February 29, 2012 in Uncategorized
“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. 26o 12′ 16″ S, 28o 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.
I covered Curro at the end of last year when they announced a R185 million acquisition of Woodhill College. Here is a reminder These guys released full year results yesterday plus an announcement for a rights issue which the market had been guesstimating for a while now. When we look at these results it must be noted that these guys do not make any money yet. It is a growth story hence the capital raising. The strategy involves both growing schools organically and by acquisition. Both of these require huge capex.
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. 40o 43′ 0″ N, 74o 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
011 022 5440