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DSTV killed your video store

November 27, 2012 in Uncategorized

“Video might have killed the Radio Star, but it is almost certain that superior network and satellite speeds killed the DVD. The DVD of course was responsible for killing the video. And believe it or not, that song Video Killed the Radio Star is only 33 years old. Remember CD’s? Remember DVD’s? In the same way that we will remember Betamax and VHS, as well as the tape deck, DVD’s are a dying business. Slowly of course.”


Jozi, Jozi 26o 12′ 16″ S, 28o 2′ 44″ E. We sank a little yesterday off record levels, I guess you could say that Mr. Market took a breather. I am surprised that there is not more anxiety about the fiscal cliff issues. There were issues around Greece to contend with yesterday, we deal with that in detail below. Again there were concerns around the gold mining sector in South Africa, recently we have seen less flattering numbers from the local producers. Just today, this morning, there is a piece in the BusinessDay that is titled “Five years” warning for South Africa’s ailing gold sector. To think that a mere few decades ago we were top of the world.

Gold Fields CFO, Paul Schmidt is quoted in the article suggesting that there will be no gold industry in South Africa in five years time. That sounds pretty dramatic, but I know what he means and what businesses concerns are. Perhaps a shoddy looking local GDP number will crystallize the thought processes of the powers that be. And perhaps a little education around the revenue collection processes is needed for some of our government ministers. Especially the ones that wanted to block the WalMart/Massmart deal. Yes, try and block that deal in the interests of what you read in a little red book from 1880 something, but be sure to fly everyone on the governments tab. Oh, and stay at places like a rock star. I checked some fellow wearing a SACP cap and t-shirt at a Nando’s last week, I felt like telling him this canteen was built on the back of capitalist tendencies. But I suspect that he would find that out at some stage. Or not.


I think that I am starting to come to the conclusion that both Carmen Reinhart and Kenneth Rogoff were right in their book, This time is different. I read that book two Decembers ago, it was fun, and challenging at the same time. A tough read, because of the detail. But simply what the book was trying to get across is that some of the trouble countries as far as debt is concerned repeat their mistakes. Although, if memory serves me right, Greece were put into a category of countries that were emerging from a bout of serial defaulting, the future was in fact going to be different because of the inclusion into the Euro zone.

Alas, they should have heeded their own advice. There is a spreadsheet which you can download from the Reinhart and Rogoff website, for data that is specific to Greece. On that page, choose the Debt_to_GDP_Ratios_Country_F-M.xls file and then once downloaded, click on the tab that says Greece. Right at the top of the spreadsheet, with a column titled Total (domestic plus external) gross central government debt/GDP. In 1848 that measure was a whopping 408.8 percent debt to GDP. Wow. In 2010, including private debt, that measure had risen to 171.5 percent of Greek GDP, the place is technically insolvent. This is not a new occurrence, it has happened many times before for Greece.

In the wee hours of this morning the third time lucky line paid off for the European negotiators working on a next tranche of funding for Greece to keep them alive, in the monetary sense that is. The IMF is not completely happy with their portion of the next funding tranche, but an agreement has been reached is perhaps the most important part for us. The agreement included lowering interest rates to Greece, which means that effectively the peripheral Euro funders could end up losing money in this deal. Both Italy and Spain, according to the FT borrow at costs higher than interest costs that Greece will have to service. The current trajectory suggests that Greece will reduce their debt burden to 120 percent of GDP by the year 2020. Maturities and interest of Greek debt have been lengthened and payments deferred. The first lot of 34.4 billion Euros will be released on Paul’s birthday, 13 December, the next round of 9.3 billion Euros at some stage in the first quarter of next year. Provided that Greece meets some reform targets, but this has always been the strong arming tactics from the rest of the zone. See that, Greece is still in the Euro zone and getting their aid from the other members.


Last Monday we looked at the Naspers trading update, this morning the company has released their results for the six months to end September. Consolidated revenue for the first half grew 22 percent to 22.597 billion ZAR, EBITDA increased 8 percent to 4.208 billion ZAR, whilst “core headline earnings per share” grew 15 percent to 10.62 ZAR. As the company always says in their results, core earnings excludes once-offs and non operating items such as unrealised forex gains or losses. The results have been boosted by the fast growing internet segment as well as benefitting from the weaker currency in the period.

