Money with a dash of Funny: May 2013

Thursday 30 May 2013

Tiger meow, where is the growl?

"Headline earnings per share grew 4% to 818c, if you exclude the dilution from the Dangote acquisition earnings were up 14% to 897c. We have to include the dilution in our analysis however because we will happily include the growth in earnings when those start coming through. Group turnover increased 7% if you exclude the Dangote addition. The stock trades at R290 or 15.9 times consensus earnings of 1820c for the full year. I wouldn't be surprised if that comes down due to the dilution."

To market, to market to buy a fat pig. Some back to earth reality dished out by Mr. Market, there certainly was nobody asking for more when closing time came around. Unless you are a bruised bear that has been beating on a tired old drum for a while, there was a little respite for you on the day, if not too much over the last 12 months. No respite or quarter was given to MMI Holdings, the company slumping 9 and a bit percent and by my measurement falling out of the top 40 companies by market capitalisation. Early days here, perhaps we shouldn't jump the gun. Why did the company fall so much? Well, they warned, on the state of the consumer actually, in their nine month trading update: "Pressure on disposable income is increasing and the market remains highly competitive.". And their new business written, well, that was actually lower. I guess that indicates that either they are losing market share or margins are being put under pressure because the South African environment is becoming more competitive.

The company does point to that, as you see above. And if that was not enough, the fellows over at Santam, were also under pressure as a result of a high claims period, Limpopo floods, fire claims in their commercial businesses, hail damage to crops in the Eastern Cape, drought insurance claims in the Western and Central regions of the country, not good. However, as they point out in the AGM operational update, MiWay and Santam Re are still delivering good results. Santam said that "Gross written premium growth" were "satisfactory considering continued low industry growth." The company also announced that they had sold 500 million ZAR worth of equities and that they had taken out downside protection on a further 2 billion Rands to date.

Now, in the Santam annual report, the company said that they had "assets totaling almost R20 billion". So, that sounds like they are hedging at these levels, for roughly ten percent of assets. And plus, they have sold into a rising market. Are they too cautious? Not sure, time will tell. The stock (-2.1 percent) sank with the rest of the sector, but not much more than the rest of the market, which was down 1.76 percent.

So, in a sense, fewer problems seemingly than MMI, but that is not fair. Including the big drop yesterday by MMI, the stock is up 43 percent plus over 12 months. Santam is up only 11 percent in that time. Discovery is up a whopping 61 percent over the same 12 months, Sanlam is up 42 and a half percent. The ALSI is up 23.3 percent over the same time. To be fair, Santam do not operate in the life business, and as such have not seen the same returns as the others, hence the underperformance. Over ten years however, Santam has crushed the index. And still, South Africans are underinsured. So whilst I suspect there is caution currently, insurance is a good business when well managed.

As ever, we appreciate your feedback. In response to the Famous Brands piece from yesterday in which Byron did a fabulous write up, in case you missed it, here it is: Famous Brands results are great. Sorry, that lame heading was mine, not enough coffee! Well, here is a great piece sent to us from a friend of Vestact!

"Interesting. After all costs and taxes Famous Brands seems to earn nett R150,000 per store; Wendy's $9,600; Burger King $18,000; Yum Brands (KFC, Pizza Hut & Taco Bell) $43,000; Tim Horton's $94,500; and McDonald's $158,000.
So McDonald's ultra efficient, Tim Horton's is probably the stock with the best growth potential on the TSX, YUM is big in China where it is not all plain sailing, and Burger King and Wendy's probably both have good recovery potential, both having emerged recently from major surgery and reconfigurations.
But profitability all over the place - quite an unusual scenario for an industry.
Subway with its 35,000+ outlets is still private (Fred de Luca and his medical doctor partner - so holding company Doctor's Associates) so no figures available. Let me guess $25,000 per outlet to give annual profits of $875m.; Wendy's $63m; Burger King $235m; Tim Horton's $403m; Yum $1,54bn and McDonald's $5.5bn.

And Famous Brands R332m from R11m just 11 years ago. Compound nett profit growth per annum of 36% compared to McDonald's 13% and Spur also 13%. Quite an achievement."

Byron answered the piece almost straight away, with a great set of observations about the market in general:

"I have 2 interesting observations here.
The first one is first world, my friend went to Paris in December. He said that the entire front end of the McDonalds was mechanised. You basically placed your order and paid at what looked like a big ATM machine. I think this is a thing for the future, not good for employment however.

The second is third world. I heard the MD of Yum! Brands Africa on the radio the other day. He said that the KFC in Lagos had already hosted a few weddings! It is such an aspirational privilege to eat out and there is a huge lack of choice in many developing countries. What we consider a normal way of life is another man's aspiration."

Thanks everybody. Comments like these make it easier to understand the businesses that we are buying, what is fast food and convenience for one person is luxury for another, I think that we can be in agreement on that!

Byron beats the streets on Tiger Brands today. The company that was founded seemingly in 1896, well according to their website anyhow. Tiger Oats, the company that renamed to Tiger Brands in the year 2000. Fifteen years ago the share price low was 21.13 ZAR. Before you say, well, it is not even 300 now, remember that the company unbundled Astral in April 2001, Spar in August 2004 and Adcock Ingram in late August 2008. If you had continue to hold those, notwithstanding recent underperformance by Astral and Adcock, you would have done fabulously well. For the record, you got 1 Spar and 1 Adcock for every 1 Tiger you held, and 0.25 shares of Astral for every 1 Tiger Brands shares. The collective value of those companies is close to 500 bucks, 495.6 ZAR as of this morning.

And add in the dividend flow over the last 15 years from those four stocks, you get a far bigger number. I did the math. It was not as easy as I thought, but eventually I came out with a number of 118.5125 ZAR for all your collective shares. If you had gone to sleep in 1998 with 4 Tiger shares worth 20 odd Rands apiece, you could have returned today to see your value worth nearly 500 ZAR and be owning 4 Adcock shares, 4 Tiger shares, 4 Spar shares and 1 Astral share, plus nearly 119 Rands worth of dividends. That I guess would have earned some interest. What a great return! And now for the results, thanks Byron!

Tiger Brands

As you can see from the image above which I hacked from their latest annual report, the company is split up into three divisions. Amongst the consumer brands includes Purity, Energade, Oros, All Gold, Black Cat, Koo, Crosse & Blackwell, Fatti's & Moni's, Doom, Peaceful Sleep, Kair, Ingram's, Beacon, Jungle and Maynards to name just a few. I am sure you have heard of a few of those.

So where do they make the money? Below I cropped the segmental operating income from the latest numbers. As you can see, grains contribute nearly 40% of profits, consumer brands close to half and exports the rest. The exports business is basically their African growth story. Nigeria includes the recent acquisition of the Dangote Flour Mill, we will cover that later.

The Numbers. Headline earnings per share grew 4% to 818c, if you exclude the dilution from the Dangote acquisition earnings were up 14% to 897c. We have to include the dilution in our analysis however because we will happily include the growth in earnings when those start coming through. Group turnover increased 7% if you exclude the Dangote addition. The stock trades at R290 or 15.9 times consensus earnings of 1820c for the full year. I wouldn't be surprised if that comes down due to the dilution.

The grains division grew 6.7% but operating income decreased due to price differentials arising in the rice market. The company has embarked on many capital projects so far this year in order to grow this division.

Consumer brands turnover was flat due to raw material cost pressures which increased prices and decreased volumes. As you know the consumer is under pressure and these price increases are taking its toll. Again a lot of capital projects are being embarked on in this division in order to improve manufacturing efficiencies. The Mrs Balls acquisition was also completed in the period.

Exports grew 13% and operating income grew 9%. This is where the excitement is coming from. The Dangote acquisition in Nigeria is only expected to start contributing after two to three years. There is a lot of work to be done there but you can see why milling and processing grains in a poor country with 162 million people sounds attractive. As long term investors we are more than happy to wait for this to bear fruit.

Yes the numbers are not exciting but the South African economy is slow at the moment. I do not believe this will be forever. On top of that they have strong relations with businesses such as Shoprite and Massmart who are planning on massive expansions into Africa. They will bring Tiger products with them without Tiger having to worry about building shopping centres and other infrastructure. We are very happy to buy into the biggest food producer on this hungry continent of ours.

Home again, home again, jiggety-jog. Another savage Japanese sell off hasn't really rattled the market here, Europe seems just fine too. Perhaps the Buffett buying is boosting sentiment a little. The president gave a speech, not really that inspiring and is now off to Japan. Sayonara Zuma-san.

Sasha Naryshkine and Byron Lotter

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Wednesday 29 May 2013

Nampak. No Marshall. Africa plan.

"And coupled with earnings not meeting expectations was perhaps the one announcement that shareholders did not want to hear at all, that the chief responsible for the turnaround, Andrew Marshall, was looking to end his short stint at Nampak. I suppose that he could say that it was job done, but still, shareholders would have wanted more of him, not less. The retirement date is set for March 2014, after which Marshall would have completed his five year contract with the company."

To market, to market to buy a fat pig. Holy smokes. Records here there and everywhere. Well, not quite, but nearly. The local equities market zoned in on 42 thousand points, finishing a mere 29 points away from that mark for the first time. The main reasons were twofold, one, a movement higher in commodity prices which were spurred on by better economic data out of the US (and Europe), and two, worse than anticipated data out locally led to a slide in the Rand to the US Dollar to the worst level in four and some change years.

