of 2013: “Initial public offerings (IPOs) within the last six months are screened out of the S&P MidCap 400- and S&P SmallCap 600-eligible universe, and those within the last 12 months are screened out of the S&P 500-eligible universe.” My conclusion is, barring some very bad news, the index is cheap historically.

Well, sometimes you just have to be patient. This time last year, Cisco announced a big restructuring plan, and if you remember right, everyone got their knickers in a knot over margins falling. The company, their management and the stock price all felt the heat, and times were tough over at Cisco. And friends were few, you know how the saying goes. The stock price slid, listen to this wild ride over the last 12 months, exactly a year ago the share price was 22.04 Dollars. Fast forward to August 10 2011, the price was as low as 13.73 Dollars. Whoa!! Last evening the price closed at 20.43, still down over 12 months, but a lot has been done over that time. Amazingly the stock price is up 46.5 percent over six months. But is down 7.35 percent over twelve months.

Let us have a quick look at these numbers, this is for the second quarter in their 2012 financial year, which ended 28 January 2012. Q2 sales clocked 11.5 billion Dollars, that is a gain of 11 percent over the same quarter last year. Net income of 2.2 billion GAAP. EPS up 48 percent to 40 cents GAAP, 47 cents non-GAAP (net income non GAAP of 2.6 billion Dollars). But perhaps the most encouraging news is that the modest dividend of 6 cents was increased to 8 cents per quarter. Cash and cash equivalents increased by 2.3 billion Dollars quarter on quarter. And you know what they say, cash does not lie!

Cash and cash equivalents is now an eye popping 46.7 billion Dollars. Market Cap is currently just shy of 110 billion Dollars. Amazing. Simple math, minus the cash from the market cap and you get to 63.3 billion. Annualise net income, you get to 8.8 billion. Divide the market cap ex the cash by the annualized GAAP net income and hey presto, you are paying at current levels around 7.2 years worth of earnings. Cheap? Sure. Especially when you figure that the future of the internet is brighter than ever before! I would say that the stock is still a buy at this juncture, we will continue to accumulate as and when we see fit.

Beijing central. 39^o 54′ 50″ N, 116^o 23′ 30″ E Chinese inflation numbers seem to have a few people spooked. The numbers are actually not that bad at all though. This story pretty much sums it up: China’s CPI at three-month high, where the suggestion is that the Chinese Lunar holidays drove food prices higher. And I am still going to stick with my view on electricity consumption lower on Chinese New Year and a warmer January. February seems bitterly cold thus far in the Northern Hemisphere. But the actual number is the third lowest over the last 12 months. What me worry? Nope, I seriously am not worried about Chinese inflation. And suspect that Beijing central, upon seeing the numbers for February, might actually act. My thoughts that we would see a triple R cut by now, well that did not happen. Sigh….

Commodities and currencies corner. Dr. Copper last traded at 387 US cents , the gold price is last at 1733 Dollars per fine ounce, the platinum price is 1657 Dollars per fine ounce. The oil price is last at 98.84 Dollars per barrel. The Rand is weaker at 7.56 to the US Dollar, 11.99 to the Pound Sterling and 10.06 to the Euro. Markets are weaker here, resources are leading us lower as a result of this Chinese inflation number.

Sasha Naryshkine and Byron Lotter

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by sashan

BHP Billions

February 8, 2012 in Uncategorized

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Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Resource stocks lead us lower on the day, collectively down one and one quarter of a percent at the close. The overall market, the Jozi all share index sank 201 points to close below 34 thousand points at 33974. Banks added nearly half a percent whilst industrials added almost one third of a percent. The gold stocks collectively sank nearly two percent, to be almost flat for the year so far. On Monday at lunchtime I said that we had not owned a gold mining stock since 2004, we sold Harmony Gold. And would you believe, at a price higher than the stock is now. In fact for some clients we sold at the end of 2003, also at a price higher than current levels.

BHP Billiton released their first half numbers this morning, and they were slightly lower than consensus. Expectations were for around 10 billion Dollars worth of profits for the first half, but the company reported 9.94 billion Dollars worth of profits. Which was 5.5 percent lower when compared to the 10.7 billion Dollars reported this time last year. This is only for the first half, 10 billion Dollars (well nearly)? Huge. Revenue was 9.7 percent higher at 37.48 billion Dollars. Basic earnings per share were 186.8 US cents, the dividend was hiked to 55 cents per share. In Rand terms at the current exchange rate, that is 7.57, this translates to 1414 ZAR cents worth of earnings per share and a dividend of 416 ZAR cents per share. Does the stock look cheap then at last evenings close of 259 ZAR? The short answer is yes.

