Money with a dash of Funny: August 2013

Monday 12 August 2013

Taper talk, round 57

"So things are looking good, the only real threat to the market at this stage is the potential tapering. That is probably why its rhetoric has such a large effect. It is the scapegoat at this stage but I am sure there is something around the corner that will rear its ugly head, there always is."

To market, to market to buy a fat pig. What a weekend! Rain, sunshine, luckily no snow! And of course, the best part was that we got our public holiday at the end of the week. I wish it worked like that all the time, either a Monday or a Friday, as to not disrupt the week of trade. I guess with our economy becoming more oriented towards retail over time, the public holiday could fall at almost any time really. I was at Sandton late on Friday and it was packed! People in their droves seemingly defying the "under pressure" tag. And then R Kelly arrived to eat at McDonald's (all the choices and he chose something familiar) and people ran to catch a glimpse. I thought someone had fallen off the escalators there was such a commotion. Throngs mobbed him up the escalators and he vanished into Queenspark. At least he could be alone with the "timeless elegance" amongst the blouses and trousers.

Thursday was a rather long time ago for some people who trade by the second and hour for a living, sometimes I think that there is a certain romance associated with trading, in the same way as I guess there is with being an airline pilot. It sounds romantic, but it seems to me at face value as being a very tough vocation. Maybe the uniform for one! Or when folks think of traders they see themselves on the floor of the NYSE, in one of those jackets and a fistful of papers, jostling for position at the trading posts. Those days are mostly gone, the bulk of trades take place electronically. There are still floor traders, but older folks.

It looks very quiet compared to what it once was, but make no mistake, the place still rocks! I found a lovely piece done last year in October titled: A Floor Broker Explains What They Actually Do All Day At The New York Stock Exchange. I like that answer about what it takes to be a floor trader: "We don't care what college you went to, but if you're good with numbers, will be on time and not cry when someone yells at you. Those are more important things than your GPA and college...." Ha-ha, I guess in the end it does boil down to your attitude, good or bad!

There are interim results from Royal Bafokeng Platinum this morning, this is for the six months to end June 2013. EPS clocked in the middle of the range indicated in the trading update on the 23rd of July, 87 cents a share. Maybe a disappointment by a cent or two, but in the middle of the range. Production improved to 130,278 ounces (yeah, exactly), whilst costs only ticked up marginally. Half of all costs are labour and contractors. That is about an industry norm nowadays I guess. So these results, as improved as they are, is this a compelling investment? I would like to think so, but in recent years we have tended to steer away from single commodity (platinum group I guess as a collective is a single commodity) and in particular single mine exposure.

Although well run, the company for the time being has the one mine, north and south shafts, and is set to try and double production over the next six to seven years, which would certainly elevate their status from middle to nearing to top five to six producers. Styldrift is a quality asset, at a shallow depth and therefore carries fewer risks than some of the other recent platinum mega projects. Which unfortunately has seen less investments over the last five odd years. Styldrift also plans to be less labour intensive, more mechanisation, which is good for shareholders, but not for labour. No dividend until Styldrift 1 is complete! And we are talking huge money here, there is big execution risk.

If you think Lake Charles is big for Sasol, this is roughly (on a relative to market capitalisation) around 50 percent bigger! The company has a market cap of 8.5 billion ZAR relative to a project that expected to cost 11.39 billion ZAR. But the project is now cheaper by around 400 million ZAR, but is expected to be 13 months longer. It is nearly one third complete, a long way to go! It seems compelling enough, but the platinum market (although much better) is still in a tough space. More recycling of auto catalytic convertors has perhaps led to a bigger supply than anticipated, but with capex reigned in over the last half a decade, the medium term guess is complicated. But if you were looking for an ungeared company, able to survive the tough times and build up for the future, this might be it. Risky though, single mine for the time being.

Byron beats the streets

We are now at the twilight of the US earnings season and it's been a good outcome. According to Eddy Elfenbein's weekly report, as of Friday we had 443 stocks who reported, 72% of those beat expectations and more importantly 55% beat sales expectations. Why is that so important? Because we knew companies were becoming slimmer and trimmer but that can only go on for so long. Sales need to start increasing for earnings growth to become sustainable. It is a good sign for the overall economy.

The market has also followed suit, especially with regards to its stability. Here is an interesting quote from the above mentioned piece.