That is good for the equities that are listed abroad and priced in ZAR, but not so great for the local economy. Imported inflation is creeping in here locally. We will discuss all of that data today, we will look at Nampak, which disappointed the market and we will look at the commentary from the MTN AGM, Byron will look at those. There was also some really useful feedback on Famous Brands, we will publish that too. Some good stuff, some bad stuff, and some real, real ugly stuff emerging yesterday.

But first, let us deal with the good stuff. The WSJ has the headline: Home Sales Power Optimism. And this is true, the more optimistic that there is a value underpin in the price of your property, the greater the chance of you spending or even renovating on that asset. Or acquiring that furniture, or a new wardrobe. That sort of thing. So I guess then it wasn't surprising that at the same time that The S&P/Case-Shiller Home Price index rose by 10.87 percent over 12 months that the consumer confidence number would also bash expectations.

What is important to note, from the 20 city download is that prices are nowhere near the highs of 2006, check it out when you download the .pdf via the above link. I had fiddled with a wonderful image, and then was reminded that it was a copyright piece. But the point I wanted to make was that the highs of 2006 were around 210 on the index. Years to go before that particular high is reached again, that is my sense. The other release that got everyone excited as well was this one: Conference Board Consumer Confidence Index. Now what I find quite funny though, that the base for the index, 100, was back in 1985. What? Does that mean that confidence has trended lower since then? What happened back in 1985 that it is better in 2013?

In 1985 Reagan was sworn in for a second term, the song "we are the world" was recorded, the worlds first autofocus lens was released by Minolta (remember them?), Gorbachev became the leader of the USSR, South Africa ended their ban on interracial marriages (no really), we discovered that the ozone layer had a hole in it, president of South Africa at the time, P.W. Botha declared a state of emergency, Tertis was released and DNA was used in a criminal case for the first time. The world population was less than 5 billion back then. So, what was so great about 1985? I can't see it. Oh, and Justin Bieber would not be born for another 9 years, isn't that astonishing!

Well, this one from yesterday showed that US consumers confidence was at a five year high. Expectations for an improved labor market had risen too, those expecting the economy to improve were more, those expecting the economy to worsen were fewer. I am ordinarily wary of surveys, because one event can change everything, change the way that people react in the short term. But it meant record highs for the Dow Jones Industrial, and a strange metric that everyone seems to be keeping an eye on, the 20th consecutive Tuesday of gains for blue chips. That is weird. Why would you care which day stocks went up or down? Seemingly some people do care. They ("those" people you know) have also measured that the Dow Jones has not yet been down three days in a row, this year that is. So what? Do I care? Not really. What matters is what you own, not what the index does. Pfff...... Markets are indicated lower today after closing off the best levels for US stocks. Better luck next time.

Local GDP. What went wrong? Why was the miss much worse than consensus? Consensus, as far as I could understand was for quarter on quarter growth of somewhere in the region of 1.7 percent, yet the actual print was around 0.9 percent. Which isn't pedestrian. It is crawling. Well, the single biggest industry going backwards is the manufacturing sector. Too expensive. Fixed costs have risen at an alarming rate over the last four to five years and finally these are the consequences. The manufacturing industry, which used to be a massive contributor to the economy is only 12.6 percent now. I suppose that can be viewed two ways, first the contributors to overall GDP: "Finance, real estate and business services - 22,4 per cent", "General government services - 16,8 per cent" with "The wholesale, retail and motor trade and catering and accommodation industry - 16,0 per cent".

And then I guess a rewind to the past, when manufacturing was a far bigger contributor. But a fall of seven percent plus? Well, there were a few public holidays in the first quarter that normally fell into the second quarter, obviously losing some steam. Newsflash, I guess the weaker Rand does not help manufacturing minister Davies. Pfff... I guess the fact that the labour minister, Mildred Oliphant, who said yesterday that illegal strikes had cost the country 17,290,552 hours last year, that could be a factor of sorts. That is 720,439.66 days. Or 1973 years. That is quite a lot of time lost there! Most of that was in the mining and quarrying sector.

And what is the state response? Well, the Mines Minister tabled her budget speech yesterday, you can find it at the Department of Mineral Resources website. I was particularly struck with this one line, that seems to go around and around (a lot): "It is the truth that South Africa has the world's largest mineral endowment, with an estimated value of US $3.8 trillion dollars. These endowments, if properly exploited using the combination of appropriate policies and regulatory framework such as we have, we are more than capable of breaking the back of the triple evils of poverty, unemployment and inequality."

Meanwhile just this morning there is an announcement from Sibanye Gold, that they could cut 1100 jobs. So much for that. But if you read the speech further you will see that under the heading titled Shale gas, there is a little interesting paragraph: "We are engaging legal processes to finalise the establishment of a State Owned Mining Company." Do you know what that sounds like to me? It sounds like the state are saying, OK, there is this reserve under the Karoo that we are going to exploit, currently no private companies do this in South Africa, so let the state get rolling here. The worst possible idea if I think about it. Hopefully I am dead wrong. And the whole idea that a relationship with the Russians could lead to something great, I am not sure that the Russians have anything but their own agenda. Again, hopefully I am wrong with that!

GDP not good, Mines Minister incredibly upbeat against what is the backdrop of poor, poor news, seemingly. I hope she is right.

Results from Nampak yesterday that Mr. Market did not like at all. I am not too sure why there was such a large overreaction, but a miss of the markets estimates is often met with aggressive selling, IF of course the stock has been up sharply over the last twelve months. And all of those things happened yesterday. Nampak stock, before yesterday's open and the number release was at 37.30 ZAR per share. A year ago the stock was at 22.34 ZAR, so you can quite clearly see the absolutely fabulous return that shareholders have enjoyed. Yesterday the enjoyment was nowhere to be found. The stock fell hard, down 4.77 ZAR, or 12.79 percent to end at 32.53 ZAR. I guess you could still say that the 12 month return has been fabulous, but clearly more was expected on the earnings front.

And coupled with earnings not meeting expectations was perhaps the one announcement that shareholders did not want to hear at all, that the chief responsible for the turnaround, Andrew Marshall, was looking to end his short stint at Nampak. I suppose that he could say that it was job done, but still, shareholders would have wanted more of him, not less. The retirement date is set for March 2014, after which Marshall would have completed his five year contract with the company. The board appreciates the man for the work that he did: "The board wishes to thank Mr Marshall for his valuable contribution to the group. During his tenure the groups expansion into the rest of Africa was accelerated, under-performing businesses were closed or sold and profitability improved significantly." Spending more time with family and also time for new and fresh management, says Marshall. Well, good for him, and jolly well done!

The main anxiety was over margins, and I guess costs. Locally the business struggled with imports (cheaper) and lower demand, which we can see in some of the GDP numbers. Plus, big expansions in their glass and cans businesses saw them accepting lower prices for longer term contracts. I suppose that makes sense at some levels, lock in the customer for longer in order for less volatile sales numbers.

Essentially, as Marshall said in his interview on CNBC's closing bell with Samantha Loring: Nampak’s Interim Results with CEO, a short term knock for a 6 to 10 year lock in! That adjustment accounted for 150 basis points, whilst the weaker South African economy accounted for a 100 basis point reduction. So there you go, the margin decline essentially explained. Marshall says that by taking the knock now, and securing the longer term contracts with multi-nationals, investors should in essence be happy. Yes. I suspect that he is very right, these investments take a long time to bear fruit, these businesses are run for the longer term.

Check out the geographical split in the graphic below, taken from their report: Interim report and dividend declaration for the six months ended 31 March 2013. What is quite amazing is that the UK business, which essentially sells plastic bottles to the dairy industry in the UK, has similar margins to the local business. And that is where the disappointment came through, as Paul said, this sounds like the old Nampak, making excuses for the South African businesses. Check it out:

Nampak has traditionally always been a good measure of the South African economy. You could and can get a sense of what the local consumer is up to. It is interesting to note that in their cans business that people are eating more fish, but less fruit and vegetables. And the paint and aerosol cans business was a little lower in terms of volumes. Plastics, flat, lower drum sales, crate demand "moderate". We haven't run out of tissue paper, thanks to Nampak, remember the crazy story about Venezuela a few weeks back running out of the stuff.

The real growth however is going to come from the rest of our continent, where the margins are much higher, nearly double here locally, because there is of course a much higher barriers to entry in those places. The can factory in Angola is cooking, that was the example used. The African division grew profits 39 percent. That business, the rest of Africa portion, has quadrupled in five years. I am not suggesting that is going to continue. Not at all, but you can clearly see what is happening. But each country in Africa has a different set of businesses currently. Marshal said that the plan would be to replicate the model here in each territory. The major expansion territories will be Angola, Kenya and Nigeria for the time being, investing 175 million Dollars in the process. Those monies were actually raised in the US, and are 7 to 10 year dated, at what they call extremely competitive rates.

Best guess, trundle along here locally and grow rapidly through the rest of our continent in the coming years. It is not without execution risk however. And the stock hardly looks overwhelming cheap anymore, on a 15 multiple. Bidvest stepped away a long, long time ago, late 2008, before Andrew Marshall was there. However, with profit projections of 15 percent per annum, and a current yield of around 4 percent I would say that this is a steady eddy stock. One for those kind of portfolios that you can shelve the shareholding and wait.

Byron beats the streets

Yesterday we received a business update for the 4 months to 30 April 2013 from MTN. I am still constantly amazed by the subscriber growth of this business. Not because I think the numbers are not there but because off a constantly higher base the growth remains consistent. MTN are expecting to service 200 million people by the middle of the year. That is astounding.

