Slasher's coffee beans

“The German 10 year bund yields 1.27 percent. Whilst inflation in the Euro zone is 2.4 percent. I can tell you that some very clever and exceptionally well paid people park their (reversing in value) money because they are scared of everything. This feels familiar. I am expecting shock and awe from the Europeans.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Sorry. No good news. End of note. Just kidding. The Spain effect continued to weigh on equity markets, there was a very interesting announcement from the European Commission, with regards to fiscal integration. But although that was a bit of respite for a little bit, the sellers stepped up and continued to sell first and then ask questions later. The 30 year German Bund sailed into another record low yield territory, as the ten year did too. The US ten year treasury also clocked a record two generational low, a record low people, forget the absolute worst and horrible situation of September 2008, this was a record low. Why? Because, as usual, everyone is afraid of the unknown. {Sigh} So they go with what they know, cash, low risk bonds, and low risk means Germany, the US, the UK and Japan, because they are “safe”. Right now, it seems that the Spanish banks are not safe. For obvious reasons, one can appreciate the concern, but it certainly seems all herd like, don’t you think? And just this morning the French and Dutch ten year bonds are trading at record lows.

The Jozi all share index closed down 471 points to 32969, that is a percentage loss of 1.4 percent. And you guessed right, the resources sector sold off heavily, down two and a half percent on the day. Banks sold off as much as the overall index. General retailers held up quite nicely, I saw that Massmart managed a little bit of a gain, Grant Pattison, the CEO of Massmart was tweeting pictures about the worldwide get together at the WalMart International conference, check out his Twitter stream here: Grant Pattison. See that, he got to watch Aerosmith this morning early our time, late in the evening there. You sure that wasn’t the judges show from Idols? No. There was not too much else in the green, that I can tell you, it was a sell everything by the end of May and go away. Pfff…

There were a few company announcements yesterday that we missed, one specific to our City Lodge holding. We had of course been alerted to the fact that they, City Lodge were looking for a wider African footprint, wider than South Africa and Botswana, and what better place to start than in Nairobi. They bought into a family managed hotel, buying half exactly of a small company, Fairview Hotel Limited, that owns runs (and owns) two hotels in the Upper Hill area of Nairobi. Now that means nothing to me, absolutely nothing, because I do not know Nairobi at all, but there was some useful insight from a Kenyan chap down in Joburg who works for CNBC Africa, a fellow by the name of Larry Madowo, follow the link to see his twitter profile.

Larry said something that struck me, the family owned hotels were about half the price of the other more expensive mainstream hotels closer or in the CBD. And then we thought, that is exactly the City Lodge that we know. 204 rooms is less than one third of a single percent of their overall number of rooms, so this is baby steps. Again, that is classic City Lodge. What are they paying? Well, that is within the thresholds of what is reportable, but I suspect that they should have told us something. I searched through the listing requirements at breakneck speed and could not find anything as to what the percentage of the market capitalisation that is required to announce the deal. This was voluntary. But I am sure with a little patience that all will be revealed. Nice, I like this City Lodge move.

And then two days ago was probably the least talked about retail company in a South African context, The Foschini Group, or TFG which is their ticker too. Just to put it into context, TFG has a market cap of 28.3 billion Rand and Mr. Price has a similar sized one, 25.2 billion Rand. Massmart is 35.3 billion Rand strong, Truworths 37.6 billion and top of the pile is Woolworths holdings at just over 40 billion Rands in market capitalisation. So those are the five in their respective sector that head a scraggly looking pack much lower down the chain, but equally compelling JD Group (9.9 billion Rand), Lewis Group (7.2 billion Rand), Italtile (5.7 billion Rand) and Cashbuild (3.25 billion Rand). Two smaller ones to talk about are Holdsport (1.9 billion Rand) Combined Motor Holdings (1.1 billion Rand).

As you can see, this is a fairly well represented group in the overall index, but when both a former insider and myself were discussing the reasons for the relatively low profile when compared to their peers, we came to one conclusion. The company is represented by perhaps too many brands, perhaps a consolidation is needed. Sterns and American Swiss? Need two? I can’t answer that question. Matrix, exact!, Donna-Claire, Due South, SportScene and Totalsports, Foschini and Markham, too many there for customers to get a real brand identity, well in my humble opinion anyhow. And, TFG just bought Fabiani, the menswear store. At the end of the year, the group had 1857 stores, with 7.7 percent more trading area than the year prior to that. If that is not enough, then TFG bought a single Charles & Keith (great guys) at Canal Walk. I am kidding, I have no idea who Charles & Keith is. AND, TFG bought a major supplier, Prestige clothing. And think about this, 581580 new accounts this year, this is an increase of 8.2 percent. Amazing.

Be that as it may, let us have a look at the raw numbers, because that would give us a much better idea. These numbers are for the full year to end March 2012. Retail turnover clocked 11.6 billion Rand, an increase of 17 percent. Operating margins increased slightly to 24 percent. Headline earnings was up a more impressive 22.1 percent to 772 cents per share, the dividend declared for the second half was 265 cents, bringing the total payout for the year to 455 cents for the year. A whopping increase of 30 percent! And a dividend cover of 1.7 times, that is fairly generous. So, the simple historical valuation of TFG is a 3.8 percent dividend yield and an earnings multiple of 15.4 times. The analyst community have the stock as a buy, and expect the earnings to grow by around 18 percent per annum for the next two year. Which means that it is by no means cheap right now, but a couple of years out, it is most certainly cheap. Byron was written about this before, quite often in fact, the difference between the official retail sales and the companies that talk about a tough operating environment but yet still manage to grow sales in the mid teens. And they are opening new stores by the bucket load, as you saw above.

In part the companies like TFG, who operate and service customers in the mass middle market income segment, have benefitted (as per their presentation -> ANALYST PRESENTATION FOR THE YEAR ENDED 31 MARCH 2012) “… from an environment driven by: Continued low interest rates, Real wage increases and Low inflation environment, albeit rising “ Yip, we often say that one should not discount the rising wages amongst the middle classes to impact the retail economy in South Africa. It has grown significantly and is far bigger than the analyst community thinks. Perhaps because they earn too much! Ha-ha.

This one slide probably tells you as much, how the business has exploded with a whole lot of new middle class entrants with increased buying power, check it out. And check it out slowly. Quite clearly the company shades in purple the three years of great pity, and it seems to me at least that the sales momentum that was maintained through the first two thirds of the last decade. Amazing, right? I guess this just reinforces the point that Byron often makes about the emerging middle class, which is more powerful than we often give the collective credit.

OK, but not withstanding all of that, a lot of sales have been driven by improving access to credit, TFG financial services debtors book is 4.6 billion Rand, and grew at 19.5 percent over the last financial year. That is a pretty big jump. Bad debts grew to 9.4 percent of the total book, which sounds like a lot, but in truth is about average (just below) in this market. Then, there is another credit division, RCS, which has a debtors book of 3.4 billion Rand, registering growth of 19.5 percent too. Phew, so total book of 8 billion Rand, which is very definitely not to be sneezed at. And growing at a serious click. Just for interests sake, Capitec’s total book at the end of February 2012 was 18.4 billion Rand. So, TFG is by no means small fry. TFG is of course a credit retailer, but I do not think that there is anything wrong with that, it is a good space to be operating in. On balance, good company, making great progress. But we prefer Massmart. And Woolworths, as well as African Bank. Too many choices, this is a good thing, better than not having any at all.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks bumping along the bottom, the same issues and worries, Greece, Spanish and Italian rising bond yields, all sending another crowd to the exits. I watched a fascinating interview with Larry Bossidy, the ex Honeywell chairman and senior exec at General Electric. He left GE to join Honeywell because he knew that the successor to good mate Jack Welch would not be him, they are about the same age. Bossidy said something that amazed the CNBC Squawk Box team, that he expected Greece to stay inside of the zone, the Europeans to get the job done, albeit in a slow and tedious way. Yes, I loved this, because this is what we have always maintained all along. We keep laughing and asking each morning, “Greece still in the Euro zone?” Yes is the answer. But the knock on impact is unnerving, stocks sold off collectively nearly 1.5 percent, that was the S&P 500. The Dow sank over one and one quarter of a percent. Facebook stock always went down, but you knew that already. Sigh. RIM crashed 7.83 percent to reach a multi year low. A stock price last seen in late 2003. Which is about where their phones look like they come from too.

Currencies and commodities corner. Dr. Copper is lower at 340 US cents per pound, 1566 Dollars per fine ounce is where the gold price is last trading. The platinum price is last at 1407 Dollars per fine ounce, yesterday it had a 13 print at the front. Sad, but true. The oil price is slightly better on the day, 88.07 Dollars per barrel. The Rand is slightly firmer as markets are better today, 8.51 to the US Dollar, 13.20 to the Pound and 10.60 to the Euro. We are better today, and the German 10 year bund yields 1.27 percent. Whilst inflation in the Euro zone is 2.4 percent. I can tell you that some very clever and exceptionally well paid people park their (reversing in value) money because they are scared of everything. This feels familiar. I am expecting shock and awe from the Europeans.

Sasha Naryshkine and Byron Lotter

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And now for something completely different

“News just out suggests that the European Commission is gunning for a banking union. Working on this and trying to find out what it means. BUT, it looks like closer together talk and not talk of falling apart and splintering.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We had a good day for equities, it is good to see green on the screen, I am pretty sure that all those who are perpetually long the equities market (as we are) get a little depressed seeing the headlines. I always smirk when I see the headlines and the hype, in truth the equities market is the collective measure of how future prospects for a collective bunch of companies should be priced in the present. And the collective is a wide variety of investors, passive ones, institutional ones on behalf of a much bigger base, short term jobbers of the market (long or short) for either their or an institutions book and the individual which of course we count ourselves in. Collectively the levels are set daily, perhaps by not as many participants as you might think. The net of stocks globally is not really as big as you think.

And in Jozi it is even smaller, the truth is, the investable universe is a whole lot smaller than you think. I suspect that for an institution like the PIC that gets a whopper of funds to invest monthly, the choices are getting smaller and smaller, because how do you own a piece of everything? Well, they do, if you have a look on the share register their name pops up all over the show. Think Nampak for a second, a 15 billion Rand entity that sees the government employees pension fund own nearly 18 and a half percent. AVI, a 16 and a half billion Rand entity biggest shareholder is the Public Investment Commissioner at 16 and one third of a percent.

So, public savings have to go into our medium to bigger listed entities, because the universe is getting smaller and smaller sadly. And that point is lost on a lot of people. You earn a salary because you are worth something to the organisation that you work at. You save money via whatever route and the organisation or entity that you hand the funds over to has to make a decision. Normally the number of shares in issue of a steady company does not really change. At the fringes, but not a wholesale number of shares, unless the company is raising money from their existing shareholder base. 9 times of 10 that is not the best outcome, going back to shareholders cap in hand. I guess all I am trying to say is that there are natural buyers every month, because folks are saving money either through their pension contributions, or in other ways, with a limited number of choices.

