You are browsing the archive for 2012 August.

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by sashan

Iron ore price goes cold

August 31, 2012 in Uncategorized

“BHP Billiton forecast was for the iron ore prices to not breech 120 Dollars a ton, that I guess was wrong in the short term. UBS however put out a note suggesting that in the short term the iron ore prices could go back to 125 Dollars a ton, but that there might be weakness again in the short term. The all time high price for iron ore is more than double what the current price is, talk about wild gyrations! So, almost anything could happen between today and the fourth quarter.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Whoa! We took a thrashing yesterday, most of that was centred around the resource shares. Collectively they fell two and a third of a percent, sending the Jozi all share index down 1.2 percent on the day. I think there is also this thought process that “nothing” is going to come out of the weeks most important speech, that of Ben Bernanke a little later today. Phew. I can’t tell at all. What has also been happening is that iron ore prices have been thrashed, down 15 percent for the month of August. And now they are below 90 Dollars a ton. At that level the squeeze is now on. The Chinese iron ore industry, as low grade as it is, is unprofitable below 120 Dollars a ton. Guess what they are doing? Not producing is my best guess. This is the lowest price that iron ore has been in three years. Yes. Three years.

Remember, we wrote about this back in March this year: BHP Billiton iron ore presentation spooks Mr. Market. Even the BHP Billiton forecast was for the iron ore prices to not breech 120 Dollars a ton, that I guess was wrong in the short term. UBS however put out a note suggesting that in the short term the iron ore prices could go back to 125 Dollars a ton, but that there might be weakness again in the short term. The all time high price for iron ore is more than double what the current price is, talk about wild gyrations! So, almost anything could happen between today and the fourth quarter. In the fourth quarter steel demand picks up.

Check this piece out from a crowd called Iron Ore Team: Global iron ore demand soft in H2 VS. supply rising, Baosteel says. Well, not theirs, but this is Baosteel talking. So, what to do? Well, BHP Billiton and Kumba Iron Ore have some of the best margins out of all of the producers. BHP Billiton’s outlook over the next decade plus remains unchanged, that is what Marius Kloppers said in the Q&A segment in the last set of results. Should you get anxious? We have said many times that being invested in single commodity stocks, that is always going to be the trickiest of the lot. And that is why we continue to say that as a premier investment choice, BHP Billiton is top of the pile. World class assets, a great management team, a good geographical mix, and a more solid portfolio over the longer run.

Aspen released a trading update yesterday. Aspen has been a wonderful performer, a great company with exceptional leadership. We know that. Their timing from an acquisitive point of view has also been nothing short of very good, and the praise should be laid directly at the desk of management. But one must learn to never get married to a company. Stockholm syndrome in a way, you know, believing yourself and being captured by a specific investment at the same time.

The company gives three ranges of earnings, so it looks a little messy. But they put diluted normalised HEPS from continuing operations as “adjusted for transaction costs, restructure costs and forex gains on transaction accounting”. On that measure, earnings are expected to increase between 18 to 24 percent for the full year to end June 30. HEPS are expected to increase between 21 to 27 percent, whilst earnings per share are expected to increase by 4 to 10 percent. Why not as big an increase? The footnote explains it as follows: “The growth in earnings per share has been reduced as a result of capital profits on the disposal of discontinued businesses and products in the present year being lower than in the prior year.”

On these three measures expect diluted normalised HEPS to be in the 595 cents per share region, EPS should measure 529 cents and HEPS should come in at 633 cents per share. No matter which way you look at the stock at 143 Rands a share, this is stretching it a little. BUT, as I am often reminded, people have been paying up for this company for a long time. In part because their acquisition history and timing is very good, the earnings do come through. Turnover for the last five years has grown on average by 35 percent, whilst the bottom line has increased by a more impressive 38 percent. Cash generated per share has also increased by 34 percent. Operating profit margins have been maintained at the 25 percent mark. The market is suggesting that at this point Aspen can keep up the current run rate. Of course this becomes a whole lot more difficult as the company continues to expand. But expand rapidly they still do, Byron wrote about this just a few weeks ago: Aspen buys a business from Glaxo. This type of relationship will continue to exist. We do not have to wait long, results are expected not next Wednesday, but the one thereafter, the 12 of September.

Byron’s beats explore another trading update, this time from Mr. Price.

    Yesterday we had a 4 month trading update from one of the darlings of the JSE, Mr Price. The stock has been one big success story coming from R15.10 in July 2008 to R136 today, just short of a ten bagger which I’m sure we will see pretty soon. How did the update look? It was solid with 14.9% sales growth, 9.7% of that was from an increase in sales while the rest was due to price increases or inflation as retailers like to call it.

    Comparable sales grew 9.5% while the company opened 24 stores and closed 5. Cash sales is still big but decreasing slowly, now 78.5% from 81.2% last year. Apparel is still the big money driver which includes Mr Price, Mr Price Sport and Miladys. This constitutes 71.6% of group sales and grew 15%. The home division which is Mr Price Home and Sheet Street also grew nicely at 14.4%.

    This is good news on two fronts. Firstly, this is a very recent update (4 months to 28 August 2012) and shows that the South African consumer is still showing a lot of strength. Because most of the sales are cash you cannot say that this growth is driven falsely by credit. The South African middle class is still growing, wages are increasing and the retailers are benefiting. That is the Macro view.

    From a micro view it still looks like Mr Price are getting it just right. There are queues at every one I go to as people from every background and income group enjoy their great value for money. The fashions are up to date and I really like their sports division. Everyone loves sport and with the great weather we are having at the moment (sorry Cape Town) who doesn’t want to get outside and soak in the rays with some outdoor activities. We have the climate, the culture and the geographic makeup for sports apparel to really take off as a consumer good in this country.

    Although their goods are cheap the share price certainly isn’t, trading on 27 times last year’s earnings. But I wouldn’t bet against these guys.
    Opening up 24 stores in 4 months is huge! And this will continue to grow. And who is to stop them from taking this winning formula further up into Africa which they are doing already of course. Clothing is less complicated than food when it comes to African expansion so expect this to be rolled out quicker than the grocery guys.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. In the wait and see week where the crowd were moving over to the side that suggests the Fed will do nothing new, in other words no QE3, the equity markets took to this announcement like serious tea party types took to the old flags. Why now would old conservative types want to be associated with the past, all the way down south in Florida? No cell phones, no cable TV, progress must be limited, right? Well, I guess the conservative types want to return to the old ways. Fiscal discipline, of course if there is a war, then that discipline goes out of the window, not so? Cost of War is a horrible website, but at least you get the point of the National priorities project, which is a far superior website. Much better and a wealth of information, designed to help those. 27 cents in each Dollar in 2011 went to military spend. But that subject is always taboo. As a percentage of mandatory spend, the military accounts for 57 percent.

Check out the pie graphs a little lower down on the FEDERAL BUDGET 101 – Where Does the Money Go? page. The word military was mentioned twice in the Mitt Romney speech. Twice, check out the TRANSCRIPT: Mitt Romney’s Speech at the Republican National Convention. And the one reference was as a result of the planned reduction in military spend, the other was talking about keeping the military strong. The word defense was used once. Surely if the debate is about cutting back, it should be more front and centre? I am going to do the same when President Obama makes his speech. Because as much as entitlements worry the right, surely continued defense spend should worry them as much? I watch and wait, like all of us.

Currencies and commodities corner. Dr. Copper is flat at 343 US cents per pound, the gold price is slightly better at 1658 Dollars per fine ounce. The platinum price is also up a smidgen, last at 1510 Dollars per fine ounce. The oil price is better at 95.06 Dollars per barrel. The Rand is firmer, 8.38 to the US Dollar. We started better, got worse, heard that the ECB might get some extraordinary powers around banking licences and are now back in the green. Marginally.

Sasha Naryshkine and Byron Lotter

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by sashan

Bernanke’s porridge choices

August 30, 2012 in Uncategorized

“Do I really then care what Ben Bernanke is going to say at Jackson Hole tomorrow? I would be lying if I said no. But do I think that there are going to be long lasting consequences of the Fed action, one way or another? No. I suspect that the tolls at their disposal, and the cleverest economic minds are navigating our way through this poor patch.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. It could have been a whole lot worse, but thanks to some economic data that was well received by Mr. Market, I suppose all was fine in the end, with the Jozi all share index finishing off the day less than one tenth of a percent from where we started. Byron made a good point about stocks in the news for the wrong reason, and their volatility. Phew. Stocks like Nokia, which has had the most amazing 30 days, up nearly 40 percent, but the most awful five years, down 90 percent. Did you see the little graphic doing the rounds? With the Samsung student cribbing the Apple students work and the Nokia student sitting way in the background. What made me chuckle was that the Research in Motion “student” was nowhere to be seen. Not even under the desks. I guess that is about right. And the fake story about Apple being paid nickels, in their Samsung settlement, someone worked out that it would take 2755 18 wheeler trucks to carry 1.05 billion Dollars in one cent coins. Let us just say that Tim Cook did not get a call and did not have to decide what to do with tens of billions of one cent coins. Nice story though.

Byron’s beats again explores the unsecured lending space in South Africa, which has been under the spotlight for a while now.

    There is still a lot of concern about the unsecured lending environment in South Africa. On Tuesday afternoon Capitec came out with a trading update which looked good but the company fell over 3% yesterday (it’s down 2.8% again today) and African Bank fell 2.5%. There was also a meeting on Monday between Finance Minister Pravin Gordhan and the country’s big bank chiefs to discuss banking in South Africa as well as this specific matter. The meeting looked at these banks surge into the unsecured market due to higher regulations in the secured lending space which is decreasing those margins and making unsecured more attractive.

    Let’s look at what Capitec had to say and then discuss some important points from the meeting. Capitec announced that headline earnings look to grow between 25%-35% for the half year ending 31 August 2012. This is good though? But Capitec is priced for perfection and this is well below last year’s growth of 53%. This has spurred speculation that impairments have increased considerably. I would agree with that. It is understandable that impairments will increase as loans increase. It all comes down to the company’s ability to manage these risks. Unfortunately there was not anymore detail in the update but the market certainly did not like it.

    Now let’s get to the meeting. Here is the release from treasury, don’t be scared, it’s only 2 pages. Here is what it said about the unsecured lending space.

    “The representatives of banks and the Minister noted the rapid increase in unsecured lending. The meeting agreed that the poorer households were at risk of getting caught in a debt spiral. Although some of this lending was by non-bank financial institutions, including retailers, banks could do more to ensure that they lend responsibly and do not contribute to household over-indebtedness.

    While there are currently no systemic risks, the meeting noted and supported the close attention that unsecured lending is receiving from the SA Reserve Bank’s Bank Supervision Department. There will be further engagement with financial and non-financial institutions on this issue so that South Africans are not over-indebted.”

    A few interesting points there. One is that the unsecured lending is not just from the banks. In JD Group’s results we saw massive growth in their unsecured lending. This holds true for the likes of Truworths and Lewis. I think the other important thing to note is that everyone is well aware of the risks. This is not the same as the sub-prime mortgage crash which snuck up on the market unawares. Everyone learnt their lessons and our highly regarded banks actually walked away from the crisis with their reputations intact.