The exact number for this period came in at 197.4 million, a 4% growth for the period. To put things into perspective, in the last report ended 31 March 2013, MTN had 195.4 million subscribers. That means they have added 2 million subscribers in a Month! By the end of 2004 the business had just short of 9 million subscribers. The power of compound growth, 4% does not seem like much but when you put things into perspective you look at it differently. And that was only ten years ago.

On the back of this subscriber growth revenues grew 5.6% year on year thanks to a good performance from MTN Nigeria. Of course the weaker rand has been beneficial for a business who report in Rands but get most of their income outside of the country. Rand reported revenues are up 15% year on year.

There have been a few issues in Nigeria with regards to the quality of their network. This is cleared up in the update.

"The main focus for the Nigerian operation is to improve network quality and capacity to enhance competitiveness and cater for higher usage. We have made good progress on our capital expenditure rollout programme and continue our constructive dialogue with the regulator, the Nigerian Communications Commission, regarding its recent determination that MTN Nigeria is a dominant operator in that country."

I guess with more control and power comes more responsibility. They also talk about South African operations which remain fairly muted as earnings marginally declined. If it weren't for good data and SMS growth this would be even worse. Fortunately this business has huge geographic diversification.

"The Group's operations in Iran, Ghana, Sudan and Uganda showed healthy growth in both revenue and subscriber for the period. Group data and SMS revenue continued to expand strongly in most markets, increasing its contribution to total group revenue to approximately 18%."

That last sentence is key. 18% is huge when you consider that data was barely mentioned a few years ago. And we expect this to only get bigger.

In a separate announcement the company announced that former CEO and the man who brought MTN to such great heights, Phuthuma Nhleko will be taking over as chairman from Cyril Ramaphosa. I take one positive and one negative from this turn of events. The positive is that over the years I am sure that Phuthuma has built quite a large share holding in MTN. This means that his interests are aligned with shareholders. The negative however is the temptation to take a more executive roll. It may be quite distracting for Sifiso Dabwengwa to have his former boss as chairman. Overall it is probably net neutral.

Crow's nest. Markets are much lower across the board here, searching for a reason is not hard. Markets were lower in the US when most of our time zone signed off, it was a matter of catch up in some senses. It seems like the currency is heading towards ten to the US Dollar, a level not seen since the financial crisis. And ironically the rest of the developing world is seemingly making progress. #Winning somewhere.

Sasha Naryshkine and Byron Lotter

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Tuesday 28 May 2013

Famously delicious

"For the year they opened up 140 new stores and revamped 136. According to CEO Kevin Hedderwick this was slower than normal because of a slowdown from their petrol depot clients. They look to open well north of 200 this year. These stores took the overall network to 2163 restaurants, 1881 in South Africa, 172 in the rest of Africa and 110 in the UK (these are all Wimpy's)."

To market, to market to buy a fat pig. With markets closed in New York and London, we were left to our own devices. Resources stocks rocked, mostly led by the diversified majors, Anglo American and BHP Billiton. But, industrials and financials also had a decent showing, the Rand continued to slide, that is not good for everyone. However, for the exporters and the Rand hedges, it is all good. For imported inflation, well it is not. And I guess that was and is the conundrum that is facing the SARB and the MPC, having to juggle imported inflationary concerns. And the other issue is that mineral exports are lower as a result of lower prices for one, and demand being lower too. Although, as we pointed out yesterday, green shoots seem to be emerging in Europe. So Europe is not finished. And you are starting to see more and more stories like this: Optimism returns as Greece sees light at the end of tunnel. What? So you mean no more Greek exit.

What about all those trolls that were 100 percent certain that this was going to happen? The Eurozone was going to fall apart in weeks/months and in same case hours. What about the spreads and the Credit default swap rates that anxious folks continually bombarded us with hourly. Default this and that, finished this and that, over and over again. And some platforms which attract an enormous following and have nothing positive EVER to say. EVER! Zero Hedge is always in the business of fear mongering. I saw a post quoting Dave Rosenberg in June 2009 saying that the Era Of Green Shoots Over. The unrelenting publishing of bearish (and very real) news over and over again can suck one into believing that there is an imminent collapse at any time. Calling markets lower. And seemingly the folks there are bullet proof. I guess we are no different, we are just the flip side of that agenda.

OK, that is interesting. The story that was doing the rounds yesterday, that the central bank locally is happy that unsecured lending is slowing in South Africa, is pleasing at some levels. Bloomberg ran a short piece yesterday: South Africa Banks Slow Unsecured Loan Growth After Intervention. The trajectory has slowed from 30 percent per annum to 25 percent per annum. But a cut away at the same time from a Reuters story at Engineering News to one of the Deputy Reserve Bank governors, Lesetja Kganyago suggesting that unsecured lending in South Africa is too small to pose a risk to the banking sector.

He (Kganyago) quantified that, as you can read in the story, SA not at risk from unsecured credit - Kganyago, by saying that unsecured loans totalled 453 billion Rands by March 2013, out of a total bank assets of 3.6 trillion ZAR in South Africa. Or, 12.5 percent of all bank assets are unsecured loans. Now, if ABIL have a book of close to 51 billion Rands, and Capitec have a book of nearly 28 billion Rands, that means the rest of the banking institutions amongst them have outstanding loan books collectively of 374 billion Rands. Unsecured sports lovers. Now of course, in the case of ABIL and Capitec, this is almost entirely their whole business. But for the big banks to muscle their way in to what is a lucrative business, they have all the channels, they know all their clients well.

You might recall in the Standard Bank results in March, that they had the following to say: "The impairment charge in personal unsecured lending (excluding card) increased to R2,3 billion (2011: R1,3 billion). This was a result of the increased incidence of default in the R3,7 billion domestic personal term loans book (loans to lower-income customers known as the inclusive banking book) and strong growth in the middle market segment in South Africa and workplace banking in the rest of Africa."

FNB suggested that their unsecured credit book grew by 27 percent, back when they released their results in March. It seems more "in control" over at FNB, or at least that is what I could read at the time. ABSA, well, they were under pressure, but it seemed that nobody was on the blower as much as in the other places. This is very lucrative money for banks, the business of making money by lending it to people, that is great business, provided you are able to manage "things" through the cycles.

Paul wrote a simple email to a concerned client last evening:

"African Bank has had a bad year, and an even worse last few weeks.

Their real problem is that the big four banks are also issuing lots of unsecured credit, which is making the space more competitive. Also, the furniture sector is looking bleak, which hampers the Ellerines results.

Did you see Byron's excellent review of the credit markets, a few days ago in the daily report? Here it is:

Unsecured lending market

Chances are that they will bounce back when public sector wage increases are negotiated or social grants are increased, or the economy picks up a bit.

We are keeping a close eye on it. Our normal inclination is to ride out the short-term ups and downs, but we will let you know if we change our minds!"

So what is the conclusion? Well, whilst the regulator and the central bank is clearly worried with the way that the unsecured market has boomed in South Africa, it is perhaps too far from what could be a bubble. And from time to time, these businesses go through tough times. But hold the line.

Byron beats the streets

Yesterday I went to the Famous Brands results presentation for the full year ending 28 February 2013. It's hard not to be impressed with a business that has managed to grow earnings on an average annual basis of 21% over the last five years. Of course the share price has followed suit, now trading at R94, up 482% from the R16 it was trading at 5 years ago.

Let's see how they went over the last financial year. Revenues grew 17% to R2.5bn which resulted in headline earnings per share growth of 22%. This equated to 339c, of that 250c will be paid out to shareholders as a dividend. As mentioned above, the stock trades at R94 which puts it on a historic PE of 28 and a dividend yield of 2.7%. Now there is no doubt this is a good business, but is it a good investment at these levels? Let's delve deeper.

For the year they opened up 140 new stores and revamped 136. According to CEO Kevin Hedderwick this was slower than normal because of a slowdown from their petrol depot clients. They look to open well north of 200 this year. These stores took the overall network to 2163 restaurants, 1881 in South Africa, 172 in the rest of Africa and 110 in the UK (these are all Wimpy's).

The sales growth is interesting, as you can see from the table below the rest of Africa is flying and now compromises around 7% of overall sales. A lot of this growth is attributable to new stores but even same store sales were up 28.3% in the respective areas. Local same store sales were up 7.7%.

That looks at the front end side of the business but what is so exciting about this model is that these stores are all locked in clients to their logistics and manufacturing business. This business has taken huge advantage of the economies of scope strategy. Basically they are trying to buy or replace any outsourced service which they can do themselves. Why pay an external supplier when you can buy the Coega Dairy factory and supply cheese to all your franchises yourself?

Another good example of a benefit of economies of scope happened within the Steers franchise. People were complaining that the burgers were too expensive. So instead of margin compression for the Steers franchisees, they supplied the meat at a cheaper price which allowed Steers to become more competitive. Yes margins in the meat manufacturing division came down but the growth in sales as a result more than made up for it.

What does the future look like? Here are some interesting stats from the presentation which explains a lot for all retail in South Africa. As you can see from the image below, things have been getting better for a lot of people and I expect this to continue.

That is just locally, the prospects for the rest of Africa are huge. Kevin Hedderwick mentioned that he is in regular contact with Whitey Basson and they plan on following Shoprite into the shopping centres being built in places such as Lagos. The base in these places is so low and the choice of restaurants is extremely limited.

Having been to the presentation and seen what they are up to behind the scenes I think the potential for this company is still in its infancy. It is competitive out there but these guys have the infrastructure and experience to dominate. They have low debt and are extremely cash generative, I am happy to buy at these levels.

