Money with a dash of Funny: February 2013

Thursday 28 February 2013

Massmart, it is still early days

"The future of this company excites me. They are completely revamping their supply chain with 3 new Massdiscounter distribution centres (DC), three Makro regional warehouses, 1 Cambridge DC and one Massbuild central DC. I have been to one of these, they are very impressive. This is obviously Wal-Mart preparing the company to literally supply a continent."

To market, to market to buy a fat pig. I was defying Marissa Meyer yesterday, I was at my desk at home. The Yahoo! CEO has suggested that people get stuff done better at work, in case you missed it: Back into the Office! 3 Reasons Marissa Mayer Has Made A Smart Move. The aircon is better here at work, the service is amazing here too (anyone who has been to our offices can attest to that, Mayvis makes the worlds best coffee), and the view is much better at the office. The people at home are much better looking however. But I felt awful, so I had to stay there, my mind was willing, but the body was not. I managed to watch the budget speech, I guess you could say that on balance (excuse the pun) it was about what was expected. There is always an enormous amount written on the budget, much better than I could ever muster up.

Well, most converge on what is ultimately the most important thing, if revenue collection is to rise then the economy must grow far quicker than it is now. And if you need reminding, today is the day that Nersa decides whether or not Eskom will get the increases that it has asked for. If you are looking for the entire budget speech to keep, here goes: 2013 Budget Speech. The Economist calls it A brave face and includes a part that no doubt was a rude wakeup call for many: "The budget deficit has widened to 5.2% of GDP in 2012-13 in part because of lost taxes from last year's mining strikes. The room to keep running deficits of this size is diminishing. The public-debt burden is climbing, in contrast to declining trends in many other middle-income countries."

No mining activity = no revenue = less money to work with. The pot is not bottomless, like a coffee at the Mugg & Bean. I hope that this message certainly starts to sink in, because it is a crying shame that many feel the money should just come. The only way to grow revenues is to have an economic environment that is conducive to job creation, but more importantly businesses employ people. Businesses need to thrive. Businesses need to be created. But at the same time we need to remember the past and where we came from as a country. Some people might balk at social spending BUT think of how worse off we would be without it. No really. Civil unrest. And that is good for nobody. Remember when you moan about social grants that 59 percent of South African households have a monthly income of less than 2300 ZAR per month. True. We can collect the money, but can we spend it properly? Bearing in mind: "In this budget we continue to invest in education, health, housing, public transport and social development - components of the social wage which add up to about 60 per cent of public expenditure." I suspect with more controls government could get more bang for their buck.

Back to markets. We bounced off our worst levels of the day, and that was in large part due to a really good durable goods read from the US. What you mean good, the number was down 5.2 percent? Well, if you strip out the transportation part, which can be really volatile, the number showed an increase of 1.9 percent at the "core". Commercial aircraft orders plunged 34 percent in January, no surprises there as the Boeing Dreamliner had multiple problems with their batteries, but even more "upsetting" I guess, was the 64 percent drop in military aircraft orders. And all that points to the US military knowing that their belts are going to tighten even further, automatic cuts or not. But at the core, orders rose 1.9 percent, as we said, machinery orders surged a whopping 13.5 percent, indicating that now that Washington DC had passed their moment of truth, on the first of January, business was ready to invest heavily again.

All to do with Boeing I guess, which as per my reading suggests received orders for 190 jets in December and hardly anything in January. I suspect that the number for February wont reflect the same, because a lot of the orders were no doubt delayed, but here is to being surprised. US markets rocketed over a percent and a quarter with the Dow Jones at another five year high, and not too far to go to the all time highs. Less than 100 points actually. Records of course are meant to be broken. Locally we are flat for the year as at last evenings close. What now? The angst, correction, the ansia (Italian for anxiety) that the markets experienced over the last few days seems to have evaporated as quickly as it came. But of course the problems of a government not being formed has not really gone away. That problem remains. Perhaps the core of that argument, the separation of what are investors and what are speculators is where your answer lies. Investors are comfortable to buy the growth stories, speculators are comfortable to buy the news of the moment. Read this great blog piece: What Is the Difference between Investing and Speculation?

OK, the one thing that I really dislike is making mistakes. I know that in order to learn and to continue to make progress, you have to make mistakes, I heard that Koos Bekker said that. No really. And yesterday I spelt his name wrong. Idiot. I was alerted to this by a client, thanks, he said Becker belongs to Boris, Bekker belongs to Koos. Sorry. Koos wishes that he was as good a tennis player as Boris and Boris wishes that we was as clever as Koos. Both were/are great at what they do.

Byron beats the streets

Massmart trading update, building for the future.

"For the 26 weeks ended 23 December 2012, Massmart's total sales increased by 14.7% over the prior comparative period, while operating profit and headline earnings declined by 17.7% and 21.2% respectively. Excluding costs relating to the Wal-Mart transaction and integration, which include the additional R140 million related to the Competition Appeal Court ruling, and foreign exchange movements, operating profit increased by 6.1% and headline earnings by 5.8%.

Comparable sales increased by 7.3% and period-weighted product inflation was 3.7% reflecting positive volume growth for the Group. There was evidence of slower growth amongst middle- and lower-income customers towards the end of the period."

If you read my piece on the update you will get the fundamental analysis of the numbers which assumed earnings of 438c, the actual number came in at 424c but as I have said before I am not too fazed with valuations at this stage. Let's look at what is happening within the company to get a real feel for the business, starting with the divisions.

Massdiscounters which compromises 114 stores namely Game and Dion Wired along with 27 Foodco stores (these are grocery retailers similar to Pick n Pay and are being opened up within Game stores) grew sales by 7.7%. Profits dropped 14.8% due to slow sales at Game and higher input costs due to the new stores being rolled out. This division is where the company is really targeting Africa with exposure to Botswana, Ghana, Lesotho, Malawi, Mozambique, Namibia, Nigeria, Tanzania, Uganda and Zambia.

Masswarehouse which compromises 18 Makro stores increased comparable sales by 8.6%. 5 new stores were opened which resulted in sales growth of 23.5%, that is what I like to see. Trading profit increased 12.7% despite costs amounting to R28 million to open up those stores. Massbuild which now has 85 stores increased comparable sales by 9.7% while profits increased 23.6% thanks to good management initiatives. They look to open up a Builderswarehouse in Mozambique and one in Zambia as well as a second one in Botswana. Only one store was added in this period.

Masscash which compromises 70 wholesale and 44 retail Cash and Carry stores grew sales by 15.3%. Trading profit increased by 19.4%. This included the acquisition of the Rhino brand which helped sales significantly. Same store sales were up 8.6%.

The future of this company excites me. They are completely revamping their supply chain with 3 new Massdiscounter distribution centres (DC), three Makro regional warehouses, 1 Cambridge DC and one Massbuild central DC. I have been to one of these, they are very impressive. This is obviously Wal-Mart preparing the company to literally supply a continent.

In the prospects section sales for the 8 weeks to 17 February have increased 11.4% even though the South African consumer remains under pressure. They all say that. Although I do feel the consumer is under more pressure than the last few years, we are still seeing double digit growth. The rest of Africa only contributes 7.3% to total sales and I expect this to pick up rapidly over the next few years.

The company is in massive expansion mode, they have the right business model to supply the continent with goods and certainly the right partner. We will continue to add to this stock.

Crow's nest. We have opened up strongly here, thanks to those US markets overnight. Jobless claims Thursday, that is each and every week on this day, that gets some tongues wagging. Ideally if that number gets closer to 300,000 that would mean that we are closer to some sort of full employment (for the time being). I am never able to quite wrap my head around what might actually be structural unemployment and what is cyclical. Surely mechanisation is a sure thing for the jobs that used to be manual, we are heading in that direction each and every day. Read this rather long piece: The Trend is the Cycle: Job Polarization and Jobless Recoveries. See, the manual labour jobs are going.

Sasha Naryshkine and Byron Lotter

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Wednesday 27 February 2013

Mama Mia, what now?!?!

"... total debt outstanding is 120 percent of GDP. The average life of Government debt in Italy, as at the end of January was 6.52 years. Believe it or not, but this problem has been ongoing for a long time now. In the period 1994 to 1996 the debt to GDP ratios were as high as they are now. Italy actually needs more than a shake up, the country needs to live in the now ..."

To market, to market to buy a fat pig. Italian anxiety, something that is supposed to be associated with perfect homemade lasagne, or ravioli or even the perfect homemade tiramisu. All of which I have made before, true story. And deep dish pizza, been there done that. But this kind of Italian anxiety was directly related to their ability to service their great debts, the country has the third highest debt burden of all nations globally, after the Americans and Japanese. I will let you in on a not so big secret and a little old: Bank of Italy: Italian Household Wealth EUR8.62T at End 2011. That is five times GDP and four times the countries debt burden. And Paul asked in the office when I presented this figure yesterday that was the wealth that "they knew about" implying that loads of wealth is stashed away where the authorities do not know. In places like Switzerland. And, what makes this number even more intriguing is that this wealth to GDP multiplier in Italy is double that of what it is in Germany. The Italians, relative to their German counterparts are wealthier. Although in Germany it is probably more spread out, a quick look at the Wiki List of countries by income equality confirms that.