Back to the markets quickly yesterday, the overall index closed at 33440, up 336 points or 1.02 percent. Again resource stocks which rose over one and a half percent, the “defensive stocks” sold off a little. I have kind of identified the stocks that attract the attention of the buyers on days that the rest of the market sell-off, and I have come up with just a few really. Normally BATS, the tobacco producer is viewed as defensive, as is the beer brewer SABMiller. But another that sort of caught my attention was Bidvest. So I checked it out, since the beginning of March, the market is basically flat and Bidvest is up six and a half percent, Breweries is up 0.8 percent, whilst BATS is up 5 percent. Ha ha, Richemont is up 11 and a half percent, but that is a special situation, in fact SABMiller also had results recently. Perhaps my theory is simpler, the resource space right now is getting sold off heavily. Meaning that perhaps the real reason these companies have been doing better is perhaps a switch out of resources. I am not too fond of this thinking.

And now for something completely different, using the words of Monty Python’s Great Flying Circus from the movie with that title. MTN released a notification from their AGM yesterday, with I guess a month extra subscriber details. Because the AGM release is covering the first four months of the year to end April, it might well have included an extra month if we had waited for the numbers towards the end of next week. The weaker currency is having a positive impact of course, but the group also reported strong growth in South Africa (which is part of Africa), Iran (yes, that place) and Ghana. I like Ghana, although I have sadly never been there. One day. Price competition in Nigeria impacted their growth rate, this was and still is expected to crimp margins over time. So far the company has bought back nearly a percent of all the shares in issue (0.9 percent) and the company maintains that they will have that 70 percent payout ratio. The Iran versus Europe and the US sanctions issue continues to be “managed” whilst the Turkcell claim is thought to be baseless. The stock actually did alright and continues to trade at attractive levels. Trading currently less than 11 times forward earnings and with a forward yield of around seven percent, that looks attractive to me. I suspect the discount applied to the company is twofold, one, geographical risk and two, margin compression worries. We continue to add them to our portfolios.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The excitement of the Greeks not falling off the cliff and into the Drachma drink was what carried everyone a little higher yesterday and Wall Street was no exception. After having thanks the Veterans who lost their lives for the country and ushering in what many think is the beginning of summer, the market was all green across the screen, closing more than a percent across the board, all the major indices moving along steadily, basic materials (resources) was a noticeable outperformer. Technology was also on a trot, adding nearly one and a half percent overall, Apple and Microsoft added nearly one and three quarters of a percent respectively. This leads nicely into the next piece:

Ah shame, poor Facebook, the stock got crushed last evening, falling to an all time low, if you count ten or so trading sessions as all time. Did you spot the picture of the Zuck on honeymoon eating McDonald’s? His poor new wife is taking a beating in the Chinese press, not that I think they care. Perhaps not. Anyhow, they are in Rome (or perhaps were), spotted by the paparazzi, if the company achieves its objectives then their privacy settings on the web would be about the only thing that they could ever protect. But getting a sense of the guy, I think he knew that a long time ago. I “like” him, if not on his Facebook page, then at least as an innovator. Whilst GM might have pulled their advertising, other companies, including the small business kind might have made progress through targeting specific groups. I will still maintain that the known Facebook universe is far more valuable in the future WHEN they manage to monetise their audience in a bigger way. Not if, but when.

Why is the going so tough right now? The stock is down a whopping 25 percent since listing, which is pretty poor really. And heading in the direction of the bottom end of the range when they initially started with the road show, remember, 28 Dollars? 28 to 35 was the initial IPO range and then that changed because of the institutional demand to 34 to 38 Dollars. And the company hit the jackpot, because they managed to raise 180 million shares times 38 Dollars, or 6.84 billion Dollars. Which is currently 11 percent of the market cap in cash. Note that Google and Apple are more around 20 percent of the market cap in cash. There could be some kind of a clue there. The balance of the shares floated (421 million minus 180 million = 241 million) at 38 Dollars were early shareholders exiting. Perhaps they look a whole lot smarter now. But what caused the stock to fall last evening around ten percent?

For starters, real options trading in the stock started, if you are confused get some quick and very simple insight here -> Facebook shares fall to $28.84 on first day of options trading. The other two reasons are a rumour that Facebook are about to buy Opera, a web browser with Norwegian roots. And the Instagram deal is being scrutinized by the antitrust regulators, nothing fresh about that news. And then some lawsuits pending against the company amongst others in terms of the listing process. I expect those to actually go away. Boo hoo, the IPO did not go your way, you read the prospectus, you expected the stock to be hot, if it was, there would not have been a single law suit. The mean estimates for next year (only 12 estimates) suggest the company will make 71 cents (54 cents at the bottom end of the range, 92 cents at the top end of the range) which sticks them on an earnings multiple of 40 times. 53 at the bottom end of the range, 31 times earnings at the top end of the range.

Expensive? Maybe. Cheap? Possibly. More pain short term, well, there are more folks betting on that scenario than not, but remember that the shorts take their chances in the same way that the longs do too. The problem that Facebook investor has right now, is that there are many investment options, and Google and Apple are just two. Their forward valuations of these companies look a lot more attractive right now, both are trading closer to ten times earnings. The future as they say, is unknown. Let us watch it, I would side with the folks that think this is an opportunity.

Research in reverse Motion announced afterhours that they would make a loss in the first quarter and then the subsequent quarters would be little better. They (the coming quarters) would be, in words straight out of the Thabo Mbeki dictionary: “challenging”. And RIM announced that they had hired JP Morgan to hedge their business with complicated derivative structures to review their business and their financial performance. That was an ugly sideswipe, apologies to the greatest smart phone maker of 2007. Sis, that was ugly too. Expecting a piece by piece taking apart of the company? Perhaps. Are they fighting a losing battle against Samsung and Apple? For the time being, yes, this could be their Dunkirk. Let us hope for them that it does not turn into a George Orwell 1984 scenario. Poor RIM, they used to make such nice phones.

Currencies and commodities corner. Dr. Copper is last at 342 US cents per pound, the metal sliding as Chinese academics debate the need for more stimulus, the Chinese have engineered a softer landing here. Soon, inflation will not be as big an issue in China. Commodity cycle finished? That is what I am hearing. Steel consumption, does that fall, or increase as a country becomes more industrialized? Steel consumption is expected to grow by around fifty percent per annum by the year 2025, according to BHP Billiton. Big speed bump currently, that is the way that we see it. The oil price is last at 89.54 Dollars per barrel, goodbye 90. The gold price is steady, last at 1554 Dollars per fine ounce, the platinum price is lower at 1411 Dollars per fine ounce. The Rand is weaker in a risk of all for the moment environment, 8.47 to the US Dollar, 13.21 to the Pound Sterling and 10.54 to the Euro. We are selling down heavily here today. Sorry bulls, it is not your day.

Parting shot. Spain. Again. Poor buggers lost their reserve bank governor last night, that is how should we say, not good. Politics is trumping common sense for the time being. News just out suggests that the European Commission is gunning for a banking union. Working on this and trying to find out what it means. BUT, it looks like closer together talk and not talk of falling apart and splintering.

Sasha Naryshkine and Byron Lotter

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“Christine Lagarde (head of the IMF) got a lot of “hating” over the weekend after suggesting that the Greeks should pay their taxes and stop dodging. She then, after getting 10 thousand odd haters on Facebook, apologized. Sort of.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Yesterday was a public holiday in both the US as well as in France, and the United Kingdom. Is that right? At the same time we saw that borrowing costs in Spain were rising, and continued to do so through the day, the country is now using government money to shore up a ropey looking bank, yesterday Bankia. Bankia of course was a cobbled together bank and is not even two years old in the current format, and now the main shareholder is government, who plan to inject 19 billion Euros into the struggling entity. More on that later. The Jozi all share index closed the day up 111 points to 33104, up just over one third of a percent on the day. Resources were the same drivers, up 1.2 percent on the day, but as a whole the sector is still down over eight percent for the year, seriously lagging the rest of the market, which is up three and a half percent so far for the year. We are about to finish five months into the year, let us just say that it has been “not good”. Platinum miners were on a bit of a tear yesterday, clocking gains in excess of two and a third of a percent, but for the year it still looks ugly, down 15.75 percent, following a 28 percent decline last year.

The reason for a bit of a lift yesterday was put down to the Greek population in polls at least putting the conservatives ahead of the far left crowd. And as I read it, if you win the elections then you get an extra fifty seats. So a win allows you to then team up with someone else and get close to a majority. I think that whilst the far left might gain some short term support, all Greek citizens (or most) polled want to stay inside of the Euro zone. Because falling out is a lot worse for Greece than for the ones inside of the zone. And the sobering thought of hyperinflation and falling (crushed) pensions does a lot to ward off the hard emotions. The lines that I am reading is simple, far left wins, Greeks set up for exit, conservatives win and continue to implement the hard austerity in return for funds, then the Greeks stay. Christine Lagarde (head of the IMF) got a lot of “hating” over the weekend after suggesting that the Greeks should pay their taxes and stop dodging. She then, after getting 10 thousand odd haters on Facebook put out this statement:

“As I have said many times before, I am very sympathetic to the Greek people and the challenges they are facing. That’s why the IMF is supporting Greece in its endeavor to overcome the current crisis and return to the path of economic growth, jobs and stability. An important part of this effort is that everyone should carry their fair share of the burden, especially the most privileged and especially in terms of paying their taxes. That is the point I was emphasizing when I spoke to the Guardian newspaper as part of a broader interview some time ago.”

I had heard this before, it came from an OECD Better life survey, it will make you think that those Lagarde comments were perhaps insensitive. Check it out: Greece. “People in Greece work 2 109 hours a year, one of the highest rates in the OECD and much higher than the OECD average of 1 749 hours. The share of employees working more than 50 hours per week is not very large across OECD countries. In Greece, some 5% of employees work very long hours, lower than the OECD average of 9%. Overall, men spend more hours in paid work: in Greece 6% of men work very long hours, compared with 4% for women.” Hmm…. so much for being lazy then, but Lagarde was talking about taxes, and not laziness, but sometimes the two go together. In this case, it seems not! But at the same time we are hearing stories about London property purchases by rich Greeks and the British a little resistant to have these new Europeans on their doorstep. Rich people problems.

Adcock Ingram, South Africa’s largest supplier of hospital and critical care products, reported results for the six months to end March 2012 this morning. Turnover registered 2.25 billion Rand, an increase of only 4 percent, gross profits were lower by a percent to 1.05 billion Rand. Profits after tax for the period were five percent lower to 341.7 million Rands. Headline earnings per share were ten percent lower at 198.1 cents per share, the dividend actually increased 6.2 percent to 86 cents. I sneakily had a bit of a chuckle with the Adcock Ingram vision: “To be recognised as a leading world-class branded healthcare company.” I guess we all have those sorts of ambitions.

Sadly Adcock have been left in the dust by Aspen, in part because they were of course shackled by being owned by Tiger Brands (Adcock) and of course some serious issues at a competitions commission levels, the company incurred fines because of collusion, not good at the time. The company has been re-listed since 2008, when it was unbundled from Tiger Brands. The company is run by a medical professional, Dr. Jonathan Louw, I am not too sure if that is good or bad, but I know that I do like the fact that Dr. Aaron Motsoaldi, minister of health is.

Back to that comparison, I laid a graph of the three (the other is Cipla) companies listed in this space in South Africa. Both Aspen and the Adcock prices hugged each other from August 2008, but there was a major divergence from the same month last year. And even though Adcock shows a great return of 85 percent from August 2008 (when they listed), Aspen has a more eye popping 176 percent return. The other smaller listed entity, Cipla has crushed both, returning 196 percent since then. There is another listed company, Litha, but their market cap is “only” 1.35 billion Rands. Adcock is valued by the market at 11 billion Rands, Cipla has a market capitalisation of 3.33 billion Rands, whilst the big daddy, Aspen, is worth nearly 52 billion Rands.