    Regulation in this sector is good. It is more focused on transparency to make sure the banks do not take advantage of ignorant and uneducated people. We are still positive on this sector. We feel there is a lot of money to be made while banks have the ability and more importantly the willingness to manage this risk very carefully. As far as valuations are concerned most of the downside is already factored into Abil’s share price which has come down heavily in the last month. We continue to add, taking advantage of this weakness.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. A flat finish overnight on Wall Street, it could have been better, it could have been worse. Before the session started there was a GDP read which matched expectations, but just as the session got going, around four pm here, a pending home sales number pushed us higher here. So of course the Fed are stuck with the same old obstacles, not so? The data is not bad enough, but equally it is not good either. I guess if you were comparing this to the old term “the Goldilocks economy” (not too hot and not too cold) then the current economy sits somewhere between the cold porridge and the baby bears porridge. As you know, the baby bears porridge is just right. Which would mean that the Fed would have to do very little one way or another, that is the whole idea of the Goldilocks economy. And adding to the market doubters of what Ben Bernanke can really say at Jackson Hole was the release of the Fed Beige Book.

Now the Beige Book is not a little book of secrets that have been added to down the years, with scribbling from William McChesney Martin and Alan Greenspan on the best diners in DC, and who not to trust in congress, but rather, as per the Fed website “Each Federal Reserve Bank gathers anecdotal information on current economic conditions in its District through reports from Bank and Branch directors and interviews with key business contacts, economists, market experts, and other sources.” And the release is 8 times a year, so roughly each and every 45 days. Which, of course, gives the Fed members from their districts, more than enough time to see gradual improvement or gradual weakening. There are two more left for this year, this is the recent release which you can find here: Current Economic Conditions. I guess the words “expand gradually” and “moderate growth” are to some extent just shy of Goldilocks. But then again “slowdown in the rate of growth” and “decline in the level of sales” hardly fills you with enormous confidence.

I did however have a chuckle when I read that there had been weaker demand for high-end jewellery in Kansas City. And another chuckle when I read that adult clothing was a good seller in Boston, Chicago and Dallas. Please don’t get me started on Dallas. Crazy that a bad soapie has the legs to come back, but that must just be me, because everyone else disagrees with me. The employment part of the report is quite interesting, wages are remaining stagnant, whilst employment is basically flat. That hardly sounds encouraging. Do I really then care what Ben Bernanke is going to say at Jackson Hole tomorrow? I would be lying if I said no. But do I think that there are going to be long lasting consequences of the Fed action, one way or another? No. I suspect that the tolls at their disposal, and the cleverest economic minds are navigating our way through this poor patch.

And that also holds true for the folks across the Atlantic Ocean. Who are dealing with their problems so actively that ECB governor Mario Draghi has declined to attend the annual junket at Jackson Hole. I thought that this was great news. Because, as you can tell from this Bloomberg article, titled Draghi Takes On Bundesbank Orthodoxy in Crisis-Plan Plea, he is busy. Busy getting the job done. Which I guess is a more meaningful shift from a year ago, where seemingly the Europeans, be they law makers, leaders or central banks were stuck in the mud. I wonder how important a factor the French and Greek elections were in the slow motion part of the crisis. I still side with the Central Bankers, there is a reason that they got to that point, and there is a reason why the arm chair critics are exactly that, arm chair critics.

Meanwhile Angela Merkel is meeting Chinese premier Wen Jiabao in Beijing. As we speak. Err… write I mean. So the Germans, as the head of the Euro zone economies, are talking to the Chinese, the fellows who ironically have most of the gunpowder in a monetary sense, and in fact the Chinese have indicated that they will participate in European debt. Or, continue to invest in European debt. The Chinese did invent gunpowder, now they can use it. Sigh. Politicians talk, the job gets done in the back rooms, provided the folks involved are competent. And I believe they may well be very competent. Their lives (the Europeans involved) are complicated by not only multiple countries and languages, but also regional issues inside of countries. Think Spain. Oh, and Real Madrid FC and Barcelona FC goes to the core of that, if you think about it. But, for all its problems, the upside of a collective Europe is worth the fight and struggle that we see currently. Otherwise when the “crisis” started, they would have all thrown in the towel, not so?

Currencies and commodities corner. Dr. Copper has improved somewhat to 346 US cents per pound, the gold price is also up a touch to 1658 Dollars per fine ounce. Ditto the platinum price, which is better at 1526 Dollars per fine ounce. The oil price, although not really impacted by Hurricane Isaac, is slightly lower at 95.30 Dollars per barrel. That is for light sweet crude, as per the NYMEX quoted price. The Rand is slightly weaker at 8.43 to the US dollar. This is also where the markets have started, weaker on the day.

Parting shot. If you were thinking of going to Jackson Hole, you had better hurry up. Actually, unless you have access to a private plane in the next few hours, it is not going to happen. Would you believe that Jackson Hole, where hardly anyone lives has an airport that sees over ten flights in a day. Jackson has a mere ten thousand residents. The whole state of Wyoming has just over a third of the population of the whole of Manhattan. Wyoming is vast. And perhaps the setting is apt for the most anticipated speech of the week.

Sasha Naryshkine and Byron Lotter

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by sashan

2Q GDP. Going forward. Slowly.

August 29, 2012 in Uncategorized

“So what did I learn when I put all the values from 2002 in a spreadsheet (it was a manual pencil thing two decades ago), and then compared it to 2011? Not as much as I would have liked, I tell you. Because the obvious is that manufacturing is a much smaller part of the overall economy than it was ten years ago. Mining and Quarrying are a smaller part of the economy than it was 10 years ago. In constant 2005 prices, mining and quarrying has gone backwards over a decade. Construction has made massive headway, but it is a small part of the economy.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. We sank, after earlier in the day threatening to reach and stretch beyond 36 thousand on the all share. The Rand continued to weaken through the day, the negative sentiment towards the country as an investment destination is being scrutinized, whether we like it or not. During the course of the day we saw a local GDP read which we briefly brushed over yesterday, it looked at the bottom end of the range. There was a Spanish GDP read for the second quarter which indicated that the economy of Europe’s fourth largest economy continues to contract. The pain in Spain continues to drag on the fortunes of Real Madrid. Yech, not that they are my favourite team in the league. Like most football fans around the world, the genius (and humility) of Lionel Messi attracts me to Barca. I swear to you I might consider supporting a club if they managed to pry Messi away from Camp Nou. And there is an “el classico” tonight. Too late for me. Staying with genius and humilty, Hashim Amla has made us all proud again.

Phew, but that has nothing to do with markets yesterday. The Jozi all share index dropped 0.36 percent on the day, led lower by resource stocks, gold stocks took an absolute pasting, down over four and a half percent. In the New York session last evening, the top three losers out of the Gold and Silver (71 companies in total) segment of basic materials were AngloGold Ashanti, Harmony Gold and Gold Fields. These companies are associated with the country that we live in. And there are talks that the companies in the South African mining sector are being approached directly by the staff, by passing the unions to talk directly to mine management. This is dangerous for all concerned, the workers are looking to leverage off the chaos at Marikana, the unions have clearly not being paying enough attention to their members and the same can be said for the mining companies. Not all companies are the same though, some have much better labour relations than others. But tell that to investors. I am just left wondering what Xstrata are thinking about their stake in Lonmin, there have of course been ongoing concerns that the Xstrata/Glencore deal is on the verge of collapsing. Not forever, but just for now, the commitment is there from both boards, just not the shareholders. Which I guess ultimately is all that counts.

We said that we would take a look at the local GDP numbers, and yes we will. How relevant second quarter GDP is at this point? We are more than halfway through the third quarter, that is what I am pointing out. For the purposes of what I am trying to get across however, this is just fine. For the full download of the release from StatsSA, here goes: Gross domestic product Second quarter 2012. What I am trying to point out is that our economy is diversified. So how is our economy made up? Well, from the release:

“Finance, real estate and business services – 20,2 percent;
General government services – 15,8 percent;
Wholesale, retail and motor trade; catering and accommodation – 14,5 percent; and
Manufacturing – 12,6 percent.”

Even to those folks who might not have been paying too close attention, that seems like more than a subtle shift over a decade. Not so? So I decided from the release, to check out the table titled “Quarterly value added by industry and gross domestic product at constant 2005 prices (R million)”. This table was hacked, don’t stare at it too hard, it might be bad for your eyes.

So what did I learn when I put all the values from 2002 in a spreadsheet (it was a manual pencil thing two decades ago), and then compared it to 2011? Not as much as I would have liked, I tell you. Because the obvious is that manufacturing is a much smaller part of the overall economy than it was ten years ago. Mining and Quarrying are a smaller part of the economy than it was 10 years ago. In constant 2005 prices, mining and quarrying has gone backwards over a decade. Construction has made massive headway, but it is a small part of the economy. Transport, storage and communication and Finance, real estate and business services have been the absolute stand out sectors of the economy over the measured time. I am pleased to say that I come away with the same conclusion, we have a much better diversified economy than we give ourselves credit for. We are not Angola or Russia, who are not too reliant on petroleum exports. We wouldn’t mind having that “problem” I guess, but you get what I am trying to say. Our economy has evolved to become more consumer focused over the last decade. Not a “bad” thing either.

BHP Billiton has had some very important news over the last few days, since their results release that has been capturing most peoples attention. First, a rather innocuous piece about the development of the Western Australian Iron Ore (WAIO) operations harbour. Yes, really. It turns out that the aggressive roll out of the Outer Harbour. The work has therefore been “slowed”. Now I have never been to Mt. Whaleback where the ore comes from, and perhaps I will never get there. The same is true for Port Headland, the harbour in question. I have however seen pictures of Mars just this morning, it looks devoid of grass, trees and all water sources. There is no life, pretty much like the Arsenal and Western Province trophy cabinets. Ouch. But basically BHP Billiton have decided to step back. Right now, the industry does not need massive expansion. They are big enough to be able to do that.

I also read an interesting mainstream piece, Kloppers Sees Long-Term Price Decline For BHP’s Commodities. Not that good I guess. BUT. This is important, the company makes these strategic calls from time to time, and just two days ago there was an announcement from the company: Sale of Yeelirrie uranium deposit. With Germany and Japan rethinking their nuclear plans in the short term, this is a longer term strategic plan from the company. Or, as part of the broader Olympic Dam pull back, this asset was acquired in the WMC transaction, perhaps non-core is the answer.

Things change. They never stay the same. I read yesterday that the processing power of the average smartphone in your pocket has more processing power than the US president had access to three decades ago. Read that again. Your smartphone is better, quicker, more powerful a tool than the most powerful super computer three decades ago. So this means that your smartphone is better than the most powerful guidance system known to man when Apollo 11 landed on the moon, courtesy of the Apollo Guidance Computer. Byron’s beats explores the smartphone platforms today.

    “The rate of iOS and Android device adoption has surpassed that of any consumer technology in history. Compared to recent technologies, smart device adoption is being adopted 10X faster than that of the 80s PC revolution, 2X faster than that of 90s Internet Boom and 3X faster than that of recent social network adoption.”

    This is from the following article posted by Flurry Blog which looks at the growth levels of software installations based on the tracking of 200 000 applications which run on 640 million mobile devices around the world. This ensures that software is being actively used and is not based on hardware sales.