But that Italian debt, it is owned by someone right? And the government of Italy owns significant stakes in businesses like ENI and Enel (around 30 percent in each), which they could sell. They also own the railways. And the post office, people still use those, the railways more than the post office of course. But, I saw an article suggest that even if they sold off all of those assets, they would only rake in around 7 percent of all debts outstanding. That sounds like a good start to me, but the subject is as taboo in Italy as are the discussions in Washington DC of tackling the obesity problem. According to the Treasury Department in Italy's website, the sad truth is that the economy has been going sideways for five years, total debt outstanding is 120 percent of GDP. The average life of Government debt in Italy, as at the end of January was 6.52 years. Believe it or not, but this problem has been ongoing for a long time now. In the period 1994 to 1996 the debt to GDP ratios were as high as they are now. Italy actually needs more than a shake up, the country needs to live in the now, otherwise the European way will be having to get by with fewer resources. A labour shake up, a slimming down of government which will be most unpopular, but most of all, the economy needs to grow.

The other big event yesterday was Ben Bernanke who was being grilled by the Senate Banking committee on Capitol Hill. I always think that he must have better things to do, surely. But politicians being possibly the most self important types that they are think otherwise, and want to see Ben Bernanke twice a year. Perhaps they have never heard of Skype, I guess it will come in the future. If you want to read the whole speech, here it is: Semiannual Monetary Policy Report to the Congress. That one small line: "The challenge for the Congress and the Administration is to put the federal budget on a sustainable long-run path that promotes economic growth and stability without unnecessarily impeding the current recovery." probably means get your you know what together. C'mon people, the short term cuts are going to cause anxiety and the long term picture is rather one that must be addressed.

What I like least about these sessions is that the politicians forward their views and ramble on, before actually asking a question. What I like most is the answers that Ben Bernanke has, saying simple things like I am not an expert on Italian politics. One question was whether lurching from crisis to crisis wasn't shooting oneself in the foot, to which Bernanke answered "I think so senator". Gosh. And round two is on again today, we have to of course watch these, and there is no way of getting this to go away. Perhaps these same platforms should have the role reversed with Treasury officials able to grill politicians on their plans. Now that would make for some good squirming.

I read a few articles (see here -> Mail.ru Plans $899 Million Dividend on Facebook Disposal) that suggested that Mail.ru, the London listed Russian company is going to be paying a special dividend of 900 million Dollars. So what does that mean to us? Well, Naspers owns around 30 percent of Mail.ru, their stake is worth around 10.1 billion Rands, the current market cap of Mail.ru in London is 3.84 billion Dollars.

Not big, but certainly not small, Naspers did buy the stake initially for 165 million Dollars. Their portion of the dividend will be 270 million Dollars, which is around 2.38 billion Rands. Where did that amount of money come from? Well, a part sale of Facebook, as well as all of their Zynga and Groupon shares. How do they, Mail.ru get so involved in these companies, often taking stakes long before the internet businesses are listed? Well, there is a very interesting guy by the name of Yuri Milner, who is the founder of both Mail.ru and Digital Sky Technologies (DST), a serial entrepreneur that gets his hands real dirty in Silicon Valley.

Milner is also the guy that bought the most expensive single family home ever in the United States, the WSJ suggested 100 million Dollars was paid for a residence in Silicon Valley. Whoa. It must have good views! He has been called many things, Yuri Milner, mostly good things and is really smart and ambitious. As a share holder of Naspers you are able to be part of this guys ambitious plans and drive to invest on both himself and his mates (through DST) and Mail.ru in interesting technology start ups that morph into quality (perhaps overpriced) investments.

For Koos Becker and the fellows over at Naspers, this is a classic case of being alongside these types of people, ambitious and driven and able to create value for their shareholders. And themselves, remember that Koos Becker as per the Naspers annual report remuneration section owns indirectly and directly 12,480,563 shares. At the current share price of around 582 Rands that is equal to 7.263 billion Rands. Wow. That is around 3 percent of the company. His (Becker's) interests are very much aligned to yours as a shareholder. Remember though that some of these are options (3.895 million shares at 176.11 ZAR a share) that he will still have to pay for in time. But even then, he still has a bucketload of shares, the important part is that he is in, up the waist and beyond.

The other guy of course that you have to keep closer dibs on at Naspers is a fellow by the name of Ma Huateng, better known as Pony Ma. Now Pony Ma is the chairman and founder of TenCent. TenCent of course is far more valuable to you as a Naspers shareholder. Naspers owns 34.26 percent of TenCent. With a market cap of 488.14 billion Hong Kong Dollars, that translates to 170.36 billion Hong Kong Dollars for the Naspers holding. According to "the Google" one Hong Kong Dollar equals 1.14 Rands. So, that stake then translates to 194.2 billion Rands. As at the close last evening, Naspers market cap was 243.2 billion Rands. The market is telling you one of two things, either the local participants think that the Hong Kong market is overvalued (possibly) or that the rest of Naspers is really cheap essentially, which I think is wrong.

Unfortunately we will not see any more news from the company until late June, because the company has a March year end. Last year the trading statement came on the 18th of June and the results nine days later. They are always some of the most anticipated results, I guess the company will tell us what they are going to be doing with that cash, around 2.4 billion Rands, or roughly one percent of their market capitalisation from a special dividend from Mail.ru. I suspect that the cash will be deployed elsewhere as the company continues to look for opportunities.

Byron beats the streets

For the whole group revenues were up 18%, operating profit was up 12% and headline earnings per share were up 14% to R8.29. This resulted in a nice dividend increase of 27% to 380c. Expectations for the full year are for around R17 a share. Trading at R201 the stock affords a forward valuation of 11.8 and assuming they pay out 50% of earnings, a dividend yield of 4%.

Per division the commentary is very interesting. The retail cluster which includes their distributorships (bringing in Kia and Hyundai vehicles from South Korea) and automotive retail which is their own dealerships has been the star of the show. Who would have thought that those two brands would have been so successful in South Africa. We do love our cars here and as those two brands have finally broken out of the low price, low quality mould their sales have flown. Profits from this division increased 19% and now contributes 54% to overall profits.

Logistics had a slow period, revenue increased by 27% but profits declined by 1%. The international business was hampered by a slowdown in the German economy and locally the strikes had a big impact. This is still a good business, as Paul mentioned to me earlier, these days everyone outsources their transport as bulk is by far cheapest. And people certainly are moving stuff around more and more. Long term we expect the German economy to start growing again as they increases exports to the developing world.

The financial division did well, buoyed by stronger equity markets and people buying second hand cars. As you can see by the pie graph the margins are great but as we all know, can be very volatile. The car rental and tourism division struggled. There were less trading weeks and the market is very competitive. This is a small part of their business however.

The future looks bright, they are 52% geared which is below their target of 60%-80%. This means there is room for another transaction. I am also positive on vehicle sales in South Africa. We love our cars here and because of the (generally) terrible public transport system, getting a car can liberalise your life in many ways. Logistics will grow with the economy and the international diversification is certainly a positive. The stock is not expensive at these levels. We are buyers of this stock.

Crow's nest. Markets are getting drilled today. We have given up all ours gains for the year. Resources are the main drag. Italy's "situation" is hardly improving, but the democrats (centre left) are open to talks, meaning that a coalition could be on the cards. Most important sort of market moving event here today, the budget speech.

Sasha Naryshkine and Byron Lotter

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Tuesday 26 February 2013

Veni, vidi, nec victoris

"Berlusconi is saying this morning that the people have spoken. The Spanish are watching Italy. Italian bonds have sold off sharply. Some Italian banking stocks have been halted limit down, meaning they have been stopped out. The Italian market is off nearly five percent today, after almost entirely reversing a 4 percent intraday gain yesterday. Ten percent here we come in a matter of days. Berlusconi is implying that markets are irrational, but of course he would say that, in his mind bunga-bunga parties are rational."

To market, to market to buy a fat pig. Right. The same old bad friends came back to haunt us, European problems and US budget issues. Welcome back, we err..... didn't miss you. Last evening it became clear that Italian politics is just as entertaining as ever. Why do I say that? Well, in the period from 1948 to 1994, according to Wikipedia's piece titled Politics of Italy, there were 61 different governments in that time. Less than 50 years saw 61 governments? And we are surprised by this current outcome?

It is a good thing that a strong civil service holds the whole thing together, the bureaucrats rather than the leaders. In fact, talking leaders, Italy is sometimes called a gerontocracy, which quite simply means a society in which the leaders and their sidekicks are a whole lot older than the average age. But much older. Sounds familiar? I guess the other problem in Italy is that although it is one country, it was not too long ago that this came about. The monarchy was abolished after the Second World War. All I am try to say is that we are pleasantly surprised by Italian politics when we should not really be, history is sometimes not kind.

