To market, to market to buy a fat pig. Markets over the seas and far away in New York touched five year highs again, in part good economic news in the form of the ISM manufacturing index, which comfortably topped expectations. Earlier in the day we had seen the European unemployment number hit a "Euro era" record high at 11.9 percent. If we had that number we would be dancing in the streets. The S&P 500 closed near the session highs to register a modest, but important gain. Blue chips, in the form of the Dow Jones Industrials, are only seventy something points, or half a percent away from the October 2007 numbers. Yes, that was a long time ago. But. According to my trusty inflation calculator, "What cost $100 in 2007 would cost $110.35 in 2012." So, on an inflation adjusted basis (and that is moving all the time), the comparable high on the Dow Jones is somewhere in the region of 15 and a half thousand points. But still, it is *nice* to get close to and surpass previous records. Over a 40 year period the Dow Jones has delivered a 1349.21 percent return without dividends.
The 100 metres record for humans across a track was set in 2009. But that gets incrementally better, in 1968 humans went through the 10 second barrier for the first time, the record currently stands at 9.58 seconds, not even a five percent improvement. Not a fair comparison though, because the 100 metre race is to get to zero, whilst company returns are infinite. Companies and stock prices have a far different effect, which we will discuss a little later in perhaps the most anticipated piece of literature written for shareholder, the Berkshire Hathaway annual shareholder letter written by Warren Buffett, the chairman and CEO. It makes for great reading.
In Jozi stocks roared ahead, adding over a percent and comfortably capturing the 40 thousand level again, the Rand continued to be under pressure and it showed somewhat. Resources however were flat, as metal prices continued to be under pressure. And that trend continues today, in particular with a left field development where the Chinese authorities have decided to put the brakes on Chinese property speculation. This is a massive jump and designed to stop folks inflating prices of urban property. Although file this in the drawer of unintended consequences. The State Council in China ordered that all capital gains on home sales be increased to 20 percent, prior to this order on Friday it was around 1 to 2 percent, according to an article that I read in China Daily. I know that this is designed to put the brakes on speculation, but surely a better thought out tax could have been on secondary homes and not primary homes. Surely that would have been better, because most folks I know like to be settled and not flip their primary residence. Even in a go-go speculating climate that is the case.
As a result of these new regulations, the Shanghai stock market has taken a kidney blow, down 3.65 percent on the day, the property developers are getting carried out in a stretcher. There are cement producers and property developers that are down ten percent plus, probably having traded limit down. In fact that is the case with many, anything over ten percent and you get suspended for the rest of the session. I suspect tomorrow might yield some more pain.
This morning we have half year numbers to December 2012 from Bidvest, the listed company that we are closest to. And by that I mean if I lean a whole lot forward in my desk and look right, I can see their stairwell. Byron has a slightly better view of the back entrance to Bidvest. That is what I mean, closest to. Have we seen Brian Joffe? Yes, a few times. In fact, even outside on the street, admiring a motor vehicle, he has a weakness for that, but we all have our vices. Chocolate, food and the like. Brian Joffe has been called the Warren Buffett of South Africa, I suppose because of his style. I have heard this said before, but the suggestion is that 10 Brian Joffes could create over 1 million jobs with this entrepreneurial approach. Huh? Well, since founding Bid Corporation in 1988, listing the business in 1989. Those were dark days for South Africa back then, those were really dark days. But, the man recognized that people need services and according to the Bidvest website the first two acquisitions were Chipkins and then Sea World. And how time flies. 25 years later, the whole business is worth 78.7 billion Rands. Around 8.65 billion Dollars market capitalisation.
But, as they say in the classics, that is history, and whilst history might be a wonderful subject and might have had one of my favourite two teachers at school (the other was my physics teacher), it tells me very little about the future. There is no way in 1939 you could have predicted a united Europe 60 years later. No ways, you would have overwhelmingly gone with more wars, less economic integration. Or a mobile handset revolution in 1980. 30 years ago a digital answering machine was cool, nowadays, that doesn't really exist anymore. All I am saying is that some industries evolve really fast, technology is a good example, other businesses not so much, food changes, but essentially we eat all the time. And I am guessing that is not going to change soon.