I really don’t know what to think about Adcock as a sizeable business in the healthcare space in South Africa. They are hardly an exciting and fast moving and dynamic company, perhaps they are still working their way into a new culture, that could be a big possibility. Whilst they have a smallish business in India and the rest of our continent, the business is mainly a South African one. Although the plan is to expand into the rest of the continent. I really like the sector, I think that whilst the company is “finding their feet”. We will continue to invest in Aspen as our preferred company in the sector.

Bankia. We have spoken about the entity before, like we said it was a cobbled together regional bank merger. Mostly Caja Madrid and Bancaja. The issue was not so much a clash of corporate culture but rather the simple fact that Bankia is the single largest holder of Spanish real estate. It is no laughing matter that Bankia’s head office is the one side of the Gate of Europe towers, which is a couple of towers leaning towards each other. Which look like they are about to fall onto the road. Which is not a good thing! I suspect that the Spanish government will continue to do what they have to, but if this is a sign of things to come, then I am not too confident. But expect shock and awe. Of course, there is a pride thing at stake here too. The current Spanish government does not want a “bailout” of any sort, that was their promise as far as the FT article that I read suggests. So, like all politicians inside of the area, they will do it their way. Meh.

At the same time we have seen the worst set of Spanish retail sales since they started keeping figures. Eeek, I hear you say (and you are right to be distressed), but the figures only go back to 2004. Scotty Barber (from Reuters) put together a great graph of retail sales in Spain relative to consumer confidence. Check it out:

No confidence. No sales. High unemployment. But hey, at least the streets of Madrid and Barcelona are feeling a whole lot better than Cairo or Damascus. Even though Damascus is apparently the oldest continuous inhabited place, it is a complete mess now. I suspect it is MUCH better to be in Spain and unemployed than unemployed in Damascus. Again, whilst these problems seem insurmountable, and the fact that Spain as far as I read it has outstanding debt and interest payments of 876 billion Euros as at the beginning of the year. Of course not all of that is due in the short term. I calculated from a download that as at the beginning of the year (that is when the data set is from), in the next seven months Spain will have to repay 105 billion Euros in interest and principal to their bond holders. That is about the amount of debt forgiven for the entire Greek last “bailout”.

Currencies and commodities corner. Dr. Copper last traded at 351 US cents per pound, better on the session, the gold price is last at 1573 Dollars per fine ounce. The platinum price is also about flat on the session, 1432 Dollars per fine ounce. The oil price is last at 91.26 Dollars per barrel. The Rand is steady, I guess, last at 8.34 to the US Dollar, 13.06 to the Pound Sterling and 10.44 to the Euro. We have started marginally better here, US futures are better.

Sasha Naryshkine and Byron Lotter

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“In the short term this is true, Greece will dominate the headlines on a day to day basis, until their next elections when there would be some clarity to answer the question, “What next for Greece?” Amazingly everyone except the politicians seem to be lining themselves up for worst case scenario, but that is the human nature, or at least some humans.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We closed lower on Friday here in Jozi, the all share slipped 0.16 percent to end the day at 32992, down 53 points. Resource stock slid nearly three quarters of a percent, looking weak as the European drag and more recently soft patch in China continues to see the prices of the underlying commodities weaker. Because China is seen to be slowing down, of course off such a big base, slowing is all relative. I love it when people talk about a hard landing, how can you land when you continue to rise and go higher. Surely the term that should be used is levelling off? Or not even that. When you are going up (hill or in the air) at a specific gradient, the landing part implies that you are going down, not so? Bath tub, U shaped, L shaped, V shaped recoveries, we can all talk the good talk, and I often get the sense that general market commentary follows the news du jour. Bleh!

Haha, I laughed when I heard the ever friendly and passionate David Shapiro suggest to Bruce Whitfield on a Friday crossing what would dominate markets over the next week. David said, Greece Monday, Greece Tuesday, Greece Wednesday, Greece Thursday, and Greece Friday. In the short term this is true, Greece will dominate the headlines on a day to day basis, until their next elections when there would be some clarity to answer the question, “What next for Greece?” Amazingly everyone except the politicians seem to be lining themselves up for worst case scenario, but that is the human nature, or at least some humans. Born optimists and born pessimists meet somewhere in the middle. Again, the importance of the short term crisis over the long term outcome was made clear through this simple graphic that Paul found and used again on the weekend, and we used in a presentation once upon a time. In a land far, far away. First, let me show you a rather innocuous looking chart of the S&P 500 over a forty year period.

The grey (gray?) areas are periods of economic downturn in the USA, the numbers on the graph represent major global events that could and do impact on markets. But like the guy in that GOLDEX spoof (for a huge laugh, check this out -> GOLDEX–Buy Gold Now!!!) notice how the graph goes up to the right. Of course this is in the face of all these crises that were potentially crippling for both economies and countries. But, we always recover. I am guessing that we can add a new event to this graph, call it the European sovereign debt crisis. Event number 24. I think what this graph does for us here is that whilst in the midst of the event you might be consumed with thinking that “the end” is nigh, often that moment proves to be an opportunity. Which leads us to our next favourite bit, the famous war poster from the United Kingdom, and possibly our motto here in the office:

This is our favourite, and it is pretty apt that it is a war poster, because sometimes it feels like you are actually in the trenches here. But it is important to separate a couple of things, one share price is what you pay for a real company. You own the company, not the share price, even though the one is present day reflection of all the market forces as to what is the right price. The business you own, make sure that it is a good business in the first place. Sometimes a stock can look cheap for a reason, and might never return to their historic mean, because the business is in sunset mode. Think Kodak, as a recent example, forgot to keep up after having been market leaders.

OK, there are a whole lot of results this morning, and perhaps top of the pile is Illovo, who just pip Tongaat Hulett in terms of market capitalisation. Both businesses are sizeable, but not that big, Illovo is a 11.9 billion Rand business, Tongaat is at 11.5 billion Rand. So, let us start with the bigger of the two, Illovo is a business that traces its roots back to 1891, but in truth the British and their colonisation of South Africa saw them introduce the crop to the country in the 1850′s. More recently the British came back, Associated British Foods bought a 51 percent stake back in 2006. The business operates in South Eastern Africa (Namibia is not a good place to grow sugar cane), with South Africa, Swaziland, Mozambique, Zambia, Tanzania and Malawi. Illovo have announced that their greenfields project in Mali has been browned out. I mean the project has been caned. I mean with regret, Illovo are not going to proceed. Meanwhile the caretaker Mali president had to fight off hundreds of folks that beat him up. Mali, hmm….

All businesses are reliant on outside factors, think TEPCO that the day before the Japanese tsunami could have seemed like a good utility company to own. But of course we all know that the weather and “mother nature” put paid to that theory. Illovo of course have been having problems in South Africa, drought conditions in their KwaZulu Natal inland regions (non irrigated I presume) that have persisted for the last two years, impacting on overall sugar production (down 7 percent), which saw sugar sales sugar fall 5 percent. But turnover for the full year grew to 9.2 billion Rand in a period marked by cost controls and a favourable market environment. Operating profits clocked 1.35 billion Rand. Check out “the country contributions were Malawi 39%, Zambia 33%, Tanzania 11%, South Africa 7%, Swaziland 6% and Mozambique 4%.” Amazing to think that South Africa, that contributes the most to overall revenue, 3.129 billion Rand out of 9.173 billion Rand, but it is not very profitable. Tanzanian revenue for Illovo added up to “only” 702 million Rand, but makes more in profits than the South African business.

So, do you buy the company at 26 Rands a share? Looks expensive, HEPS clocked 132.6 cents, 18 percent higher than last year. The company pays a very modest capital distribution, 43 cents this time around, add 23 cents at the half year stage and you get to 66 cents for the year. AND, remember that the company raised money, 3 billion Rand at the current share price, around three years ago. At a discount to the share price at the time. So, basically, and I really dislike saying this, the share price has done nothing for three years. Understanding the underlying commodity is perhaps more important when making up your mind whether you should own this company. Sugar usage from traditional markets is falling, the Tim Noakes approach to staying slender, think along those lines. Usage should continue to rise in the developed world, so that should continue to support the prices. But again, there is nothing transformative about this business, I agree that their African business is well placed, or better placed from both the weather point of view and costs. But owning a business that relies heavily on the weather, no thanks, too tricky and earnings perhaps not as smooth as one would like.

The next business that we look at also relies heavily on the weather, Tongaat Hulett Limited, which also reported numbers this morning for the full year to end March 2012. Now their numbers at face value actually look a whole lot better, with sugar production up 14.3 percent, revenue up 24.8 percent to just over 12 billion Rands. Headline earnings increased by just over ten percent to 891 million Rand. On a per share basis, HEPS increased to 838 cents per share, the dividend paid out for the year totalled 290 cents per share.

On an out and out valuations basis you can quite quickly see that Tongaat is much cheaper than Illovo. The South African business as a percentage contributes a little less to Tongaat’s total revenue, Zimbabwe is an important business for them. Their starch business is the main big difference between themselves and Illovo, and contributes around 20 percent to total revenue. Of course some of these products are sold to SABMiller, but not them alone, there are plenty of uses for their starch products business. And then of course there are the conversion processes of land to “active developments”. This is where people get excited, the unlocking of value. Tongaat suggests that part of the business is slow, but happening.

I think that the same applies for Tongaat, as we said with Illovo. Also, the issues around the unlock of value via developing more of the land around the new airport in Durban, the King Shaka airport. But you would not want to own the business because of that, surely? I think if I had to choose between the two, Tongaat would win this battle. A little more diverse, better managed, not one (or two) shareholders looking over your shoulder all the time (ABF owns 51.5 percent and Allan Gray owns 21 percent of Illovo). Yip, Tongaat win my vote here, but I am not going to direct any funds in that direction.

Currencies and commodities corner. 347 US cents per pound is where the copper price currently trades, the gold price is a little higher at 1579 Dollars per fine ounce. The platinum price is better at 1436 Dollars per fine ounce. The oil price is higher at 91.80 Dollars per barrel. The Rand has firmed a little as Mr. Market has improved somewhat, last at 8.28 to the US Dollar and 13.06 to the Pound Sterling. We are higher here on a holiday in the US, a holiday in France.

Sasha Naryshkine and Byron Lotter

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“I can see why Angela Merkel does not want Germany to go down the path of Euro bond issuances right now. It would immediately see Germany’s funding costs jump, because they would be lumped with their peers down South, and in particular the third (Italy) and fourth (Spain) largest economies in Europe who both have yields of six percent or more currently. Right now the Germans can get their issuances away and not have to pay the folks holding the bonds anything.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Whilst the main talking of item of the day on the front page for nine days in a row had been Facebook, in South Africa it was about court cases and paintings and strong emotions, old and new. I am certainly not going to get into that, far too many emotions and good points made by both sides of the aisle. What it does prove is that we are not boring and have a collective strong spirit that when channelled for good makes a tremendous difference all around. That is all. Our market was driven by the resource counters, those stocks as a collective were up 0.92 percent to send the Jozi all share up just shy of half a percent, 158 points to the goo to close at 33046. Another 1500 points to get back to the early May all time highs. 2nd of May the ALSI touched 34648. Nice number, if you like the word nice. The gold stocks went absolutely berserk (this word is courtesy of Japanese Manga books), we could not quite figure it out, but the night prior in New York most of the gold sector got a serious lift, and we followed that market. As we always do. Up a whopping four and a half percent all the way through to the close. There must be the same thinking (a collective with gold? No ways?) out there that I have heard time a few times now, and that is that the stocks globally trade at a significant discount to the gold price. That is something that we are used to here in South Africa, but perhaps it is not a worldwide phenomenon.