So what now? You have Beppe Grillo, the comedian and actor with his five star movement with 109 of the 630 seats in the chamber of deputies (the house), you have Pier Luigi Bersani's centre left with 344 seats. That old crazy Silvio Berlusconi, who sees the worlds most beautiful person in the mirror each and every morning with his centre right coalition with 126 seats. Lastly Mario Monti with 48 seats. The communist party got a whole three seats so that is a definite no-no. Yes, at least the Italians have some sense to be weary of those communists. As far as I can tell, the civil revolution party got zero votes too. Yeah, that sounds bad as well, a civil revolution is not likely to solve anything.

But..... it is in the senate that the same said parties need a majority too. As Wiki says about the Senate: "Results in the Senate are more unpredictable as there are 20 regional elections in which the winning coalition is secured of more than half of the seats even if they had a much lower proportion of votes. Moreover, the electoral thresholds are set much higher. A list should belong to a coalition that reached 20% in order to have a threshold set at 3%, otherwise, it should reach 8%. Unitary lists should also reach 8%." Sounds complicated. But the long and the short of it all is that the senate is not decided and in order to govern, a party needs to have a majority. The reason for the angst is simple, the comedian wants a referendum on whether to stay in the Euro or not and the philanderer promised to reverse some of the austerity measures imposed by technocrat Mario Monti. This is probably the worst outcome for stability in Italian politics (seemingly a rare thing at the best of times) and that is why markets in New York and indeed Europe sold off heavily.

Berlusconi is saying this morning that the people have spoken. The Spanish are watching Italy. Italian bonds have sold off sharply. Some Italian banking stocks have been halted limit down, meaning they have been stopped out. The Italian market is off nearly five percent today, after almost entirely reversing a 4 percent intraday gain yesterday. Ten percent here we come in a matter of days. Berlusconi is implying that markets are irrational, but of course he would say that, in his mind bunga-bunga parties are rational. Italian stock brokers must be sweating in Milan today, even though temperatures are expected to peak at 4 degrees Celsius today. The upshot of this bad outcome in Italian elections is that the uncertainty overhang is placed firmly back. I await the responses from the French and Germans as to what they think of these results. A relative calm that had descended on Italy is now broken I guess.

That wasn't the only reason however that markets sold off heavily. The Dow registered the worst session of the year, down over one and a half percent, whilst the broader market S&P 500 sold off even more sharply than that, down 1.83 percent on the session. We lost two thirds of a percent from our highs. The other reason that markets fell, which we alluded to earlier, was that bad old friend in the form of the US Budget. With spending cuts looming, the sequestration is close enough to get everyone frothing at the mouth again. If you are confused, then there is a really good description of the automatic spending cuts: The Sequester: Absolutely everything you could possibly need to know, in one FAQ. Most of the cuts this year come in defense spending. The single biggest cut to a specific program is a 13.5 billion Dollar cut to military operations. Out of the 85.4 billion Dollars. It is not really huge in the bigger picture, but it all adds up and the impact could be as much as 1.5 percent to the US economy this year.

So, let me get this right. Everyone wants desperately to reduce the governments involvement in the US economy, but the cuts are too deep to bear, even if it actually in the long run is the right thing to do. The democrats want to raise taxes, the republicans want to reduce domestic spend and keep defense spending as is. But I get the sense that everyone can't have what they are looking for, and perhaps the moment for cuts and higher taxes is not now, the recovery is still seen as too fragile. But either way it seems like the cuts in government spend should probably be delayed to get a sense of how tax receipts are improving.

Most important question is do I do anything at all? The answer is no. Will companies change their current plans as a result of Italian elections and the sequester? Most probably not. Our advice is always, don't panic. If anything, turn the argument around and say, I am buying a piece of a company that I wish to hold for as long as possible. In the Berkshire 1988 chairman's letter, written by Warren Buffett, when he spoke about recent investments, he said: "our favorite holding period is forever. We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds." Own the quality, be patient, buy when nobody else wants to.

Byron beats the streets

It is quite clear in these numbers that the reason for the growth, especially on the revenue side was due to a 61% increase in their Australian division which is now comfortably their biggest revenue driver. In fact it is now responsible for 51% of revenues. 26% comes from building and civil engineering while 23% comes from roads and earthworks. But and this is a big but, the roads and earthworks division is where the best margins are at. That division brings in 51% of profits, building and engineering brings in 24% and the Australian division contributes 23%. The rest comes from 'other operations'.

This has been a great example of how geographic diversification in the right area can be the difference between your average company and your market leader. According to the report the Australian market, which has benefited extensively from selling commodities to China, has seen a big uptick in the residential market and WBHO Australia has benefited from this.

Locally we are seeing the same old pattern, growth in demand but margin squeeze due to intense competition and higher input costs.

From their building division:

"The last six months have shown an increase in activity in the industry, particularly in the building sector, however, the pressure on margins remains. Revenue increased by 21% to R3,2 billion with an operating profit of R139 million."

From their Roadworks division:

"Trading conditions for the division have remained very competitive and the environment in the local market resulted in lower margins. The division has maintained its momentum through focusing on the resources sector in Africa. Revenue increased by 40% to R2,7 billion and operating profit increased by 25% to R288 million."

For us, even with the best operator in the market, there are too many risks. Yes government have earmarked hundreds of billions of Rands to infrastructure but where is that money going to come from? The industry is also too competitive and that is why we are seeing big collusion inquiries. And how, if they have to resort to collusion, are they going to cope with increases in Labour and electricity costs? As for WBHO in Australia, this has clearly been a great move but Australia's complete dependence on the Chinese economy is still a risk.

The prospects seem encouraging as a whole for the South African economy but as investors I would prefer to put my money elsewhere.

Crow's nest. That Italian outcome has spooked them all. Good for them. I can't remember the Italian election results in 2001, but according to the World Bank data that I have, the Italian economy is nearly twice the size now versus back then. So to worry, or not to worry? Julius Caesar supposedly said: Veni, vidi, vici, which translates loosely to I came, I saw, I conquered. In this case it is more apt to say, Veni, vidi, nec victoris, or I came, I saw, none were victorious.

Sasha Naryshkine and Byron Lotter

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Monday 25 February 2013

UK Downgrade. Who cares?

"Like a lot of industrialized nations, the UK has a high debt to GDP ratio, not too dissimilar to that of the United States. What is not immediately apparent is how the UK are going to work their way out of this current conundrum. The US leads with innovation, whilst the UK perhaps is struggling between an entrepreneurial and big financial sector mindset whilst sharing the socialism of Europe, with a big portion of the population dependant on big government. An ageing population. Household debt of around 100 percent of GDP. All in, including government, corporations (100 percent plus of GDP), financial sector (200 percent plus of GDP) and households, British debt is 500 percent of GDP. Stop hyperventilating there."

To market, to market to buy a fat pig. Stocks ended a few points in the red here in Jozi Friday, after a session of ebbing and flowing. Resources managed a half a percent gain, banks, construction stocks and industrials all pulled in the other direction, our overall market is only up a percent so far this year. It was of course a poor week for resource stocks, in fact the last two weeks have been poor for those companies as a whole. In the last two trading weeks, collectively the resource stocks have lost around 7 percent. On Friday this piece of news was hardly encouraging: Amcu absent from Govt. brokered peace pact. Why? Unions and money coupled with the power that they wield over the tripartite alliance. Sending the message I guess that a little competition will be ignored. All I can make from this is that Amcu themselves have gained incredible support in a very short period of time, whilst NUM are clearly the loser here. I am presuming that of course. Understand the tensions when it is about lost revenue. Organised labour is not my favourite topic.

Markets on the other side of the Atlantic, on Wall Street, had different ideas, the Dow Jones topped 14 thousand again, adding a little short of a percent with a big triple digit gain. There was some good news in the form of housing data, but this one in particular caught my eye: Is the USA Facing a Housing Shortage? Inventory is low, for the time being, the thinking however is that the shadow inventory will pick up the slack. Folks who are forced sellers as economic conditions worsen. New home building is being stifled by a lack of willingness to extend credit, that should balance "things" out. Either way, this is what people wanted, a lower inventory.

Falling into a category of I thought that is what everyone wanted, was the automatic spending cuts. Over the weekend the White House release(d) a state-by-state breakdown of sequester's effects. The tricky part to tell immediately will be the impact of the spending cuts and whether or not there will be a limited impact on the US economic recovery. 85 billion is huge, but not so big for the US. The US is such a big economy, in recovery mode this might not have as big an impact.

Unfortunately this morning the Chinese HSBC flash PMI has disappointed, missing expectations by quite some margin and being the lowest number since October last here. China manufacturing 'on track' despite slowdown is straight from the ... err..... mouth of the horse. Just yesterday the WSJ reported on the Hidden Risks of a Hard Landing in China.

Must we sit here and worry about what this means in the short term? Must we sit here and get anxious about Chinese asset prices, Chinese debt levels, too fast too soon? Do yourself a favour and check out the various graphs on the web that show where the Chinese have come from. Pork consumption has more than doubled in two decades. That tells you there are more people who can eat meat. And meat is a luxury. The motor vehicle new sales market has more than doubled in the last half a decade. Individual mobility is directly linked to rising incomes. Annual disposable income has increased nearly tenfold over the last two decades. But the urbanisation trends are amazing. According to data from McKinsey cities with one million folks in China numbered 34 in the year 2000. By last year that number had grown to 102 and the prediction is by 2025 that there will be 221 such cities in China. Amazing. Urbanisation brings along greater consumption trends and more aspirational consumers. And think about it for just a second, a total change in the mindset of the population, away from the "traditional" ways of life and embracing the new urban ways. Let's be honest, if gold had not been discovered here in Joburg we wouldn't live here at all. Reason, the place is not built on a river and is not near the sea. But that is another story for another day. Joburg as we know it is one of 50 odd megalopolises in the world. Feel kind of privileged to live here.

