Slasher's coffee beans

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.

Last week we had Visa report first quarter earnings for the period ending 31 December 2011. And as we have come to expect from this company we saw good growth in revenue and margins. Revenues came in at $2.5bn which equated to net income of $1bn. How’s that for a profitable business. This equated to $1.49 a share for the quarter.

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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