Crow's nest. Markets are going up today, across the globe. Anxious about Japan? Maybe, but as someone on the Twitter thingie pointed out, Japanese stocks as an investment over 23 years have been shocking. Exactly. And talking about shocking, our local GDP read was more than a little awful and a shock to the system.

Sasha Naryshkine and Byron Lotter

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Friday 24 May 2013

Fee-fi-fo-Fed

"So that I guess was the biggest anxiety yesterday, concerns that the central bank stimulus is coming to an end. We were pleased here. We really were. Because the way that we see it here in this office is simple, if some of the finest minds believe that the US economy can stand on its two feet alone, that is as good a sign as anyone needs, right? But not everyone sees it that way."

To market, to market to buy a fat pig. Wow. The Fed statements and testimony in where Bernanke and his fellow FOMC members have indicated that the "punch bowl" is going to be taken away soon. Or at least that is how the market sees it. Now that term "punch bowl" was coined (as far as my reading tells me) by the longest serving Fed chairman, William McChesney Martin. Now before you shout, it was Alan Greenspan, Martin beats him by a whisker. Martin was in the position so long that he served under five US presidents, Truman, Eisenhower, JFK, Johnson and Nixon. Martin was the guy who when asked what the job of the Fed is answered simply: "to take away the punch bowl just as the party gets going...." It is an art, like leaving a function just before the youngsters tie their ties around their heads and the table dancing begins. Recognising when that is going to happen is when the Fed must withdraw the punch bowl. You don't have to tell everyone to go home, but you can prevent the inevitable chaos by withdrawing the jungle juice.

So that I guess was the biggest anxiety yesterday, concerns that the central bank stimulus is coming to an end. We were pleased here. We really were. Because the way that we see it here in this office is simple, if some of the finest minds believe that the US economy can stand on its two feet alone, that is as good a sign as anyone needs, right? But not everyone sees it that way. The Japanese market reaction was brutal, stocks there after the most incredible run over six months experienced a Genghis Khan raid of sorts. Heading for the hills, and leaving behind them an index that was down 7 percent and some more on the day. Just this morning here, the index has been 3.6 percent higher at the open and then three percent lower, before rebounding around another two percent from the lows. Volatile. Very volatile. Ha-ha, and the Japanese Finance minister, Taro Aso, said that it was natural for markets to go up and down. Insightful. But not really, thanks for that Mr. Aso.

An unbelievable story, of Taro Aso, he is related through marriage to the royal family, to prime ministers past and has seemingly overcome many hiccups. According to Wiki, whilst studying at Stanford his parents cut off funding, because he was becoming too American (I thought that was the job of the Disney channel), so he returned home on a boat. He then managed to get into the London School of Economics and finished there. He worked for a diamond miner in Sierra Leone before the civil war pushed him out. Fear not, the next adventure sent Aso to Brazil, where he learnt to speak Portuguese fluently. And if that is/was not enough adventure, he went to the Olympics in 1976, not as a spectator, but rather as a member of the Japanese shooting team. Not that it should matter too much, but he is a Roman Catholic, a tiny minority (1 percent) of the overall population. And there you thought Japanese folks were conservative. Anyhows, let us leave that for another day.

The upshot of the global where-am-I-going-to-get-my-punch-from-next realisation, was met with the usual reaction. Sell. Everything. And do it fast. We were no exception here, experiencing a 1000 points sell off in the local market. So, from record highs to a serious spot of turbulence. Across the board selling, resources particularly hard hit, as we mentioned yesterday, the weaker than anticipated Chinese PMI numbers did very little to encourage resource stocks buyers. Coupled with that came a whole host of broker downgrades for stocks in the resource space. And for what it is worth, Citigroup research suggests the end of the resources boom. Maybe. The same institution also said a few days ago that their base case for Greece leaving the Eurozone no longer has a date. Yes. We got some of our money from that. So thanks so much the guys at PIMCO, thanks so much Nouriel and all you other fear mongers, but it seems like the Euro zone is intact and working just fine. OK, let me retract the second part of that last sentence, but the truth is, all the predictions for a "disintegration within weeks" and "a total collapse imminent", well, that never transpired.

I am always amazed that we need some folks to tell us that "things" are better in order to proceed from a specific point. If Mario Draghi hadn't told us yesterday that the crisis in Europe, well, lawmakers and policy folks were on top of it. But the most important thing about the speech that Mario Draghi delivered yesterday in London, was to explain to both Europeans and English people that they are more tied than they think. Check it out: Building stability and sustained prosperity in Europe. "Around 40% of the deposits placed with euro area banks from outside the euro area come from the UK. At the same time, an equally large share, i.e. 40%, of all loans granted by euro area banks to non-euro area residents goes to UK borrowers."

Nice, so if banks stopped doing business there with each other it might take another 30 to 40 years before ties are severed. It is never going to happen. As Draghi said in his closing remarks: "Since then, even more political capital has been mobilised. The answer to the crisis has not been less Europe but more Europe." Non Europeans were telling Europe to solve their problems by being less connected, the answer was to get more integrated. Oh, and then I saw this port: The Eurozone's economy could surprise to the upside. Fancy that, green shoots in Europe. And just from last week: New Passenger Car Registrations. That is some of the best news that I have seen for a while, at least for the platinum price. Negotiations, wages? Who knows where to from here.

SABMiller served up their results yesterday, this for the full year to end 31 March 2013. And you thought that pouring a beer was easy, well it turns out that there is some sort of art to it, at least according to this from (the competitor) Stella Artois: The Stella Artois 9 Step Pouring Ritual. Huh? I suppose you could have a whole lot of froth, and that would be bad. Drink it out of the bottle, already in a glass I say.

So, what were the results like? I guess good, and ahead of market consensus as far as I could tell, it was difficult on a day where the market was getting toasted to tell. SABMiller are masters are cost containment, fixed costs per hectolitre in many of their territories were much lower than CPI. Locally, much below that, and even in soft drinks. Yes, SABMiller is one of the biggest bottlers of soft drinks globally. They stick to their knitting, when buying a local producer, they grow that brand. In fact they only have four beers that they refer to as their global brands, Pilsner Urquell, Grolsch, Miller and Peroni. You know those ones well, locally here in South Africa you know Castle, Castle light, Castle Milk Stout, Hansa Pilsner, as well as Redd's and Brutal Fruit. You are however less likely to know the local brands from the other places that they operate, Bluetongue (Australia), Laurentina (Mozambique, OK, you know that one), Timisoreana (Romania) and Balboa (Panama), perhaps that one leaves you feeling like you went five rounds with Rocky. Keep the local brands, and grow those aggressively. 200 plus beer brands might seem like too many, but it has worked really well.

SABMiller group revenue increased by 9.9 percent to 34.487 billion Dollars, EBITA increased by 14 percent to 6.421 billion Dollars with margins increasing too, all pleasing numbers. Adjusted EBITDA margins rose to 24.1 percent. Gearing has been reduced sharply to 57.2 percent from 68.6 percent last year, holy smokes, that is pretty impressive. Total volumes, those are fairly important, they clocked 300 million hector litres for the first time, 306 to be exact. Of which 242 million was Lager, 57 million was soft drinks and the balance, 7 million hectolitres was categorized as "other alcoholic beverages".

All that translated to earnings per share numbers of 238.7 US cents, 151.1 pence and 2031.3 ZAR cents. The dividend declared for the second half of the year was 77 US cents, bringing the full year payout to 101 cents. Which at current exchange rates is around 67 pence a share (FY) and 964 ZAR cents (FY). For the purposes of simple valuations we will look at the UK market, which attracts the most volumes. The stock trades more or less at 3416 pence. The stock trades on a 22.6 multiple with a dividend yield of 1.9 percent. Sound attractive at these levels? I hear you say no. But here is the deal. There are very few, if any companies that operate on all the continents, are listed in one of the few financial centres in our time zone, but more importantly are at a ground level in terms of Latin America and Africa. And also in China and India.

So, whilst the stock looks expensive to many, it operates in the growth territories that everyone wants to be in. And this little pie chart, you can see that clearly. This is EBIDTA growth contribution. You can see who is responsible for growing earnings, South Africa, the rest of the continent and Latin America.

And that is why I think that folks pay a premium, for the specific growth territories. The actual contributions to EBITA are Latin America 32 percent, South Africa (beverages) 17 percent, Rest of Africa at 12 percent, North America and Europe at 12 percent each too and 13 percent from Asia Pacific. So, essentially nearly three quarters of profits come from emerging markets. Premium beer, premium stock. I shall leave you with one single reason why I think the premium exists. Their Chinese equity accounted share of volumes is 53.750 million hectolitres, and was 6 percent higher than last year. Their second biggest market is here, inside of our borders, 27.28 million hectolitres. The Chinese market is almost double the local market, in terms of volumes, but astonishingly a whole lot less profitable. The market is probably waiting for that to change.

What are the risks? Increased regulatory pressures have to come, these are soft targets for government revenues that are under pressure. And social programs that continue to expand, even our local minister does not want advertising from these types of businesses. Healthcare over beer, I can see where the minister is going with this. Also, volumes are not growing at the pace that justifies the multiple and again, there is only so much cost cutting you can do. Having said all that, the company has positioned themselves to capture the next growth continent, our own.

Byron beats the streets

On Wednesday we received a very informative and encouraging sales update from Massmart. Not because the numbers were good but because it gave some clarity of how operations are going within the business. Let's look at the commentary, then the numbers.