Since the beginning of the year the company has made acquisitions topping 4.5 billion Rands, most of the focus is on e-commerce businesses. Businesses that have been bought include Netretail and Flipkart, as well as eMag, mentioned below. Naspers has seen organic growth of 27 percent in their e-commerce businesses, but with all the strong acquisitive growth that has been boosted to 4 billion ZAR, an increase of 61 percent over this time last year. Most recently, since October, and Byron wrote about these events, the company has invested 120 million Dollars in buying a controlling stake in an online retailer in Romania, eMag as well as a minority stake in a smaller Dubai based online business, Souq.com. That has to be one of my most favourite names for a website.

In the pay TV segment Naspers managed to add 393 thousand subscribers, the total base across the continent (48 countries covered) now stands at 6 million. You could argue that is nowhere close to maturity. In fact, if this business was the life of a person I would not hesitate to suggest that this is just a child learning to speak. In South Africa the additions were 187 thousand, to bring the total subscriber base to 4.2 million households. 87 percent of the growth came through the Compact offering. It is absolutely no coincidence that the compact offering includes both local and international football. Live sport is something that you cannot watch tomorrow, your mates have already told you the score and results.

Talking, of devices that you can watch your favourite programs on tomorrow, PVR sales increased by 90,000 with the total base now at 747 thousand. Which meant of course that rentals have taken off as people become familiar with the process of downloading and paying for movies. BoxOffice monthly rentals topped 400 thousand for the first time. I commented to my wife that I can’t believe that “Video” stores still have the same priced films as BoxOffice. If I rented DVD’s, I would employ someone to drop them off and pick them up, plus sell them at a discount to the BoxOffice one, at least in the better to do areas. Video might have killed the Radio Star, but it is almost certain that superior network and satellite speeds killed the DVD. The DVD of course was responsible for killing the video. And believe it or not, that song Video Killed the Radio Star is only 33 years old. Remember CD’s? Remember DVD’s? In the same way that we will remember Betamax and VHS, as well as the tape deck, DVD’s are a dying business. Slowly of course.

This might well be the first time that I have however seen the subscriber base in Africa grow at this cracking pace however, with total subscribers increasing more on the rest of the continent than at home. Pay television was added to 206 thousand new houses bringing the rest of sub Saharan Africa subscriber base to 1.8 million folks. And the growth, as Naspers points out in the commentary was across all bouquets and platforms. You can’t quite compare the satellite TV revolution in Africa as the cell phone revolution, because satellite TV is more for the one percent. Perhaps not quite, but richer people with a proper formal dwelling, access to reliable electricity supply as well as the earnings power of the household are more likely to be looking for superior entertainment. And often entertainment is live sport and in particular, football or soccer as the Americans call it.

Revenues from this core pay TV business increased 19 percent to 14.4 billion ZAR, trading profits totalled 4 billion ZAR, up 18 percent from the prior reporting period. The important investment cycle in the infrastructure will continue to suck cash, but should pay off in the medium term. Naspers are developing their digital terrestrial television (DTT) network across Africa, this requires big spend.

The old print business chugged along, margins improved as a result of cost cutting exercises. Revenue growth in this “old” division increased, by what the group describes as a pedestrian pace of 5 percent.

Core earnings from their associate businesses, the old exciting ones, Tencent, Mail.ru and Abril increased a whopping 46 percent to 3.1 billion ZAR. As you can see, the satellite TV, upgraded and all is still their most important business. Tencent now attracts 784 million instant messaging accounts that are active monthly. Peak online simultaneous users increased to 167 million, or roughly the entire population of Nigeria. Tencent is investing in ecommerce opportunities, again, that shift is coming. Mail.ru attracts a more paltry 32 million unique Russian users, but that is still not to be sneezed at.

Both the financial director, Steve Pacak and long time CEO, Koos Bekker are making noises about stepping up the spend in their e-commerce businesses in emerging markets. That will result in increased development spend and lower margins. But this will result in a different business, less reliance on two specific parts, a more spread and stable business. I think that bodes really well for shareholders, the greater the mix from the company, the better for both the long term profitability of the company and by extension, the shareholders. There is a definite shift in focus towards ecommerce, strangely a decade and a half when people got very excited about it. Amazon is changing the world, but at a slower rate than people anticipated.

The good news for Naspers shareholders is that they own these core businesses that are still growing. The pay TV business still excites me, and should continue to grow strongly. Their internet businesses are still exciting too, the opportunities are many. We continue to buy Naspers, even though the stock on an earnings valuation has always looked expensive. But when you drill down and separate the parts, well, then not so much. Good results, the market has responded favourably.


