Slasher's coffee beans

“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 26^o 12′ 16″ S, 28^o 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. 40^o 43′ 0″ N, 74^o 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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