The first part of the update explains to investors that the distraction of the Wal-Mart deal, along with Competition Commission enquiries, interrogations and community commitments, are now a thing of the past. It is now time to 100% focus on implementing their strategy. That's encouraging because although the Wal-Mart deal has been great for the business, the complications surrounding it have surely been distracting for management.

The next part tells us about a bit about what is being implemented.

"We have conducted a thorough review of the business. This has resulted in management changes and redoubled focus on underperforming parts of the business on strategic and operating disciplines, including considering closing or selling underperforming stores."

The next part talks about the massive restructuring of their supply chain which has been completed. I have spoken about this before, the business is investing heavily and gearing themselves up to supply a continent with goods. This may be sacrificing current profits but the future looks bright. And along with the supply chain investments comes new stores.

"We remain focused on store growth in South Africa and sub-Saharan Africa. New store openings have included opening a Makro in Alberton, Builders Warehouse in George, Saverite in Xai Xai, Mozambique, one Cambridge and two Game stores, and the commissioning of our Massbuild national DC in Midrand, Johannesburg. Over the remainder of the financial year to December, we will open 27 stores, including a Makro in Amanzimtoti, Durban, and a Builders Warehouse store in each of Botswana and Mozambique.

The increase in trading space compared to a year ago is 9%.

We have completed the acquisition of seven Makro properties that were previously lease-held and secured a loan from Walmart to fund this purchase."

This makes me excited for what's to come.

Before we look at the numbers here is a reminder of their divisional breakdown (I'm putting this in because I needed a refresher myself).

The numbers looked in line. Total and comparable sales growths in each division 17.0%, 7.4% (2.8% inflation) in Masswarehouse; 5.6%, 4.5% (5.0% inflation) in Masscash; 10.0%, 4.5% (0.7% inflation) in Massdiscounters; and 7.6%, 7.5% (2.9% inflation) in Massbuild.

The big Masswarehouse growth is on the back of new Makro stores.

I am encouraged by this update as it reinstates what we have been saying about this company all along. Be patient because behind the seens the hard yards are being covered.

Crow's nest. We are flat here to start with, some German confidence numbers were better than anticipated. Later we have US durable goods numbers. Methinks depending on how those turn out, that could change the makeup of the day here.

Sasha Naryshkine and Byron Lotter

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Thursday 23 May 2013

Very nice Mr. Price

"So what has grown that bottom line so nicely? Trade receivables increased by 28.4% to R1.6bn. Their expansion into the credit market has done wonders for their earnings growth. However, and this is nice to hear as an investor, they are doing this very cautiously and have set a limit of at least 75% having to be cash sales. The current ratio is 80.4%. This makes me believe that every cash retailer should trade at a premium to one who relies on credit."

To market, to market to buy a fat pig. It was a case of the little steam engine making a comeback through the day, mostly as resource stocks rocked the joint, and had the pulling power to see us through to the most modest of gains for the day. A few points actually. But hey, check that one down for the bulls. The currency seemingly caught a bid and then the intraday graph heads South again. The timing of course coincided with precious metal prices spiking, and then resting back lower. Why? Because the steady Ben, no, no, Ben "the measured" Bernanke was testifying to a rather unknowledgeable crowd on capitol hill, Before the Joint Economic Committee, yesterday. Have a read through the speech.

I think that the key and critical parts are that the Fed are looking to end their asset buying program, but won’t until the unemployment picture improves dramatically. Check it out: "With unemployment well above normal levels and inflation subdued, fostering our congressionally mandated objectives of maximum employment and price stability requires a highly accommodative monetary policy." And the key rate, announced at the December meeting is a full percentage point lower than it is currently. 6.5 percent! And of course don't forget the dual mandate of inflation targeting, the fact that the programs and rates will remain here whilst inflation is benign. In the US, that is, not so much here, where we are pushing the top end of the range. At least we are still in that range. So I guess the takeaway is that whilst the Fed is large and in charge, the short term news flows are watched by all. And if better than anticipated, expect the Fed to slow their persistent presence that one has been accustomed to.

At the same as this prepared testimony, there was also the release of the Fed minutes, from the prior meeting. FOMC Minutes - April 30-May 1, 2013, take a look. The worries that tax burdens on folks and the sequester, what are those likely to reveal about the strength of the US economy, the FOMC are watching that. Clues. Oh yes, and the Fed pointed to large scale asset purchases by the Japanese as being proof that it worked when looking for economic recoveries. I guess that there are still many sceptics there, the Japanese market continues to defy all odds, at least over the last 6 months. The Nikkei 225 is up 65 percent since the BoJ decided to wander off on the inflation and growth path, seeing as the deflationary grips were too much. I wonder what a wealth effect could have on Japanese fertility rates, seriously. Surely if people feel richer, it might tip them over to having another child. And in Japan that comes with a whole host of benefits. But, the Japanese are still reluctant to have kids. Perhaps immigration reform is in order.

But Wall Street grappled with the Bernanke testimony and more so the Fed minutes, a slowing in Fed asset purchases at least in the mind of the masses is a bad thing. But those same folks want the Fed to end their stimulus, so which one is it? I go for the second one. If the Fed see the picture for employment improving, then the economy will take care of itself. The impact of the automatic spending cuts, those will be noticeable, but hey, I thought that is what people wanted too. They wanted less Fed, a recovering market and very definitely less government spending. And if that meant defense (the US defense spelling) spending is reduced, then perhaps that is a very good thing in the long run.

Markets slid through the session on Wall Street, the later Fed minutes compounded the thinking. The broader market S&P 500 reversed the session opening gains and sank over four fifths of a percent. Just this morning I would think that there is a little more cause for concern, at least in some quarters as a Chinese PMI read, the flash HSBC PMI one showed contraction in the manufacturing sector. Soft external demand remains, I guess that is no surprise. But local (i.e. internal China) demand is obviously not strong enough in order to offset the continued weakness from the rest of the world. Check it out from the horses mouth: China's recovery cools. So I guess when we get the full release in 11 odd days time, we should have a clearer picture. But I guess in the short term this will create some anxiety, as it always does. The Japanese are getting an absolute pasting this morning, selling off from the recent highs. I guess it has been all "go" for them lately. But 7 odd percent!!! Phew.

Byron beats the streets

Yesterday Mr Price released full year numbers for the period ending 30 March 2013 which came in at the middle of the range alluded to by the trading update released at the beginning of the month. This company sure has been an amazing performer. And they remind you of this in the report, why not?

"The Company has achieved a 27-year compound annual growth rate in HEPS of 23.5%, DPS of 25.3% and share price of 26.9%. The return on equity of 51.1% is the highest achieved to date."

This year was no laggard as the business managed to increase headline earnings per share by 26.3% to 635.5c. This came off the back of a 12.7% increase in sales and a gross margin increase of 0.4% to a healthy 42.2%. Same store sales came in at 7.7% while inflation increased by 5.1%. 77 stores were opened and 20 were expanded. Let's look at the divisions and then see why and how earnings growth comfortably beat sales growth.

The Apparel chains increased sales by 12.5%, comparable sales up 5.9% while earnings increased 14% thanks to margin expansion. Within this division Mr Price Sports grew sales 22.9% (comparable 11.9%) which is an exciting prospect for the group going forward. You already know my thesis on sports apparel and our recommendation on Holdsport.

The home chains increased sales by 15.2% with comparables up 10.8%. This again shows us that Ellerines are losing market share with their higher end brands such as Wetherlys. Margins grew very nicely in this division, up to 12.9% from 11.2% the year before. This was achieved in a weaker rand environment which means that the business has been able to comfortably pass on the cost increases to the client while remaining competitive.

So what has grown that bottom line so nicely? Trade receivables increased by 28.4% to R1.6bn. Their expansion into the credit market has done wonders for their earnings growth. However, and this is nice to hear as an investor, they are doing this very cautiously and have set a limit of at least 75% having to be cash sales. The current ratio is 80.4%. This makes me believe that every cash retailer should trade at a premium to one who relies on credit. This is because entering into the credit world can enhance earnings considerably over a short period of time. A business like Cashbuild comes to mind, who have the potential to enter the credit market more aggressively. I think a ratio of 75% cash, 25% credit sounds healthy.

Their outlook on the industry is interesting.

"In the short term there are some serious challenges facing consumers. Growth in consumer spending in South Africa is expected to become more subdued and less supportive of economic growth. "The current financial hardships are mainly being experienced by low-income households and it is a misconception that these represent the Group's core customers," said Bird. "As per the latest independent AMPS survey, our largest chain, Mr Price Apparel, has a strong representation of shoppers across the mid to upper LSM spectrum (LSM 6 to 10)." Under tight economic conditions, shoppers tend to shop for value and therefore, as a value retailer, the Group is well placed to attract more customers. The Group will continue its unwavering focus on its core competency - offering fashionable merchandise at everyday low prices."

This is a fantastically managed business and I think one of secrets behind their success is their buyers. These are people who work for Mr Price and go around the world finding the right goods to put into Mr Price stores. They always seem to get it right and that is why Mr Price have moved up the LSM line and are able to charge a premium. Their clients have happily absorbed the price increases and shareholders have happily reaped the benefits. I don't see this trend ending although maintaining this kind of growth in current conditions will be tough.

Crow's nest. We are following the Asian sell off in a big way, US futures got crushed and then stabilized much lower, we are red across the board. The gold price has at least found a good level, for the sake of the countries gold mines we need it a whole lot higher though!

