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
Follow Sasha and Byron on Twitter
011 022 5440
No comments:
Post a Comment