    Byron’s beats
    Today we had 6 month results from a company we have liked for a while now. And rightly so, Omnia have had a fantastic year. If you are uncertain of what these guys do, here is a brief explanation from their website.

    “Omnia Holdings Ltd. and its subsidiaries (together, “the group”) distribute speciality, functional and effect chemicals and polymers, offer a broad spectrum of services to the mining industry and produce granular, liquid and speciality fertilizers. The group has a presence and operations throughout South Africa and Africa, as well as in New Zealand, Australia and Brazil.”

    Basically there are three main divisions, Mining, Agriculture and Chemicals. Let’s look at the numbers and how the future looks for this company.

    Group revenue rose 21.5% to R6bn on the back of strong volume growth in the mining division and price increases. Operating profit increased 55% to R547 million thanks to big margin growth in the mining and agricultural divisions. This equated to 546.3c a share. The stock, which has had a great year so far (up nearly 50%) is now trading at R130. Historically the second half is better than the first thanks to seasonal variations in demand from the agricultural division. This puts analyst expectations at around 1200c for the full year. Trading at 10.8 times full year earnings the stock looks very reasonable.

    Let’s look at the divisions. Mining (mostly bulk explosives and bulk emulsion) which contributes 34% of revenues and 61% of profits had a really good year. Surprising considering our tough mining environment but their presence north of our borders was their saving grace. With a weaker rand and lots of mining projects expanding in Africa this division grew its profits by 79%.

    Agriculture (Omnia Fertilizer is the market leader in Southern Africa) contributed 35% to revenues and 34% to profits also had a good year coming off a low base. This part of the business is very exciting as Africa becomes more and more prominent in agriculture. We have the fertile land, a great climate and the expertise are growing. Africa is also coming off a very low base. Margins improved from replacing expensive inputs with lower cost nitric acid from the new nitric acid complex. We will talk about this development later though.

    Chemicals contributes 31% to revenues but only 5% to profits. Margins are not great in this business, only 1.4% which is well below target of 4.5%-5.5%.

    Where the kicker lies for this business is the big Nitric acid plant they have built in Sasolburg. Production began in March 2012 which is going to benefit all three divisions. The R1.4bn plant has 40% more capacity than the first nitric acid plant and is by far Omnia’s biggest investment. Nitric Acid is a key material in both fertilisers and explosives which will drastically cut costs and improve margins in both the agricultural and mining divisions.

    Soft commodity prices are booming, mining in Africa is rife and the company is very well positioned to benefit from these macro elements. At these prices I would be adding to the stock even after the share price has rallied.


Digest this.

I did not know whether to laugh, or whether to cry, when I read the headline from the WSJ piece titled: Facebook Shares Jump 8.1% After Former Naysayer Changes His Mind. What? Some analyst decided that Facebook was now a buy and not a sell anymore, so now the stock goes up. Believe it or not, the concerns around being able to monetize mobile and the share unlock overhang seems to have diminished for this guy. What? There is a favourite moment for me in the Josh Brown book I have just finished reading, when he talks about the analyst community covering a stock/company by the name of Jamba Juice. Which was on fire and then flops horribly. Josh spoke of an analyst, Nicole Regan is her name, who he suggested saved his career by continuing to call the stock a buy all the way down from 11 Dollars to 50 cents. That is the same point I am trying to make above. At least Regan had conviction, a very bad kind of conviction, but conviction nevertheless.


It is just not British really. Barmy, Bees Knees, Bob’s your uncle and bollocks, but what was the Bank of England thinking when they had chosen Mark Carney as the new governor of the BOE as of next year July? Why? Because he is Canadian. And a former investment banker. I absolutely love it! This WSJ article does great justice to describe who the man is, and what he will inherit: Britain Picks Canadian To Head BOE. The greatest thing about this appointment is that the first non-pom and 120th governor of the Bank of England has been a sensible appointment. The right person for the job, regardless of creed or colour, that is refreshing thinking. But then I looked at it a little closer. His wife is a vegan and British economist and apparently he will seek British nationality as soon as he assumes the role. So it turns out that all’s well that ends well.


Crow’s nest. Markets are higher here, thanks to the Greek deal. Deal number many and something. Hey, we are within a whisper of 38 thousand points. Next stop 40.


Sasha Naryshkine and Byron Lotter

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