Sasha Naryshkine and Byron Lotter

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Wednesday 15 May 2013

The David not so tepid rally

"He is one of those very few market commentators who have the ability to move the market. My favourite quote I emailed to my colleagues, it went like this: "guys that are short, better have a shovel to get themselves out of the grave." Phew, he is talking his book, the line that everyone is using is, "I'm definitely bullish", and that captured the broader market. Stocks rallied again, and new all time highs were reached, again!"

To market, to market to buy a fat pig. Those platinum stocks got hammered yesterday, the union turf wars at Lonmin impacting on the majors. And the aftermath of the Amplats restructuring plans which have seemed to please only the PR people, they are the ones getting paid to write the releases. Collectively the platinum stocks sank 4.85 percent to a seven odd year low. Sis. Amplats went below 300 ZAR, Implats sank below 100 ZAR a share. Equally the gold stocks this morning find themselves in a pickle.

The gold stocks as a collective are at a four odd year low, but apart from the 2008 swoon (when the world was ending), the index was last at these levels 8 odd years ago. In fact, my eldest daughter turns 8 this Friday, if I had bought her gold stocks on that day, we would be basically break even. Sis. Too many struggles with higher costs on the labour and power front, lower grades, falling production, it has looked a little sad out there. No, terrible. And on an inflation adjusted basis, I am pretty sure even worse. Prices in the last CPI data was rebased to 100 in December 2012. And I can't really find too much on the StatsSA website to get an inflation adjusted return. But I suspect it has been absolutely woeful.

I have access to ten and a half year history. Over that time the all share index has increased by nearly 330 percent, the gold index is down over 50 percent. The platinum index is up only 30 odd percent. These companies constitute a very important past and future for this country. But yet, GoldFields was trumpeting the importance of the fact last Friday that they only employed around 9000 folks. Just a few days ago we were talking about AngloGold Ashanti's (they should really change that name) mechanisation projects. No really. They were excited about the idea of mechanising their operations. And this must be worrying for labour, and NUM, as if the union does not have enough on their plate. But I guess there is a point where business says enough is enough. You will recall in the last labour report that mechanisation was already happening, because machine operators were being hired, skilled people were being hired, unskilled labour was NOT. Sad. True.

What did happen however is that David Tepper spoke, and when he does speak, people listen. He is one of those very few market commentators who have the ability to move the market. My favourite quote I emailed to my colleagues, it went like this: "guys that are short, better have a shovel to get themselves out of the grave." Phew, he is talking his book, the line that everyone is using is, "I'm definitely bullish", and that captured the broader market. Stocks rallied again, and new all time highs were reached, again! As Paul however said this morning, and I hadn't thought of it this way, if your investment thesis is to wait for someone else to come on TV and then say everything is OK, then perhaps you should try doing something else. There is so much noise to sift and filter through.

Byron beats the streets

This morning we received full year results from one of our recommended retailers, Holdsport. For the year ending 28 February, the company managed to grow sales by 10.5% to R1.375bn which resulted in operating profits of R243 million. This was up 7.4% from last year and equated to headline earnings of 416c a share. Let's have a look at their sales mix.

As you can see from the table above, Sportsmans Warehouse compromises 73% of sales, Outdoor Warehouse 23% and Performance Brands 4%. In case you needed reminding, this from the website. "Performance Brands own and distribute brands that produce technical gear, designed to work when you need it most. Our brands include First Ascent, Capestorm and Nathan. Each brand is independently managed through the design, production and marketing stages, and then distributed through our Performance Brands platform."

Fundamentals. For the first half they only made 143c. That means that the second half was very good, nearly 100% more than the first with 273c. That is because it includes the festive period and as Sasha mentioned, summer, where people tend to get more active. The stock trades at R44 and a historic PE of 10.5. Sounds cheap. With a dividend before tax of 200c that is a very healthy yield of 4.5%.

The commentary was interesting. The weaker rand hampered margins somewhat. Product inflation was only 2.9%, this was probably kept in line by strong competition from the likes of Mr Price Sport. They also increased investment in working capital by 24.3% and this explains why sales growth outperformed earnings growth. Nothing wrong with that. The business is increasing its Sportmans trading space by expanding its Fourways store, relocating in Polokwane and adding new stores in Rustenburg and Bloemfontein. An Outdoor Warehouse was also added in Rustenburg while a JV was entered into with Redefine to develop a distribution centre in Cape Town.

They also mention that the base was high in 2011 because of a rugby world cup. This has a big impact on merchandise sales. There is nothing significant this year but next year we have a soccer world cup (hopefully Bafana qualify) and a rugby world cup the following year (hopefully the Bokke win) which should bode well for the future.

Prospects. You know my take on the growing awareness of an active lifestyle. And as our middle class grows these people will enter that realm where first world problems such as watching your calorie intake versus calories burnt, become important. This business is still small which means the room for growth is huge. Opening up Sportsmans stores in Rustenburg and the likes will help the business grow fast as they expand their footprint.

Because it is small opening up 1 or 2 stores can have a big impact on sales. We feel the demand for these kinds of stores is still huge around the country, especially in the smaller towns that are growing fast. Of course being small has its risks and the competition is rife. We continue to like and add to this stock.

Shorts. Digest these tasty morsels.

Byron loves to read the Buffett Berkshire annual letters. Really. Better than most text books he tells us, I have been reading them for a while, but not the much further back ones that Byron is talking about. That is why I wasn't too surprised to read blogs like these: 5 Lessons from Warren Buffett's Letters. The one about the oil prospector going to heaven and then to hell is rather amusing.

I was interested to see this BusinessInsider article, because there has been lots of evidence to suggest that shorter and sharper bursts are more productive than a long slog: One Chart That Will Absolutely Convince You To Get More Sleep. It turns out that being tired is not different to having the same sort of performance as someone who has had a few toots, a few too many actually. I remember my physics teacher who encouraged us to yawn in class, because it meant more oxygen to the brain. Perhaps the secret to a successful business is a whole lot more yawning. Or more sleep actually.

Via Bill McBride, on his Calculated Risk: NY Fed: Consumer Debt declines in Q1, Deleveraging Continues. This is amazing. A 1.45 trillion Dollar decrease in household indebtedness from Q3 2008. Wow. And that is what happens when people feel under pressure, they change their spending patterns. What also helps explain the student debt exploding is the simple fact that fewer jobs being available means those currently studying will extend their stay at university. Or go back. Or do more post graduate stuff, making sure that whilst times are poor, the prospect of getting employment after skilling up, get better. So, pile on the debt now, pay it off later. Hopefully.

Unsurprisingly mortgages are still the bulk of total consumer debt, 71 percent of the whole pot. Perhaps also the much lower household debt environment would have normally led to loads more refinancing, but the banks reigned in their lending practices too. Home ownership in the US is quite high, two thirds or so. In places like Slovenia and Spain, home ownership is exceptionally high. Germany is strangely, very, very low at around 40 percent. Why?

Wow. The WSJ headline says it all: Greece Gets Rating Recognition. And that part about rates having gone from 30 percent to 9 percent, over 12 months, that is in-between the ratings downgrade and the ratings upgrade. Bizarre. But that is probably another reason why one should do their own homework, rather than rely on the ratings agencies, who seem to put two slips and a gully in place after the ball has been nicked twenty times.

This is probably the worst egg on the face of the deficit hawks, and in particular the Ryan/Romney campaign, but too late to rubbish their detailed work. I am pretty sure that a lot of people are in favour of keeping a lid on entitlements. But, for better or worse: Federal deficit shrinks at surprising rate. On the other side of the US, the Washington Post had a similar story with nice graphs: CBO says deficit problem is solved for the next 10 years. See that. When an economic recovery takes place, tax receipts increase. I wonder what the highly volatile Rick Santelli thinks about all of this, perhaps Steve Liesman should have a quiet word, that would make for interesting television.

Crow's nest. Markets are trading close to the all time highs here locally, notwithstanding multi year lows from the precious metal producers. Industrials continue to drive this market up. European GDP reads were pretty poor, all missing expectations. Austerity sucks, and continues to suck some more. Perhaps the French were right.

Sasha Naryshkine and Byron Lotter

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Monday 13 May 2013

Famous. For their Brands.

"There are a few questions to be asked here. Why are they doing well while many retailers are struggling? Are they a defensive business and can they maintain this growth? The answer to the first question stems from the fact that they are well diversified amongst income groups. In fact you would probably find that fast food is a luxury way out of the reach of the lower income groups and these are the people who have been struggling the most of late."

To market, to market to buy a fat pig. Darn, we were slip sliding away again during the session, but I guess this comes after a good week, so perhaps complaining is not warranted. We have still comfortably underperformed the rest of the globes equity markets, the S&P 500 has year to date added 14.55 percent. It is the best start since 1999, but our market is up only two and a half percent year to date. That is nothing, the Nikkei 225 is up a whopping 39.46 percent year to date. Even the resource heavyweight FTSE 100 is up 12 and one third of a percent year to date.

But we, here in Jozi, Jozi, have lagged. As have some of our bigger BRIC brothers and sisters, the Bombay Sensex is up "only" 2.7 percent year to date. The Shanghai Stock Exchange year to date is down 1.12 percent year to date, not great. The Brazilian Bovespa is DOWN 9.6 percent year to date. The Russian stock market index is down 2.5 percent year to date. If you look at those numbers, we have not really done that badly. Back to the European majors, the French market is up 10 and a half percent, the Dax in Germany has risen 8.75 percent this year and even the Italians have seen their market rise 6.52 percent. And yet...... there are still some that tell us that Europe is "so bad".

