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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