Jozi, Jozi 26o 12' 16" S, 28o 2' 44" E. Friday was such a long time ago. So long ago that I could even have a couple of swims on the weekend, it certainly was warm enough. I was eying the screens out from time to time, but family time was top of the agenda. On Friday however, resources were thrashed, platinum and gold stocks were taking pain, a lot of that had also to do with the Rand having firmed up significantly, post the interest rate decision on Thursday last week. Yesterday whilst we were lazing around and revelling in our heritage, wearing whatever attire we thought fit, the Germans were reporting lower confidence numbers, released by the IFO institute. That sent markets yesterday lower, not great news, but I suspect that the Europeans muddle through all of this, worrying German numbers will do more to draw them all closer together.
The WSJ reported on Friday afternoon, Anglo Struggles to Extract Itself From Deep Hole. The story is short, but it highlights what we have said all along, the Brazilian iron ore project (which was supposed to have started already) is not turning out the way that the business wanted. As we understand it, Carroll brought the project to the board. And if that is the case, when the project eventually comes online in a couple of years time, at what cost? And where will the price be? When will the price of iron ore be at that time? And what will the demand picture look like? The more burning questions are closer to home however, what will Anglo American do with their stake in Anglo American Platinum? As the article points out, only two percent of Anglo American EBIT is contributed by Amplats. But as much as 25 percent of the parents value is made up by the number one platinum producer.
Meanwhile the problems persist at Amplats operations, the company is still hit by no shows. The company is threatening legal action against their employees. There are more reports on the wires that suggest that there are more talks around wages today. Whilst I agree that the jobs that the rock drill operators do are very dangerous, how much should that skill set get paid? Seemingly nursing is a dangerous job too, but in order to qualify for the profession, nurses have to study post school. I stumbled across this list: Average years of schooling of adults (most recent) by country. The USA is top of the list, with 12 years. That is the average. We are in 50th place, with 6.1 years. I was amazed that Portugal is less than us. But richer, for historic reason. Our 6.1 years average adult education is below the global average of 6.2 years. If we want to earn more, we should earn the right to earn more. By furthering our own educations.
I wonder what implications this is going to have in South Africa, the higher wage settlements in the mining sector. I suspect that we will see this spread to other parts of the economy, which could mean that retail could continue to do well. We are of course all watching this very closely.
Tiger Brands have announced this morning that they have effectively concluded their purchase of 63.35 percent of Dangote Flour Mills, purchasing the equity stake from the parent company, Dangote Industries. Dangote Industries will continue to hold a ten percent holding in Dangote Flour Mills. You will recall that we wrote this up at the time, in early July when the announcement was first made: Tiger Brands close to acquiring stake in Nigerian company. As we wrote at the time, whilst Nigeria is an exciting market for many companies globally, the purchase consideration (which we calculated at the time) was around 2 percent of Tiger's market cap.
Now that we have some more concrete numbers, in terms of the purchase consideration, we can run those numbers again. I remember just after the announcement was made I sent our Nigerian Brokerage connection a couple of questions, which were answered. My concerns were about a huge debt ramp up by Dangote flour mills. Or DFM as the company calls it in the Tiger Brands press release.
I said to Jimi, the analyst in Nigeria who covers the sector: "The simple question that I have is that there is a creaking debt load, and a big jump in short term borrowings from 2010 to 2011, what is this? I cannot find any extra reference on the internet sadly." And then I asked another question: "And secondly at what rates was this funding obtained?"
Jimi then said to me: "Dangote Flour has piled up some huge debts in the last year. Unfortunately its pretty difficult to trace these borrowings to an expansion in production capacity or other capital expenditure. In addition to the increase in the short term borrowing, we also see an increase in other short term liabilities. Has management has piled up debt ahead of a sell-out?" That last question is pretty telling, but it stares at you in the face. Jimi also told me that lots of the Dangote subsidiary companies borrow from the parent, which wields far greater power I assume in terms of funding rates.
But if you were worried, fear not, because of course, as Jimi points out: "I'm sure Tiger Brands will have done their due diligence on these issues because through their acquisition of UAC Foods and Deli Foods, they have been able to deepen their knowledge of the Nigerian market. The deal may have been attractive to Tiger Brands because of Dangote Flour's market share of the food business in Nigeria." Local knowledge is power you see. And talking to people who consume the products, that is quite fun too. That was my interaction with the fellow at the time.
So what did Tiger end up paying? More than I thought initially. 1.5 billion Rands, in local currency that is 30.093 billion Naira. Tiger suggests that they are getting a good deal, as all parties would when you do a deal. "The Purchase Price represents a Transaction Enterprise Value to EBITDA ratio of 8.5x based on DFM's published unaudited annual financial results for the year ended 31 December 2011." Not cheap, but not a crazy purchase price, I would have hoped that they would have paid a little less.
Tiger of course give the rationale for the purchase, we know well that quicker to prepare foods, that are cheap enough to compete with traditional fare are more attractive to the locals. Should we be eating bread down here? That is a separate question, pasta and bread are filling and cheap, and attract almost everyone. Who doesn't enjoy a nice slice of warm bread or fresh pasta? I make my own pasta, really, it is very quick and very easy to prepare and even quicker to eat.