So, as you can quickly see, the money has definitely been flowing in the region of the developed world anticipating that there is going to be a quicker recovery than first thought. Ironically, as the clouds are starting to lift and the outlook brightened, the "riskier" assets sold off. And that of course includes ourselves, or at least a segment of our market. Our market has had major divergence in some key sectors. In 2005 and 2006, there was not a single sector that ended the year negative, BUT since 2007 and 2008, it has been different.

The gold and platinum sectors, and indeed the resources as a whole have really, REALLY struggled. Friday, and the Amplats announcement was one that pleased nobody. Industrials on the other hand are the stocks that have catapulted this market higher, SABMiller, British American Tobacco, Richemont, Aspen and Naspers have all been bright shining lights, surpassing the traditional focus of this market. It used to be banks, financials and resources in particular that muscled this market around. Today, it is the industrial companies.

Sorry, I forgot MTN, Vodacom and Shoprite off that list, although in truth, if you are outside the top 10 stocks, you have to work harder at moving the needle. Let me explain quickly. Vodacom is in 11th place in terms of market capitalisation ranking table, but yet accounts for only 2 percent of the overall market cap of the JSE. Although remember if the majority of your shareholders are not here, or you are owned by a bigger business (Anglo American holds roughly 80 percent of Anglo American Platinum), then your overall index weighting is reduced. But the top 10 companies account for nearly 54 percent of the overall stock market value! Less when it comes to weighting, but still substantial. That means that their average weighting is 5.4 percent. The 360 companies below them accounts for 46 percent of the rest of the market value. The rest. Average weighting 0.12 percent each. Sad, but true. And that is my simple little point that I make from time to time. Our market is not stuffed full of local businesses which are a fair reflection of SA inc. But then again, the world is changing, all businesses are trying to globalise. This is good for global peace, no?

Lonmin hit the screens with results this morning. The stock is up a lot this morning, but was down a lot on Friday, so all in all, still slightly down on Thursday's close. So what is the excitement today? Well, the company looks better than what it was, recency bias at work here. People draw the line in the sand at the worst possible moment and then say, oh well, it looks like "things" are getting better from here. But after that announcement on Friday from Amplats, where it seems nobody is happy, the outlook still looks clouded. And I read a story this morning that an AMCU regional organiser was shot over the weekend. So, if you were expecting some sort of return to normality (what we were used to) then I suspect that might not happen. Costs continue to be a big issue for all underground mining companies in South Africa. We continue to avoid all the opportunities presented to us, even though they might look attractive. We do however expect in the coming months the platinum price to start to catch a bid as all of the problems in the industry start to catch up. Which ironically could be very good for a while, for the share prices.

Byron beats the streets

This morning we had a trading update in respect of the full year ended 28 February 2013 from Famous Brands. Now these guys have had a very busy year where they have bought a 60% controlling stake in Java Lava Beverage manufacturers, entered a JV with Coega Dairy company, bought the franchise rights to Europa and Fego Caffe and bought stakes in Turn and Tender and The Bread Basket.

"Accordingly, shareholders are advised that the Group expects to report headline earnings per share (HEPS) and earnings per share (EPS) (calculated on an IFRS basis) of between 336 cents per share and 342 cents per share. This is an improvement on the prior year comparable HEPS and EPS of between 21% and 23%."

If you take the middle of the range 339c the company is trading on 26 times this years earnings. That is very expensive for any business. Is this justified? Well the business has a great model with very good margins for the franchise division. That division then locks in a long term client to their supply chain. It is a two edged sword but in a good way.

There are a few questions to be asked here. Why are they doing well while many retailers are struggling? Are they a defensive business and can they maintain this growth? The answer to the first question stems from the fact that they are well diversified amongst income groups. In fact you would probably find that fast food is a luxury way out of the reach of the lower income groups and these are the people who have been struggling the most of late. Even if our consumer is weak, fast food is still coming off a low base in this country and still has legs to grow. People love it and it really is a luxury many do not appreciate. I definitely don't think it is defensive, we can see that from McDonalds latest performance in Europe. If the South African consumer was strong they'd be doing even better.

Can they maintain this growth? I think the short answer is yes. More than half the country cannot afford their offerings. As this changes and people enter the realm where fast food is a weekly occurrence, Famous Brands with the best brands in the country are perfectly situated to benefit. As you can see from their latest acquisitions, they are gaining more and more exposure to the sit down market which has higher input costs for the franchiser but also has higher margins. They are also building nicely on that supply chain. We are not scared of the lofty valuations and continue to add to this one.

Crow's nest. There is something that made me a little grumpy last week. In interviews with our finance minister Pravin Gordhan (whom I like) last week, he lead with that line, "things are still weak in Europe" implying that our finances were in a much better state. My contention was simple. How come, and hear me out here, are people willing to lend Italy money for ten years at 3.9 odd percent but yet to us South Africans, that price comes at 6.1 percent. So you tell me, which one looks more attractive for which government? Now obviously inflation also plays an important role here, so I guess you are rewarded for your risk taking in Italy bonds, but you get my point. If we were that great an investment destination because of economic policies, I can promise you that people would lend us money at much cheaper rates. Just saying..... you know, not hating. But to be smug and continue with this line that we are x and y and Europe is this and that, it is time to bury that.

Because for all the problems that Europe have, the poverty threshold is 60 percent of average income. In France that means 876 Euros a month. Or 10398 Rands a month. That is the definition of poverty in France. And "only" 13.5 percent of French people are at that level of poverty, the other 86.5 percent are richer than that. My point being is that if you gave the vast majority of South Africans the reverse argument, in which country would you choose to be poor, I know what the answer would be. France. Because the safety net is wider, the benefits greater, but most importantly the quality is MUCH, MUCH higher. In the same way that Africans to the North come here to the South to enjoy a (relative) better standard of living, because of higher quality services, the same exists in France. And by the way, France are the only country NOT to conduct ethnic background information in their census. There are only estimates. I suspect that we should take a leaf out of their book.

Sasha Naryshkine and Byron Lotter

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Thursday 9 May 2013

Horse manure

"Town planners met for a global pow-wow in 1898 their biggest problem was getting rid of the horse manure around the city, because the beasts that were the primary form of transport were in the habit of ... you know. London had 50 thousand odd horses at that time, by 1900, New York had 100 thousand horses, producing 2.5 million pounds of horse manure each and every day. Wow. And some fellow had calculated that by 1950, in a Times of London article published in 1894, that London would be buried under nine feet of horse manure."

To market, to market to buy a fat pig. Yesterday was an action packed day. Yes, this is true, even though we often just sit here, the investment process is like an enormous coffee pot that never quite gets filled. It is always percolating. The definition of percolating is twofold, one, it is the filtration of a gas or liquid through a porous surface, the second is a gradual information spread through a group of people. Both normally involve coffee, don't they? And hot air, of which I guess there must be a lot down in Cape Town at the World Economic Forum, dealing specifically with African growth. I like the concept that Klaus Schwab has put together here, I hope that the legacy that he leaves will be a long lasting one. A non political platform designed for solving the economic problems of humanity, some folks say that he is a little overbearing, but hey, he created the idea. Good for him, and good for us all.

Anyhow, yesterday I went through all the crisis events after the great financial crisis of 2008/09 (I think that is what they call it) and I came up with several. Iceland Banks, Ireland, Dubai World. Then there was Chinese inflation, Chinese hard landing, exits from the Euro zone by Greece, or even Germany, to break free from the other slackers in Europe. Iran, North Korea, and the associated tensions. Tsunami in Japan, Cyprus and US debt ceiling talks, fiscal cliff, and so the list actually goes on and on and on. There are always events that are going to be out there that could potentially be the next "thing" that could derail the world economy. We all worry all of the time, it is human nature, but if we based our investment ideas on geo political risks, you might never invest a cent. Something is always happening somewhere. We go on, we make investment decisions each and every day, positive ones mostly. Little incremental ones too.

And often we are accused of being overly optimistic, not cautious enough about the future, about the potential risks out there that could derail the businesses that our clients own. Yes, that might appear so at face value, but there are very many sectors that we avoid. We avoid them at all costs, because in our mind those investments are neither transformative, nor do they appear to be businesses of the future. We are sceptical about certain industries. Paper is one, check out the poor numbers from Sappi today, they can't seem to catch a bid and are always "turning the corner". Sometimes you turn the corner so much that you bump into yourself leaving to turn the next corner. From their results this morning, 71 percent of their sales are in North America and Europe, and 65 percent of their sales by product are coated paper. Not too sure about you, but the grand turnaround plan sounds like a pretty long way away when you look at it that way.

You might have heard this story before. The one that when town planners met for a global pow-wow in 1898 their biggest problem was getting rid of the horse manure around the city, because the beasts that were the primary form of transport were in the habit of ... you know. London had 50 thousand odd horses at that time, by 1900, New York had 100 thousand horses, producing 2.5 million pounds of horse manure each and every day. Wow. And some fellow had calculated that by 1950, in a Times of London article in 1894, that London would be buried under nine feet of horse manure. What a stink! Of course, by 1950 there was probably nigh a horse to be found in London on the streets and half a century (and some more) later, the biggest worry around horses is if they appear in your burger or not from your favourite convenience store. Things change, I am sure that repairing horse shoes and saddles was a great business in 1890, but a terrible one in 1980, at least from a mainstream point of view. I am sure that saddle makers still have the most amazing skills and churn out extraordinary products.