Wow. Results have poured in this morning here in Jozi, Nedbank perhaps the most important, lower down the ranking tables were results from Wilson Bayly and Hulamin. Even lower down from that, and a very strange spike in the share price was Rolfes Holdings. Finger trouble it looks like in that one, the stock up nearly 80 percent in a single trade of 1418 shares. The share price in a hurry got back to the closing price of 562 cents. Wow. I hope for the buyers sake that the trade is unwound and put down to finger trouble. Hulamin, that stock is down 85 percent since the middle of 2007, so any positive market reaction has to be seen against the backdrop of higher costs (electricity, no thanks to Eskom) and cheaper imports. The first part is not going away, and could get a great deal worse for the company. Nedbank, those are interesting results, no, those are superb results relative to their peers. But should one buy banking shares? You might have a short term memory, but let me remind you that Nedbank had to recapitalise their business back in 2004 with a 5 billion Rand rights issue. Somewhere in the region of 45 ZAR if memory serves me right, you would have done really well to have followed your rights back then. Perhaps a little more on Nedbank tomorrow, the stock is leading the banks, up two and a half percent.

It finally happened. Moody's decided late on Friday to downgrade the credit rating of the United Kingdom a single notch, but did place the outlook to stable. Stable is a place you keep your horse, but in this case the horse had bolted already. The expectations ahead of the UK budget were for a downgrade perhaps post the George Osborne presentation to loud heckles and jeering (or does that happen when the floor is open?). That crazy little decades old briefcase held together no doubt with glue and sticky tape. The little red briefcase is known as the Gladstone box, but according to Wiki, the original has been retired. Besides, the key to the original has apparently been lost. What does this mean for ~~Great~~ Britain? A run on the pound some suggest. Really? Not likely. Inflation, because of a weaker pound? That is a reality. Borrowing costs rising? Definitely, but perhaps they did not deserve to be so "low".

Like a lot of industrialized nations, the UK has a high debt to GDP ratio, not too dissimilar to that of the United States. What is not immediately apparent is how the UK are going to work their way out of this current conundrum. The US leads with innovation, whilst the UK perhaps is struggling between an entrepreneurial and big financial sector mindset whilst sharing the socialism of Europe, with a big portion of the population dependant on big government. An ageing population. Household debt of around 100 percent of GDP. All in, including government, corporations (100 percent plus of GDP), financial sector (200 percent plus of GDP) and households, British debt is 500 percent of GDP. Stop hyperventilating there. Most important question, who owns Gilts? Turns out it is a little less complicated than you might think. As at September last year the Bank of England owned around one quarter, Insurance companies nearly one quarter whilst foreign holdings were around 30 percent. Banks and building societies make up the balance of just less than 10 percent. In many ways their dire situation is not too dissimilar to that of Japan. No, really. Check out this, exhibit A (rather old, but you get the trajectory picture) from Economics Help, via this fairly recent post: UK National Debt.

So, what is the solution? There are many, and unfortunately not many of them are pretty. Making people work longer for starters, so that they can continue to contribute to the states coffers, that does however have a direct impact on youth employment. The answer is to try and create a culture of saving (the UK has a similar low savings dynamic not too dissimilar to the US), but more importantly try and create a different climate for investment and innovation. Pensionable age is going to have to rise. This is a great document, titled PENSIONABLE AGE AND LIFE EXPECTANCY, 1950-2050. In Norway you could retire only at the age of 70, 40 odd years ago, that is now a more reasonable 67. The governments of France (60.5 years), Greece (57 years) and Italy (59 years) are all going to have to give their many civil servants a huge wakeup call soon. Retirement duration (the golden years) in the OECD countries is expected to rise from 13.4 years in 1938 to nearly 20.3 years by 2050. Naturally one is going to have to work for longer in order to save more for a longer retirement. A fascinating document, with useful insight. And all the reason why you should start saving as soon as possible, as young as possible. Forget the fancy "stuff", start saving like crazy.

Byron beats the streets

"Curro listed on the Alt-X just more than 18 months ago. On listing, the Company had 5 557 learners in 12 schools. In the pre-listing statement the Company envisaged that by the end of 2013 it would have 17 schools with 9 594 learners. To date the Group has grown to 26 schools and 20 840 learners across 7 provinces."

The reason for the growth they say is a massive demand for affordable private schooling. That makes sense. The faster they can roll out schools the better because at this stage demand far outweighs supply. During the year they spent R223 million on existing campuses, developed 4 new campuses in Bloemfontein, Cape Town, Krugersdorp and Centurion at the cost of R237 million and bought 8 schools around the country for R322 million. They managed to raise this cash through us the shareholders (R800 million) and the OMIGSA partnership (R440 million) which I have spoken about in detail before.

Revenues more than doubled to R356 million which resulted in a headline profit of R15 million or 7.1c a share. Trading at R18 there is no point valuing this company on an earnings basis. There is a decent property underpin of R1.2bn but that is still far off the R4.3bn market cap.

It is all about the future for this company and how quickly they can roll out schools to meet that massive demand. To do this they need financing which is why listing has been so beneficial for these guys. On releasing these results they announced another rights offer.

"Shareholders are hereby advised that Curro intends to raise R605 879 376 by way of an underwritten renounceable rights offer ("the Rights Offer") of 50 489 948 new Curro ordinary shares ("Rights Offer Shares") to qualifying shareholders at a subscription price of 1200 cents per Rights Offer Share, in the ratio of 21 Rights Offer Shares for every 100 Curro ordinary shares held on the Rights Offer record date, being Friday, 12 April 2013."

Yes you are getting diluted as a share holder but at least you know your money is being put to good use. I really do feel the potential for this stock is massive. There are many independent schools out there which can be bought and the there are millions of potential learners, desperate for quality affordable education. I know it is sad but this is where the private sector can benefit for the state's failure. We have seen it with the private hospitals, medical insurance, Multichoice, the network providers and many more. If you are already a shareholder I would advise you follow your rights, PSG who own 52.84% have already committed. If you are not a shareholder, I would be happy to add to this stock at present levels, but you are going to have to roll with the punches.

Crow's nest. Markets are rocking globally. If you get anxious, check this graph out, with the heading that tells it like it is: World industrial output reached a new record high in 2012. Sigh. I miss Nouriel and his bearish predictions, stocks were so much cheaper when he was calling it worse.

Sasha Naryshkine and Byron Lotter

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Friday 22 February 2013

Walmart. Huge. Enormous.

"So, what is their bottom line? Well, income from continuing operations topped 17 billion Dollars, after tax margins of 3.65 percent again might not sound like a lot and a whole lot of hard work in getting there, but hey, that is what you get in retail. Whenever WalMart comes up with numbers I love using that Charlie Munger quote about Costco. "I believe Costco does more for civilization than the Rockefeller Foundation" What Charlie is trying to say is that these massive retailers do more to lower inflation and therefore make sure that the spending power of the lower income is improved by capitalistic ventures, rather than philanthropic ones."

To market, to market to buy a fat pig. Locally we got completely dismantled, resource stocks were taken apart. Resources sank as a collective down 3.4 percent, sending the broader market down nearly 1.9 percent. Why? Well, in recent days you have seen us talk about two things, firstly the fact that gold is losing its shine does most certainly impact on the broader commodities market. Secondly, the Fed is indicating that "things" are getting better and perhaps quantitative easing is going to end sooner rather than later. That is good for the US Dollar, that is normally not so good for commodities. The third reason could also be the Chinese authorities continued pressure on real estate. But I suspect the middle reason is the one to "blame".

Weirdly the gasoline price has ticked up every day in the US for a period longer than a month, prompting concerns from politicians. Ha-ha. Perhaps those same said folks should start riding bicycles to work, their security detail can run next to them. We should definitely start that here too, there is a huge open space in front of the parliamentary buildings, even next to the helipad. Park your bicycles there, healthy body, health mind. Which reminds me, I should start running again. There is perhaps a fourth reason too for the sell-off in commodities and specifically gold, the G20 and G7 suggesting that "currency wars" were off the table. I am guessing that the ideas that excessive monetary stimulus would wane in the coming months, that would also be very bad for the gold price. And no doubt, as I said yesterday, some shorts jumped on the already fast moving wagon.

But I suspect that it is not that easy, the Saudis are planning to ramp up oil production again, after having been lower for the last two months, in order to meet Chinese demand, which is stronger. But more importantly, as far as crude oil is concerned: US oil output increased last week to the highest level since August 1992, more than 20 years ago. The oil and gas revolution is happening in front of our eyes, jobs are at 25 year highs in the industry, it is booming. We sit here whilst the shale gas revolution is increasingly reducing the US' reliance on the outside world for energy sources, wondering whether to frack or not.