The key paragraph for me in the rationale follows a generic Mark Mobius style explanation, but it makes sense: "Nigeria is a key strategic growth market in West Africa, the second largest African economy and one of the fastest growing economies in subSaharan Africa. With an estimated population in excess of 160 million and projected average real GDP growth forecast over the next three years of approximately 7% per annum, Tiger Brands believes, particularly for consumer goods, that the potential of the Nigerian market is significant. The Transaction will substantially add scale to Tiger Brands' existing Nigerian businesses and strategically positions Tiger Brands to take advantage of the market opportunities within the Nigerian milling sector and related essential food categories."
The market has responded favourably to the deal this morning, the stock is up nearly a percent. We will continue to filter this recent news, but we are still at these levels a buyer of the shares.
Digest these links.
What? You want more? Over the first weekend of sales of the iPhone 5 there were "only" five million. People were expecting closer to six million, even though the phone itself was the single biggest weekend for Apple ever. I even heard about a scuffle outside the Apple flagship store in New York. That was not good. What was good however is that the phone sold out completely. Not one left. Apple spent a month building the phone en masse. So we are going to have loads more, right? Well, not so fast, we might have a slight delay, when I read Foxconn China plant closed after 2,000 riot. This is just one Foxconn factory, the Taiwanese company employs one million people in China. So perhaps whilst this continues to highlight the concerns of the working conditions (this is a global thing you see) the roll out for richer consumers of their favourite product might be stalled for a while. Either way I guess this is not the best news for Apple the company. Related, the WSJ reports New iPhone Sellout Tests Apple Supply.
This I guess is fairly typical. Government always tend to think that revenue collections are going to improve as time progresses. The reality of course is that deep economic contractions expose their, well, non budgeting. Check the chart of the day from the Atantic wire: Countries Tend to Be Too Optimistic About Their Budget Forecasts. As the author says: "The seven most optimistic countries include a who's who of the European debt crisis: Greece, Ireland, Portugal, Spain, and Italy all were among the most optimistic." Governments? Over promising? Well I never. Still, this hardly makes the lives of ordinary citizens any easier, as you can see from this slideshow from the New York Times: In Spain, Austerity and Hunger.
Wow, I thought that this story was worth a look at. It is titled Weapons of Mass Urban Destruction. No, it is not about insect repellents and sprays, but rather about Chinese motor vehicle consumption. 1 million people at a motor show? That line "China's urban population is projected to grow by 350 million people by 2020, effectively adding today's entire U.S. population to its cities in less than a decade." is still difficult to digest. I think that this still bodes well for infrastructure development, not only in China, but in India too. Do you remember when you got your first motor vehicle? How did you feel? Empowered. You now could move around. If you think our traffic here in Jozi is bad, it is only going to get worse. According to the piece, 64 percent of all people will be in urban areas by 2025. Time to live at work, or work at live (home) more now than ever before I guess.
Staying with Motor vehicle sales, surely "things" can't be so bad if U.S. cars sales (are) expected to reach a 54-month high this month. I guess the bears will say that we are still around 3 million away from the highs. But still, that graph looks good to me.
This Bob McTeer post Will The Banker Bashing Never End? asks some important questions about society. We need a scapegoat. And we lump all institutions together. Read it, it will enlighten you no doubt.
- Byron's beats
There is a huge debate going on about whether the commodities boom is still sustainable or whether we are going to see a collapse. To add fuel to the fire Caterpillar, a massive proxy for the commodity market, cut back earnings estimates for 2015. Yes you read that right, they have estimates going that far forward. The company said it is expected to earn between $12-$18 compared to previous forecasts of $15-$20 a share.
Before we look at the commodities debate lets first look at the Caterpillar statement. To be honest I wouldn't look too much into these numbers. There are still so many uncertainties ahead and 2015 is still 3 years away. On top of that, the earnings range is huge, $12-$18 leaves a lot of room for error. This year the company is expected to make $9.62 so even at the bottom of this estimate range we see earnings growth of 25% per annum, which at current interest rates is not bad.
So the specific numbers should not give you sleepless nights, what it does do however is give you an indication of Caterpillars long term sentiment and that has clearly been downgraded. It is to be expected however. BHP have already announced holding back on billions of dollars of capex over the next few years. Waning demand from China on top of over capacity caused by the boom have meant commodity prices have fallen hard over the last few months.
So do we carry on banking on the commodity cycle by buying Vestact recommended stocks BHP Billiton and Caterpillar? The short answer is yes. At the moment sentiment in the sector is weak and that has already reflected in the share prices. The Miners are trading well below 10 historic multiples and even CAT who are trading at $90 look cheap. We believe that growth in China will be more than expected and that talk of a hard landing is ludicrous. When you look at the size and scale of that nation you will realise that the base is still very low compared to any developed nation.
When buying BHP shares you must also realise that they are very well diversified. Developed nations use more energy and copper and less Iron ore as their infrastructure spend plateaus. Billiton are well covered in these areas. So yes, infrastructure spend may be slowing as Beijing shifts its focus but that does not mean that consumption of other commodities will cease. Let's not forget that both India and Africa are still heavily underdeveloped as far as infrastructure is concerned. To conclude, sentiment is low thanks to a fall in commodity prices but we believe that this is a good opportunity to buy while everyone else is fearful.
Currencies and commodities corner. Dr. Copper is last at 372 US cents per pound steady for the time being. The gold price is higher at 1766 Dollars per fine ounce, the platinum price is also marginally better at 1621 Dollars per fine ounce. The oil price is also slightly higher on the session, last at 92.36 Dollars per barrel. The Rand is last at 8.21 to the US Dollar, 13.32 to the Pound Sterling and 10.58 to the Euro. We have started the day in catch up mode, and are lower to begin with.
Sasha Naryshkine and Byron Lotter
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