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