To market, to market to buy a fat pig. We took off yesterday here locally, thanks to improved global markets enjoying a second decent showing. There is still some anxiety around, there were visuals of Ben Bernanke pulling into his office in a large SUV in Washington DC, on Constitution Avenue Northwest. Or is it corner 20th Street and Constitution Avenue Northwest? The Fed website was not that clear, at least to me. I checked it out on Google maps. Yes, things were so much better in the old days.
So the feeling is that this is probably the most important interpretation of the Federal Open Market Committee's (FOMC) statement that will accompany the end of the 2 day meeting. Look for signs! Even the finance minister Pravin Gordhan said that the interpretation of the commentary could have an impact on markets. And I guess most noticeably ours, we are prone to wild swings and roundabouts based on the news flows. Again, our view is that the Fed will do what they have to in order to meet the requirement of their dual mandate. And in case you didn't know what that was, or forgot, as per the Federal Reserve Act of 1913, Monetary policy objectives:
- "The Board of Governors of the Federal Reserve System and the Federal Open Market Committee shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates."
Maximum employment and stable prices with moderate long-term interest rates, it sounds so easy not so? In fact so easy that you are bound to fail at even the simplest of simulations, this is an excellent old Fed chairman simulation interactive piece put together, if you pass first time then I would say that you have been lucky or know what is going on. I got it right on the third go, but the program tends to throw a whole lot of curveballs at you whilst you are the Fed as a whole, raising and lowering rates as you see fit! So that day comes today, the day that the FOMC will likely indicate that the current Fed programs will unwind in an orderly fashion. Rates are still set to stay low and like the rest of us, the Fed will watch the data releases and interpret them in the same manner as the collective. BUT, with an important twist. The Fed will be a whole lot less hysterical about it than the tapering twisty masses.
Talking of central banks, this morning we have the quarterly review from our Reserve Bank, release time at 10 am. If you wanted to go and responded to the invitation then no doubt we will see your news around 10, and you would have seen all the release already. Talking of local releases, we had a less trumped up but equally important employment report released by StatsSA yesterday: Quarterly Employment Statistics for March 2013.
It seems rather late, not so? 18th of June for a release of numbers for the first three months of the year? Rather late than never. These are the equivalent of our non-farm payrolls numbers says the octoboxes on the business channels and people shouting at each other on how they should and could be doing better! The overall number showed an increase of only 7000 jobs or roughly 77 people getting a new job each and every day. Or only 3 and a bit each and every hour. Really? That sounds completely pathetic. The annual increase is a more pleasing 80 thousand, but that does not pick up the slack. There are far too many school leavers looking for gainful employment but lack the necessary skills. As far back as I can remember school leavers had very little or no work experience. Perhaps there is a huge space to fill here, to become enablers of entrepreneurial activity here in South Africa. An entrepreneurial school!
Back to these numbers quickly. I think the good news is that if you have employment then your salary continues to tick higher. "The gross earnings paid to employees during the quarter ended March 2013 (January 2013 to March 2013) amounted to R377 191 million. This reflects an annual increase of R28 269 million (+8,1%) compared with the quarter ended March 2012 (January 2012 to March 2012)." 28 billion more Rands during the quarter! How much is that? Well, I took the first six months turnover numbers for Shoprite, Woolies, Massmart, Truworths and the Foschini Group (Foschini are the only one without the December/June cycle) and that came to just shy of 111 billion Rands. So whilst you might not think that is significant, it is certainly an improvement and adds to the spending power of what is a struggling and indebted South African consumer. Not good enough, we will have to try harder.
The release hit the wires this morning, the quarterly SARB review, the Rand firmed from those levels, adding a negative bias to a market that was trending lower I guess. Read all 95 pages and get back to me please!
Aspen Pharma, what happened there yesterday? The stock climbed 4.44 percent on the day to 193.25 ZAR and is up another two odd percent at the open of trade. Well, there was some more clarity on the transaction with their main shareholder, GlaxoSmithKline (GSK) and their local and international businesses (Aspen Global Incorporated – AGI). It seems big, really big. Six month revenues (at last count) were just shy of nine billion Rands, this current transaction that we are talking about here could potentially add 35 percent (at current exchange rates) to their annual revenue. Which would then makes the business more than a two thirds offshore revenue business, which is not necessarily a great thing, but it is amazing how much the business has changed over the last half a decade.