And the kind of businesses that Bidvest own, those are businesses with earnings clarity and better visibility. Apart from arguably the fish business, turns out that there are not plenty of fish in the sea. Group revenue increased 11.9 percent to 75.3 billion ZAR, profits after tax were 1.1 percent higher at 2.377 billion Rand. The reason for the slightly disappointing at face value profit number is that in the prior results there was a windfall from a part sale in the Mumbai airport of 399 million ZAR. Excluding that sale, normalised headline earnings were 19.3 percent higher. Basic earnings per share increased 1.9 percent to 724.4 cents per share, the normal dividend for the first half was 324 cents.
Whilst Bidvest might have "many moving parts", the group is broken down into Bidvest South Africa and then their Bidvest Foodservices business. The Foodservices business of course includes Southern Africa, which is a relatively small contributor relative to the other two geographical divisions, Asia Pacific and Europe. Bidvest South Africa contributes "only" 44.25 percent of revenues. And if you drill into the divisional numbers, Freight at nearly 15 and a half percent of group revenues and Automotive with nearly 13 and two thirds of a percent are the most important revenue wise. The Europe Foodservice business is their single biggest division, with 30 and two thirds of a percent of the overall group revenue, the Asia Pacific business second with nearly 18 and a half percent of revenues. Collectively, those four divisions add up to nearly 80 percent of revenues.
Quite clearly it is cars (Automotive) that South Africans get excited about, that division performed well, but Burchmores was disappointing, so clearly that fellow with his bugle wasn't on song. Owning a motor dealership is a tough business at the best of times, I can't imagine managing 110 plus, as is the case with this division. The Freight division is always a good performer, obviously the better the economy, the more freight is being handled. I guess expertise in that bulk business does translate to the foodservice business. Frozen and chilled food makes the world go around, the consumer today expects all the foods to be in stock all the time. Our grandparents just accepted that when grapes were not in stock they were not there, the seasons yielded different fruits and you ate those. Nowadays if your favourite foods are grapes and bananas, you can eat those all year around. Someone of course has to transport those fruits and vegetables around. Equally restaurants, canteens, hospitals and general caterers are reliant on businesses like Bidvest. Simple businesses that are very well run yield very good results.
Revenue is one thing, but more important to the shareholders are profits, you can have all the revenue in the world but have lower profits than a green grocer. I speak without authority on this matter, because I have no idea what the margins are at green grocers. And even if such things still exist on the small scale that they used to exist. And this is where it gets more interesting. Their Financial Services business (Bidvest Bank, Master currency and Rennies foreign exchange) has the best trading margins across the group, contributing only a little over a percent to group revenues, but almost nine and a half percent in trading profits. Bidvest Namibia, (Windhoek is around 1180 kilometres West North West from here, 1255.9 km on roads) is a little over two percent in group revenues, but contributes 7 percent overall to group trading profits. The three biggest divisions however are Foodservice Asia Pacific (15.74 percent), Foodservice Europe (11.8 percent) and Freight South Africa at 12.69 percent. So, ironically, at a trading profit level the group is a whole lot more diversified and less reliant on one specific division. I guess that is part of the genius of having pieced together the group over the years.
So where to from here? The prospects column refers to a volatile and challenging environment, I guess everyone will concur with that outlook. Across all regions when the right acquisition presents itself the group will no doubt pounce. The prospects refers to the Bidvest culture. A keep calm and carry on culture, I recall a sign in the lobby that said "we refuse to participate in the recession" or some other such thing, I must check and see if it is down. If it is down then I suspect that the mood has improved in recent years. Is a forward multiple of 15 and a half times expensive for the company? The yield forward is a little less than three percent. Earnings are expected to grow at around 12 percent for the next three years. There is nothing wrong with that. We continue to add as a defensive investment as much as expecting an unlock of value in due course, with perhaps a geographical split of the group. Not cheap, not expensive, quality is everything as an investor however.
Staying with quality, because quality is everything when you invest, I suspect that you are going to struggle in corporate history to find a company better than Berkshire Hathaway. The returns to the investors in the stock are laid out at the beginning of the Chairman's letter. The Berkshire website is arguably the worst corporate website when compared to market capitalisation, if there was such a thing. The shareholder returns have only ever underperformed the broader market for 9 years out of the last 48. Compounded annual returns of 19.7 percent from 1965 to 2012 have comfortably trounced the broader market S&P 500, which has only returned 9.4 percent over the same time frame. And in case you were wondering, yes, that included the benefit of dividends for the S&P 500, Berkshire paid only one dividend and that was in the early days of the company. If you read towards the end of the newsletter, you might well find the section that covers dividends. Basically you are entrusting the team at Berkshire to be smarter than you. I guess, having invested with them, you should expect them to make better investment decisions.