To frack, or not to frack, that is the fracking question. A question around water in the Karoo, and the farming of sheep. Honestly, if the same said folks in the Karoo were very concerned about the environment, they would all be vegetarians. And ride bicycles. But I have been to the Karoo, the Klein Karoo most. I get the sense that folks do not want their tranquil life and way of life upset by what essentially is a big business. And water is a massive issue. Sheep almost certainly do not help that equation, but who doesn't like a lamb chop? Choices. Energy independence, new industries, job creation and lastly looking for a trade surplus. Oil accounts for some 25 percent of our imports by value. But, with the current mindset around resource rent taxes and increased tampering, only the brave would take a longer term view when sinking billions of Dollars required to get the process of extraction to the levels required to turn a profit. We have the world leaders in gas-to-liquids technology. And they, Sasol, decided that the US was a better investment destination than here. Now that is a crying shame.

A Forbes article, titled How Unconventional Oil And Gas Is Supercharging The U.S. Economy,suggested that the US "unconventional" oil and gas capex by 2020 could be as much as 300 billion Dollars and could have created 3 million jobs. If the first part sounds too much like corporate greed undertones, then surely the second part should sound like music to politicians ears. If we were honestly that caring about the environment, then we would be encouraging alternative energy. Just remind me, oh yes, we are currently building two of the last internationally funded coal fired power stations. When finished, both Medupi and Kusile will be in the top ten coal power stations in the world. Ahead of us are 6 in China, one in Poland and the worlds biggest one in Taiwan. Which is set to expand by the end of 2016. The plant, the Taichung Power Plant holds the dubious record of being the world's largest emitter of carbon dioxide. Sis.

Gas power stations have much lower emissions. There could be a power station close. We could and should embark on building desalinisation plants in order to pump water from the coast, expensive, but I am sure worth it. Check this out: Desalination by the Numbers. 300 million people, or around the population of the US, relies on desalinated water. The cost however is crazy, but then again, water is life. But I see in Aussie that in Victoria (Mervyn Hughes is not the greatest Victorian, surely that belongs to Shane Warne) a desalinisation plant has just been completed at a cost of 5.7 billion Aussie Dollars. Phew. Medupi is expected to cost around 100 billion Rands, that is nearly 11 billion Aussie Dollars. Both come at an enormous cost. Where to from here locally for fracking? I suspect not too much for now. More "thinking" about it. Meanwhile a gas revolution has attracted Sasol elsewhere. Well, at least shareholders get to benefit. To understand more from the company that could help us here: Shell -> The Karoo. Make up your own mind, but I urge you to concentrate your efforts on both the practicality of energy consumption as well as energy concerns. And think about job creation and a whole new energy supply, which is great for the trade numbers and ultimately currency.

WalMart Stores, the biggest retailer in the world reported numbers yesterday morning, before the market opened. The quarter was comfortably ahead of Wall Street's expectations on the bottom line, but it missed on the top line. Let us rather than get into the Q4 numbers, and get sucked into that dreadful affliction of quarteritis, look at the full year numbers. Yes. That is good. Consolidated sales for the full year was 466.1 billion Dollars. Take a little time to reflect on that number. That is an annual turnover almost equal to the nominal GDP of Argentina, or Norway. More than South Africa. That is the size and scale of the number. Global GDP according to the IMF estimate last year was 71.277 billion Dollars, WalMart annual sales are 0.65 percent of that. Amazing. One company that employs over 2 million people worldwide. I beg your pardon, associates, not employees.

So, what is their bottom line? Well, income from continuing operations topped 17 billion Dollars, after tax margins of 3.65 percent again might not sound like a lot and a whole lot of hard work in getting there, but hey, that is what you get in retail. Whenever WalMart comes up with numbers I love using that Charlie Munger quote about Costco. "I believe Costco does more for civilization than the Rockefeller Foundation" What Charlie is trying to say is that these massive retailers do more to lower inflation and therefore make sure that the spending power of the lower income is improved by capitalistic ventures, rather than philanthropic ones. Charlie is of course Warren Buffett's right hand man, and Buffett just happened to donate a large sum of his wealth to the Bill & Melinda Gates foundations, which is a philanthropic organisation. Low prices to the masses obviously has its societal benefits.

Why would you however want to own the shares of this company? The yield is not princely, it is two and a quarter percent, whilst the earnings multiple is around 14 and a half times. So the valuation metrics look OK, but what are the growth prospects? The company paints the US consumer as still under pressure, but their own business prospects as good. "Walmart is operating in markets that offer continued opportunity for growth, both in our stores and online. With our core Walmart U.S. business operating so well, our investments in e-commerce and our international markets focused on growth and improving returns, we are truly the best positioned global retailer." In the coming years expect their incredible distribution and procurement capabilities to translate to wonderful online shopping experiences. Well, more online shopping experiences. There are also various cost saving initiatives which aims to slice 100 basis points off costs over the next five years. Now that might sounds small, but when you are talking 470 odd billion Dollars in revenue and Operating, selling, general and administrative expenses clock 88.8 billion with cost of sales at 352.5 billion Dollars, 1 percent is massive.

Their international businesses are growing revenue at between 7 and 8 percent and net income growing by about the same amount. Which is around double the growth rates in the local US business. So, I guess you could actually believe that WalMart would and could get out of this price rut, where on the last trading day of 1999 the stock traded at almost the same level as it opened yesterday. True story. All you have gotten is multiple contraction. And of course a healthy dividend flow. Walmart has increased their dividend each and every year since 1974. The market has seen earnings improve a whole lot, and have not given the stock the re-rating. But I suspect that 14 times is about all you should pay for this company. I suspect that if you are not wanting to think too hard and need a retail stock with global reach, then this company would not be out of place in a portfolio that only ever intends to hold blue chips and accumulate. The stock is about ten percent from its highs.

Byron beats the streets

Let's look at the numbers first then I'll tell you what I learnt from the presentation.

"The period saw growth in new business annualised premium income up 12% to R5 106 million; normalised profit from operations up 21% to R1 973 million; and normalised headline earnings up 20% to R1 349 million. The period was noteworthy for its greater diversification of new business and earnings, underpinned by the outstanding performance in the UK. The UK businesses contributed R283 million or 14% of the normalised profit from operations, and their strong new business growth contributed to the embedded value growing by 18% to R33.4 billion. The embedded value growth was further driven by the positive experience variances across all the businesses. With Discovery Life cash flow positive, the group was able to achieve this growth with little recourse to capital."

On a per share basis this equated to R2.21. Earnings for the full year are expected to come in at R4.71. Trading at R67.81 after rallying 4% yesterday the share trades on 14 times this year's earnings. Certainly not expensive for a company growing this fast. But insurance companies are valued differently. They look at a metric called embedded value which is similar to NAV but a lot more complicated, determined by Discovery's actuaries. That number came at R59.26 per share. Usually an insurance company trades at a similar number to embedded value but I think because of discoveries exceptional growth prospects we are seeing a premium.

I was very impressed by the presentation. The word innovate was used more than any other and when Adrian Gore demonstrated a few new products there were gasps coming from the crowd. All of these examples were geared towards making the discovery experience easier and better for the client and that is exactly why they will steal market share from their competitors.

The one slide that stood out the most for me was the one explaining the Chinese market, see below. 37% of health care expenditure comes out of pocket. That is huge potential for growth. Discovery are increasing their stake in Ping An health from 20% to 25% and are very keen to benefit from the potential the Chinese market has to offer.

They are also taking Vitality to the US and have established a partnership with Wal-Mart. Vitality members will get a 5% discount on healthy foods. That theme of a good healthy lifestyle can only grow from here and will never go out of fashion. The UK business has also seen huge growth as the NHI suffers from austerity and private healthcare becomes more prominent.

With very exciting prospects internationally, an amazing innovative and creative model which is stealing market share, an extremely astute management and operating in a sector that has a very bright future we are happy to be adding at these levels.

Crow's nest. Markets are flat at midday. Retailers are lower, resources seem to have caught a bid. Some more German sentiment numbers have beaten expectations. Italian elections this weekend people, I suspect that the Italians are going to show us again the push back on austerity.

Sasha Naryshkine and Byron Lotter

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Thursday 21 February 2013

The Golden Goose is no War Horse

"Only 7 percent of mining revenues have been returned to shareholders, the other 93 percent goes to suppliers of goods and services, peoples wages, local community development programs and government in the form of taxes. And we are open for business? Give me a break here. As he says, when "people" and I am sure that he is referring to loose comments from government officials and the chattering types that taxes have to increase, that would amount to more than 100 percent"

To market, to market to buy a fat pig. Sony released their latest PS, the first in seven years last evening. The PS4 will only be available at the end of the year, pretty weak if you think about it. This is of course an attempt to revive a struggling company. Consoles are being eaten alive by "new" experiences, you can buy FIFA 13 on the app store for around five Dollars. Sure, it might not have all the graphics and details that the real users crave (notice how I have to be really selective about the words I use) but it does the job. Over the last five years Sony is down some 72 percent plus in Tokyo. They sold the walkman, the coolest invention of its time. The original PS was released in 1994. That is right, nearly 20 years old. Since the dotcom artificial highs the stock is down 95 percent. Sony were the legends. Sony were the best. I guess they forgot to pay attention and listen to their users and to see what the consumers wanted. Canon is a perfect example. Once the king of the world, not too dissimilar to what happened to General Motors. Add Sharp and Panasonic to that mix, and you have a perfect example of why you should always be paying attention to consumer trends. Sigh. As the Business Insider pointed out last evening, 70 percent of Samsung's profits come from their smartphones.