We had the small matter of the SARB’s MPC (that is South African Reserve Bank’s Monetary Policy Committee) end their deliberations and the en result was an expected hold on rates. I must admit, you might get trader types telling you that the bulls are defending a specific level on the ALSI, but it has absolutely nothing to do with us. Even those sophisticated enough to trade the local futures market should know that if you are watching only one thing around the world, then the S&P futures it is. Because that is so actively traded, that even Jack Bogle’s (The Vanguard index tracker guy) eyes pop out when he talks about it, in his mind the S&P indices are an investing tool. I agree with Jack, but we have got distracted again.

The MPC decided to keep rates on hold, no surprises. I said to Paul that if the inflation read moves back inside of the band, and the soft economic patch looks more like a cabbage patch, then we might see the MPC act. As far as monetary policy goes, it was a pretty bland (you can’t say vanilla, that is a good flavour) release. We will act this way or that way if we have to. Yes, as we sniggered in the office, the tax payers continue to pay the salaries, you monitor it. Hah hah! If you are looking for the full release, then look no further than this link: 2012-05-24: Statement of the Monetary Policy Committee.

It is always about the volatile currency, that is just the way that it is going to work down here. The statement says as much: “The balance of risks to the inflation outlook is less clear. While the inflation forecast appears to be more favourable, there are renewed upside risks from a possible further weakening of the exchange rate. However, countervailing pressures could come from weaker demand and lower commodity prices, particularly those of oil. On balance the Committee judges these risks to the inflation outlook to be somewhat on the upside.” Yip, their guess as to the resolution of the current European Brussels sprouts patch is as good as anyone else. As my hero Jim O’Neill said, it is the one issue on everyones mind right now, Greece. And like I showed you yesterday, at less than two percent of the overall European economy. And I looked last night, the Athens stock exchange has been pounded, but is the market cap really only 17.2 billion Euros? Sounds too small. Which sadly over one year is down 61 percent. Wow.

I can see why Angela Merkel does not want Germany to go down the path of Euro bond issuances right now. It would immediately see Germany’s funding costs jump, because they would be lumped with their peers down South, and in particular the third (Italy) and fourth (Spain) largest economies in Europe who both have yields of six percent or more currently. Right now the Germans can get their issuances away and not have to pay the folks holding the bonds anything. Really. Check this out from Wednesday, in case you missed it: German 2-Year Note Bids Beat Target as Yield Falls to Record. But at the same time yesterday there was a warning shot across the bow, German confidence sank, the IFO business climate index dropped, and was below expectations. At the same time the release of manufacturing data in the form of the PMI was also lower than anticipated and clocked 45. A services PMI number from Germany did however manage to beat expectations and register a number comfortably north of 50, indicating expansion. 52.2 to be exact. And the rest of the Euro zone collectively saw both manufacturing and service level PMI’s register lower than anticipated reads.

So am I trying to say that one particular read should make Germany sit up and take notice? Well, maybe. I suspect that growing pressure from France and Italy, and even what we said yesterday, higher wage increases in Germany are all heading in the right direction as far as the Germans are concerned. In the words of one of my favourite financial journalists, Sylvia Wadhwa, it is amazing how many people outside of Europe keep suggesting ideas and solutions for the Europeans. The Europeans will solve this, they have had worse moments. Even in the last 100 years, two crippling wars and the rebuild from that. And the Spanish Influenza, which killed around 50 to 100 million people. The cold war. Those seem like much bigger problems than the ones that we are seeing now. And you know what, Europe got through it! Just saying.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Another choppy trading session with yet another move in the last hour of trade that saw both the broader market S&P 500 (+0.27 percent) and the Dow Jones (+0.14) finish in the green, with the tech stocks lagging the rest of the pack, down 0.38 percent after all was said. Definitely not all done, it never is, continuous trade of the futures and an aftermarket see market participants as slaves to each and every second. Facebook caught its second positive trading day, the stock up 3.22 percent on the day. I did a quick run through of the tech sector as a whole, 871 different companies listed there, they are certainly spoilt for choice. There are in fact many, many choices if you have access to all the trading platforms in the world.

IPO’s might be fewer in the US, but according to the World Federation of Stock Exchanges, of which there are 54 members globally, there are (were) over 45 thousand listed companies globally, and that excludes investment funds. The NYSE has over 2200 companies, less than in 1999, the NASDAQ has nearly 2800 choices, the Toronto stock exchange crunches both, with over 3700 listed companies. That is up significantly for the Canadians, up two and a half times from 15 years ago. Interestingly in Jozi, we have been going backwards slightly for the last ten years. Warsaw is up fivefold in terms of listed entities in the last 15 years. The whole Asia group has more than doubled their number of listings over the last ten years, with the Bombay stock exchange having over five thousand entities. Looking for price mismatches? It must be there.

Currencies and commodities corner. Dr. Copper is last at 347 US cents per pound, the oil price is slightly lower at 90.63 Dollars per barrel for NYMEX WTI. The gold price is steady to lower at 1552 Dollars per fine ounce, the platinum price is slightly higher at 1417 Dollars per fine ounce. The Rand is steady at best, 8.38 to the US Dollar, 13.12 to the Pound Sterling and 10.50 to the Euro. We can expect a lower start here, Asian markets are lower on the giant (and small) problem that is Greece. And I guess more importantly the debate in Europe about growth and austerity, and yes, you can have both. It is not like reverse gear and first gear, you can cut costs and provide a better platform in which businesses can thrive. Unlike the French who guess that a 75 percent tax rate on rich people will keep them happy. Expect people with choices to move to Switzerland, and then you know what, no tax whatsoever, because those folks ultimately become Swiss and not French. Rich people always have choices.

Sasha Naryshkine and Byron Lotter

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Euro bonds. Nein!

“I think that there must be a roadmap for fiscal integration (there probably is amongst the reams of paper stored in Brussels), I suspect that Berlin will only want this once government accounts are in order. And that might take a few more years of pain for the southern states before Germany agrees to proceed.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Not good, or at least not looking good at all. My hero Jim O’Neill, who is chairman of Goldman Sachs Asset management and therefore should know a thing or two, said that he had recently been in the US on a whirlwind tour and the only thing that everyone wanted to know about was Greece. He said that he had seen encouraging signs in the US, but his clients concerns was on something on the other side of the ocean. But let us put this into perspective. The Greek economy is two percent of the size of the US. Meaning, quite simply if the US grows at a very anaemic two percent this year, that would have added the entire Greek economy. So, how can something that small (in the bigger picture) really drag down the rest of the world? Even more telling is that Greece is 1.72 percent of the entire European Union. How could one country of that size bring down an entire bloc? I guess confidence in the zone has been dented, the countries are more interconnected than ever before. So this is possibly the one and only event that is keeping us back. That Mad guy Jim Cramer reckons (on his Tuesday evening show) that we would be close if not at all time highs if it was not for Greece. Amazing.

Resource stocks took another hammering, down 2.4 percent, and are now nine and a half percent collectively this year. Versus an index that is up just shy of three percent. The Jozi all share index sank 1.79 percent, or 600 points to 32887. There was little place for anyone to hide yesterday, we were all “greased up” (Greece’d) and sliding downhill. Full of olive oil and wrestling a slippery slide downhill with our hands tied behind our backs. You know what, when everyone gets scared and runs, shooting first and asking questions later, eventually the sellers are fatigued in the same way that the buyers are. We are long term accumulators of quality stocks, so if you have free cash lined up for investing, get cracking.

Mussels in Brussels. Mussels are always on the menu when you visit Belgium, I have only ever spent a few hours there, so I can’t comment. It turns out the European leaders might as well have gathered for a friendly meal at the European headquarters yesterday, because after all was said and done, nothing really happened. At least at a headline level, the Germans said no to the Euro bonds that the French had been pushing for (not a new thing, because Nicolas Sarkozy wanted this too), and all the leaders said that they would like to see the Greeks stay in the Euro zone. So, at face value, the meeting was a waste of time. But I have always maintained that the only way to move to fiscal integration in Europe is to actually do it, and nothing like a good old fashioned crisis to get everyone on the same page.

Angela Merkel said that she wanted Greece to stay in the Euro zone, but they must keep the promises that they made. In other words, this upstart Tsipras (that the opinion polls suggests has one in four people on his side) that is saying that this austerity is not the right way, and the terms posed are crippling Greece, you must stick to your side of the deal. In the mean time the suggestion is that Europe is making contingency plans for a Greek exit. A Grexit. I am pretty sure that the Greeks know very well that a vote on the 17th of June is basically a referendum. Elect the lefties and let them form a government, and you are out. Auf Wiedersehen. I think that is right, my German friends can help me with that.

I think that there must be a roadmap for fiscal integration (there probably is amongst the reams of paper stored in Brussels), I suspect that Berlin will only want this once government accounts are in order. And that might take a few more years of pain for the southern states before Germany agrees to proceed. But I guess that point, the issuance of Euro bonds would be the real moment and would see us closer to fiscal integration. I guess either it comes, in a normal European kind of a way, slow and bureaucratic, or the zone really does risk spinning off the weaker members.

Back to that Jim O’Neill guy who said that he had already seen a change in attitude of the Germans since the Hollande election. And this was the example that he cited, one of the biggest labour unions in Germany, around 800 thousand metal workers had won a 4.3 percent pay rise. This comes after finance minister Wolfgang Schaeuble said it was time that wages rose in Germany to reduce economic imbalances in Europe. You must be thinking, 4.3 percent, that does not sound like too much. BUT. This is the biggest increase in twenty years. And German civil servants managed to get a 6.3 percent pay increase, this is for two years. SO, what Jim is saying is that Germany has made a concerted effort to move towards stronger consumption internally in German. Sneaky hey? Even sneakier is that German government (meaning high end folks) increased their own salaries by 5.7 percent. But, the German have basically said that they have done all the reforms, so they can do this. Austerity could actually be a thing of the past in Germany. Perhaps the Hollande election thing is coincidence, the timing.

SABMiller have released results this morning for the 12 month period to end March 2012. Really strong numbers for Latin America and the rest of Africa (as well as South Africa) more than offset pretty stodgy numbers from Europe and North America. Asia Pacific, although still relatively small from a profit contribution point of view, grew strongly. It is actually quite a diverse business (30 countries in total) with an extraordinary number of brands across all their geographies.

In the US there are 30 brands, including Coors, Miller and Blue Moon, 11 brands in South Africa, with well known brands such as Carling Black Label, Castle and Hansa, Latin America has 30 brands, including Pilsen and Aguila, Europe (think emerging Europe mostly) has 60 brands including Pilsner Urquell, Peroni and Grolsch whilst the SABMiller rest of Africa business has 36 brands, including 2M and Laurentina, just over the border to the East of us. And then there is the Asia Pacific, which has 73 brands in total, including a whopping 58 in Australia. Brands such as Snow in China, Fosters in India and VB in Australia. So, add those up and you get to 240 brands in 30 geographies, an average of 8 per country, not bad I guess, Aussie pulls the average up a lot. In Vietnam they have a single brand, Zorok and in Lesotho a single one too, Maluti Premium Lager. I am a very limited drinker of alcohol, of the above brands I have tasted four. And that is because they are all here in South Africa.