    Click on the link, there are some very informative graphs which show some distinct patterns. Let’s discuss the ones I picked up on which should have some significance to us as investors. Firstly there is a distinct lack of Africa anywhere in this article. Not even on the fastest growing scale. China with a 401% growth rate was top of the list which included all four of the BRIC nations but sadly no South Africa.

    I see this as a positive though. We are still coming off an extremely low base and companies like MTN and Vodacom are certainly not ex-growth when it comes to data consumption because more smartphones obviously means higher data usage.

    The other important shift was one we have seen in most consumption patterns, a huge shift into the developing world. Last year July the US was responsible for 52% of IOS and Android app sessions. In the very short space of a year that has dropped to 36% with the rest of the top 10 contributing the next 36% and the rest of the world only contributing the final 28%.

    We agree with the conclusion of this article, that there has never been a better time in the history of technology to be a software developer. But I would go further in saying that there has never been a more evolutionary technology shift than what the smartphone has provided us. I know that is a big statement when you consider what the internet, electricity, TV, cellphones etc have done for us but the smartphone has taken all of these life changing technologies and put them in the palm of our hand.

    How do we benefit from this as investors? We continue to like MTN who look to provide this data to a very under-connected Africa. In New York we like Apple, Cisco and Google (in that order) who are all benefitting from and evolving this massive shift in technology and massive shift in the way we live our lives.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Perhaps the minds and efforts of the street are elsewhere this week, the last real week of summer in the Northern Hemisphere and some folks are away, whilst the Republican convention is also on the go. Mitt Romney was officially endorsed as the Republican presidential candidate to take on the incumbent in early November. Everyone got to know Mitt Romney’s wife and hear what a swell guy he is, perhaps the only disappointment was the Chris Christie speech. Or so that is what I could tell from the folks that I follow on Twitter, who were watching it real time and tweeting about it. As a politician I think Christie is tops, he is one of those few guys at that level that can get away with that sort of brashness, people love that approach. Like he says in his speech, which you should watch, because one day this guy might actually be the president of the USA, “she spoke the truth, bluntly, directly and without much varnish, I am her son”. That is who he is. Entertaining. I changed my mind about the Twitter folks after having watched this speech. But for all of that, I am still doubting whether or not Mitt Romney is the guy to beat Barrack Obama.

Currencies and commodities corner. Dr. Copper is last at 342 US cents per pound, taking a little tap today. The gold price is just a touch lower, at 1664 Dollars per fine ounce, the platinum price is down from the recent highs, last at 1512 Dollars per fine ounce. The oil price is lower at 95.57 Dollars per barrel. The Rand is slightly weaker, last at 8.41 to the US Dollar. We are lower here to begin with today.

Sasha Naryshkine and Byron Lotter

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Ben is goin’ to Jackson, to be that big-talkin’ man

August 28, 2012 in Uncategorized

“But perhaps the reason why the markets are seemingly “going nowhere” this week is as a result of the closing weeks of summer vacation for the Northern Hemisphere. And perhaps because of all of the posturing ahead of the Ben Bernanke Jackson Hole speech, that is on Friday. Are we set for a week of low volumes, or as the bears like to call it, a sign that there are sharks in the water.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Another Monday and yet another record high for the all share index, in part the recent rally has been driven by those stocks that have stood on the sideline for the better part of the year, resource companies. Whilst the broader market might be up 12 and one quarter of a percent year to date, as at the last evenings close, the resource stocks collectively (the big ten) are off six and a half percent. Driving this market higher have been the retail stocks, up over thirty percent year to date and banks and financials have weighed in with 20 percent plus increase. Industrials have also led the markets higher, collectively up 25 percent. The big losers this year, so far, have been the platinum miners, down nearly 20 percent year to date, whilst the gold companies together are off 15.6 percent. It certainly has been a mixed bag around here.

There is a local GDP read for the second quarter today, the forecast that I got from the FT suggested that year on year we should expect between 2.6 to 2.8 percent growth. And the quarter on quarter growth is expected to be around more than three percent, but less than four percent, the range that I have seen is 3.2 to 3.9 percent. That represents a fairly wide range. In fact the release has come in meeting expectations somewhat, check out the early release: Gross domestic product – Second quarter 2012. We will go into greater detail on this one tomorrow.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Apple surged to another all time high, as the market participants were acting favourably towards the Samsung ruling. Although some folks are suggesting that the real winners in this potential ban on Samsung products might well be Nokia and Microsoft. And another loser alongside Samsung could be Google. Ironically the share price of Apple surpassed that of Google yesterday. The relative market caps are miles apart though, the hefty 218 billion market cap of Google sits in the large shadow of Apple’s 633 billion Dollar market cap. Wow. The Apple share price topped 680 Dollars for the first time, there are many folks that still think that the company offers a lot of value at these levels. And to end the conversation off on the two tech titans, the last five years has seen the Apple share price up nearly 400 percent, whilst Google has looked more like a Sunday afternoon pie thrower, sending down ill placed full tosses and long hops that send the close fielders scurrying. And of course the outfielders fetching. Cricket terminology. Over five years Google is up a mere 30 percent. Guess who is smiling.

A long dated deal was finally closed (money still not in the till, but closed for all intents and purposes) when Dollar Thrifty agreed to be bought by Hertz Global for around 2.6 billion Dollars. These are both motor vehicle rental companies. still lists OR Tambo International airport as Joburg International. But then has the search option as OR Tambo. That aside, both stocks advanced around eight percent. It is rare that both sets of shareholders are pleased with an announcement like this, but obviously there are cost savings involved. The combined entity will now cover around one quarter of the combined US rental market. Also gaining momentum was competitor Avis, the stock was up on the basis that this time around they would NOT be bidding for Dollar Thrifty. Although the competition hurdle still needs to be cleared.

Another set of shareholders both welcoming merger news was Hudson City Bancorp (stock up 15.7 percent) who agreed to be acquired by M&T Bank (stock up 4.6 percent) for 3.7 billion Dollars. Deals in them old mountains I tell you. In the tech space IBM paid handsomely, all 1.3 billion Dollars and a more than 40 percent premium for a listed business called Kenexa. Kenexa still makes no money, but the business is rapidly expanding in the business software space. Of course. Kenexa supplies human resources with valuable software aimed at staff retention and growth of their skill-sets. IBM sank over a percent. Like I said, they probably overpaid in the short term. IBM is undoubtedly the granddaddy of the tech sector. The business has a complex and longer dated history than any other tech company of size that I can think of. And the name suggests that, International Business Machines, that has stood since 1924. Check out the IBM company history.

But perhaps the reason why the markets are seemingly “going nowhere” this week is as a result of the closing weeks of summer vacation for the Northern Hemisphere. And perhaps because of all of the posturing ahead of the Ben Bernanke Jackson Hole speech, that is on Friday. Are we set for a week of low volumes, or as the bears like to call it, a sign that there are sharks in the water. Here is one of my favourite posts of the day that dispels that myth: A Low Volume Bull. See, don’t get anxious about the lack of conviction. I never get excited about the low volumes, because the high volumes of yesteryear just might not be around nowadays, if you know what I mean. Be that as it may, the Ben Bernanke is goin’ to Jackson, to be that big-talkin’ man (see the lyrics on this Christmas tree bit -> JOHNNY CASH LYRICS – Jackson). And that gets Mr. Market another reason to find another event that is all the focus this week.

Currencies and commodities corner. Dr. Copper last clocked 344 US cents per pound, lower on the session. The oil price is falling a little, even though the news is that tropical storm Isaac shut down 78 percent of all Gulf of Mexico production. At least for 36 odd hours, as it makes landfall (Louisiana coast) later tonight in the US, or early Wednesday morning. Isaac could be upgraded to a hurricane, a category one over the course of the day. The national hurricane centre website is a wealth of information for all the weather nerds out there. I remember reading somewhere that the weather is the best ice breaker subject, because everyone has an opinion. The oil price last traded at 95.35 Dollars per barrel. The platinum price is weaker at 1533.7 Dollars per fine ounce, the gold price is also lower at 1662 Dollars per fine ounce. Of course the anticipation of more Federal Reserve easing is to some extent buoying the precious metals sector. The Rand is weaker at 8.42 to the US Dollar. US futures are marginally lower, and that follows a negative session from Wall Street overnight. We should start lower, perhaps another cushion from a weaker Rand will protect us a little.

Parting shot. Another myth is that the Federal Reserve actions since the financial crisis began have proved to be worthless, and have only resulted in an eventual loss to the US taxpayer. This is not true. In fact, this post will perhaps help you deal with that idea. And although it was a long and painful road, the Fed made a marginal profit out of the sale of their AIG shares. On behalf of the US tax payer. Check it out: U.S. monetary policy since the financial crisis. The most amazing part of the post is the graphic, the thinking that the Fed will never wind these programs down, that part always cracks me up. The Fed will do what they have to, in order to stabilize the economy in the short term. I am no armchair critic, I am grateful that they did all they could during what may well turn out to be the biggest speed bump that we ever experienced. Or not. Right now there is a crisis brewing somewhere, there always is.

Sasha Naryshkine and Byron Lotter

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Samsung falls far from the Apple tree

August 27, 2012 in Uncategorized

“I know that the two products look similar in design and feel, and the optimal design might have been held by one or the other, or both. I use optimal in the sense that the single button design is huge for the fans. Now there is actually a number, 1.05 billion Dollars in damages has been awarded to Apple by a US court, which has led the Samsung board to hold an emergency meeting overnight.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Friday. I was away, watching the mountains, looking for my new spot when the Drakensberg becomes the highest spot on the planet after the events of the 2012 movie come true. The mountains never move, the news flows slowly like a spring stream and the people seem rested. At least from the point of view of the outsiders, like myself. Friday the markets locally closed slightly lower, down 0.14 percent from their all time highs on the close Thursday. Today we have started better and back at all time highs. Tell me when we are at 36 thousand points. I have a small gripe. There are people that think that the levels of the ALSI 40 matters, and there are those who follow the levels religiously. Talking about support at that level or this, breaking this and that, that is not for me. If the US markets drive global markets, then surely you should be following technical levels there, and the best chartists on that side of the world? Or have I got it wrong? I am not too sure.

Bidvest have released results for the full year to end June this morning. They look decent enough in this “challenging” environment. The results were pretty much telegraphed in the trading statement, which we wrote up over ten days ago: Bidvest trading update. Here are the numbers that you need to know. Revenue increased 12.7 percent to 133.5 billion Rands, the companies trading profits increased to 7 billion Rands, normalised HEPS clocked 1352.3 ZA cents per share. Perhaps the biggest surprise to the upside is a 29.6 percent increase in the dividend to 622 cents per share. Perhaps this is just to take into consideration the change in dividend taxation. You, the shareholder will get 290.7 cents per share for the second half of the year, 255 cents was paid for the final dividend last year.

To get a real understanding of the business you need to understand all the profitability of the various segments. As we often reflect on, revenue counts for naught if you can’t be profitable. So, in trying to determine which are the best businesses that Bidvest owns, there is no better place to look than the segmental analysis. And this you can get for yourself from the The Bidvest Group Limited Audited results for the year ended June 30 2012.