This does not happen too often, but perhaps it is just timing. The Bank of England governor, Mervyn King was basically outvoted, the minutes reveal yesterday. Some are saying embarrassing, I guess it is when the rest of the committee do not agree on current direction. Check it out: Bank of England chief joins minority wanting more asset buying. The pound got crushed. Mark Carney, the current governor of the Bank of Canada takes over in the middle of the year. He is highly regarded. Perhaps this shift from the committee members is them anticipating a change in policy when Carney marches into their HQ on Threadneedle Street in London, on the first of July this year. Lucky one July is a Monday, a full work week. There is actually a South African connection here, Carney, whilst he was working at Goldman Sachs, as per the Wiki entry: "He worked on South Africa's post-apartheid venture into international bond markets..." Nice. Good luck in what is a tough beat, expectations are for a rating downgrade of the United Kingdom in the coming months. The pound sank, folks worried about the split monetary policy committee and a lack of consensus.

Equally, over the sea in the US policy makers were a little split on what to do next. The Fed of course will stay in their current mode of asset buying until unemployment shows a meaningful drop, and the inflationary fears were unfounded, or perhaps have not emerged as of yet. Coupled with this Fed "uncertainty" is the plunging gold price. Stuck in a "death cross" is what the technical analysts are saying. Ha-ha, what the hell is that? According to Investopedia: "A crossover resulting from a security's long-term moving average breaking above its short-term moving average or support level." Hmm.... when I hear about support levels and graphs and all that, I switch off. The fact that you expect a price (because you couldn't give a hoot about the underlying business) to move in a certain direction as a result of historic price moves, what is that all about? Show me the 10 thousand day moving average.

I think that the platinum executives speaking to the folks in parliament yesterday was a great outcome for all of us. What it meant is that parliamentarians (who get bucketloads of freebies at your and my expense) can hear it from the ~~masquerading as beef~~ horses mouth. Like I said last week, and I was talking about Hugo Chavez and Venezuela, they are going to be stuck with a whole lot of useless oil when the combustion engine ends. Equally, platinum bosses told the committee the bad news, and the truth. This Miningmx story lays it out: Amplats' Griffith "not confident" of saving jobs. See that simple line: "I'm not confident that we will come up with any clever ideas so that Amplats can become profitable again. Discussions have turned very aggressive, but that won't change the fundamentals."

I suspect that the combative to business politicians need to think a little harder when making statements that these mines make billion. No. As Griffiths said, 80 percent of their (Amplats) operations were unprofitable last year, obviously the already bleak landscape was exacerbated by strike action. As Griffiths suggested though however, 30 to 40 percent of Amplats operations would have been unprofitable if the illegal strikes had not happened. I think that he made it completely clear. Private business is not backstopped by government, in the case of SOE's, when their shareholder say enough, it is quite frankly enough.

It is not just the platinum producers under pressure on this score, AngloGold Ashanti had weak results yesterday, not too well received either. And these were the last that Mark Cutifani presented. There is a very nice interview on CNBC Africa, where Samantha Loring interviews him: AngloGold Ashanti Annual Results with CEO Mark Cutifani. Some very interesting points there, including having watched the Gold Fields split. But the frightening part comes when Cutifani starts talking about what is left in it for shareholders, from about 5 and a half minutes in the video clip. Very little as it turns out over the last five years, next to nothing, what a disgrace really. Cutifani tells the ugly truth.

He says that only 7 percent of revenues have been returned to shareholders, the other 93 percent goes to suppliers of goods and services, peoples wages, local community development programs and government in the form of taxes. And we are open for business? Give me a break here. As he says, when "people" and I am sure that he is referring to loose comments from government officials and the chattering types that taxes have to increase, that would amount to more than 100 percent, no viable of course. And he is worried that this type of talk is scaring people in an industry that has shrunk in value relative to the rest of the market.

Yes, we know what he, Cutifani, is talking about. Cutifani has a great way of explaining things, he says that anybody who thinks that mining in South Africa has a big pot of gold at the end of the rainbow "doesn't understand the numbers". But the good news is that Cutifani reckons that the Finance Minister understand which is why he is cautioning against folks expecting more. Quite frankly, there is no more. Higher taxes, as he says means less employment and less money for community development programs, simply because you do not have the money. He also talks about electricity prices being up 278 percent in five years, and the current Eskom proposals would take it up to a 578 percent increase. And that, he said, would force AngloGold Ashanti to continue to cut costs, and sadly the only that they can control is labour. So in other words, more taxes equals fewer jobs.

This is no golden goose that unfortunately people think it is. I used the analogy that a goose can't pull a wagon over a bumpy (and perhaps potholed) road. It just can't. Unsustainable. The goose is no War Worse. Cook it and it is finished. I hope the message is starting to sink in.

Byron beats the streets

If you exclude all these factors and just focus on continuing operations Aspen grew earnings by between 21% and 25%. However, you need to factor in the dilution because in essence those preference shares becoming ordinary shares is a form of compensation from the shareholders. It is a form of cost, just like salaries. That headline number will come in between 15% and 19% growth. If you include everything earnings per share will increase 5% to 9%.

Looking at the headline numbers we should expect R3.60 compared to R3.08 in this period last year. Forecasts for the full year are for around R7.80. Trading at R163 which is north of 20 times earnings the stock is definitely not cheap. But with those growth rates, huge margins and a business model which does not look like it will slow down either here in SA or around the world you can see why the stock attracts a high rating.

We will evaluate the business in more detail when the full numbers come out but we remain firm buyers of this stock.

Crow's nest. Thursdays is always a day that you get insight into the health of the US labour market. Resource and commodity stocks have taken some pain as the gold price in particular has attracted some short interest. Johnny and his band Come Lately have initiated a short. And another inflation number in the US. Perhaps Rick Santelli four years on from his Boston Tea Party rant will provide us with some more entertaining TV.

Sasha Naryshkine and Byron Lotter

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Wednesday 20 February 2013

Klippity Kloppers on his horse

"Kloppers is young, only 50, I suspect that he will pop up somewhere soon, there would be a certain irony if he went on to replace Andrew Liveris (an Aussie by birth and in contention for the BHP Billiton job when Kloppers got it) at Dow Chemicals in the US. So, good luck to him and what looks like a really tight family. The fellow replacing Kloppers looks like a magnificent replacement. He has extensive mining and petroleum experience, having worked for both Rio Tinto and BP."

To market, to market to buy a fat pig. Better than anticipated German confidence numbers gave us a really good lift across the board, Germany's DAX rose 1.6 percent and some change. France's CAC went better, adding nearly 1.9 percent on the day, the FTSE closed up nearly a percent on the news. Most of these markets all buoyed by that ZEW data. The ZEW is a non for profit research organisation, staffed by 183 odd (very smart no doubt) folks who publish all sorts of economic papers. And this monthly sentiment read as per their website is where around 350 financial experts are surveyed. Interestingly, not only does the survey ask about Germany, but also the large economies of the world too, including the Eurozone.

Unfortunately the yellow metal is getting no loving. This is really bad for our local miners, who after having worked hard at downsizing to more profitable ounces produced, now they have to deal with a weaker metal price. The most unfortunate part comes as Gold Fields unbundles Sibanye Gold from their stable, to focus on their higher quality assets. Adding the two share prices back together and unfortunately the move has coincided with a gold price that has been crushed. When the company announced the split, the Gold Fields share price was at 105 odd ZAR a share. Add the current Gold Fields price, last at 8269 and Sibanye Gold, last at 1269, and I get to nearly 95 and a half Rands. A drop of over 9 percent. Granted, the Rand has strengthened and the gold price has fallen in that time, but at face value many will say, "oh well that didn't work". A year or two of results first before making those comments, but it might not look pretty in a while from now.

We have a long standing {insert word that rhymes with spoke/smoke/broke} in the office here, where Byron can't sleep before the BHP Billiton results because he is so excited. Of course that is not true, but we always have a chuckle. Not laughing I guess is Marius Kloppers. Or perhaps he is, who knows? We did know that he was going to retire at some stage, that was telegraphed last November. This morning, along with interim results, Marius Kloppers has announced his resignation. No doubt to spend more time with his fishing rod, I mean his family and garden. Kloppers has been at the helm of BHP Billiton since the 1st of October 2007 when Chip Goodyear resigned. Previous to that Kloppers ran the Non-Ferrous Materials division, and has been at the group since the beginning in 2001. Kloppers went to school just down the drag here, at the corner of Jan Smuts and Empire, at Helpmekaar.