The results themselves, well, a picture tells you what many more words would, so I did a hack job from this place: F12 full year results: SABMiller drives strong results in developing markets. First, financial highlights:

All those numbers look very decent, then you get to the segmental report and you can see how strong the Latin America market is for SABMiller. Well timed purchase, credit must be given where it is due, 7.8 billion Dollars was the purchase price in July 2005 (for roughly three quarters of the overall business), that business now makes 1.865 billion Dollars EBITA. One third (33.1 percent) of EBIDTA comes from Latin America, 20.73 percent from South Africa, 13.19 percent from the rest of Africa and only 5.7 percent from the Asia Pacific region. So it is safe to say that it is an emerging market business with 72.72 percent of EBITA coming from these regions. I guess you could also add in the 2.4 percent hotels and gaming stake contribution from South Africa. This is now from a 36.87 holding in Tsogo Sun Holdings. That contributes 135 million Dollars in EBITA. Wow. Here goes, the breakdown:

See the quite large fall off in Europe. And remember that they only have operations in the old Western Europe in the Netherlands and Italy. All the other countries in Europe are the old traditional ones, the ones in Eastern Europe including the Czech Republic, Poland and Romania, as well as Slovakia and Hungary. The only other country included in that cluster are the Canary Islands. Which is closer to West Africa than to Europe, but is a Spanish protectorate.

OK, so what are the attractions of owning a business like SABMiller? Well, it is consumer oriented business that is well placed and in some cases the market leader in some fast growing developing markets. Sure, they have tricky operating environments in the developed market businesses, but those are manageable. As you can see from the above, all the regions that contribute to earnings growth are the developing world, so tick that box, emerging market consumer based stock! Next, does the price look right? Well, that is trickier, let us work that out in Pounds. The stock trades at just over 24 pounds, or in Dollar terms 37.7 Dollars. The company reported adjusted EPS of 214.8 US cents, so the stock trades on a historical multiple of 17.55 times. And a dividend yield of 2.4 percent with a 91 US cents per share for an annual dividend. You would hardly say cheap, but you would hardly say overly expensive. Somewhere in the middle and I suspect that is what the shareholders who have driven it to these levels say to themselves, growing developing world, stodgy old world, need to pay up a little.

Paul said the other evening on Hot Stoxx (watch it daily at 20:00 on CNBC Africa, channel 410 on the DSTv bouquet) that he thought that the business is not really in a transformative industry. So it is not going to change the way that the world works, we are talking about beer here. Make no mistake, they seem to execute really well, some deals have been great. We worry too about the regulatory environment, there has been quite a lot of talk about increased taxation on alcohol products. Let me be clear, do governments of the world want a workforce that drinks less or more? Pretty simple to answer that one. It has done amazingly well, in ten years in Pound terms the stock is up 320 percent versus the FTSE that is up only 2.27 percent. Heineken is DOWN 10 and a half percent over the same time period. Time to give a big up to the smart folks there. But we wouldn’t buy any over here at Vestact.

Beijing central. 39^o 54′ 50″ N, 116^o 23′ 30″ E Eeekkk. The HSBC flash PMI data release, which is always a little earlier than the state official one (and very often looks worse) has come in lower than expected. These flash numbers are also ahead of the final numbers from the same release, to coincide with the official ones. The number was 48.7, which indicates weakness. In part the Chinese put the brakes on themselves, they engineered this slowdown. Inflation is slowing, that is what they wanted to do. Time for some more policy response as we indicated a little earlier in the month, the triple R has been cut, it is possibly a matter of weeks before we see w full blown interest rate cut.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Stocks staged a heroic bounce ending flat to 0.4 percent higher in the case of the NASDAQ. Buyers. Starting to sniff a bargain when they see one I guess, and perhaps that dumb line that I used earlier, sellers fatigue. Metal fatigue is understandable, but other types of fatigue, especially when trying to give the collective market human characteristics, that is just plain strange. That is why I always tongue in cheek refer to this as Mr. Market. I think the actual term is Anthropomorphism. Collective buyers and sellers are involved, not all of them human, perhaps there is a human element to assigning a human emotion to the collective. Like I said yesterday, I see the market as quite cheap. But that is just me. Many are anxious about Europe. That will pass.

Currencies and commodities corner. Dr. Copper is last at 346 US cents per pound, the gold price is slightly lower at 1557 Dollars per fine ounce. The platinum price is weaker at 1419 Dollars per fine ounce. The oil price is slightly higher at 90.46 Dollars per barrel for WTI NYMEX. The Rand is 8.37 to the US Dollar and 13.13 to the Pound Sterling. The market has started marginally better, but some average European data has weighed us down a little.

Sasha Naryshkine and Byron Lotter

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“The way that I read it is simple, more regulation often leads to higher costs, and whilst law makers think that their intentions are well founded, it is generally the customer, in this case the patient that suffers.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. Call it a relief rally, call it whatever you want, the bulls got a chance to run out their wounds. Because let us face it, it has not exactly been an absolutely awful time over the last few weeks, we have been protected by a weakening currency. Spare a thought for those with savings in southern Europe, but at least they have savings I guess. The resources led the rally here yesterday, closing a whole 1.8 percent higher, driving the overall market higher by 1.22 percent to 33488 points, an increase of 402 points. Tiger Brands lagged the broader market, the results I guess falling short of analysts expectations. And all the while in the background the main news of the day here in South Africa was folks getting irritated about a specific painting, exposed parts, freedom of expression versus human dignity. It is a VERY difficult argument to get into, because if you think with both hats on, it is more complicated than Paris and Nicole. What am I saying, I mean Kim and Kris and the 72 day wedding. BTW, I have been married for 3651 days. Which means in two days time, Friday, it will be ten whole years of marriage! I guess I am very, very lucky.

Byron’s beats looks at mining news across the globe and locally. This is your last one for a while, he is away for a bit to study, good luck!

Yesterday Anglo America announced an agreement with Codelco to suspend legal proceedings with regards to that massive Copper asset in Chile which could mean as much as $9bn to Anglo. If you want a refresher here was the piece that Sasha wrote at the beginning of the year called Codelco and Anglo battle for copper continues. Within that refresher is another refresher you can click on for further down the line details. You see, we are quite jacked up with our archives here at Vestact.

“On 22 May, the parties have agreed to explore the possibility of negotiating an agreement in relation to Anglo American Sur. Should this prove successful, it will enable the parties to overcome their current legal dispute. Cynthia Carroll, Chief Executive of Anglo American, said: We welcome this opportunity to re-engage with Codelco and explore whether a solution may be achievable. From the outset, we have been consistently in favour of discussing commercial solution that takes into account the interests of both parties.”

This is good news. Legal proceedings are expensive and often a waste of time. I can imagine that negotiations are still far apart but the fact that both parties are willing to compromise is important. Many investors were worried about Anglo’s position in Chile after taking on Codelco (who are owned by the Chilean government) head on in a Chilean court. it’s good to see that the Chilean legal system stayed strong and was not bias. We will have to wait and see what the outcome will be as negotiations are being done privately. I wonder if the fall in the copper price since October last year had something to do with the parties dropping their aggressive stances.

In other mining news it just seems like Impala cannot catch a break. Yesterday it was announced that there was a fire at their jointly owned Mimosa mine in Zimbabwe. There were no fatalities but production has been hampered and of course damages incurred. The extent of the damages will come out in due course.

On top of this, their flagship Rustenburg mine is still battling with their employees. But the dynamics are different this time. The battle is going on between the unions where the rival newcomer Association of Mineworkers and Construction Union (Amcu) has made headway against NUM. The clashes between workers, who are now not showing up for work, costs Impala 3000oz of Platinum per day. This equates to R36m a day lost to Impala and a big portion of that lost to the state. It seems like it is easier to start up a union than it is to start up a business. There is something very wrong with that. This Businessday article covers the story extensively.

There were results from Mediclinic, one of South Africa’s big three hospital companies yesterday afternoon. In fairness, both Mediclinic and Netcare have international exposure and the only pure South African hospital group is Life Healthcare. What are Mediclinic, where do they have operations? 49 hospitals in South Africa, three in Namibia, two hospitals in Dubai and 14 private hospitals in Switzerland. 68 in total. They are a hospital group sports lovers. In the 2011 annual report, the group said that they have 7103 beds (7378 now at year end 2012) in South Africa (13588 employees), 1457 beds (1479 now) in Switzerland (5919 staffers) and 336 beds in the UAE (1676 staff). See that ratio, that basically tells me what sort of care the patients are getting. Staff to patient ratio, just less than 2-1 in South Africa, 1.9, just a little over four in Switzerland, 4.06 staffers to patients and nearly five (4.98 times) staff to patients in Dubai. These are important numbers, we will deal with them later when we do a divisional breakdown of the regions.

Revenue for the full year was 18 percent higher to 21.986 billion Rand (call it 22 billion), profits for the year were marginally higher (103 million Rand more) at 1.484 billion Rand. Headline earnings per share were six percent higher to 194.9 cents. Administrative and operating expenses grew by nearly the same amount as revenue, 21.6 percent. Not good. A 55 cent dividend has been declared, 46.75 cents net of dividend tax. At just above 37 Rand a share, the stock looks stretched. The analyst community have a fairly aggressive outlook though, suggesting a nearly 40 percent growth in earnings for the next year to March and over 20 percent the year after. So much so, that the current price trades at 11x 2014 earnings projections.

This is where I am going to make my real points, the segmental report from the release, which you can find here -> Audited results of Mediclinic international limited.

OK. First observation, revenue and operating profits of both Switzerland and South Africa are the same, more or less for the purposes of the next point. The asset base, which must include some wonderful Swiss buildings is heavily weighted towards Switzerland, by a country mile. As are the outstanding liabilities, both weighted by a factor of six in favour of Switzerland over South Africa. So, Mediclinic paid up big time for an outlandishly large asset base in Switzerland and now have to chisel away at the debt load. The weakening Rand to the Swiss Franc (which was pegged to the Euro, remember) helped the profitability and value of the Swiss assets in Rands, but equally this has the same negative with regards to the debt load.

Some of the observations about the NHI make for interesting reading. “Mediclinic is of the opinion that the NHI and indeed these initial activities to institute an NHI will not have any significant effect on the medical schemes market or the private sector industry in the immediate future.” Sure, that is because it is going to take a long time to roll out, so no immediate impact.

And then there is government regulation, less so here than in Switzerland. Where, as you can see, people pay top Dollar (Franc) for medical treatments. There were changes in legislation that led to higher costs. Tariff declines, although moderate, are not always welcome. Mediclinic talks about three pieces of regulation impacting on their business, “(i) the introduction of fixed fees for inpatient services based on DRGs; (ii) a new hospital financing system which redefines the funding proportions of the cantons versus the health insurance companies; and (iii) the revision of the hospital planning that led to new hospital lists, defining those hospitals that are eligible to treat generally insured patients.” The way that I read it is simple, more regulation often leads to higher costs, and whilst law makers think that their intentions are well founded, it is generally the customer, in this case the patient that suffers.