So what was the announcement? Here goes, a copy paste from the SENS announcement:
"AGI will acquire from GSK the Arixtra and Fraxiparine/Fraxodi brands ("the Brands") and business worldwide, except in China, Pakistan and India - these Brands generated approximately £420 million in revenue for GSK in its 2012 financial year ended 31 December 2012. The Brands would transfer to AGI at the end of 2013; and" "Aspen will acquire from GSK a specialised sterile production site which manufactures the Brands at Notre Dame de Bondeville, France ("the Site"). The Site would transfer to Aspen during the fourth quarter of Aspen's 2014 financial year."
These are anticoagulants, which are administered post orthopaedic surgery. These surgeries are becoming more commonplace, more knee and hip replacements, more shoulder and elbow surgery, and more spinal procedures. Plus these procedures are becoming mechanised to a degree, machines are helping in perfecting the outcome. And growing faster than people would have thought. From my reading on such matters around 750 thousand such procedures are performed annually in the US. Wow. And 60 years ago? Very few as I understand it, the first recorded metallic hip replacement happened as long ago as 1940. But it is now common in the developed world and increasing in the developing world where these procedures are becoming more common. Medical healthcare might be expensive, but the more people that have the expensive therapies, the cheaper they become.
Why the excitement though? Well for one, as we pointed out GSK is the biggest shareholder of Apsen. 18.6 percent. So why does that matter? Because as a shareholder of the entity that is going to accept the assets, they would want a fair price. And as GSK for their shareholders, equally they want to be seen as a dynamic business that is ejecting these less dynamic assets. Aspen can of course spruce and sweat these much harder, it is more core to their business. The way we see it is that it is a win for both businesses. This is a serious cheque that is going to be shelled out and might be part shares and part financed successfully as they have in the past. For the time being the collective are pleased and relieved. Expect more of these as time goes on.
Byron beats the streets
If there is one business that has proven extremely resilient in this weaker consumer environment, it has been Famous Brands. The business released quarterly sales numbers for the period starting March to the end of May.
"System-wide franchise sales increased 16.8%, comprising a 16% improvement in South Africa and a 27.2% improvement in sales in the rest of Africa region. Like-on-like sales grew 9.6%, with South Africa and the rest of Africa operations delivering growth of 9.3% and 13.2% respectively. The average weighted menu price increase was 4.25% illustrating the real growth achieved."
There a few things to note here. Firstly it shows how small the rest of Africa still is. The 27.2% growth only increased overall sales growth by 0.8% compared to the 16% recorded in SA. As this grows however inevitably and obviously the impact will be bigger every period. The other thing to note is how big an impact new stores are having. The franchise model allows entrepreneurs to take on these businesses and employ people around the country. It has a very positive impact.
Talking about new stores here is what the release had to say which quotes CEO Kevin Hedderwick: "During the quarter 34 new restaurants were opened. Hedderwick notes, Of the 30 restaurants opened in South Africa, 18 are in new emerging markets. We are especially pleased with our entry into these markets where we were previously under-represented and where our brands are viewed as aspirational. This penetration into new emerging markets is part of a deliberate strategy to make our brands available, accessible and affordable."
This is an exciting trend which goes back to my point earlier. The African segment is going to influence sales more and more. The update goes on to talk about certain plans with new stores internationally and locally. Most of this was covered when I did the full year results last month but here it is in case you want to read the full release. Famous Brands Defies Retail Slump to Deliver Strong Quarterly Results.
I want to make one more point here. Kevin Hedderwick has often stated that typically in a developing market the fast food industry will grow at twice the speed of the economy. At these rates it seems like this was an understatement. If the South African economy was flying Famous Brands would be doing even better. There is still so much room for growth in South Africa. Even without African expansion this business has great potential. Again the stock shows why it trades at the multiple it does. We are not deterred by this, the potential is still huge. We continue to add.
Home again, home again, jiggety-jog. The Ben Bernanke take down this morning, as the market tapers off ahead of the taper talk. Markets are off their worst levels. And don't forget the cricket today, let us hope we can get through to the finals at least and remove that monkey.
Sasha Naryshkine and Byron Lotter
Follow Sasha and Byron on Twitter
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