But you know how the story ends. The motor vehicle changed everything. In 1900, according to Wikipedia, the US ownership per motor vehicle was 0.11 per one thousand people. By 2010, "only" 110 years later, that number had changed to 828 per 1000 people. In Africa, the continent where we live, that number is around 25 cars per thousand people. Wow, gulp, that is nothing. And the World Economic Forum is seeking to address these issues around African development. The growth rates are there, provided no dumb economic policies get in the way we will all be "just fine" I suspect. A talk shop designed to showcase the continent, perhaps the pessimism is slowly starting to thaw. We are here, we have been investing in businesses for a long time that have a growth agenda across the continent, MTN, Massmart, Shoprite, Tiger Brands, SABMiller, amongst many other businesses have serious expansion plans across the rest of our continent. Don't get muddled in that line of thinking, remember to NEVER ask the question to a South African business, "So, what is your Africa agenda?" Because last I checked on a map, we are at the bottom of the continent called Africa.

Byron beats the streets

This morning we received a third quarter sales update from Cashbuild which came in line with what we have been seeing for the past six months, flat sales.

"Revenue for the company was up by 1% on the third quarter of the prior financial year. Stores opened since 1 July 2011 (new stores - 9 stores) contributed 2% of the increase, whilst existing stores (187 stores) decreased with 1%. This, together with the growth reported in the first half, equates to an increase in revenue year to date of 2%.

Transactions through the tills during the third quarter decreased by 2% compared to the third quarter of the prior financial year. New stores contributed an increase of 3% while existing stores decreased by 5%. Total units sold for the third quarter remained at similar levels to the prior year with existing stores decreasing by 2%."

This is pretty much in line with what we saw in the first half which saw same store sales down 2%. I guess where the biggest concern comes from and why the share price is down 2% today was the following line. "Gross profit percentage margins have decreased from levels reported at the half year." That means we are probably going to see a decline in earnings for the full year. I definitely feel that this is comfortably factored into the share price, let's look at the macro picture which is hurting Cashbuild so much.

Firstly the crimping margins would be a direct result of the weaker Rand. More expensive transport costs and imports have forced Cashbuild to keep prices below inflation to remain competitive amongst a weak consumer.

The second issue and I have spoken about this extensively before relates to the current political situation we find ourselves in. The strikes deteriorated foreign confidence in this country. That weakened the rand extensively which in turn made most goods more expensive. If you are earning a small salary these price increases make a huge difference. Cashbuild are very badly diversified amongst the income groups. Their locations mean that they are fully geared to lower income households.

When you look at the dynamics of this country you can see that the majority are struggling and will be very unhappy with the current environment. The powers that be will have to change this especially when voting season approaches. This leads me to believe that Cashbuild will be fine over the long run. Because their best interests are in line with the ruling parties electorate. Whether it be by grants, wage increases or more state jobs.

South Africa has certainly hit a rough patch in terms of economic development. But we have hit speed bumps many times before. We have a big population with millions of people waiting to be liberated by education and wealth. And we have millions of talented and motivated people who will carry us through, despite policy. Sorry for the patriotic/political rant.

Crow's nest. We are up again today, I can't quite remember where the all time high is, but I suspect that it is closer to 41 thousand points, we are not yet there. That level was in fact breached in early March, a couple of months ago. May is not over by a long shot just as of yet, but we are up nearly 2000 points on the All share in the month so far. Buy back in June, because you were pruned. Buy in July, or continue to stay shy. Definitely "back by October, because you are now sober".

Sasha Naryshkine and Byron Lotter

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Tuesday 7 May 2013

Skills please

"So, I can tell you from this table what business have been doing, they have been mechanising for one, and then hiring people with more than above average skills. I would even go so far as to suggest that the "one percent" in a South African sense continues to benefit from a dearth of skills here locally. The short answer is to make sure that the education system does all the hard yards. The education system can change everything. There needs to be political will however. The thing is, the right and left of centre are pretty far apart around here!"

To market, to market to buy a fat pig. Markets in Jozi opened higher and pretty much stayed there all day, all the way through to the close. Resources boosted stocks, better US employment data still trumped a weaker sub set of Chinese data, and a marginally improving (but still weak) European set of data. Just this morning the Aussies have decided to cut rates, the expectations from the economist community were split on the matter, most siding with a no change for now. So it does come as a little surprise, but we have seen some weaker Aussie data over the last little while. Not too dissimilar to disappointing data from everywhere, really. Markets, well, they cared less for the disappointing data from China and Europe (and indeed locally) and cared more about the jobs data from the US. Local markets rallied 0.6 percent to 39 829. US markets were mixed, the Dow was a fraction lower, whilst the S&P 500 rallied again, and the NASDAQ was buoyed by a strong performance from Apple, that stock up nearly two and a half percent. Barclays raised their price target. Wow, that is amazing against the backdrop of a whole host of price targets being lowered recently.

Another strange (I thought) piece of news was the French Finance Minister declaring that austerity is (sort of) over. That is it, he said. Bill McBride has an interesting piece: The End of Austerity in Europe? The poor Reinhardt and Rogoff theories and calculations are getting rubbished just because a few economics students had some question marks about their spreadsheets. I suspect that Germany will just "give a little more" rather than a full austerity out the window. AND, in a sign that the bottom is close, this WSJ was welcomed: Spanish Jobless Claims Dwindle. Markets were closed in both Tokyo and London yesterday, those have to be in catch up mode today.

Talking of the trend of disappointing data, the local employment data was really grubby. The StatsSA release at 11:30 in the morning, the Quarterly Labour Force Survey, was met with a great collective sigh. We are all in agreement that something needs to be done to restructure our economy, the liberal types will say that labour laws and regulations must be greatly relaxed, whilst those in a position of power as well as their allies have been pushing for a more radical government involvement in the economy. Very little will be given on either side seemingly. Here is a simple table that tells a pretty sorry story:

We have a population of around 50 million, right? Around 17 million of those folks are younger than 15 or older than 64, most younger than 15. I would say, that judging from the population pyramids that I have seen, 3 odd million are older than 64. So, we have over the next decade and a half, around 14 million people entering the workforce. And because we are a young population, most people will all be jostling for jobs at the same time. 70 percent of unemployed people are "the youth".

There are 100 thousand more unemployed people than there were in the prior quarter, perhaps the school leavers impact, but the truth is that jobs have been shed in the formal sector. There are 144 thousand more people in the labour force, from the December quarter, that is enough to almost fill both the FNB Stadium (err... National Stadium, Soccer City) and Ellis Park. Those are the number of new people that entered the workforce during a three month period. Did you know that Ellis Park staged 6 cricket test matches and did you know that the first Wanderers cricket club was at Park Station. Wanderers Street is still around there, running next to Park Station.

There is some insight into where the jobs are actually being created, check out this table:

What is absolutely astonishing is that the jobs that ARE being added are skilled jobs and the people that are operating machines. So, I can tell you from this table what business have been doing, they have been mechanising for one, and then hiring people with more than above average skills. I would even go so far as to suggest that the "one percent" in a South African sense continues to benefit from a dearth of skills here locally. The short answer is to make sure that the education system does all the hard yards. The education system can change everything. There needs to be political will however. The thing is, the right and left of centre are pretty far apart around here!

CNBC carried an exclusive with Warren Buffett and Bill Gates yesterday, anchored by Becky Quick on all sorts of topics. Gates is a board member of Berkshire remember, and to have both of them in one place being interviewed at the same time was pretty cool. What is amazing is that even Buffett does not say anything particularly insightful, if he says something that others say, it carries greater weight. When asked by Becky about the markets going higher on a daily basis, whether that makes him anxious, this was his simple answer. He remembered it crossing 100, 1000 but it will be higher in his lifetime and also in Becky's. So I guess the key, as ever, is patience. And owning the right businesses. But when he (Buffett) says it, people nod their heads. I call it the Buffett comfy blanket effect.

Shorts. Digest these tasty morsels.

I think that this single event is huge. I am not one to watch foreign relations closely, but this specific one caught my eye: Chinese President makes four-point proposal for settlement of Palestinian question. The fact that the Chinese are negotiating in what must be the most difficult beat diplomatically indicates that Xi Jinping thinks that they are "ready". They might be a member of the Security Council, they might be the go to people on North Korean tensions, but this is very different. This is a political hotbed. And it reflects that the Chinese are heading towards being the global power brokers. With economic influence comes great political influence. This link comes via a fantastic daily email, which you should sign up for (yes, more reading): The Sinocism China Newsletter.

This also really captured my attention, the post is short, but a picture tells a thousand words. I found this fellow, via another fellow, but this is an economics PhD student at UC Berkley who has a post titled Corporate Profits as a Share of GDP. He mean US corporate profits, but he lives there, so that is OK. Here is the chart, it needs no explanation:

And if you needed an explanation why markets were higher, this is as good as any. The jobs picture might look iffy, but the corporate profitability picture most certainly does not.

Crow's nest. I have seen an encouraging sign that European financials (the majors) are starting to beat expectations that have been lowered over the last little while. We are a little lower here today. But have been higher. Hey, Buffett reckons that stocks are good and bonds are bad, in general. So when is that great rotation going to happen then? How long will it last, or will that be determined by interest rate levels? Mario Draghi is lining up another potential rate cut (one last week), perhaps the deposit rate could even go to zip, zero, that is what some are suggesting. And, more importantly, in an attempt to spur lending by big banks, the ECB could be ready to stand for a negative deposit rate. We wait and watch.

Sasha Naryshkine and Byron Lotter

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