Healthcare is an emotive issue. Whilst we over here at Vestact think that it is a growing area of increased investment, you can see that there is a large amount of government meddling. In the case of a hospitals, you find yourself there because of illness and in many cases extreme illness, or for a procedure of sorts. And that is an emotive issue. So whilst I might say the same old thing, overloaded with debt, more regulation to come, Mediclinic is probably a good investment. They will continue to grow their number of beds, more people will have access to medical insurance which will mean that they can visit these healthcare facilities. More so in a South African context, although we have no idea what the NHI would mean for their business. Uncertainty. Do you think when faced with uncertainty that a business is more likely to expand their operations, or just follow a wait and see? I guess the answer is grow modestly, which they are looking to do, upgrading some facilities and adding a really modest number of beds. Not my favourite, but not the worst.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Slip sliding away. That old Paul Simon song, it was Paul Simon not so? That is what happened to markets in New York last evening, the last hour dominated proceedings again. After a really good early start, where markets were up nearly a percent, they ended about flat. There were encouraging existing home sales, which marginally beat expectations. Not just a good read, as that crazy Jim Cramer said, the size of the gains (in Dollar terms) was the best in years. Just earlier there had been a European consumer confidence read, which, although negative, had also beaten expectations. A Spanish bond auction had gone off OK, so that wasn’t the reason for the late sell-off. It probably had a whole lot more to do with an informal European meeting today in Brussels. The way the WSJ see it is the beer drinkers against the wine drinkers. You know, Germany and Sweden (and co.), versus France and Italy (and co.) on the idea that austerity is the only path to follow. Angela Merkel did concede that austerity was not the only path. Oh, and Austria are siding with Germany, they might be further south, but they drink beer, not so?

The late news that crushed the rally was delivered by ex Greek Prime Minister Lucas Papademos, thanks to the Business Insider for putting this piece up: Former Greek PM Papademos Warns That Greek Exit Plans Are Under Consideration, MARKETS FREAK OUT. Don’t worry about that Markets freak out, that is classic Business Insider headlines. The Dow closed down a point and two thirds of a point, barely unchanged to 12502. The broader market S&P 500 eked out a modest gain, just a little one. The nerds of NASDAQ dropped one third of a percent, Facebook still continued to take a whole lot of pain. Hmmm…. the NASDAQ and Morgan Stanley must be irritated right now. But not more than the Facebook management and the Zuck. BUT, they can say that they raised money at 38 Dollars a share. Monetise the millions on mobile, that should be the mantra.

Currencies and commodities corner. Dr. Copper is last at 346 US cents per pound. The lowest level seen in quite some time. There is a flash HSBC Chinese PMI read tomorrow, probably the most important number we have seen in a while, in terms of sensitivity for commodity prices. The gold price is lower at 1555 Dollars per fine ounce, the platinum price is also lower at 1425 Dollars per fine ounce. The light sweet crude oil WTI price as per the NYMEX quote is last at 90.92 Dollars per barrel. The Rand is weaker, Mr Risk off is visiting again and equity markets are lower around the world, last at 8.40 to the US Dollar.

Parting shot. Those European folks meet today. I saw some funny reference to meeting times of the socialist bloc and the conservative bloc, and the socialists were meeting for twice as long as the conservatives. Nice long lunches, siesta times and lots of talk. Conservatives, let us just get the job done. Do I have any great confidence that we are going to see anything else other than another solidarity pact, the Greeks are in, blah, blah? Perhaps. Or perhaps not, and the usual European way of just stumbling along and getting the job done only when it needs to. That is probably more likely. The suggestion is that a working group has been setup to deal with the prickly issue of Greece. Oh, to be a fly on the wall.

Sasha Naryshkine and Byron Lotter

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“Why did Naspers drop so much yesterday? Because Tencent fell hard on the Facebook share price. I wouldn’t be too worried. Many traders were banking on a big rerating in social media companies following the Facebook IPO, this is one of the reasons Tencent is up 35% this year. So yes, they have been rerated and the Facebook thesis has been correct.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We closed down around one fifth of a percent on the day, dragged lower again by the usual suspects, resource stocks once again underperformed the broader market. The Jozi all share index closed at 33086 points, that is a loss of 62 points on the day. Naspers took a clobbering yesterday, the stock was down over five percent, two factors, one the Facebook listing not going off as well as the NASDAQ the market guessed it might. But more importantly, their giant Asian holding in TenCent took some tap after an incredible run. We will have a look at that later.

Tiger Brands have released results this morning for the six months to end March. This is a business that has brands entrenched in your pantry for over generations, All Gold tomato sauce is a big hit in my house, Black Cat peanut butter is great as long as you are not allergic to the thing, Colman’s mustard is my pops favourite, Fatti’s & Moni’s I don’t buy anymore, I make my own pasta (no really), Koo is baked beans, Beacon sweets, Maynards chewy sweets are always a favourite, Ace maize meal a huge staple in South Africa, Albany bread, I use the sliced kind, Golden Cloud, I use it sometimes, Jungle oats, I should eat more of that, Tastic rice, I like it a lot, more recently Energade, which I used to drink when I ran more (I should, lazy bum me), old favourite Lucky Star, not my favourite, the baby products, Elizabeth Arden and Purity which I don’t use anymore, my babies are not babies anymore. Putting a feel to the stock, something we do not do enough of.

Group turnover for the period clocked 11.6 billion Rand, an increase of just over 12 percent from H1 2011. Domestic turnover, that is you and I buying jam and peanut butter, increased only 3.4 percent, but exports and their international businesses grew turnover by 27 percent. This is largely what people have been getting excited about is my guess, bidding the stock higher. Their expansion plans into the rest of the continent, we sometimes think of ourselves as not part of Africa. Hello, Africa is the second part of our name. OK, getting distracted here again, profits increased 10.1 percent to 1.295 billion Rand. Headline earnings per share increased a paltry 5.2 percent to 787 cents per share. The interim dividend is 5 percent higher to 295 cents per share, BUT, after the 15 percent dividend tax, the dividend received by the shareholder (most) is closer to 250 cents per share.

What is interesting about Tiger Brands is to know what you are dealing with, so I hacked the annual report and came up with this turnover and contribution to operating income, and you can very quickly see that it is about boring old grains. Tastic, Albany, Ace and Tiger Oats are the most profitable parts of their business. Strange to think that, but it is true. Check it out:

The last two years have been quite exciting for Tiger Brands, they certainly have expanded into the rest of the continent, sub Saharan Africa mostly. We are actually seeing interesting talks between Tiger and Dangote Industries with regards to the Dangote Flour Mills. It seems either Tiger want to buy the Industries stake from Flour Mills. Aliko Dangote is the richest fellow in Africa, according to Wikipedia he is worth over 11 billion Dollars. Dangote flour is a major producer of much of Nigeria’s wheat flour, bread flour, confectionary flour and pasta semolina. Of course Tiger has bought other businesses in Nigeria, UAC Foods which is in the confectionary and drinks business as well as Deli Foods, a biscuit manufacturer. There is of course another West African business in Cameroon, Chococam, a small cocoa product business. Small as in, when Tiger bought it back in 2008, annual turnover was a mere 28 million Euros a year. Across the continent and in Kenya, Tiger have a business called Haco Industries, a much more sizeable entity selling the products we know here, as well as other products in the personal care segment.

This business is run by Peter Matlare, a fellow who once ran the hot potato SABC for a whole four years. He resigned from that role back in 2005. Peter Matlare then went to Vodacom, where he was chief strategy and business development officer. Matlare has been running Tiger Brands for over four years now, he certainly had big boots to fill in the form of Nick Dennis. Dennis fell on his sword as a result of the bread price fixing scandal which cost Tiger nearly 100 million Rand. The CFO is a relatively new appointment, from last year June, Funke Ighodaro. She is educated in the United Kingdom, worked for Primedia as well as for Kagiso’s private equity fund. So it seems like she has done the time, she is older than I thought (good picture!) and seems more than capable. Talking management shuffles, the Chairman, Lex van Vught, resigned on Valentines day and Andre Parker took over. Parker is also relatively new to Tiger, having sat on the board since 2007.

We know the size and scale of the business, we know their history, we know that they have been one of the single best investments in South African corporate history. They really have, they have unbundled amongst others, Adcock, Astral Foods and Spar along the way. But at 266 Rands, is the stock priced too aggressively? It is a September year end and judging by analyst consensus it is trading on a forward multiple of 15 times and a dividend yield forward of a modest 3.3 percent. Their expansion plans are exciting, that is why I think that you are forced to pay up to these levels. Earnings are expected to grow around 14 percent per annum for the next couple of years, and the yield should also tick up accordingly, we remain buyers of the stock in our extended portfolios.

Byron’s beats covers the largest and probably most important business inside of the Naspers stable. TenCent!

We had results that slipped through the cracks the other day but I think it’s fitting to cover it today seeing that Naspers dropped 5% yesterday. I’m talking about the Tencent results which were released last week which were yet again very impressive. Analysts have constantly questioned Tencents ability to maintain their fascinating growth rate off an ever increasing base but yet again they have managed to do great things. I guess it’s understandable when you have nearly 1 billion users.

To put things into perspective Naspers own 34% of Tencent which at a market cap of $50bn equates to $17bn or R140bn. Naspers entire market cap as of today sits at R180bn. So, you can see why the Naspers share price follows the Tencent one so closely and why it is very important for us to follow the company as if it were our own.

So far this year Naspers is up 25% whilst Tencent has improved 35%. South African Investors are conservative and still believe Tencent is overvalued. It does trade on demanding valuations, so let’s look at those numbers. The company managed to increase revenues by 52% whilst profits came in at $467 million. The stock sits on a historic PE of 31 but growth projections look good.

The business looks strong. It’s like the Facebook, Google, Zynga and BBM of the western world all amalgamated into one company. Microblogging, messaging and gaming have really revelled under this massive smartphone expansion. Who would have thought? Better phones means a better experience and more consumption of data and services. In the quarter the company added 30.9 million subscribers (for the quarter!!) while their flagship QQ instant messaging service reached a total of 751 million subscribers.

The big revenue driver is the online gaming and QQ related subscription fees which grew 41%. E-commerce is also coming into the forefront which has just been introduced onto the platform. If you believe what we do about the Chinese consumer driving growth then this is going to be massive. They have the clients, now they just have to monetise them, which in the past, they have managed to do already. This is like Facebook on steroids with one third the valuation.

So those looked very encouraging. Why did Naspers drop so much yesterday? Because Tencent fell hard on the Facebook share price. I wouldn’t be too worried. Many traders were banking on a big rerating in social media companies following the Facebook IPO, this is one of the reasons Tencent is up 35% this year. So yes, they have been rerated and the Facebook thesis has been correct. But the stock dropped 10% yesterday and of course that is going spur sellers in the sector. Nothing to worry about as a long term holder.

As promised yesterday we will look at the Vodacom results from yesterday, we ran short of time again. Time. Not enough of it, or perhaps I should just compromise sleep in favour of more mileage on the computer. I would probably be an almighty pain in the posterior with a lack of sleep. Making Russian bears with sore heads look more friendly than what they are. Leave that for the moment, let us focus on these numbers from the number one mobile phone company in South Africa. The shareholding in the company has undergone pretty big changes over time, at the moment the shareholder base consists of the Vodafone Group (65%), the South African government (just less than 14 percent) and the Government Employees pension fund (just less than 5.5 percent). So, comfortably over 80 percent of the company is in hands that I guess are not really sellers anytime soon.