Whilst some people may get a kick out of making an enormous amount of money and buying fancy things that they don't need. Like Mayor Bloomberg said on a recent Charlie Rose, the reason why I don't have multiple houses is that I can only sleep in one bed a night. But philanthropy aside, Buffet seems to get a direct kick out of having identified a better investment for this shareholders over anything else. And seeing the business that he purchased coming good over time, and outperforming a relative investment.
It is not so much the eye popping returns that catch me, but rather the simplicity of the investment philosophy. The businesses that both Charlie Munger and Warren Buffet identify are ones that have been around a long time. Whilst many wring hands in uncertain environments, Buffet refers to a song "Every Storm Runs Out of Rain" as a chance to make investments in quality businesses. Recently there was the HJ Heinz announcement, baked beans and ketchup, there is a business that he can understand well.
This paragraph however resonates positively for me, and underscores why investors must and should be very patient. And disciplined as well as ignore the short term noise:
- "American business will do fine over time. And stocks will do well just as certainly, since their fate is tied to business performance. Periodic setbacks will occur, yes, but investors and managers are in a game that is heavily stacked in their favor. (The Dow Jones Industrials advanced from 66 to 11,497 in the 20th Century, a staggering 17,320% increase that materialized despite four costly wars, a Great Depression and many recessions. And don't forget that shareholders received substantial dividends throughout the century as well.)"
So what do I learn from reading these newsletters year after year? That investing is the same as owning your own business, or your own property, it is a multiyear discipline. Think about it. If Warren Buffett really had the secret sauce to making money overnight, it would not have taken him multiple decades to get there. The real way to make money in the long term is to pick more solid investments than the next person. Only having done that will you be able to make real money over time. Read the letter, just that portion, it might be the best thing you read all month.
- Byron beats the streets. It is not one of our recommended stocks but on Friday Clover announced an acquisition which I thought was quite an exciting one and certainly makes me like the company a bit more. Of course we like the food manufacture sector but have used Tiger Brands as our preferred entry.
"Clover today announced the acquisition of Nestlé South Africa's Gauteng based Doornkloof property, bottled water manufacturing facility and water rights through a new entity formed by Clover S.A. Proprietary Limited (Clover SA) and Nestlé, called Clover Waters (Pty) Ltd (Clover Waters) (the transaction). As a result of the transactions, Clover Waters will also obtain the right, by way of licence, to manufacture, distribute, market and sell bottled mineral water under Nestlés Pure Life ®, Valvita ® and Schoonspruit ® brands as well as ice tea under the Nestea brand. These brands will complement Clover SAs Aquartz bottled water and Manhattan ice tea brands which will also be manufactured, distributed, marketed and sold by Clover Waters."
The deal will cost the company R58 million and will be settled by the issue of 30% of Clover Waters to Nestle. Clover will then hold 70% of the new entity and Nestle will own the other 30%.
There are two things that I take away from this transaction. Firstly I think it is a great deal because the assets Clover are buying have a strong future in my opinion. Bottled water is a great business as people strive to become healthier and more weight conscious. Water is the route to everything healthy. Bottled water will also be pushed by the lack of trust people have for tap water. South Africa has some of best tap water in the world but more and more people prefer bottled water, it certainly tastes better.
The second thing I take away from this deal is that it is another example of a massive multinational company using a well managed South African company to supply their goods. Aspen did a deal similar to this with GlaxoSmithKline which allowed them to sell and market some of their non-core products in Southern Africa in exchange for shares. At this stage the Southern African region would be considered non-core to a $200bn company like Nestle. But they are still keeping their interests aligned with the region by having an equity stake in Clover.
This could also mean further deals down the line as Clover leverages off the fantastic brands that Nestle have built over the years. It really does create a lot of potential for the company. All in all a good deal for the company and good to see foreign investment still coming into SA. Clover is certainly on my radar.
Crow's nest. Markets under pressure here today at the get go. There are many stocks ex div today, many of the majors, but on balance the market is not liking some of the deadlock in Washington DC and the Chinese housing news. Opportunities. Knocking.
Sasha Naryshkine and Byron Lotter
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