"Tuesday was the S&P 500's worst day since June 24th, but the more arresting fact is that that terrible, awful plunge was a loss of a mere -0.57%. Yes, that was our worst loss in a span of 30 trading days! Sheesh, going by recent history, -0.57% doesn't even scratch the paint. In 2008, the S&P 500 lost more than -0.57% in a single day 38% of the time. How times have changed."

So things are looking good, the only real threat to the market at this stage is the potential tapering. That is probably why its rhetoric has such a large effect. It is the scapegoat at this stage but I am sure there is something around the corner that will rear its ugly head, there always is. My opinion is that tapering will have a bigger effect on the market than the economy. Because of this the market will stabilise and regroup back to rational levels ones the uneasiness dies away.

Talking about sustainable growth I came across this article from the WSJ titled Consumers Set to Reach for Their Wallets. It states that sluggish spending in the second quarter was due to tax increases. Once that is absorbed and the consumer is used to the new rates, spending will increase again. We have also finally seen a bit of lending from the banks which has increased money in the system. This will also help the consumer.

The US economy grew 1.7% in the second quarter of the year on the back of a 1.8% growth in consumer spending. As confidence increases and the wealth affect becomes more and more influential, I'd expect this to be a bigger contributor in the third quarter. It'll also be very interesting to see comparable sales numbers when the next results season comes along.

Home again, home again, jiggety-jog. Our markets have traded at highs, because the resources have ramped our markets to all time highs. Or close anyhow. We are there! The broader resource markets are as a collective still down over five percent year to date, so it has been a proper slog!

Thanks for the support! I met a subscriber to the newsletter over the weekend, he said he loved our newsletter. I told him that we write it for him, and to some extent that is true. The reason why we write is to research, have an opinion on something, and to inform our clients and potential clients. Part of the journey is to make sure that we all become better informed, we stay the course and try and sort noise from the important and meaty issues that change the course of companies. We invest in companies. Central banks and government impact rates and policy and by extension the broader economy, but despite all that, quality companies negotiate their way around the efforts of big government. Who of course they fund! Irony.

Sasha Naryshkine and Byron Lotter

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Tuesday 6 August 2013

Koos is coining it

"The chief executive, Mr J P Bekker, does not earn any remuneration from the group. In particular no salary, bonus, car scheme, medical or pension contributions of any nature are payable. No other remuneration is paid to the executive directors. Remuneration is earned for services rendered in connection with the carrying on of the affairs of the business in the company."

To market, to market to buy a fat pig. Time flies. I heard some fellow on the wireless try and explain why time seems to go faster as you get older, and I must admit that his argument was pretty compelling. When you are 1, and you add another year, you have effectively doubled the number of years that you have lived. Even from 10 to 11 is ten percent of your life, a long time by most measures. When you are fifty however and you add a year, that is only around 2 percent of your life. If you manage to make it to 100, an extra year is only a percent, or roughly 3 days in the life of a 1 year old. Makes sense, not so? Or not......

So time does not really fly, it remains constant. Every four years we squeeze in an extra day, that is not exactly scientific, because as Wiki points out: "The marginal difference of 0.000125 days between the average Gregorian calendar year and the actual year means that in 8,000 years the calendar will be about one day behind where it is now. But in 8,000 years, the length of the vernal equinox year will have changed by an amount that cannot be accurately predicted."

Enough of this nonsense! As John Maynard Keynes said, in the long run we are all dead! So your investment time frames must be set, because you are not going to live forever. Equally they must be more than a little open ended, because you might outlive the rest of us! For instance, in Medieval Britain you were not expected to live beyond 30. The global average nowadays is somewhere closer to 70, 68 or so. The long term has certainly changed from a decade to a number of decades!!!

Yesterday in the city founded on gold deposits richer than any other ever found, the local market touched and reached for all time highs during the session, but failed to take a foothold at the 42 thousand point mark, after touching that point at almost midday. We fell away as US markets opened, perhaps the taper talk and the tepid jobs report is starting to squirm into the collectives psyche. How am I to know anything! Wall Street closed mixed, tech stocks were higher, but the S&P 500 was marginally lower, with blue chips off around one third. Mixed at best. Apple caught a bid as the US President had vetoed a ban of sales on earlier models, the iPhone 4. The stock traded at their best level since the first half of February.

I was asked yesterday as to why it was that Naspers has had such a run, why the stock price was up so much. I thought for a while and then applied myself and came up with this answer:

To me it is simple, a Facebook re-rating over the last 8 trading sessions must have a lot to do with it. Plus LinkedIn. The "quality" internet assets have been rerated.

Since the 25th of June Tencent is up a whopping 33.3 percent! Over the last month alone Tencent is up 20.23 percent in Hong Kong.