The numbers. Quick recap, earnings of 709 cents per share, dividend of 710 cents per share. As we said yesterday, Vodafone is going to suck out as much of the cash as they can. The company increased turnover to 66.9 billion Rand, whilst headline earnings topped 10 billion Rand, 10.374 billion to be precise. Total customers increased 11 million over the year to 47.8 million. Data revenue grew 23.6 percent whilst data customers grew nearly 50 percent to 15.1 million folks. Most of those customers are in South Africa, with active data consumers here running at 12.2 million. A massive part of that has been driven by smartphones, which now top 5.1 million on the Vodacom network. Valuations, the simple metrics, the stock trades at 104.50 ZAR, roughly. So, the stock trades on an earnings multiple of 14.7 times, with a dividend yield of 6.8 percent. That is why people will pay up for the stock, the yield is amazing. But as we said, Vodafone are going to try and suck as much cash out as they can. In the presentation the company says that they will continue to payout at least 90 percent of headline earnings per share.

Data is the future, whilst it is small for now, you can see the explosion in smartphones and the strong growth that we have seen in data revenue. Although the breakneck pace will slow, I can imagine that more consumers want smartphones and to be connected and “online”. Average smartphone usage has increased from 38MB to 98MB. And that is why Vodacom have invested heavily in their network, adding over 1000 sites and spending a whopping 8.66 billion Rands. That is a lot. And we continue to think that there is going to be strong growth in the data space.

But the Vodafone geographical shackles are a bit of a problem. Will Vodacom become more utility like? I suspect that the ex-growth label is not warranted, data margins, which are not as good as voice margins, are going to still grow a lot. I am not too sure what the eventual mix will be, but I suspect it is a long way before we get a fifty-fifty mix. In the US would you believe, according to this piece Verizon, AT&T dominate in global data revenues, US overall data as a percentage of ARPU is 40 percent. BUT, constitutes 85 percent of all traffic. Get that point about data margins? Still, in a world of choices, we see the rest of Africa offering greater opportunities than South Africa. And whilst that is the case, we will continue to buy MTN. BUT, if you are looking to do the same as Vodafone, look for a great yield, then Vodacom still looks cheap enough. And you are paying up for the yield.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Whoa! What a session, particularly for tech stocks which were driven higher by a massive move northwards in Apple. In part I guess folks saying, well I can pay between 40 to 100 times 2013 earnings for Facebook, or 10 times forward for Apple. Guess which one won yesterday? Six days in a row of selling saw some fatigue and some buyers comfortable at these levels. Whatever the case, the European issues will linger for some time to come, the levels of the broader market are still relatively cheap. So, if 100 Dollars plus for the S&P earnings is expected for the year, then we still see an implied 30 percent discount to the long term averages. Perhaps we deserve to see equity markets trade at these discounts to the long term average, simply because of all the issues that remain.

Currencies and commodities corner. Dr. Copper is last at 352 US cents per pound, the gold price is slightly lower at 1576 Dollars per fine ounce, the platinum price continues to take some heat, down at 1454 Dollars per fine ounce. The oil price is lower at 92.01 Dollars per barrel. The Rand is slightly firmer, 8.25 to the US Dollar, 13.02 to the Pound Sterling and 10.57 to the Euro. We are higher here, thanks to the second half rally in New York last night.

Sasha Naryshkine and Byron Lotter

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“Despite talk of early signs of economic recovery in the country, the period under review remained challenging for retailers. Pessimistic consumer sentiment prevailed in an environment featuring continued high levels of unemployment and indebtedness, limited real wage increases, and consumer spend pressured by rising power and fuel costs and widespread food inflation.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. The Facebook listing was delayed due to some issues with regards to the NASDAQ trading systems. They (the NASDAQ) had been stress testing their systems over the days before the listing to make sure that the listing went off smoothly. A little more on that later. We were taking some more heat from the sellers, financials sold off nearly two percent, the banks sold off nearly two and a half percent, the gold miners were the only stocks that really took off, 4.38 percent better on the day. Greece of course remains a problem for the time being. Because there is a conclusion to this, and it is closer every day. Or at least that is what we are always thinking, whilst the G8 basically said they were committed to Greece staying in the Euro. And France and Britain keen for Eurobonds. Phew. And Angela Merkel is committed to Europe and the currency, more than ever.

African Bank have released results for the six months to end March 2012 this morning, as previously indicated to us. Remember a few weeks ago, we wrote up about the steer that the company gave us, African Bank trading update comes inline with expectations. We suggested that the middle of the range was 170 cents, and bang this morning we saw earnings per share clock 170.4 cents. The dividend was unchanged at 85 cents for the first half, at the top end of the dividend policy this is two times cover, perhaps not so much as in the past, but the commentary gives the following reasons: “We believe that the current cover will retain sufficient capital to support growth for the current year.” AND “The group will continue to manage its dividend policy to support ABIL through the current growth phase as well as the anticipated Basel III impacts.” But still, if you double the first half earnings (which you shouldn’t, it is the better half) the stock trades at around 11 times forward earnings and a dividend yield (presuming unchanged for the year) of just over five percent. 5.2 percent. Sounds good to me.

OK, headline earnings increased 25 percent to 1.37 billion Rands, almost all of it from the banking unit, the furniture unit is slowly turning around. But, making progress of course. The return on equity has moved north for the last few years, to poke its head up back over 20 percent. Return on shareholders equity is defined as follows from Investopedia: “The amount of net income returned as a percentage of shareholders equity. Return on equity measures a corporation’s profitability by revealing how much profit a company generates with the money shareholders have invested. ROE is expressed as a percentage and calculated as:

Return on Equity = Net Income/Shareholder’s Equity

Net income is for the full fiscal year (before dividends paid to common stock holders but after dividends to preferred stock.) Shareholder’s equity does not include preferred shares. Also known as “return on net worth” (RONW).” So, rising return on equity is a good thing.

Customers added for the period clocked 320 thousand and more importantly, dormant customers reactivated or rehabilitated numbered 133 thousand. Nice. This is important, listen in, 54 percent of new customers walk away with credit cards being issued. So, I guess the new customers can go and pay for school fees or additions to their new house, you will see later. AND, there are pilot programs for both funeral insurance as well as a vehicle financing division, which has extended 94 million Rand thus far.

A great slide from the presentation, titled “Unsecured lending growth”, you can find it here: African Bank Unaudited interim results. The graphic below is hacked just to give you an idea of who has accounts in South Africa, and how most people make sure that they look after their credit records.

And then there is another slide, which ABIL suggests how their customers use the loans advanced. I reckon it is deserving of another slide to have a look. Most of the loans are taken for improving homes and improving lives by paying for education. I guess two things that you cannot take away in a hurry and improving the country. You might not like me saying it, but credit extension, provided that it is serviced properly improves peoples lives.

Nice. We were saying, OK, the total book is 47 billion Rand and is roughly one tenth of the size of ABSA’s total book, but as Paul pointed out, ABSA has had a century and a half to build their book. ABIL was founded in 1974, but has only exploded in the last decade or so. In truth ABIL have only been a listed entity since 1998, when Theta acquired King Finance, Unity Finance and AltFin. The name change to the current one came in 1999.

That is all history. I do not care too much for the past, history was a favourite subject but I guess is only useful if you are in a profession that needs it. Think law. African Bank is a growth business and the rating that they are trading on is inline with some of the bigger more established banks, who are having problems of their own. We think they should trade on a higher multiple, but that will come in time. We have a great admiration and respect for the management team, and think that they are always in deal making mode. We suspect that a growing middle class in South Africa will continue to grow their credit profiles as they try and get ahead. We continue to maintain our buy rating on the stock.

Vodacom released results for the full year to end March 2012. HEPS were up 8.1 percent to 709 cents for the year. Dividend payouts exceeded that amount, to 710 cents. Vodafone wants the cash, they do not really care that the debt levels rise I guess, and as Paul said, with these cash flows from Vodacom, the banks won’t worry too much about extending longer lines of credit. I like Pieter Uys, I think that he is a good guy, too many people think that Allan Knott-Craig is and was the business. Uys is a whole lot more humble and I think more than capable to run that business. Anyhow, I am going to have a long hard look at these results and get back to you tomorrow.

Byron’s beats covers a company in a sector that we like, aspirational consumerism.

This morning we had results from Famous Brands which came pretty much in line with the trading update they released on the 7th of May. Revenue was up 15% to R2.15bn while operating profits also increased 15% to R423mil. Headline earnings per share were up 15% to 278c while a very handsome dividend of 200c is being paid. Wow that is a cover of 1.39. With a share price of R52.46 we get a historic valuation of 18.8 and a dividend yield of 3.8%. That is a great yield for a stock that is actually quite ‘expensive’.

The group has had a busy year acquiring Milky Lane and Juicy Lucy whilst opening up 146 new restaurants, 113 of them in South Africa and 33 North of our border. This is why the business grows so quick. Not only are same store sales growing but there is still so much room for new stores. And the best thing about it is that franchisers take on the risks and spot the opportunities. Their whole livelihood relies on the success of the franchise so you would imagine they are run efficiently.

There are two parts to this business. The franchising division which is responsible for R440 million of revenues (20%) and R265 million of profits (63%). And then the supply chain which is responsible for R1.7bn of revenues (80%) and R158 million in profits (37%). See the differences in margins? Well that makes perfect sense, once a franchise is sold not much costs are needed going forward other than collecting their percentage of the revenues. It’s the manufacture and logistics where all the hard work is done and where Famous Brands have been so efficient. Costs have been cut and margins have increased.

But we know how this business model works, I have discussed it many times. How is the economic environment? For such good results they seem quite cautious on the economy, but most retailers are.

“Despite talk of early signs of economic recovery in the country, the period under review remained challenging for retailers. Pessimistic consumer sentiment prevailed in an environment featuring continued high levels of unemployment and indebtedness, limited real wage increases, and consumer spend pressured by rising power and fuel costs and widespread food inflation. Notwithstanding these testing conditions, Famous Brands has delivered creditable results for the year ended 29 February 2012, achieved through intensified focus and improvements in the front and back ends of the business.”

I’ve vented my frustration about this kind of commentary before. All the retailers love blowing their own horn about good results in tough conditions but I just cannot find out who is losing allthis market share? So what about the future? I think the company is very well positioned to benefit from the African growth story. Their brands are fantastic and they have a well balanced consumer base from all ranges of incomes. I still like the long term story. I will leave you with what they say about their outlook, remember it’s very fashionable to be cautious and then beat expectations.

“Consumer disposable income will remain pressured by escalating electricity tariffs, fuel costs and general food inflation. The bulk of consumers in payment arrears are middle-class earners, the traditional target market for food services operators. To entice them to resume previous levels of spending will demand intensified innovation, particularly should interest rates increase and economic uncertainty persist. Despite the negative effect which these factors will have on the industry, the Group’s all-encompassing business model, exceptional personnel and best- in-class leisure brands position Famous Brands for continued growth. In this regard, the Group will undertake a range of initiatives in the period ahead aimed at unlocking further value for shareholders. This will include centralising the Group’s procurement function enabling Famous Brands to become an even lower cost producer; extending the Group’s presence in market segments where it currently has no representation, including identifying new joint venture partnerships; and continuing to explore opportunities to leverage the synergies afforded by Famous Brands’ supply chain.”