What is immediately visible is that Bidvest Foodservice, the European division is nearly 30 percent of total revenue, but is only actually 13 percent of trading profits. Asia Pacific on the other hand, is just over 17.5 percent of total revenue, but at 14.25 percent of the total trading profits, is the most important profit contributor overall. And of course has the superior margins. My point I guess is simple, if there is a bounce back in the coming year(s) in Europe, then I would presume that is a positive for Bidvest. What always amazes me though is the Bidvest Namibia division. A mere 2.2 percent of total revenues (with an increase of nearly 40 percent) translates to 9 percent of total profits. This is huge and indicates that the margins in the country just to the North West of here are nothing short of spectacular.

What is the attraction of owning this company? It is a valid question of course. Are you owning the genius of Brian Joffe, the current CEO and his deal making expertise? Because over the years he has put together this business, he has been called the Warren Buffett of South Africa. But, unlike Warren Buffett, Joffe does not own the same percentage stake in this business (Bidvest) as Buffett holds in Berkshire Hathaway. He used to own around 23.3 percent economic value in the company, but I think that was before he gave away a whole whack to the Bill and Melinda Gates foundation. And I guess if you want to be nit picking, then you could say that Brian Joffe is a whole lot better paid than Warren Buffett. This company is a steady performer, well diversified and pretty defensive. We continue to accumulate the stock at current levels.

This has been confusing me for a long time, the ongoing patent disputes between Samsung and Apple. I know that the two products look similar in design and feel, and the optimal design might have been held by one or the other, or both. I use optimal in the sense that the single button design is huge for the fans. Now there is actually a number, 1.05 billion Dollars in damages has been awarded to Apple by a US court, which has led the Samsung board to hold an emergency meeting overnight. A Korean court called it a tie on Friday, at least that is what a Marketwatch article says: Apple, Samsung tie in Korea verdict. The upshot of it all is that Samsung devices might be banned from selling their blockbuster products in the US. For the time being. Which is of course is not good for the company, the share price in Korea ended the day down 7.61 percent. Down 97 thousand Won on the session to close at 1,178,000 Won. More confusing is dealing with the large outlandish numbers.

A good friend of mine asked me once (several times) whether or not he could buy the Samsung devices stock separately, and I said no. Not easily anyhow. First things first, the stock is only available to investors in Seoul and through a GDR program in London, check out their Samsung investor relations page. But more importantly I told my good mate Bruce, you can’t own the juicy parts, the phone and the tablets. You have to own all the other products when you buy Samsung Electronics. And that includes fridges, washing machines, air conditioners, TVs, laptops, copiers, cameras, networking devices and chips. Check out the Samsung 2011 Annual Report.

And inside of the handset sales, you want to only be with the high margin smartphones right? Well, as per that annual report: “Worldwide demand for mobile phones was a staggering 1.5 billion units in 2011. Samsung Electronics accounted for 330 million of those units, far exceeding our target. We realized impressive growth in smartphone sales as well. The bestselling GALAXY S II sold more than 20 million units since its launch in April 2011.” So it is always going to be tough to own the company on these sort of numbers. Even if the sub segment is the most profitable, unlike Apple you get exposure to all the other products. I am left with the same conclusion as I had initially with my chat with Bruce. You can’t really get exposure to what you want to. My advice to him is the same as before. If you want to not be owning Apple shares, and are looking for the competitor, then perhaps the place to be looking is Google. And not Samsung. The matter is not over. Samsung are appealing the ruling. So this is by no means finished. And in the short term, the real winner is seen as Nokia/Microsoft. See Nokia to Microsoft Seen Benefiting From Possible Samsung Ban.

Byron’s beats has a look at something that was complicated. But not complicated as in a soapie, much more complicated than you would think, financial engineering at perhaps its finest.

    We have liked Steinhoff for a while now on the basis that Europe is not going to be as bad as everyone thinks. This is because they have big exposure to the European consumer through their Conforama business and also why they look so cheap based on earnings. It is a complicated one to assess. Steinhoff have been very busy of late restructuring with the likes of JD Group and KAP. Before we look at the numbers let us try and understand what the Steinhoff structure actually entails.

    I’m not going to explain how this was all done because that is a whole new story all together, Sasha did a good job, in January this year in an article titled: Steinhoff looking to take control of JD Group. So let’s look at the structure of the business as we see it today. Steinhoff Europe constitutes that Conforama business which is the second biggest furniture retailer on the continent. They also do manufacturing, sourcing and logistics all over Europe.

    Locally they own 62% of KAP which is a R7bn listed company and has a whole host of brands in Timber, Logistics and industrial. This is from the ShareData description. “KAP International Holdings Ltd is an investment company with a portfolio of diverse manufacturing businesses. These include canned and value-added meals, maize milling, leather products, footwear, bottle resin, automotive products and towelling products.”

    They also own 50% plus one share of JD group who have brands such as Joshua Doore, Russels, Unitrans, SteinBuild and Incredible Connection. Many of these brands have been integrated from Steinhoff as an exchange for equity in JD group. Lastly they own 20% of PSG following a deal between Marcus Jooste and Christo Wiese whereby they swapped Steinhoff shares for PSG. As you can see it is all very complicated with a separate listing of the European business on the cards. In interviews with Marcus Jooste he says they are looking to be an investing holding company mainly in furniture retail, transport and you manufacture. There are lots of potential synergies there.

    Ok here’s the trading update, which looked good:

    “Accordingly, shareholders are advised that both the earnings per share (“EPS”) from continuing operations and headline earnings per share (“HEPS”) from continuing operations of Steinhoff, for the year ended 30 June 2012, will be between 30% and 35% higher than the EPS and HEPS from continuing operations, as reported for the comparable period ended 30 June 2011.”

    These results include the first full year of Conforama results as well as the consolidation of JD group and KAP. Last year the company made 258.9c so we should be expecting around 345c. For a company trading at R25.80 they look very cheap. I guess there are a few concerns. Europe is of course facing a long term recession or stagnant growth at the least. That European business is 65% of revenues. There is also the complexity of it all. It’s difficult to understand the business as well as what Marcus Jooste will be up to next. We continue to like it as a contrarian view on Europe but only for the hardy investor with a high pain threshold.

Currencies and commodities corner. Dr. Copper is higher at 346 US cents per pound, the gold price is steady at 1670 Dollars per fine ounce, the platinum price is also steady at 1540 Dollars per fine ounce. The oil price is higher at 97.04 Dollars per barrel, this is as a tropical storm heads across the gulf. The Rand is weaker, at 8.40 to the US Dollar. UK markets are closed today. Bank holiday. I thought bankers got paid too much in the UK, why do they deserve bank holidays too? Kidding! A public holiday with no particular attachment to an event or a person, that sounds about right to me!

Parting shot. My absolute favourite Johnny Cash song is actually a duet performed with June Carter. Although I read that Jackson (song) was a cover by the two, which changes my view on the song no way at all. At least the rendition. But why do I bring this up? In perhaps the most anticipated event of the week, once again the annual Jackson Hole pow-wow hosted by the Federal Reserve Bank of Kansas City becomes the most watched place. Why? Because Ben Bernanke, the Fed chairman, will give a speech Friday at 10am E.D.T. So what, the Fed chair gives speeches all the time? Well, the short termers mark this speech as a possible clue to further monetary easing. Do I care? Not really, but obviously this event will have a marked impact on short term price movements, one way or another. The rumour mills are suggesting that the short termers are going to be bitterly disappointed with further QE not coming. But that would mean that the medium term outlook for equities is better, not so?

Sasha Naryshkine and Byron Lotter

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BHP Billions

August 22, 2012 in Uncategorized

“So whilst Chinese GDP is forecast to be 27 odd trillion Dollars in 13 years time, on a per capita basis, whilst catching their Brazilian and Russian peers, they will still fall short. Infrastructural development is set to continue in China. BHP Billiton in their forecasting provide an eye popping number: “Chinese GDP is forecast to almost triple by CY25 with growth equivalent to 25% of current global GDP”. Chinese, broader Asian and much of the developing world urbanisation will continue to buoy commodity prices over the coming half a decade at least.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Phew. It has still been a time of reflection on the events of last week, we saw our parliamentarians on both sides of the aisle exhibiting politicking of the highest order, enough to make one weep and laugh at the same time. And not once did anyone say, ok, we are all to blame here. Civil society, government, the unions, the company, the community, all of us for breaking promises, not keeping the peace (being too violent at the same time) and not speeding up reforms of all sorts. Reforms from all people. There have been many articles written about the massacre, the events leading to it, the aftermath and the blame game. There is no simple answer, nor should you only have one point of view. It is too easy to have an answer, the practical middle ground one about business. Too easy. Still, I would like to hear your point of view.

Ye olde worlde. The rumours around the ECB, the Bundesbank, ECB sovereign debt buying of peripheral debt continued to do the rounds, with a are-they-or-are-they-not? And they are the ECB, because the European Central Bank has indicated that this is something that they would like to do, to lower the spreads on the short term government debt. You don’t need to understand the nitty gritty, just understand that the intention is for the peripheral countries in the Euro Zone, most notably Spain and Italy to have access to cheaper short term funding. The thinking is that when “things” settle and investors are not so skittish, then the longer dated issuances will become a reality at lower yields. I can appreciate that a lot of it is around sentiment, the reality is not going to change immediately. These events are going to impact on our markets in the very short-term, we still maintain that the Europeans are going to get the job done. They are definitely on it. And although the outsiders are spouting their pearls of wisdom on what the Europeans should, or should not do, we are comfortable that all hands on are deck.

OK, so we have perhaps one of the most important days today, well at least for us over at Vestact here. No, it is not the fact that we have the sliding doors open celebrating the arrival of spring, but rather the fact that BHP Billiton reported their full year numbers this morning. Byron was so excited he did not sleep last night. No, that is not entirely true, he slept well he told me, but the excitement around the results are of course high here in our office. Market nerds.

Time to dive straight in, the full release is available for download here Report for the year ended 30 June 2012. Revenue up ever so marginally to 72.226 billion Dollars, net profits off 34.8 percent to 15.417 billion Dollars. Phew, that is a big number, but markedly lower than this time last year, when the number clocked 23.6 billion Dollars. Gearing is now 26 percent, this has not changed that much. Underlying EBIT registered a 14.8 percent fall to 27.238 billion Dollars, profit from operations fell to 23.752 billion Dollars, there were some exceptional items which we deal with below. Here is an operational overview, which I hacked from the results release:

Why the big fall in profits? Well, there were a number of telegraphed write downs, including gas assets bought from Chesapeake, remember we wrote about this on the third of August: BHP Billiton write offs. There was of course also the Nickel West impairment, and a charge taken at Olympic Dam. We will deal with Olympic Dam a little later in more detail, it is important in these numbers. All in all exceptional items nearly topped 2.5 billion Dollars, or 3.7 billion Dollars before tax. It is a whopper. Also impacting on earnings were the weaker commodity markets and rising costs, it is not just a South African issue that. BHP Billiton have dealt with the costs issues by closing several production facilities, two down under and one here in South Africa. Controlling costs is harder when you have fewer operations, that is for sure, when you have smaller ones, such as these ones that have been shut it is easier!

