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. This morning we received results from Massmart for the 26 weeks ended 23 December 2012. Remember they released an update a few weeks ago which showed us more or less what earnings were going to look like, I covered it here, Massmart trading update, building for the future. Well no more speculation, here is what the company has done in the past 6 months.
"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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