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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