The final dividend is a little higher than last year, now at 57 US cents per share. At the current exchange rate, of around 8.27 to the US Dollar, that translates to around 471 ZA cents for the second half. This follows a dividend payment of 55 US cents, actual payment of 418.96 ZA cents per share at the half year stage. No exchange rate announced for the Rand dividend yet, expect that announcement in around three weeks time. But, if the exchange rate were to remain the same, the Rand payment would be 890 ZA cents for the year. At the closing share price of 257.2 Rands last evening, the company is yielding 3.46 percent. I guess that is more than acceptable for the risk that you assume as a shareholder of the very biggest mining company on the planet. Basic earnings per share after exceptional items showed a 32.5 percent drop to 289.5 US cents per share. Roughly that translates to 2395 ZA cents per share. Again, at a 257.2 ZAR closing price, the company trades on a historic multiple of 10.74 times earnings. That is hardly expensive, but the market has got the share price levels relative to the news flow correct. Well done Mr. Market.

At ten of their operations BHP Billiton achieved record production. We covered their production report when it was released in mid July: BHP Billiton production report for Q4. But here is perhaps the biggest disappointment, but NOT something unexpected, the uncertainty around the development of Olympic Dam continues. Delays. For those of you who do not know what Olympic Dam is, the company has a pretty good explanation: “Olympic Dam is a multi-mineral ore body containing uranium oxide, copper, gold and silver. Olympic Dam is Australia’s largest underground mine.” Kloppers made a good comment, you will recall that nuclear energy was all the rage and there was much excitement about that, until the Japanese disaster at Fukushima Daiichi. His comment was that the landscape had changed, and therefore the development of Olympic Dam is not going to be what investors had expected. Also, the costs in Australia have risen quite sharply and therefore BHP Billiton are looking at cheaper ways of developing this one of a kind asset. The company therefore says that there is a “change in status” of the project.

So, now that shareholders are expecting lower capex as a result of iffy demand and a less uncertain outlook, how is the company going to allocate capital. “first: invest in high return growth opportunities throughout the economic cycle” And this means projects like the Jansen Potash mine will be prioritised above all else. At the moment. Of course the company invested heavily in the period of the financial crisis, when everyone else was stationary. The company is at pains to point this out, as the differential from their peer group. “second: maintain a solid A credit rating” This means that the level of gearing should be maintained at current levels, and when the company raises money for expansion, they are acutely aware of balance sheet relative strength.

In the presentation the capital allocation continues: “third: grow our progressive dividend” This of course is good news for shareholders, who have been patient. “fourth: return excess capital to shareholders” There were no buybacks in the last financial year, following the whopper in 2011, around 10 billion Dollars. Expect that to happen at some stage in the future, for us South Africans it might not be the most effective way of returning capital to shareholders, but in some other places where the company is listed, most notably Australia, this makes sense. You can’t please all of your shareholders when they invest in multiple geographies with different jurisdictions.

Before I end off, with both their conclusion and our own, I think that it is important to note the earnings mix. It is still for most intents and purposes a three division business. Check out this hacked piece from a slide in their presentation, I have written their underlying EBIT contribution relative to the overall number:

Iron Ore is still the champion, but less so than before. The petroleum division maintains that roughly quarter contribution, which it has consistently done over time. Base metals, as you can no doubt see has been a smaller contributor, but this is not completely due to the lower performance this year, but also in large part due to the outperformance of the iron ore division. The other two major contributors are their coal assets. But this looks like better diversification than their peers, we like the energy aspect.

In conclusion as to whether or not you should own the company, I am first going to present BHP Billiton’s outlook on Chinese growth.

So whilst Chinese GDP is forecast to be 27 odd trillion Dollars in 13 years time, on a per capita basis, whilst catching their Brazilian and Russian peers, they will still fall short. Infrastructural development is set to continue in China. BHP Billiton in their forecasting provide an eye popping number: “Chinese GDP is forecast to almost triple by CY25 with growth equivalent to 25% of current global GDP”. Chinese, broader Asian and much of the developing world urbanisation will continue to buoy commodity prices over the coming half a decade at least. And in a world of choices I want to be invested in the premier mining business on the planet. We continue to add to the position through what we think is cyclical weakness. Buy.

Byron’s beats covers retail, who would have thought?

    This morning we got full year results from our core recommended retailer, Massmart. To put things into perspective let’s just take a quick look at what the share price has done since the Wal-Mart acquisition which took place in June last year at R148. It has had a bumpy ride, but mostly positive all the way up to R180 at the beginning of this year. Since then it has plateaued somewhat trading around R170, where it is today. Clearly investors are waiting patiently for that big Wal-Mart induced growth spurt that the share price is so highly valued for. Let’s see if these numbers can give us some direction.

    For the 52 week year sales increased 15.6% to R61bn, profits increased 21% and headline earnings increased 38%. That is because last year included the costs of the acquisition. Without those costs headline earnings are only up 8.9%. These headline earnings a share equated to R6.33 affording the company a valuation of 27 times earnings, not too dissimilar to Shoprite, who reported yesterday.

    This is however an example of a company who is investing heavily in the future at the expense of current profits. They have financed a record R1.7bn in capital spending on maintenance, growing operations and acquisitions. This is up 20% from last year more directly due to 3 new Makro stores, investment in the Cambridge supply chain and IT upgrades across all divisions. For a company with operating profits of R2.1bn this is big spending. Let’s look at the divisional make up of the business and see where the money is made.

    In case you weren’t aware, Massdiscounters includes Game and DionWired, Masswarehouse is Makro and Fruitspot, Massbuild is the DIY and home improvement brands such as Builderswarehouse and Builders Express and Masscash is the retail cash and carry brands such as Cambridge and Rhino.

    It is a great mix, covering all the retail divisions you would expect to grow with an up and coming middleclass and an undersupplied African continent. 8 Game stores, 5 DionWireds, 3 Makros, expanded DC’s, acquisition of Fruitspot, 1 Builderswarehouse, 2 Builders Express, 5 new retail cash and carry stores and the acquisition of Rhino which consists of 15 stores were all added this year. This will certainly be earnings enhancing for a company that now compromises 348 stores across 12 countries in sub-Saharan Africa.

    Even though the company looks expensive we are not deterred for two reasons. Sacrificing current profits for the future is not a reason to sell, in fact in many cases it is a good thing assuming the demand for your product can match your increase in supply. With the African consumer still off such a low base yet growing we are confident Massmart can infiltrate the right areas. The second reason, and it’s one we have discussed before, is the foreign investor premium. Massmart probably have the highest of all the SA retailers because of the Wal-Mart factor. If Wal-Mart back and trust these guys then so will investors. We don’t see this premium going away anytime soon so the share price should grow with earnings. We continue to add at these levels.

Currencies and commodities corner. Dr. Copper is last at 343 US cents per pound. The platinum price is higher at 1513 Dollars per fine ounce, the gold price is slightly higher at 1641 Dollars per fine ounce. The oil price is slightly lower at 96.59 Dollars per barrel. The Rand is weaker at 8.28 to the US Dollar. Risk off, in part there is catch up from weaker overnight markets in New York, those markets slipped away all day. Today we wait for the FOMC minutes of their meeting. Nice. But, as people say, the Jackson Hole Bernanke speech could be key in the very short term. Sigh. I am still going to continue to beat on this drum. Benjamin Graham said that in the short term the market acts like a voting machine and in the long term as a weighing machine. Investing is weighing, trading is voting. We are weighing folks around here.

Sasha Naryshkine and Byron Lotter

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Apple is not Microsoft

August 21, 2012 in Uncategorized

“Some people are taking this all time high in their stride, others are rubbishing the facts (claims), suggesting that the world has seen more valuable companies before, on an inflation adjusted basis. I am taking a different angle. I am suggesting that the valuations are probably more important than absolute market value.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. We sank one fifth of a percent yesterday, the gold miners took a drubbing, I have noticed that poor Harmony sank, and continues to sink to near their 52 week low. Which is strange, because from where I am sitting, without looking, I would have thought that the gold price has done “well” in recent weeks. Or so I thought. A quick glance at the Kitco Christmas tree says that the 30 day change in the gold price is 2.6 percent. The one year change shows a slightly poorer picture, the Dollar price has slid 12.3 percent. The Rand price however, which is more important to Harmony, is flat over the last year, indicating that the Rand has weakened to the US Dollar by around the amount that the gold price in Dollar terms has weakened. Harmony relative to that Rand Gold price however has underperformed, down just over 13 percent over the last 12 months. The ALSI over the same time period is up nearly 21 percent. Ouch. This has been a recent thing however, the divergence over a three year period comes in early January of this year.

It is not just a gold miners “thing”, Anglo has underperformed the index by over 25 percent. BHP Billiton has done a whole lot better, in part due to their non exposure to the poorly performing platinum sector, that is currently the focus of global attention, due to the human tragedy through last week. BHP Billiton has underperformed the index by around two percent, if the results are good tomorrow, then I would think that BHP Billiton could turn the table somewhat on the broader market. As has been well documented over the last week and a half, the impact of the rising costs and lower production of a weaker priced metal has not only hamstrung the platinum miners, but has weighed heavily on their shareholders. Collectively the platinum stocks are down nearly 22 percent year to date. And this is on top of a 28 percent fall last year. It has been a really tough half a decade for what was once the darling sector of South African mining. I guess the mantle was handed to the likes of Kumba Iron Ore and Exxaro to a lesser extent.

Another darling of the equities market for the better part of the last decade has been Shoprite. It has been an amazing story of being able to leverage off the ever increasing middle class in South Africa, who have been growing their spending power dramatically. The lowest Shoprite share price was during the financial year to end June 2003, 530 cents. The stock now trades after their results this morning, at a little over 158 Rands a share. Add onto that 530 cents (if you were lucky to have bought them then) and you get 1234.5 cents worth of dividends paid since 2003. Christo Wiese, who owns just over 16.5 percent of the company has become a very (more) wealthy man over the last decade. And according to some weekend papers as a result of this has a very tricky SARS problem to deal with, as much as two billion Rands, is that right? I am not following that development too closely. At the current share price Wiese is worth just shy of a whopping 15 billion Rands. Gulp, that is more money than a small village could spend in a lifetime.

So here goes, the full year numbers for Shoprite holdings. Turnover increased over 14 percent to 82.73 billion Rands, profits for the full year topped 3 billion Rands for the first time. Costs were contained below top line growth, which I guess is encouraging in this higher cost environment. Earnings per share rose 19 percent to 590 cents, headline earnings per share rose by slightly more to 607 cents per share. The total dividend for the year was 303 cents, 194 cents in the second half of the year. So, on a simple valuations basis at 158 Rands a share, the company trades on a historic earnings multiple of 26 times, and a dividend yield of just less than two percent, 1.91 percent to be exact. Hmm… whilst their merchandise might be competitively priced, their share price hardly sounds like a bargain.

We often tell you however that the price is set by foreigners, who view Shoprite and Massmart as great proxies for retail in Africa. Just yesterday I sent my colleagues an Economist article titled A continent goes shopping. A very low base is what we have here in Africa, and you can see why many investors get wildly excited about our continent. Sure, we have the same old stereotypes about the African continent, but I think therein actually lies a massive opportunity. Africa has many opportunities. But many problems, ummmm, sorry challenges as we like to refer to them down here. Challenges. The right price for Shoprite then seems more like a philosophical argument, which it should never be. It is an out and out monetary and economic decision that the equity holders decide on a daily basis. Because the assumption is that all investors are paying attention, factoring in past information and making assumption about the future. The current share price reflects the balance between the buyers and the sellers, and their lack of bias on the company presuming that investors are irrational. So I don’t care much for what your price target is. But rather, I care what you pay for at a specific point in time, whether or not you will be rewarded for buying the quality that is available to you.