This is quite a nice slide from the presentation, which you can download here -> Interim results Half year ended 31 December 2011. This is from page 13 titled “A uniquely diversified portfolio”.

Well, I would not go too far and say that they are uniquely diversified, but I think relative to their competitors, far more diversified. But this is actually what I mean, you can see that they have become less diversified from an earnings point of view from this time last year:

Iron ore EBIT is more than half now (50.36 percent to be exact), last year it was 39.19 percent. But remember that the first half iron ore production put the full year run rate at 178 million tons per annum, but BHP Billiton guided that they would produce around 159 million tons for the full year. Petroleum EBIT has increased to one quarter of the total, whereas last year it was 19.25 percent. Met coal’s contribution was basically unchanged at 9.8 percent, this year and the last, all weather problems included. It was base metals that got clobbered, EBIT contribution in this half was 10.46 percent of overall EBIT, but last year it was nearly a quarter. And you can point all of those fingers at one operation, one massive copper mine, Escondida. Revenues halved and EBIT shrank by nearly 70 percent. Seeing as it is their biggest copper mine, I guess then we are not surprised with the big fall off in the contribution from base metals. The fall off was as a result of lower grades and industrial activity.

Before you need to reach for a brown paper bag, in their presentation, BHP Billiton make it clear that this mine should return to old ways: “A substantial increase in copper production at Escondida as operations progress towards higher grade ore in the main pit” is forecast. So things should return to as close as to normal with a mining asset.

Also in the positive column, for the outlook for their heavily hit coal division: “Queensland Coal positioned for strong production growth following the weather related challenges of the last twelve months.” Of course, barring any other extraordinary weather events, those cannot be planned for.

And good news for their petroleum assets in the Gulf: “Development drilling at non-operated Gulf of Mexico facilities to deliver an increase in high margin oil production following a recovery from the drilling moratorium.” Excellent.

Perhaps most important in their current contributions though, is that their Western Australia Iron Ore operations are expected to increase from a run rate of around 159 million tons per annum to around 200 million tons per annum by 2014. And this is without any additional major project approval. Most of that Capex has been approved already. I guess, as it is with all of their other commodities that they produce, the price is key here.

That is of course key to almost everything here, the prices of the commodities that they produce. Because the prices should be determined by demand. They do list a number of risks and uncertainties: “Influence of China and impact of a slowdown in consumption” and “Increased costs and schedule delays to our development projects.”

There is always a detailed outlook segment, which is split up into two different parts, the economic outlook and the commodities outlook. Let us see how their folks see the global economy first: “The first half of the 2012 financial year had its challenges in terms of global economic growth reflecting continued difficulties in Europe and slowing levels of activity in the high growth economies of China and India. Two bright spots were the United States, which saw stronger growth on the back of robust performance in the manufacturing sector, and Japan, which saw a rebound in activity following the impacts of the March 2011 tsunami.”

So the developing world demand is slowing a little whilst the developed world, sans Europe is improving. But they do not expect an acceleration on the part of the Americans or the Japanese. None of us do, I guess, but there are signs, particularly in a US context that the economy is improving. And in fact beating low expectations. The long term theme however remains in place, and this is one of the reasons why we have held the stock for a long time: “In the longer term, we remain positive on the outlook for the global economy as the drivers of urbanisation and industrialisation in China, India and other emerging economies are expected to underpin global growth and robust commodities demand.”

For a shorter term view, we look towards the commodities outlook. Where I guess they state the obvious: “We expect volatility in commodity markets to persist as the European sovereign debt crisis and general weakness in the manufacturing and construction sectors across key markets are expected to weigh on customer behaviour and sentiment.” So, until it is sorted, whatever conclusion you really are expecting, expect the European outlook to be fuzzy at best.

This is the juicy part however: “However, we expect underlying demand growth rates to remain robust, so long as the macroeconomic policy setting of the developing world retains a growth bias. Of the commodities, copper and iron ore are expected to remain supported by their compelling supply-demand fundamentals while the structural shift in Chinese demand for metallurgical coal remains well entrenched. Geopolitical factors are once again likely to influence crude oil pricing. In contrast, the outlook for the aluminium, nickel and manganese alloy industries remains challenging and has led to significant margin compression for most producers, almost irrespective of their position on the various global cost curves.”

This seems to have their mix in the sweet spot then, am I right in presuming that? Of course they would say that. I saw on the Twitter thingie that Chinese electricity consumption was lower by 7.5 percent versus the prior January. Some have said Chinese New Year, some have said, no wait, warmer winter than usual. Until of course just a few days ago. Either way this is not a positive.