On a simple NAV basis that has added 51.15 billion ZAR (570bn HKD @ 308.4 on the 25th of June to 685.98bn HKD @ 370.8 on the 5 August = 115.4 bn HKD difference * 1.2697 (exchange rate) = 146.57bn ZAR * 34.9% stake = 51.15bn ZAR)

Pretty easy to understand, methinks!!

25 June, Naspers = 688 ZAR, today (5 August) = 815 ZAR. Shares in issue = 415 million shares. 127 ZAR*415 million = 52.7 billion ZAR.

Sounds about right!!!

The market I guess was working properly there. And Facebook, if you had not noticed had been through their listing price of last May. In early September the stock traded as low as 17.55. Just under a year ago there is someone who is looking at the price at 39.19 and asking themselves, why oh why did I sell that one? Because at the time there were anxieties over whether the company could monetize mobile. And yes, by the time the company reports their next quarter you might see advertising through their mobile channels at nearly half of all revenues. The company trades on a forward multiple of 80. That is crazy. But that shrinks quickly over the coming years as the business starts to be more and more profitable.

But back to the other issue at heart here too, the remuneration of Koos Bekker in Naspers N stock. I was asked about that too, and equally I am going to share my answer with you:

In the annual report (page 117) it says:

Also, it makes it clear:

"Mr J P Bekker has an indirect 25% interest in Wheatfields 221 Proprietary Limited, which controls 168 605 Naspers Beleggings (RF) Beperk ordinary shares, 16 860 500 Keeromstraat 30 Beleggings (RF) Beperk ordinary shares and 133 350 Naspers A shares."

But I guess you are referring to the shares payment arrangement, the 3.9 million shares that are to be paid in the years three, four and five of his current contract:

He agreed, the board agreed and shareholders no doubt ratified the payments in shares. When the share price was much lower, that stake was worth a whole lot less.

Total shares in issue are around 415.8 million shares, he is effectively a 4 percent shareholder. Good to have the chiefs own holdings aligned with yours, it is not altogether his fault that the stock price has gone bananas and through the roof. That is no doubt why he structured the deal that way!!

Not sure what to think further.........

As shareholders we are glad that he has his interests aligned with our own. Shareholders must remember that in large part it was and is his visionary thinking that made them a fortune, so far of course.

Byron beats the streets

This morning we received a sales update for the fourth quarter from Cashbuild. If you have been following my updates on this company you will know that is has been a tough year for Cashbuild and I was getting concerned that sales were actually going to decrease. Well a stronger fourth quarter has prevented that, let's look at the numbers in more detail.

On a comparable basis (last year compromised 53 weeks) full year revenues grew 3%. This is very much thanks to a strong fourth quarter which grew revenues by 8%. South Africa which compromises 88% of sales was the main driver with 8% growth in the last quarter.

The company which is usually quite conservative had a busy period operationally.

"Four new stores were opened during the fourth quarter, resulting in the number of stores trading at the end of the financial year to be 200. Two stores were relocated and seven stores refurbished during the fourth quarter. A total of nine new stores were opened during the financial year with 21 refurbishments and six relocations being completed."

So from the nine new stores opened this year, four were opened in the last quarter. This of course had an impact on sales but same store revenues still grew 5% in the quarter.

There are a number of factors which have affected sales. The company is mostly geared towards the lower LSM income brackets who have struggled, thanks mostly to a weaker rand. Weaker rand equals higher inflation, which has a knock on impact for the poor. We have also seen a big pull back in unsecured loans. Cashbuild do cash sales so when clients don't have the money to improve their homes they turn to the unsecured lenders. Lastly, there has been a big increase in competition from independent operators who, so I am told, do not adhere to many forced costs that face a big corporate (like taxes). This has affected margins.

None the less I am glad we have seen an uptick in sales and hopefully this is a continuing trend going into the first quarter of their next financial year. As for this year's numbers I wouldn't expect too much earnings growth but the share price is not expecting that. This is a long term hold and it is times like these when you should be accumulating such a well run business that have so often found themselves in a sweet spot among South African consumers. More details when the results come out, probably mid September.

Home again, home again, jiggety-jog. The Mars Rover landing celebrated it first anniversary yesterday. That is pretty awesome to think as a species that we put a craft on that planet and it manages to transmit pictures back to us. Longer than we initially thought, I use the "we" as a collective, because humans sent that craft there. You can add this to the list when people tell you that this market "feels" like 1984 or 1996 or whatever. Ask them how many Mars Rovers were sending pictures back then and see what they have to say. None of course. If you still think, so what is the big deal, then watch this YouTube clip: Challenges of Getting to Mars: Curiosity's Seven Minutes of Terror. YouTube of course was not around then either, the video sharing service has only been around since 2005!!