The business is still very much a South African one, and whilst non South African supermarkets revenue grew by 25.4 percent, this segment only represents 11 percent of group sales. But we are at the bottom of Africa. We are African. All sales are African for the company, they do not have a footprint in South America or South-East Asia. So perhaps the time must come for us to stop referring to Africa. This is an African company. With only 11 percent of their revenue outside of our borders, which means that there is huge scope for growth. For the time being however, the company are giving rather cautious guidance, but this is not new.

In their prospects column “The board expects trading conditions to remain largely the same for at least the first half of the new financial year.” But it gets trickier beyond that, the company continues: “Nothing on the horizon suggests that the pressure on consumers’ disposable income will ease off; if anything, it will increase further with a rise in global food prices at this stage seemingly unavoidable.” I like the sector, I like the company, clearly they have identified and acted on their instinct and executed their strategy to perfection. You know we are buyers of Massmart, which is in a similar space.

I only have two issues with Shoprite. One is that the Checkers colours are not the most appealing in the world, that is a personal thing, the other is that I think that the company overpays their chief, but that is a shareholder matter. All I know is that this South African success story employs more than 100 thousand jobs, having added another 7000 this last year. Long live Shoprite, long live. And until sales and profits do not keep up the pace that shareholders are used to, the stock should continue to deliver more than above inflationary returns to their shareholders, based on all the facts that I have at my disposal. The biggest risk for me is if there are fleeing international shareholders, selling at all costs. Because in the same way that “they” are happy to pay up, “they” are as comfortable to head for the exits. That is the biggest risk to existing shareholders, methinks.

Byron’s beats explores a space of the economy that has burst away, private education. Why? Well, what is the alternative for middle income earners? I want to know how you feel on the whole education landscape in South Africa, try and remove the emotion. I did say try…..

    Yesterday we had 6 month results from Curro one of my favourite stocks but wow has the ride been wild. How is this for some share price moves? The stock listed at 550c in June 2011 and closed at 799c on the day, it then fell all the way back down to 550c before starting its upward surge. It reached as much as R20 this month before pulling back to R16 a couple of days ago. After these results it is now sitting above R18 and a market cap of R4.2bn.

    So how did the numbers look? Clearly the market liked them as the stock shot up over 10% in 2 days but is it sustainable? Revenues increased 103% to R161 million, learners increased 125% to 12497. In 2009 the school had just 2059 learners. EBITDA increased 226% to R18 million while earnings per share still came in at a loss, -1.8c compared to -9.6c. It looks like we may see some profits for the year end.

    But these numbers look awfully small for a company of R4.2bn. Assets which of course includes their schools comes in at just over R1bn. The biggest question is whether the company has the potential to make enough money to justify the share price. R18m EBITDA is clearly not enough at this stage. It seems to be a capacity issue. This Moneyweb article got the following from the company.

    “At this point not many of these schools are profitable. Curro expects a school to become profitable after three years of operation. Currently just two schools are operating at almost capacity (between 75% and 100%); seven are operating at between 50% and 75% capacity; nine at 25% to 50% and four are operating at below 25% capacity. Earnings per school are not disclosed but at year end Curro disclosed that one school was operating at almost full capacity, earning R9.2m before interest and tax. At the same time (last December) six schools were operating below 25% capacity, incurring losses of R3.3m.”

    So do you believe they will be able to fill this capacity? I believe the answer is a resounding yes and that is why I like the company. The demand for their product due to the failure of the state will increase more in more. I think even at this stage the demand is so high that we don’t even need an economic boom to fill this capacity. Opportunity’s are also flowing as many small private schools lack funding and require consolidation. Chris vd Merwe had this to say in another Moneyweb interview.

    “What we clearly see in the marketplace, Alec, is that I think we underestimated the number of opportunities that we have to develop these Curro schools. Naturally we reassessed the situation and now we are of the firm belief that the target of 40 by 2020 is too small, and we can even up that to 80 schools.”

    And this is why the share price is where it is. Opportunity to grow by acquisition, willing funders (remember the Education Impact fund) and a massive gap in the market for a product that is an absolute priority. Short term I think the price will remain volatile but long term I would be happy to hold.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Stocks started slower, but closed as close to flat as you could get. Early in the session stocks had lost half a percent, but clawed all the way back. Northern Hemisphere Summertime volumes are looking poor, that is perhaps the case all the way through to labour (sorry, Labor day) weekend, September the 3rd. This is the American version of May day, reading up, and unofficially marks the end of the summer vacation for Americans and Europeans. So sad for them, but for us the exact opposite is true, I dispensed with both my beanie and running gloves this morning! No need for those bulky things, spring is here. No spring in the step of Mr. Market, the S&P 500 ended a whole 0.03 points (not big enough to register a percentage move) lower to 1418. I saw the ever bullish Tom Lee, from JP Morgan suggest that by late November the level on the S&P could be 1475. 60 odd points in three months does not sound like a tough ask, four odd percent. But, when you look back over history and come to a number of around 8 percent per annum as an acceptable return over time, then 4 percent is a lot more moving from here than you might think. Again, I don’t think that the S&P would be stretched with around 102 Dollars of earnings for the year.

Apple became the most valuable company ever last evening. But not on an inflation adjusted basis, but then again who is checking that? It turns out that there are some folks. The stock closed at a 52 week and all time high at 665.15 Dollars a share, to give the company a market valuation of 623.52 billion Dollars. This tops the Microsoft all time high back in December of 1999, where the company was grossly over-valued at 616.34 billion Dollars. The strike out is for obvious reasons, Apple currently trades on a multiple of only 15.64 times, historic that is.

For the financial year to end September 1999, Microsoft earned 34 cents per share. 34 cents? There has been one stock split on the 18th of February, so adjusted for that you come to 68 cents for the full year. At that stage, adjusted for the prior split the stock reached 58.37 Dollars the day before Christmas 1999. Back then the stock then traded on a historic valuation of 85 times earnings. You can adjust that market valuation back then for inflation (see someone here did that -> Apple Becomes the Most Valuable Public Company Ever, With an Asterisk) and come to around 856 billion Dollars, but the point that I am trying to make is that back then Microsoft was way overvalued. Crazy.

And Apple? Well, the stock hardly looks stretched at just over 15 times earnings. The analyst community, for what it is, suggest that the company can deliver next fiscal earnings of 52.77 Dollars per share. Check out the MarketWatch Apple Inc. analyst estimates. And adding more to the conversation is that someone has gone further back and said on an inflation adjusted basis that IBM would be worth 1.3 trillion Dollars, had it maintained the same rating afforded to the stock back in 1967.

Some people are taking this all time high in their stride, others are rubbishing the facts (claims), suggesting that the world has seen more valuable companies before, on an inflation adjusted basis. I am taking a different angle. I am suggesting that the valuations are probably more important than absolute market value. And on that basis I think that you can continue accumulating Apple, in anticipation of the release of a new iPhone and increased sales of the iPad, which have multiple uses in both the work and education spaces/places. I see average price targets, but you know my view on that. Earnings. Future, both immediate and longer dated depends on where the stock will trade. Because as sure as eggs are eggs (and Blackberry’s are Blackberry’s), the new products are being lapped up by Joe Public. Be careful, that can all change in a flash, consumers are notoriously running at the next new thing. Their greatest risk is also their greatest attribute, making amazing products, keeping the consumer allure.

Currencies and commodities corner. Dr. Copper is last at 341 US cents per pound, the gold price is steady to slightly higher at 1625 Dollars per fine ounce. The platinum price has crept up, it seems that the extremely tricky labour force issues at Marikana (which is nearly all of Lonmin’s operations) continue, keeping supply under pressure. The platinum price is last at 1489 Dollars per fine ounce. The oil price is also higher, 96.54 Dollars per barrel is where it traded last. The Rand is firmer at 8.26 to the US Dollar, as risk on visits us today. Our market is comfortably in the green to start with.

Sasha Naryshkine and Byron Lotter

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Unpicking Marikana

August 20, 2012 in Uncategorized

“The annual report, 2011 version says that the board spent 79 percent of their time engaged in the issues of operational and strategic issues, 5 percent in risk and 16 percent in governance. Perhaps a little more time should be spent on risk, and I suspect that will happen. Non execs are paid handsomely, the total for the 2011 financial year was 861 thousand pounds. The three executive board members, Ian Farmer, the CEO, Alan Ferguson, the former CFO and Simon Scott, the current CFO collectively pocketed 3.416 million pounds, including 640 thousand pounds in annual bonuses. These are all clear as daylight in the annual report. That amounts to roughly 44.6 million Rands…”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Friday was spent soul searching as the markets drifted lower through the course of the day, visibly most people were shaken by the images on the screen of police firing at striking workers on the charge. A low point in South African history, that was for sure. Emotions were mixed, very mixed on the matter, I am pretty sure that you came across a whole range of feelings from broader society, dismay, disbelief, anger, hopelessness and a general downbeat feeling. Anger can be broadcast in many different forms and directions, Paul decided to stay on the sidelines on this one, that was perhaps the right thing to do. I got involved at a human level, the loss of life, and that seemingly was met with mixed emotions from the twitter community.

The markets sank, the Jozi all share index losing over half a percent, banks lost over a percent, but the real selling felt as if it was amongst the SA inc. stocks. General retail fell nearly four percent, the food and drug retailers fell nearly three and one third of a percent. But to some extent we were “saved” by resource stocks, which ended flat on the day. I am just guessing out loud here, but the Marikana images did very little to put South African investors minds at rest. During the course of the day however, Naspers crossed through the 500 Rand level, on some pretty decent TenCent results earlier in the week. And the market cap topped 200 billion Rands too, making Naspers the eighth most valuable company by market cap here in South Africa. You could argue that Naspers is the third most valuable South African listed only company. Sasol in 7th place with a market cap of 228 billion Rand and MTN in 5th place with a market cap of 288 billion Rand are businesses that are listed here only. BATS, SABMiller, BHP Billiton, Anglo American and Richemont who make up the rest of the top eight all have their primary listings in London, Richemont of course in Zurich.

Staying with dual listed companies, Lonmin sank half a percent on the day, but the situation could have been a whole lot worse for shareholders, the stock traded at 75 Rands (592.5 pence in London) during the course of the day. In London the stock actually closed higher. I saw a sell recommendation during the course of the previous days trade, but nothing to do with the ongoing violence at the mine, rather the operational issues that face the company. In fact the rumours over the weekend surfaced that Lonmin will be looking towards their shareholders, going cap in hand to raise around 1 billion Dollars. A comment on the FT article titled The cold-hearted market in Lonmin stock suggested that this is going to be a tough sell. It is going to be really tough for the business in the short to medium term, I would not be surprised to see the ill Ian Farmer decide at a personal level that enough is enough, again leaving the company with another serious issue.

Meanwhile over the weekend a lot has been done to try and repair the damage done. Government, union representation and business decided on the road forward. A road forward is often seen differently by different stake holders, one learns this with experience. I quite like the BusinessDay editorial, read it: EDITORIAL: A failure of our society on many levels. It does not leave you feeling any better about the future of the business, the industry and labour relations, but at least it highlights the problems that remain. Who knows whether they are solvable or not, we might just stumble our way through to a solution.