With the short term outlook a little cloudy, the long term outlook is a little more positive. Even if it is less predictable. The commodity mix is right, even if it is skewed a little this half. We buy into long term industrialisation and urbanisation in China and India, which does lead to higher resource consumption per capita. You are being more than compensated for these risks in the current share price. It is cheap, very cheap. And if you needed reminding, it is the premier mining company on the planet, the best quality assets, a great management team and the least volatile earnings amongst their peers. We maintain our bias to the company and continue to buy the stock.

Sorry, I have been out of action since Monday afternoon, would you believe that I have had a bad case of tonsillitis. Horrible. Sis, I wouldn’t wish this on anyone. So I am not my best at the moment, but I will have a look at Glencore/Xstrata tomorrow after I have digested all of the information in my own time, rather than being rushed. Digest in liquid form of course. And we will also cover ArcelorMittal too.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Whilst there is some anxiety around the Greeks continually stalling on signing off on more austerity measures in return for more funds, I am starting to get the sense that people are tired and have recognized that we have probably priced the middle road scenario properly. Markets in New York rallied after their poor start, perhaps the parade of the <….cough, cough….> World Champion Football (as in American Football) team in the city had something to do with that. Nothing like winning to make you feel a little more positive about the world, especially yours. Markets added modestly to their overnight positions, the broader market S&P 500 closed at 1347, up one fifth of a percent on the day!

The “Ben Bernanke” had to endure one of those irritating grilling in front of the US senate budget committee. I am not too sure that these things cannot be resolved with a simple phone call if any of these guys have specific questions. Why don’t they do that rather? And all of the questions are not exactly high browed questions and have mostly been answered anyhow. Anyhow, the Senate committee is much better than the House, that is for sure.

Byron’s beats has a look at the Coca-Cola results from yesterday. Like is often the case, the fellow who invented the stuff, John Pemberton, well, he died before the stuff even became famous outside of Atlanta. But that is another story for another day.

To benefit from this phenomenon we have identified a few companies both locally and in New York that are situating themselves in these markets ahead of the pack. This includes McDonalds, Nike, Richemont, Yum Brands, Apple, Starbucks, Woolworths, Famous Brands and Coca-Cola. Coke came out with full year numbers yesterday which we will now take a look at.

Volumes for the year grew 5% which may not sound like a lot but this is Coke, the base is huge. Revenues grew 33% which reflected an acquisition of the separately listed North America operations. This came in at a whopping $46bn. Earnings for the year came in at $8.5bn, a very profitable business as you can see. This equated to $3.69 per share. The stock trades at $68.55 and a historic multiple of 18.5. Not cheap but analysts expect the company to make $5 a share by 2014 so the growth is what you are paying for.

CEO Muhtar Kent had the following to say about Coke within the global economy. “Even as we believe that global market volatility will continue in the near term, the breadth of our global footprint and the strength of our brands create a resilient business that was built for times like these. As we enter into the third year of our 2020 Vision, our Roadmap for Winning Together remains clear. The assumptions that shaped our 2020 Vision have not changed. Our expectations for long-term, sustainable and balanced growth across emerging and developed markets have not wavered. And we will continue to make significant investments in our future all around the world to support the tremendous opportunity we see in non-alcoholic ready to drink beverages, one of the fastest growing segments in consumer packaged goods.”

As a percentage of revenues North America is still the dominant force with 45%, then Pacific (China) with 12.3%, Europe and Latin America with 12% each and Eurasia and Africa with 6%. The bottling business brought in 18% of revenues. And where did the growth come from? In terms of the overall 5% volume growth, North America grew 4% (very good for such a big market), Pacific 5%, Latin America 6%, Europe 2% and Eurasia and Africa 6%.

As you already know we like the theme and the defensive nature. This big blue-chip with probably the most well known brand to man will not let you down. We continue to add at these levels.

Commodities and currencies corner. The copper price is higher at 390 US cents per pound, after a big fall last year, it has crept back up nicely. The gold price is higher at 1747 Dollars per fine ounce, the platinum price is flat at 1647 Dollars per fine ounce. The oil price, that is last at 99.38 Dollars per barrel, that is for NYMEX WTI. The Brent crude oil is last at 116.17 Dollars per barrel. The Rand is steady at 7.53 to the Dollar, 11.98 to the Pound Sterling and 10 exactly to the Euro. We have started better here this morning. Good thing.

Sasha Naryshkine and Byron Lotter

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