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. The Facebook listing was one of those memorable listings, one of those events that you have to have watched. I was not watching because it was my daughters seventh birthday party, that was a success too! But the Faceook listing did not go off as planned. A glitch of sorts by the NASDAQ saw many a investor and folks hoping for a giant pop confused and mad with the NASDAQ. But I guess on balance, perhaps Morgan Stanley and Facebook would not feel completely happy with the outcome, but the stock listed and traded. And the Zuck got married on Saturday (our Mayvis said he is too young to get married) to long time girlfriend, Priscilla Chan. Mr and Mrs. Zuck. The Zucks. Yeah, but that actually zucks, I mean sucks, the listing technology problems. The NASDAQ say that they are embarrassed by what happened. And they (the NASDAQ) are planning to repay some investors but would need SEC approval, according to the WSJ. This was a screen grab from the Zucks weekend, see, he was busy.

Next and most important question, where to for the stock? They closed JUST above the listing price, I was hopelessly wrong on Friday. Perhaps the problems in Europe, perhaps the greater offering from the vendors or the trading glitch, or the valuations. Or all these issues saw the price close just above the IPO price of 38 Dollars. There could be some short sellers stepping up the pace, there could be staggers throwing in the towel, equally the pent up demand could return to the screens. We watch as the NASDAQ continue to apologize for their mistakes.

Currencies and commodities corner. Dr. Copper is trading higher at 352 US cents per pound. The gold price is last at 1592 Dollars per fine ounce, having bounced properly on Friday. The platinum price is trading at 1464 Dollars per fine ounce. The oil price has also ticked up, 107.39 Dollars per barrel for Brent Crude, 91.86 Dollars per barrel for NYMEX WTI. The Rand is steady I guess, 8.34 to the US dollar, 13.11 to the Pound Sterling and 10.63 to the Euro. We have started a bit mixed here, a little lower.

Sasha Naryshkine and Byron Lotter

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“Another tough set of results for Investec. Adjusted earnings decreased by 21.4% for the year ended 31 March 2012. To put things into perspective the Investec PLC share price is down over 4% so far this year while the overall banking index is up over 16%, even after this recent fall.”

Jozi, Jozi. 26^o 12′ 16″ S, 28^o 2′ 44″ E. We had a pretty poor day after all was said and done yesterday, the all share sank around three quarters of a percent or 255 points to 33538. The resource ten sector sank 1.29 percent weighing on the overall market. Gold stocks rocked as the Rand weakened and there was renewed buying for bullion, you know, the price is just “too low” right now. There was something that that crazy fellow Jim Rogers said that I have said before, what happens if the Indians (twenty percent buyers of gold) change their minds on what is considered investment grade. For example Indian savings bonds that pay interest and are protected. Sounds better than squirreling small bars under your bed. Or perhaps only to me, but Jim Rogers asked the same question. Still, he has fairly outlandish ideas, as far as we are concerned over here.

So whilst all the politicians tell us that they are committed to Greece staying inside of the Eurozone, the market believers are fewer and fewer. Because like it or not, the Spanish banks are getting clobbered, one in particular, Bankia who has had a pretty rubbish time since they IPO’ed last European summer. And as the FT says, institutional investors shunned the company, retail investors have been left with the bad investment. I almost said turd, but that would have been rude. What is also quite rude is the rumours that there is a low level bank run on Bankia, depositors not trusting the banking system and the company and more than a slight bit of panic. Spain now, because of Greece, that is the real worry you see, the Grexit sparking bigger problems for the rest of Europe with Spain and Italy more than just problems. Spanish banks also got downgraded.

And not so long ago, a serious upstart who is getting on my nerves, that Alexis Tsipras, who, reminder, got just less than 17 percent of the vote in the last Greek elections, says that Europe has to fund Greece because if it stops, then Greece will stop servicing its debt. Yeah, that is actually what has been happening. So, the only reason you could pay your debts was because of the inclusion in the zone, not because of rising tax revenues. Simple, let me try and explain what will happen. If Greece stops paying, nobody is going to lend. And my next question is, do you think that they have enough money to continue to pay their salaried state employees what they are used to, and the associated benefits? Important. Well, if the people of Greece want that, the ECB will cut the funding off. Tsipras reckons that worst case scenario, the Greek people will be fine. He wants to nationalise banks to lend straight to the source, rich people must stop avoiding tax and Greece must cut their defence spending. And crack down on corruption. And waste. Yeah, there are many things I agree with.

Paul seems to suggest that Tsipras is right. But then what to do? Has he exposed a design flaw? Yes. Is he going to be taken seriously? Yes and no. The polls suggest that he will get the most votes next time around, because he is making the most of his new found fame. The opposition parties have been quiet because they have been creamed. So the next vote will no doubt be a Greek Euro referendum. In a way I think this is a very good thing. Portugal et al can watch and see whether or not this happens. And once this event has, or has not taken place, then see what the landscape looks like afterwards. You cannot say that there has been a run on Greek banks, because in truth from that Scotty Barber graphic yesterday and this one today, there has been a “run” on the Greek banks since the end of 2009 when bank deposits peaked. In wondered a little to myself if the Greek economy has contracted for five years in a row, as people supplementing their income draw down on cash reserves. Possible. Perhaps both things are happening. Courtesy of the chart of the day from the BusinessInsider.

French and German deposits rising and Ireland and Spain falling? Sounds about right, not so? Everyone is speaking as if the Greeks are out of the zone already. I wouldn’t act so fast. I suspect we will see more than a little action after the G8 and a serious policy response very quickly. From everyone, because you can see the fear. And when there are bad things going on and everyone is a seller, well, history has shown that one should be a buyer rather.

Byron’s beats. Byron said to me that there was nothing else to add to from yesterday to the PPC results, I seemed to have covered it all, so he has chosen to cover the Investec results from yesterday.

Another tough set of results for Investec. Adjusted earnings decreased by 21.4% for the year ended 31 March 2012. To put things into perspective the Investec PLC share price is down over 4% so far this year while the overall banking index is up over 16%, even after this recent fall. Wow that is a big underperformance. It seems like their exposure to boring old developed economies is slowing them down. The UK and especially Australia have really dampened earnings while South Africa is still doing fine.

In terms of their segmental performances the asset management and wealth management businesses now contribute 48% of the groups operating profit. That is up from 38.6% last year. They will be happy with this because that has been the long term plan for a while now, shifting away from capital intensive activities to higher margin asset management.

It was the specialist banking segment (which is responsible for 52% of profits) that let the group down with operating profits decreasing by 30.2%. Again the South African division did fine. “In South Africa the division has benefited from improved margins in the lending and fixed income businesses and a strong increase in fees and commissions supported by increased activity in the corporate and advisory divisions.” That is nice to see for our economies sake. The UK was mixed but Australia got hit hard by big property impairments while activity levels remained muted.

To get a good feeling of the operational mix and how they have preformed over the last few years I hacked this graphic from their results.



I guess in a world of choices why would you invest in a bank that has exposure to struggling economies when there are better options out there. The growth is coming from the developing world so allocate your money there. Another worrying factor which we tend to ramble on about was thrown in our faces again with the latest JP Morgan trading saga. These guys were supposed to be the best operators amongst all the banks and $2bn (possibly more) still managed to slip through the cracks. It is an unwanted risk and regulation is only going to get stricter.

There is no doubt the company offers some value and there is a good chance the stock will turn. The stock trades on a 13 times historical valuation but analysts expect a big jump in 2013 earnings after all these impairments have been absorbed. However we prefer to stay away, not because of the company or its management (who do happen to pay themselves very well), but because we avoid the whole sector. You see we are not bullish on everything, this market is about making your choices very wisely.

The G8 meets this weekend. At Camp David, hosted by Barack Obama. And Vladimir Putin is not coming, so there. He (Putin) cites bare shirted horseback riding, ice hockey practice and toboggan rides as a reason for not making it. No, that is not right, he is actually reshuffling his cabinet. Meaning he actually does not want to attend, because in his mind Russia is the greatest country in the world. Why not? If only in that part of the world. Meanwhile, the reappointment of himself as President has seen money continue to flow out of Russia. 42 billion Dollars have flowed out in the first four months this year. The recipients of the funds have been Germany, the UK, the US and strangely, Austria. Austria? What? Perhaps “Vlad the Awesome” has stayed home to manage his long positions, the Russian stock market is at a 8 month low AND for those who care about this sort of stuff, it is now in bear territory, down 20 percent from the last high. Mostly because of lower oil prices, one can understand that. But listen to this, whilst China is NOT a member of the G8, both Italy and Canada are for historic reasons. Time for the G20 to meet, or is that too many people in a room? At least the exclusive club should include India and China for starters.

New York, New York. 40^o 43′ 0″ N, 74^o 0′ 0″ W. Yech. Stocks slid to their worst levels since mid January on the S&P 500, the broader market now only registers a 3 and three quarters of a percent gain for the year. We are still up for the year! This is good news I guess, better than being in the dumpsters. So, it feels like everything is on sale, it sure is from a few short weeks ago, the highs of the year on the S&P 500 are 1419, the level is now 1304. I must admit, one of the stocks that I like the most right now is boring old McDonald’s because as you can imagine, their input prices have been falling. And that was something that everyone was worried about. But it is not about burgers today. It is about Facebook.

Whether you like it or not, it is going to be Facebook focus today. Mark Zuckerberg is going to be the most talked about person on our screens. Yes, he is worth around 19.1 billion Dollars. The only reason he is placing a bucketload of stock, around 1 billion Dollars worth, is to pay the tax bill associated with exercising options for 120 million class B shares. And that would probably make him the highest individual tax payer in 2012. So that issue aside and the fascination with how rich somebody is, or not, the company lists today. And although the headlines will read that the company raises 16 billion in IPO, this is not right. In fact, a lot of that goes to the vendors, existing shareholders exiting at the IPO price of 38 Dollars, the top end of the range. The company is now valued at 104.18 billion Dollars as a company. And probably 30 odd percent more after the opening auction process which should end at about 16:00 or so, so look out for that. Where will it close by the time the dust has settled? I am going to go for a range between 47 and 52 Dollars, that is my best guess. Paul says he has absolutely no idea. Retail demand is strong, as Paul said who is selling today? Perhaps I am wrong, the price might even pop to 60 Dollars, that is what Jim Cramer said in the middle of the week. Tune into your favourite business channels around 16:30 and then again at the close of trade tonight. It is certainly a momentous day.

Currencies and commodities corner. Dr. Copper is slightly higher at 351 US cents per pound, the gold price is also higher at 1586 Dollars per fine ounce, the platinum price is also recovering off their lowest levels, 1458 Dollars per fine ounce. The oil price is lower at 92.53 Dollars per barrel, this is for NYMEX WTI. The Rand is suffering from the risk off trade, 8.38 to the US Dollar, 13.24 to the Pound Sterling and 10.67 to the Euro. We are down about a percent and a quarter today to start. Not good, but I am going to stick my neck out and say that the short term buckling has happened. Some folks are now asking questions about how low it can go, and how much cheaper some stocks are.

Sasha Naryshkine and Byron Lotter

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