A callous observation is that the platinum price has been cracking on the pace, as the supply side of the equation starts to look weaker. And ironically that is all that matters to solve this desperate situation. Higher platinum prices which should lead to higher profitability for the business. And then perhaps Lonmin can be more careful when coming to remunerating their chiefs. The discourse on this was clear on my Facebook stream, with a school friend despairing about the company that he used to work for, and all the good quality people there, whilst a university friend lashed out at the non-existent management and lack of communication from the company. Perhaps a lack of visibility, rather than communication, the chief is in hospital. The company did put out a statement Friday: Lonmin Statement on Marikana Situation which suggests some compassion, but I am thinking that it is time to move the management structure here.

The annual report, 2011 version says that the board spent 79 percent of their time engaged in the issues of operational and strategic issues, 5 percent in risk and 16 percent in governance. Perhaps a little more time should be spent on risk, and I suspect that will happen. Non execs are paid handsomely, the total for the 2011 financial year was 861 thousand pounds. The three executive board members, Ian Farmer, the CEO, Alan Ferguson, the former CFO and Simon Scott, the current CFO collectively pocketed 3.416 million pounds, including 640 thousand pounds in annual bonuses. These are all clear as daylight in the annual report. That amounts to roughly 44.6 million Rands all in (including salary and benefits), and can actually be directly attributed to two persons. Two. Are the Lonmin execs worth this, when factoring in their relative workloads, or their skill set? Could you get cheaper management here in Joburg? Possibly. Would they be able to deal with the operational issues that have plagued the problem? Maybe the Joburg management would do a better job. That is not for you or I to decide, that is for shareholders to decide. And the major shareholder remember are Xstrata, who own nearly one quarter of the business. I want to know what they think. And I want to know what you think too about the whole saga, we can publish it anonymously.

Byron’s beats follows on from the conversation higher, where we spoke about Naspers and the share price having gone through 500 Rands a share. And the main reason becomes apparent as Byron goes on.

    The Naspers share price is doing fantastically well, trading at all time highs just short of R500. Most of this is attributable to the great performance of Tencent following very good half year results released last week. Let’s take a look at these results.

    In case you forgot, Tencent is like the amalgamated version of Facebook, Whatsapp, Zynga, Ebay and Amazon for China with over 750 million subscribers. The company has historically traded at high valuations yet has constantly managed to post very strong growth over an exceedingly higher base. Even during a slowing Chinese economy the company managed to post a 32% rise in second quarter profits thanks to strong advertising revenues.

    In fact advertising revenues grew 80% as the company embraced new advertising technologies on their mobile platforms. This is good news for the company who have made most of their money from gaming and e-commerce. Yet advertising was never a big driver. But if you have so many subscribers then why not? And it makes you realize that there must be other ways to monetize so many subscribers. This is why it is so difficult to value social networks. The options are endless and you’ll find that many money making ideas have not even been thought up yet.

    Gaming also did very well with a 53% growth in revenues. The subscription based role playing gaming is very popular in China and they are expanding this internationally into the likes of South Korea. Here is what management had to say about their overall performance.

    “Despite maturing Internet user growth and decelerating economic growth, we sustained healthy year-on-year improvements in our revenues, earnings, and cash flow during the second quarter of 2012. Our IVAS business continued to expand year-on-year as our existing and new games added users, and as we generated more revenue from applications on our open platforms. Our MVAS business experienced modest growth during the quarter, thanks primarily to our bundled SMS packages and mobile games. Our online advertising business achieved a significant year-on-year growth rate, due to new platform contributions and market share gains in key advertiser categories. Revenue of our e-Commerce transactions business increased sequentially, benefiting from growth in GMV of principal transactions and commission fees derived from transactions on our marketplace.”

    Revenues for the first half of the year came in at 20.1 billion yuan ($3.2bn). Margins are huge with operating profits of $1.2bn. When you look at their businesses you can see why margins are so good. Very little input is required once the platforms are created and you have 750 million people to grasp. The company trades on a valuation of 34 which has been the norm. We are not deterred by this.

    We continue to see Naspers who own 34.26% of the company as a great entry into Tencent. We think that this surge in the share price is justified and it still has room to grow. Plus you are getting a whole lot of good assets along with the potential of the next Tencent.

Currencies and commodities corner. Dr. Copper is last at 338 US cents per pound. The Rand is last trading at 13.06 to the Pound Sterling, 8.31 to the US Dollar and 10.27 to the Euro. Weaker on the session. The gold price is lower at 1615 Dollars per fine ounce, the platinum price is also lower at 1465 Dollars per fine ounce. The oil price is 95.92 Dollars per barrel. Creeping higher. As are the markets, we are marginally higher to start with.

Sasha Naryshkine and Byron Lotter

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Marikana massacre shakes us to the core

August 17, 2012 in Uncategorized

“I have no conclusion, I just feel sad. We should all feel sad and angry. Angry that the very leadership required to make sure that we avoid these tensions has been absent on all fronts. Not that in the background the involved parties have been doing nothing, just not enough. My Twitter stream has lit up with all sorts of views. And to compound matters further, just hitting the wires is the (unconfirmed) news that a further fatal shooting has taken place this morning.”

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Although our markets touched another all time high, with the Jozi ALSI closing at 35743, up 199 points (0.56 percent), the victory felt hollow. For reasons which we will discuss later, in the parting shot segment which deals with the Lonmin and Marikana mines disaster that unfolded yesterday afternoon. Standard Bank was thrashed yesterday, clearly the market participants were disappointed with those numbers. Banks as a whole lost over a percent, platinum stocks lost over a percent and three quarters. Gold miners were the big winners on the day, Harmony with OK annual numbers, not so great quarterly numbers. You know our thoughts on that stock, there are better investments around than to go chasing Harmony. And if you had, it would seem like that old fox terrier that we had growing up as a kid, with her constantly itchy tail. And of course the way that she tried to deal with that issue, rushing around and around in circles, us collapsing on the floor laughing.

Byron’s beats is looking at the South African retail landscape once again. A sector that still confounds the locals, but foreign investors still continue to pay up for the companies. Because in their world, a 20 times earnings multiple is cheaper than they can get around the world, for similar sized consumer exposure. Do not forget that our market is deep and liquid, and easily tradable.

    On Wednesday afternoon we had full year results from Truworths and on the same day we had SA retail numbers. Let’s look at the two and see how our retail sector is looking starting with the data release. The figure showed an 8.3% yearly increase for June which was way above expectations of 4.5%. On top of this May was revised upwards to 7.1% from 6.4%. This is great news for our economy and a theme we have seen throughout the developing world as more and more people get liberalised and enter the middle class.

    The Truworths results were also good on what is seemingly becoming a higher and higher base. In 2007 the company made 248.6c per share. This year (for 53 weeks) they made more than double that, 526.7c a share which is up 16% from last year but also includes an extra week. Product inflation (price increases) was up 8% while group sales grew 12.7%. The company is our biggest clothing retailer with total sales of R9.1bn. 73% of these sales were on credit which was up from 71% last year which of course they earn interest on, improving their margins and more than making up for impairments. Bad debt as a percentage of gross trade receivables came in at 7.9%.

    The stock trades at R100. It traded at R21,50 during the worst times of 2008 so let’s just say it’s been a good investment reaching and breaking all time highs consistently (for all of you who are scared to invest in a stock at an all time high, it is not a ceiling). On these numbers the stock trades at a demanding historic valuation of 19. Next year’s forecasts sees around R5.80 affording the stock a forward of 17. You know what we think of retailer valuations though. Big foreign investors create a premium which we believe will stay for the long term.

    Here is management’s outlook: “Management remains committed to implementing the Groups business philosophy which has guided operating activities ably over many years. The supply of internationally inspired, high quality fashionable clothing to youthful South Africans continues to drive the Groups strategy and will remain the focus for the period ahead. Group retail sales for the first six weeks of the 2013 financial period increased by 13.6% over the corresponding accounting period in 2012. The credit environment is expected to become more challenging in the year ahead as credit affordability remains under pressure for consumers in South Africa.”

    We do not recommend Truworths, we prefer the mix of a Massmart which includes all the consumer categories. We are still positive on the sector however. Yes, management remain cautious, but that is their job and Management teams in the sectorhave been cautious over the last 3 years. We still believe the South African consumer has legs and feel people underestimate how low the SA base is. I suppose the biggest risk is government policy, wage increases are good for the sector but they need to be sustainable.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. Facebook had an awful day in an otherwise good market, participants fleeing on the not so new news that the lockup expires for some insiders yesterday. And many an insider I guess was involved in the selling, Facebook was top of the pile in terms of volumes at the NASDAQ. And down a full 6.27 percent, below 20 Dollars a share for the first time. Luckily however, for the tech stocks as a whole, Cisco enjoyed a whopping day, up nearly ten percent on the day. Topping 19 Dollars. So, both companies have a 19 in front of their share prices, but for completely different reasons of course. Cisco trades on a multiple of less than 13 times and a dividend yield of just less than three percent. Wow, it suddenly sounds very compelling for lots of people who would have avoided the stock in the past.

Currencies and commodities corner. Dr. Copper is last at 339 US cents per pound, the gold price is 1616 Dollars per fine ounce, getting a leg up on the news that Angela Merkel is also of course going to do everything in her power to save the Euro. The platinum price is higher for sad reasons, 1450 Dollars per fine ounce. The oil price is last at 95.2 Dollars per barrel, Brent Crude is at 114 Dollars a barrel. The Rand is weaker today, not risk off at a global level, but perhaps some selling South African assets.

Parting shot. I said to Byron that I did not even know what to say about the violence at the Marikana mine yesterday and the senseless loss of life, that might top 30 easily. You must understand that if people are willing to lay their lives on the line for a job, then things are completely desperate. Desperation is again at the top of the agenda for the unemployed. And that in itself is crazy, but the fact that we have the time at our disposal and means to read various commentary on the issues, means we are privileged. Those involved in the conflict yesterday, and indeed the victims, well, they don’t have the means that we have. Make no mistake, I do not condone violence of any sort, I credit that to my parents and upbringing. Strangely I lived in two places that had serious conflicts as a kid, but never saw it with my own eyes. Even though I saw the signs. But that is another story altogether.

I have put together some links which I urge you to work your way through over the coming days to try and understand how we got to this point. First, a David McKay business related article, from MiningMx titled ‘Winner takes all’ is tinder to Amcu, the NUM. That deals with the union turf wars, which is one of the issues here. Malcolm Rees, a Moneyweb journalist who was on site and was tweeting whilst it was happening, wrote this piece (Reuters video too) last evening: Lonmin death toll at about 40 people – Nathi Mthethwa.

The Mail & Guardian have this piece from Phillip de Wet, titled Lonmin’s burning: Mthethwa says over 30 killed. There is a much more in depth, excellent piece from Kwanele Sosibo, also at the Mail & Guardian titled Lonmin crisis: A tinderbox of discontent. At the core of the issue is people economics. Workers are earning a salary that I am not too sure that many would ever want to earn. Ever.