Kloppers has worked at Mintek and Sasol for a short amount of time. He first however obtained a chemical engineering degree from Tuks and then he managed a Phd from MIT. That was not good enough, he went on to get an MBA from INSEAD. And he is a vegetarian, so no horse meat has passed through those lips. I found quite a *nice* old bio in the FT of Kloppers, it is worth a read: Man in the News: Marius Kloppers. Because the retirement coincides with an expected slump in profits, comparisons are drawn between Cynthia Carroll of Anglo American and Tom Albanese of Rio Tinto. But, if you quickly look at the respective share prices from when Kloppers took over, you can quickly tell that he has done a whole lot better. Kloppers took over on the 1st of October 2007, the month coincidently that the Dow Jones and S&P 500 reached their all time highs, so that should have been near the top I guess. Since then, to present day, BHP Billiton is up 35 percent in London. The FTSE 100 is down over a percent since then. But more importantly, if you want the Carroll and Albanese comparison, then you will quickly see that Anglo American is down 37 percent since then, and Rio Tinto is down 8 and a quarter percent. So there you go, if you needed a comparison.

Kloppers is young, only 50, I suspect that he will pop up somewhere soon, there would be a certain irony if he went on to replace Andrew Liveris (an Aussie by birth and in contention for the BHP Billiton job when Kloppers got it) at Dow Chemicals in the US. So, good luck to him and what looks like a really tight family. The fellow replacing Kloppers looks like a magnificent replacement. He has extensive mining and petroleum experience, having worked for both Rio Tinto and BP. This replacement does tell me that BHP Billiton are increasingly going to move towards the energy side of their business, something that they have been doing already of course. Andrew MacKenzie was actually hired by Marius Kloppers from Rio Tinto, where he spent 4 years, the previous 22 years had been at BP. In his last years at BP, MacKenzie was working for BP's petrochemicals business in the US. He seems like a wonderful replacement, I suspect that he definitely will be a one term guy, six odd years, because by that time he will be 62 or so. An excellent end to a career at BHP Billiton and a wonderful replacement in the form of MacKenzie ushers in the "energy" era for BHP Billiton.

Now, we can actually get to the interim results themselves having dealt with the management change over at BHP Billiton. Revenues decreased by 14.1 percent to 32.2 billion Dollars. Phew, that is a big number for a materials company. Underlying EBIT fell 38 percent mostly as a result of inflationary pressures, a weaker US Dollar and of course the most obvious one, lower commodity prices. Better volumes and good cost controls were not enough to offset the decline in underlying commodity prices. Profits excluding exceptionals clocked 5.7 billion Dollars, but attributable profits including exceptional items of 1.4 billion Dollars slumped 58 percent to 4.2 billion Dollars. This is the part that you could be forgiven for thinking that Kloppers was pushed as a result of lower profits. The last time I checked, Marius Kloppers himself had very little sway over commodity prices. The company continued to divest from non-core assets, remarkably asset sales totalled 4.3 billion Dollars (announced and completed) for the half. Astonishing, translate that to Rands at the current exchange rate, 8.835 and you get to almost 38 billion Rands. Or basically a company locally that would just sneak into the top 40. Wow.

The impact of the lower commodity prices was across four divisions, Iron Ore where total price variance was 3.169 billion Dollars. Phew. Metallurgical coal experienced a similar thing, total price variance in this half topped 1.6 billion Dollars. Add in energy coal at 439 million Dollars and the Aluminium and Nickel business at 385 million Dollars, and there you have the difference. Held sway by the fast moving commodity prices and a function of supply and demand, restocking and running down of inventories, who knows the truth behind the Chinese slowing? That leadership change conference in November was key, both to confidence in the Chinese economy as well as the newer leaders being committed to continued infrastructural development. That said, Chinese commodity demand is moderating, expectations are still however that demand growth rates are set to be in the 2 to 4 percent range per annum for BHP Billiton's core products. Energy, copper, iron ore and metallurgical coal no doubt.

The sensitivity of the moves in the underlying commodity prices is remarkable, a one Dollar a ton move in the iron ore price has a 110 million Dollar impact on the company. A one Dollar move in the price of a barrel of oil amounts to a 45 million US Dollars swing. The other big factor is a one cent move in the Aussie Dollar relative to the US Dollar, that swing is as much as 110 million Dollars. All these important swing factors are found on slide 34 of the BHP Billiton interim results presentation. The last slide is most interesting, their three core businesses, the petroleum, iron ore and base metals all separately have higher EBIT margins than the average group margins. Equally, margins have been falling in an "uncertain" commodities pricing environment.

The company announced cost savings of 944 million Dollars, around 1.9 billion Dollars on an annualised basis, shareholders will no doubt be pleased with these initiatives. But the part that we care about most is direction, and perhaps always in the present, valuations. Excluding exceptional items, the company made 106.8 cents per share, a 43 percent drop, but still boosted their dividend by nearly 4 percent to 57 US cents. At current Rand/Dollar exchange rates that translates to 9.43 ZAR of half year earnings and a dividend of 503 cents per share. On these numbers if you annualise the half, the stock is not dirt cheap anymore. But, and this is a big but, I suspect that the gas assets will start becoming more and more important to the future of the company.

The few research notes that I have read so far suggest the appointment of MacKenzie means business as usual at BHP Billiton and no earth shattering deals. The company will continue to invest in their businesses where they see future demand. This is key to the future, it might sound like a simple thing to get right, but this company has importantly the quality, the geographical and commodity mix diversity to see you through the cycles. And the last cycle was severe, about as bad as you are going to see. We continue to recommend this company as the core part of our client portfolios to leverage off the longer term commodities consumption story in developing countries.

Byron beats the streets

The statement says that if you exclude the abnormal profit (which is perfectly normal as it is a once off) headline earnings per share are expected to be between 17% and 19% higher for the 6 month period ending December 31 2012. This is compared to the 6 months in December 2011 where the company made 613c.

If you add 18% middle of the range to 613c we should be expecting R7.23. Expectations for the full year are for around 1527c of earnings. This makes sense, the second half normally outperforms the first. Trading at R232.50 the stock trades at 15 times this year's earnings. But that is not the only reason we hold them. We feel there is a lot of value to be unlocked and the sum of the parts is worth more than what the market affords the stock.

As far as growth in earnings is concerned, 18% is very commendable for a company who boasts revenues of over R139bn. They are a great proxy for growing economies around the world and then of course you are buying the M&A skills of the legendary Brian Joffe who I am told is one of the most talented negotiators in the country and clearly has a great eye for a good deal.

Bidvest made two deals at the end of last year which looked very compelling, targeting the growth of the South African consumer. That is how conglomerates work. They use their size and scale to take a small business and grow it faster than if it were operating independently. It makes perfect sense, access to capital, lots of potential synergies and of course the intellectual talent the company has built over the years.

We are optimistic about global GDP growth and even more optimistic that Bidvest can outperform that. The stock price has had a good run of late, coming from R180 midway through last year to R232 today. When the full set of numbers come out we will look at the actual business in more detail but as far as the trading update is concerned, we are happy to add to the stock even after the share price has rallied.

Crow's nest. Local CPI was lower than anticipated, which is great. BHP Billiton is getting drilled, this is not what people were looking for, even though surprisingly it was a beat. It is pretty much lower across the commodities complex this morning. The gold price is below 1600 Dollars per fine ounce. Yech.

Sasha Naryshkine and Byron Lotter

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Tuesday 19 February 2013

Shoprite slips on sloppy outlook

"Shoprite is still very much a South African business, with the fast growing non RSA business contributing 12.3 percent of group sales in this first half. For the full year to end June 2012 that number was 11.0 percent. Phew, that is growing at a serious click. At the full year stage the presentation documentation suggests that 100 million folks went through their Non RSA stores. Wow, now that is a big number. Angola strangely at that point (June 2012) was their biggest contributor to non RSA sales. You might have been forgiven for thinking that Nigeria would be the place where it was happening for them."

To market, to market to buy a fat pig. Yesterday was rather quiet as the Americans were closed for a holiday, presidents day. It was a chance to reflect on the 43 presidents before the current sitting one. Currently there is George Bush senior and junior, Bill Clinton and Jimmy Carter, who is 88 years old. So, out of the 44 presidents that there have been in 74 different terms (I think I have that second part right), five are currently alive, including the sitting president. But presidents day is the celebration of the 1st American president's birthday, that of George Washington. And all the subsequent presidents get "celebrated" too. Although the NYSE was only founded in 1817, there was an earlier agreement, the Buttonwood agreement signed under a tree by the same name, in 1792. 3 years after independence from the British. And from there was born the best example, in scale, known to man for opportunities to be successful in the business place. Democracy coupled with capitalism made America what it is today. And don't you dare say nearly bankrupt.

Talking democracy, yesterday was perhaps the start of something fresh and new that I suspect the chattering classes were waiting for. The 65 year old, but still very health looking Dr. Mamphela Ramphele started a new movement which will lead to a new political party to contest the 2014 elections. She has launched Agang, which as per the Facebook page translates to "Build South Africa". Agang in the Nguni languages means Build. Is this something to get really excited about? Like I said above, democracy and capitalism combined together are truly a great mix for wealth creation. Dr. Ramphele covers all the necessary bases, the historical connection to Steve Biko is huge and shouldn't be completely discounted. That said, she is an academic, she has been involved on the world stage at the World Bank, she has been involved in business, she resigned as the chair of Gold Fields just last week. She seems like the human face that has been lacking. We will see how much momentum she gets initially and whether she, and whomever joins her, can maintain that momentum.