Cullen Roche quotes one of his favourites extensively in this piece titled What if Everything Goes Right for Once? That favourite is Jan Hatzius, the well respected Goldman Sachs chief economist. Who is a lot more optimistic about the future than most, and we sit squarely in his camp. Italian GDP this morning was still a negative read, but it was less bad than anticipated. 8 negative quarters is the longest on record and a clear indication of what austerity has done. But we are calling it, green shoots!

Sasha Naryshkine and Byron Lotter

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Monday 5 August 2013

Wild in the ABIL stable

"The company has announced that they are raising up to 4 billion Rands by way of a rights issue at as of yet an undetermined price. And that is possibly the key to explaining the massive wild swings of the share price this morning. It has been down 10 percent, and it has been up 7 percent. The stock is currently trading a little higher now from the close Friday, up around three and a half percent. The volumes are enormous. Three times higher than the normal volume, which itself has been elevated significantly."

To market, to market to buy a fat pig. We all need more jobs! Interestingly we are starting to live through the age of the machines, in which companies respond to higher wage demands by mechanizing in order to maximise profits. For their shareholders, which are of course humans and not machines. Not so long ago, in 2008, some of the big bulk commodity miners pushed the heavy duty machinery equipment maker for autonomous trucks. That is recently a reality, driverless trucks don't get tired, don't have to stop when nature calls, make fewer mistakes, but ultimately are cheaper in the long run. Rio Tinto, and it is early stages, are already running 10 driverless trucks as of May 2012. I suspect that there might be more, in fact in what I have read up on the matter, 40 trucks of this nature by the end of 2014 in the Pilbara. A truck costs a bomb, a human, what do they cost?

Well, Rio Tinto suggest that they are going to "start" 16 percent fewer people. In other words their annual intake is going to be less. They are "mining for the future", which is code for fewer jobs for skilled workers, let alone for semi to unskilled workers. At the end of the day, companies have to adjust for the future, and saving money in order to see the business make money for their shareholders. Nobody is going to invest money in a business that does not make them money, for the risks that are taken on. Business is not charity, and charity ironically needs business to be successful in order for philanthropy to be a reality. The word philanthropic translates effectively to love of humanity. On the Wiki entry for philanthropic donations, of the top 15, 14 are Americans. Makes you wonder, right? In order for donations to be of a certain size and scale, you need to encourage people to be rich!

And talking of America, and where the above is all going, the US non-farm payrolls were released on Friday mid afternoon local time. An hour before the US markets opened. The number was somewhere between little baby bear's porridge and mommy bear's porridge. Not quite the goldilocks number that everyone was looking for, a number that was actually a little disappointing, 162 thousand jobs created for the month on July. And there were also some downward revisions for the months prior to that, so all in all not the best outcome. Because of course a poor number is a poor number. The unemployment rate fell, some of that was largely to do with labour participation rates falling. A little. Here is the monthly release, you can even bookmark this: Employment Situation Summary.

So what happened to Mr. Market? How did the collective approach this piece of news, because the unemployment rate is ticking down, that is not good news, right? Of course it is, you would say. But for the short termers, the folks are/were really, really worried about when the Fed is going to end their bond buying program. Because the unemployment rate is getting to a point when tapering will start to happen soon. And as such, some might have interpreted this number (weaker employment relative to the last 12 month average) and a lower unemployment rate as a bad outcome. Equally both weekly hours worked and pay shrank, as a direct result of the sequester, that is starting to take its toll somewhat.

But equally as folks are anxious NOW, about the employment situation, the sequester impact was supposed to be much worse than it has turned out. So far. All in all neutral I guess, the equity markets ended the day at the best point, the S&P 500 and the Dow Jones closing at all time highs. Oh well, so much for anxiety. Most of the anxiety was in the bond markets, with the ten year yielding 2.74 percent at one point, the highest levels in 2 years. Yip, that 6.5 percent unemployment rate will mean that rates will rise. Perhaps the bond market is getting ahead of itself. Not all positive for the Dollar, hence that is why we are seeing the Rand at better levels this morning.