The BusinessDay has this piece: ‘Massacre’ outrage as workers die in bloodbath at Marikana. But there is also extensive international coverage, the New York Times lays the painful truth bare on the table: 30 Killed in South Africa After Police Open Fire on Striking Miners. Inequality. And then the WSJ too: Miners, Police Spar in South Africa.

I have no conclusion, I just feel sad. We should all feel sad and angry. Angry that the very leadership required to make sure that we avoid these tensions has been absent on all fronts. Not that in the background the involved parties have been doing nothing, just not enough. My Twitter stream has lit up with all sorts of views. And to compound matters further, just hitting the wires is the (unconfirmed) news that a further fatal shooting has taken place this morning. The president cannot make it home soon enough, at least Maputo is a short flight away. Time for more than conversation.

Sasha Naryshkine and Byron Lotter

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Cisco dividend lights up the dance floor

August 16, 2012 in Uncategorized

“I have picked the key points out of that report, at least for trying to explain why the company is attractive as an investment proposition: ‘Traffic from wireless devices will exceed traffic from wired devices by 2016.’ That means your current handset will be working overtime, your tablet (future or current) will become more important in how you consume data. ‘Globally, mobile data traffic will increase 18-fold between 2011 and 2016.’

Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. Industrials had a decent enough day, but we were always going to be forced onto the back foot (Yay, the cricket starts today, missing one huge ego though) as banks and resources took a knock. So, it was reversing away from the all time highs. As Byron pointed out though, he was on the box this morning, all time highs today are not remembered a decade later. It is not a ceiling. It is not a record where you need to go faster and faster to break and push boundaries and limits. It does not matter where the index is today, it only matters where you think it is in ten or five years time. Or more importantly, the index could move sideways for five years, but one needs to identify the companies that are better than their peers and through the toughest of times are more likely to make headway, by garnering a higher valuation. PE expansion! And I am not talking about the windy city.

Bidvest released a trading statement yesterday afternoon which said that for the full year to June investors should expect a jump in earnings of between 26 to 30 percent when compared to the corresponding numbers. This includes the part sale of a stake in the Mumbai airport, which netted the group 399.1 billion Rands. EPS last year clocked 1110.5 cents, which means that the range should be between 1399 to 1444 cents. HEPS for the year to end June 2011 were 1157.4 cents, this increase puts the range at around 1458 to 1504 cents per share. The second half is roughly 3 percent better than the first half. At over 200 Rands, and having nearly trebled from their lows during the crisis times of 2008/2009 is the stock starting to look a little stretched? I suspect not, and further value could be unlocked with a big bang exit from Brian Joffe in the form of Bidvest restructuring.

Now there are two things that you will be surprised to learn about one of the giants of corporate South Africa (that must sit within 75 metres of us daily), first is that he is a budding and published wildlife photographer, but more importantly through his family interests does not own as many shares as folks think. In fact, according to the Major shareholders segment suggests that his family interests are 1 percent of all the shareholders, or 3 335 296 shares. As at 30 June last year. But wait, at the current price, 206.6 ZAR, that stake is worth a very cool 689 million Rands. Wow. But to think that the family interests pull the strings over at Bidvest, perhaps that is a little misled. As Paul points out, perhaps an exit by Joffe would lead to investment bankers swooping and getting excited about slicing and dicing the group to “unlock” value. But that is a while from now, I have no clear insight as to the sway that Joffe holds over the major shareholders. In the interim, one can own a steady and quality business. Results are expected on the 27th of August.

Byron’s beats covers the results of another preferred companies.

    Yesterday we received results from one of our recommended stocks which is always an exciting occasion here at Vestact. This time it was City Lodge who managed to grow revenues by 11% while normalised operating profit increased by 13%. Normalised headline earnings rose by 17% to 442.8c. Occupancies for the current year increased by 3% to 59% which is very encouraging. Remember we said that a small occupancy increase will result in a bigger earnings increase because of the big capacity ramp up? Well that is what we are seeing here.

    The stock trades at R80 and a historic valuation of just above 18. There are other ways to value this company though. Remember that they own most of their hotels. On an accounting basis property, plant and equipment is valued at R1.092 billion which is depreciated each year. However management normally give their own valuation which last time came in at R3.6bn. This time they value estimated replacement cost of R3.8bn, a nice premium over the current market cap of R3.4bn.

    This makes sense, buildings are maintained, especially hotels so the depreciation is not as excessive. In fact property usually increases in value and judging by the listed property index which is up 30% so far this year, the sector has done well. If the company had financial trouble they could certainly sell some hotels and it also allows them to pay great dividends. Both of these are comforting for investors. Talking about that dividend, they are distributing 60% of those earnings to bring in 268c for the year. That is a current yield of 3.35% which is not bad.

    The company is not without its challenges. Input costs are increasing and electricity is a big expense. The industry is also very competitive and the global economic downturn has had a negative impact on global business travel. Despite the challenges we remain positive on the stock. Here is management’s outlook.

    “The improving occupancy trend has continued into the first two months of the new financial year. Construction of the 106-room Town Lodge Gaborone in Botswana is progressing well and the hotel is on track for all rooms to be opened by early February 2013. The joint venture transaction in Kenya, which includes the acquisition of a 50% stake in the Fairview Hotel and the Country Lodge in Nairobi, is now unconditional and a positive contribution to earnings is anticipated in the 2013 financial year. There is continuing emphasis on investigating expansion opportunities in East and West Africa, as well as in the SADC region and the group is confident that these efforts will be rewarded in the years ahead.”

    This management is very innovative in the industry and the expansion into Africa is very compelling. There is huge demand for low cost hotels in the continent, apparently hotel prices north of our borders are extremely excessive. We continue to add at these levels.

New York, New York. 40o 43′ 0″ N, 74o 0′ 0″ W. One of the companies that felt the wrath of the sellers yesterday was machinery producer John Deere which fell over six percent as the company cut their profits and sales outlook as a direct result of the current US drought. I guess you could have predicted it, farmers worried about the immediate future would of course defer expensive purchases in the form of heavy duty farming equipment. Of course John Deere has a massive range, and even supply the military with smaller specialised vehicles, designed to carry two folks. If I ever get a massive garden in my retirement, I will get a lawn tractor. Sounds bad for your carbon footprint, but sounds like the kind of man-toy that would attract a lot of conversation. You don’t believe me? Check out the X300 tractor with 42 inch deck. You can also fit a snow blower for the depth of winter, provided you lived somewhere cold, you know.

Enough of that, Deere warned that “Global economic conditions and dryness in several key markets warrant some caution in coming months.” Sounds fair enough, dryness = lack of rain and of course we are still plagued with uncertainty. But then they go on to say “However, this year’s drought could positively influence our outlook as it spotlights the need for John Deere’s highly productive agricultural equipment.” I am thinking that the short termers just got out at all costs. The stock was not trading near the mid February highs before yesterday, the five year performance has been wild, but the valuations certainly look very attractive. Could this just be a case of selling on the drought news?

No, that is not it. Rather the numbers were a miss. Because of what? Europe! You guessed it! And manufacturing “issues” connected to their new combine harvester, according to this detailed FT article Deere shares fall on weak Europe. In my opinion it is a quality company with some short term question marks, but at the same time represents an opportunity. However, according to the research notes that I have read, do not expect any fireworks over the next 12 months!

Another one in our stable of preferred companies, Cisco released results after the bell last evening. The Cisco disco ball really spun this time, and the dancing investors lit up the dance floor with their crazy moves, sending the stock in the post market up nearly five and a half percent! Excellent, it is about time, shareholders have been getting tired of John Chambers in that Forrest Gump voice of his make excuses. I have seen several publications suggesting that the expensive structures at Cisco are not exactly delivering the kind of return that shareholders would have expected from the kings of routing and switching. The main reason for owning the company is that with the increase in quality of the consumer hardware, both at a retail and business level, and with bandwidth speeds continuing to improve the speed and reliability of the network, the “facilitators” of the internet traffic should benefit enormously.

Cisco published a paper in late May of this year in which they said “Annual global IP traffic will surpass the zettabyte threshold (1.3 zettabytes) by the end of 2016. In 2016, global IP traffic will reach 1.3 zettabytes per year or 109.5 exabytes per month.” I get dizzy just trying to work that out! But they make some key points that I have shared from this document Cisco Visual Networking Index: Forecast and Methodology, 2011-2016.

I have picked the key points out of that report, at least for trying to explain why the company is attractive as an investment proposition: “Traffic from wireless devices will exceed traffic from wired devices by 2016.” That means your current handset will be working overtime, your tablet (future or current) will become more important in how you consume data. “Globally, mobile data traffic will increase 18-fold between 2011 and 2016.” Makes you want to let rip with a few expletives, when you hear that, and is one of the many reasons that we believe that mobile companies are not “ex-growth”. The growth predictions for Africa are even further ahead of the rest of the world, as you might imagine. As the gateway and premier provider of the hardware equipment used in routing and switching, naturally Cisco would be in the pound seat.

But it has been tough going. Costs, top heavy management, too many structures in an iffy market exposed them. But they have dealt with that, and investors are slowly starting to see the benefits. Yesterday the numbers were for the fourth quarter and the full year of course. Net sales for the full year clocked 46.1 billion Dollars, a little less than a 7 percent increase for the year. Non-GAAP Net income came in at 10 billion Dollars, which was a nearly 11 percent jump on the prior year, on a per share basis it equates to 1.85. 47 cents for the quarter, which was a 2 cent beat on the Streets expectations. Operating expenses as a percentage of revenue were markedly lower, this is pleasing to see, although gross margins are still not quite at their prior higher levels!

But the biggest excitement that is probably going to cause a little ripple in the corporate sector on the West coast of the US. The dividend has rocketed higher by 75 percent to 14 cents per quarter. Which means that suddenly from yielding NOTHING, the company has gone to being a three percent yielder! And of course the buyback program will continue, the company plans, as they said in their Q4 Fiscal Year 2012 slide presentation is that “Going forward, we intend to return minimum of 50% of free cash flows* annually through dividends and share repurchases.” Just to put things straight, the company said: “* Free cash flows represent cash flows from operating activities less capital expenditures, which are defined as ‘cash flows from operating activities’ less ‘acquisition of property and equipment,'”

For the moment there is over one years worth of sales of cash and cash equivalents on their balance sheet, 48.716 billion Dollars as at the end of last quarter. By indicating that Cisco are more forthcoming with the cash, they are telling investors two things. First, the future looks better, so the company can part with some of that cash and secondly the shift to actually do it! The first dividend that Cisco paid was only in March of 2011. 6 dividends only in their entire history. We think that the stock offers very attractive valuations over the short to medium term, and although there are still many question marks about the top tier management, we are pleased. We continue to be buyers of the stock.

Currencies and commodities corner. Dr. Copper is last at 335 US cents per pound, the gold price is flat at 1602 Dollars per fine ounce, whilst the platinum price is still too “low”, as far as our country is concerned, last at 1393 Dollars per fine ounce. The oil price is possibly inflated above the rest of the commodities complex over Middle Eastern tensions, 94.05 Dollars a barrel is where the WTI NYMEX price is last quoted. The Rand is last trading at 10.14 to the Euro, 8.27 to the US Dollar and 12.95 to the Pound Sterling. Our market has started lower here, we will cover Standard Bank who have fallen nearly three percent in early trade here, Mr. Market is clearly a little disappointed.

Sasha Naryshkine and Byron Lotter

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