Over in Spain the folks at Iberia have had to take a long hard look at their business and unfortunately have plans to shed 3800 jobs. Of course this was met with violent protests from the unions, and "things" turned ugly. Out with unprofitable routes, and cost cutting at pace. According to the New York Times, Iberia loses 2 million Euros a day. That is unsustainable. No entity can suck that up. Byron and I had this discussion yesterday and he disagreed on my proposals for long haul flights that carried fewer staff and involved a greater deal of self service by passengers. The only reason I use (rarely at that) a long overnight flight is to get to my destination. Time for the work force to skill up, reliance on government or quasi government type jobs, that is gone. Big government is unsustainable. But hey, tell that to the people who wear black caps with little red stars. That did not work in Russia, that did not work in Eastern Europe, extreme socialism discounts the human element.

Jozi, Jozi 26^o 12' 16" S, 28^o 2' 44" E Platinum stocks got whacked, in particular Amplats as news came through that inter union violence had again risen at their Siphumelele mine, part of the Amplats Rustenburg mines. Siphumelele is next door to the Khomanani mine, where remember shafts one and two are targeted as potentially being shuttered in the operational review. So, as you can imagine tensions are already high. The official Amplats parent, Anglo American release is as follows: Incident at Siphumelele mine in Rustenburg. So it seems from that release that NUM shop stewards were told to vacate their offices by the workers committee at the mine. Now, what the release does not say is that rival union AMCU was involved here. That is what is being widely reported. So, once again it is about union rivalry.

And what is in it for championing the causes of the working class? Money. Unions make money off their members, by entering into the collective bargaining process on their behalf. How much money the unions "make" in South Africa is unclear to me, but what is clear is that being a shop steward for one of the unions comes with better working conditions than the miners themselves. And more money probably. In 2010, Cosatu's revenue was nearly 71 million Rands, that was from their affiliation fee collections, grants received and political levy. That information is available from the document: Cosatu Secretariat Report 2011. Now, I can't find the National Union of Mine Workers annual income. It turns out that a few unions are rather late with their financial statements, no wonder that my sneaking around could not find the relevant documentation. I managed to find however this story from the M&G titled: State nails errant unions. There is a key paragraph in there:

"Unions receive membership fees from their workers, which Watkins estimated at an average of R30 to R35 per member per month. This means that Cosatu unions receive R60-million to R70-million a month in dues. But Watkins said that payments for pension and provident funds, funeral schemes and many other offerings far exceed membership fees and that unions were big business."

Yowsers. See what I mean. The business of being in unions is big business. A multi million Rand business. Now you can understand why there is violence at the mines and union turf wars, it ultimately boils down to money and a "what is in it for me" attitude. So much for the collective and taking the workers needs and putting them first. You have of course seen much written about this. David McKay as ever has a cracker of a story at MiningMx: Rival unions shatter fragile peace at Amplats. His conclusion is worth noting: "It will be interesting to see how the South African government responds to this latest setback for union peace after president Jacob Zuma declared in his State Of The Nation Address to parliament last week that public protests would no longer be tolerated." You heard anything yet?

So, what is the fallout expected to be? Well, as far as I can tell, don't expect that specific mine to be open today. More lost revenue for the company who is under pressure already. Very bad. Bloomberg and CNBC Asia ran the stories in their headlines. Err.... at the top of the hour. And I have already seen a research note that suggested that this event suggest further downside and heightened risks to mining equities in South Africa. As a journalist friend of mine said: "Money, money and more money, while people face losing their jobs. It’s quite sickening actually." As for Byron, I might actually have to tie him to his chair today, as he becomes more and more enraged with the unions in South Africa.

Byron beats the streets

When you consider these added costs, the R140 million charge probably having the biggest impact, headline earnings per share are expected to be down between 18% and 25%. That equates to between 312c and 341c a share. This is not good for a company that is priced for strong growth. Had it not been for these extra charges the company looks to make between 410c and 438c. That sees growth of between 2%-9%.

Again that is not good enough for this company. Annualise the top of the range 438c and we get 876c. Trading at R185 and 21 times forward earnings you can see why I say these results are not good enough. But as an investor we are not at all unhappy. I go back to something I have spoken about a lot of late. We are not worried about short term earnings. Of course it is important but it is only one element to consider when deciding on the long term bigger picture.

We have full faith in the Massmart management team who are investing heavily now, for the future. Africa is hungry not only for food but for appliances, sports equipment, entertainment devices and everything else that makes our lives as comfortable as they are. It is not going to be easy getting it there and this will be an expensive exercise. But once it is there they could experience growth that is unattainable anywhere else in the world. We will continue to add to this stock and will remain patient.

As for the share price, it was actually up 1.8% on the news yesterday. Obviously these numbers were slightly better than expected. However it lost that all today and more as Shoprite released disappointing numbers. Sasha has covered those in intricate detail, as always.

Shoprite has released results for the six months to end December 2012 this morning. Sales for the 6 months increased 13.2 percent to 46.723 billion Rands. That is a big number. Net profit for the period was 1.697 billion Rands, headline earnings clocked 1.690 billion, which was an increase of 18.9 percent. Growth in HEPS was more muted however, remembering that the company raised money through a share issuance last March. And extra 27 million shares were issued. Good for the company to raise money at what many would consider, a lofty share price. But we will get to that part later. Outside of South Africa (read as the rest of the continent) sales cracked on the pace, with turnover up 28.2 percent. Constant currency growth was very, very impressive managing to grow by 23,5 percent. See, stop worrying so much about the valuations.

Shoprite is still very much a South African business, with the fast growing non RSA business contributing 12.3 percent of group sales in this first half. For the full year to end June 2012 that number was 11.0 percent. Phew, that is growing at a serious click. At the full year stage the presentation documentation suggests that 100 million folks went through their Non RSA stores. Wow, now that is a big number. Angola strangely at that point (June 2012) was their biggest contributor to non RSA sales. You might have been forgiven for thinking that Nigeria would be the place where it was happening for them. At June 2012 Shoprite had also only just opened their first store in the DRC. The DRC, which as Shoprite points out (and this all happens in a territory where extreme violence is a way of life) has shown nearly a decade of 6 percent real GDP growth, astounding. Many believe that the DRC could be the real Africa unlock of extreme wealth. The country possesses extreme mineral wealth but yet struggles with conflict after conflict. A young and violent population. But with major risks come potential great rewards, bearing in mind that the country is able to have these growth rates against that sort of backdrop. Imagine the potential.

*Nice* little factoid, basically for every 1 ZAR in sales (imagine your Checkers basket) the company makes after all costs 3.6 cents. Retail is an incredibly tough old business folks, and these guys are amongst some of the best. Just bear that in mind next time you are standing in the queue, take a look around at the staff compliment and store infrastructure. And how well it runs, that does not just happen, that takes an enormous amount of skill.

Shoprite points out that 74 supermarkets were opened last year, 56 of those in South Africa, the rest across our continent. The company creates employment for 109 thousand people, those shops opening and also further beefing (and not horsing) up their infrastructural development saw another 6700 jobs being created. Retail jobs. If you do a quick analysis of the South African economy over the last decade plus, that is one of the strong growth points. At the expense of the old traditional part of the economy, mining and manufacturing. Shoprite reported that they had managed to continue to gain market share, South African sales increased 11.5 percent, which is comfortably ahead of the 8.2 percent growth rates in local food sales across the industry.

Valuations. I told you that I would get to this part. The company reported headline earnings per share of 315.9 cents per share, with an interim dividend of 123 cents. Last years HEPS was 590 cents. The stock trades at 170 odd Rands and is down over four percent this morning as these results clearly disappointed "investors". OK, but this perhaps explains more than anything else why the stock trades at a premium. Their shareholder analysis breakdown, first a list of who really owns the stock, Shareholder Analysis:

So, as you can see from that table, 61 shareholders own 83.58 percent of the company. And most of those as you can see from the second part that I hacked are "committed" long term holders.

These are the entities or shareholders that own more than one percent of the shares in issue. So, what you can see here is that Christo Weise, the GEPF, Shoprite Checkers and Whitey Basson are the South African shareholders. The international institutional shareholders are the other main shareholders. And in their world, paying between a 20 and 25 multiple for these growth rates is not out of line. Most especially when taking a much longer term view on the stock. So, I suspect without thinking too hard about the current valuations, these shareholders find Shoprite as a great investment for leveraging off the low base that is African retail sales.

Crow's nest. German ZEW numbers beat by a whopping margin, sentiment is obviously improving a lot in that part of the world. That is the very good news. The very bad news is that the noise around Amplats continues to get louder and louder. That is the awful truth, union turf wars. And I have not seen any government response as of yet.

Sasha Naryshkine and Byron Lotter

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