ABIL is out with a trading update this morning. But that will not be front and centre of shareholders minds. At the same time, the company has announced that they are raising up to 4 billion Rands by way of a rights issue at as of yet an undetermined price. And that is possibly the key to explaining the massive wild swings of the share price this morning. It has been down 10 percent, and it has been up 7 percent. The stock is currently trading a little higher now from the close Friday, up around three and a half percent. The volumes are enormous. Three times higher than the normal volume, which itself has been elevated significantly.

First, let us look at the business itself, before we get to any assumptions around the capital raising. I am presuming that a lot of care was put into communicating these third quarter results, more than usual because of the heightened interest in the company and the sector. And because the company let us know that they were paying more attention to communicating with the market, and in particular their shareholders.

Total advances over the comparable period grew 19 percent to 60.3 billion Rand, but credit disbursements over the last three quarters is ten percent lower, year on year at 17.7 billion Rand. That means that whilst the overall book has grown, more recently the business written has been a whole lot more constrained. As a result of a more cautious approach by management, having recognized nearly a year ago that there were early signs of stress. And also as a result of lower application and higher rejections, not exactly what you want to see. Non-performing loans as a percentage of total advances ticked up 100 basis points from 29.3 percent to 30.2 percent, reflective of a more stressful environment. And prudence, or perhaps both.

The trading environment explanation nails it: "The third quarter proved to be another challenging period with the trends of the first half of 2013 continuing through the quarter, albeit improving. Over the past 12 months the environment in which ABIL operates has changed considerably due to the rapid deterioration in the economy and the high levels of indebtedness amongst consumers, following a period of high growth in unsecured lending."

And then perhaps a smallish bombshell: "Review of EHL's strategic fit" Ellerines, a review of that business. And there is a little explanation further down, suggesting that the whole furniture retail business will be disposed of. I am guessing that the initial reaction will be that the management of ABIL made a mistake, when they acquired the business in the first place. Water under the bridge, in the same way that Sappi have to deal with mistakes made in the past, ABIL management have to deal with this now.

So as far as the business going forward, the cost of funding is still OK, that is in order to maintain extending credit, their core business. Interestingly, the cost of funding is expected to be lower than last year. That is probably one of the more critical things to look out for and possibly explains why the company has decided to embark on a capital raising, of as much as 4 billion Rand. Underwritten by Goldman Sachs, we have no way of knowing this, but I don't think that it will come cheap. But if you want cheap, I guess you go further down the feeding chain.

In order to raise money for capital adequacy requirements, ABIL have turned to their shareholders. The quantum is not clear, they say up to 4 billion Rands. And the price is not there. I guess the dilution impact remains to be seen, until we get more clarity. For the time being, we will continue to stay the course, as painful as it may be in the short term and we will continue to monitor the newsflow.

Interesting, I saw via my twitter stream that us folks over here at Vestact are too bullish. Now in a world of markets, there are people with different views on different equities all of the time. Otherwise they would all trade on a rubbish multiple with no new listings (and perhaps going private if the prices were too cheap) or they would be so expensive and the inevitable would transpire. That is what makes a market, different sides of the investment spectrum. We like businesses that operate in transformative industries, and not businesses that are in decline. I know that sounds easy enough, and it is, but too much focus is given to the present set of earnings, and not enough to the business itself.

There are many businesses and sectors that we do not like. Paper (not packaging), old media (newspapers circulations falling, fighting the internet), tobacco (too many regulations, volumes in decline), big banks (too much black box activity), construction, insurance (too cyclical, both of those) and perhaps the gold miners, at the fringes. I can assure you that we buy far fewer companies on behalf of our clients than some of the portfolios that we get in from the other brokerage houses when people transfer their accounts in. Promise.

Byron beats the streets

We received a series of PMI releases from around the world which have shown an obvious pattern. Developed markets are showing growth and signs of potential growth while emerging markets are decelerating. It is amazing how markets work. Just a few months ago the markets already smelt this shift and the flows started happening in a big way. Unfortunately for us, as a developing nation the rand and the local market took a hit.

But why is this happening and what are the implications? Markets work in cycles. I think a huge reason for this is human nature. People get overly excited when times are good and panic when times are bad. This means that growth will never be linear and we will get volatility. When the financial crisis happened China immediately came out with massive stimulus packages. They had the resources and acted fast. This created over capacity which is now being absorbed.

China is also experiencing a structural change whereby the consumer is becoming stronger. This is a good outcome but change can be sticky and certain policies need to be implemented. This can hamper short term growth and it definitely won't be as strong as the infrastructure boom we have just experienced. China is slowing and that has a direct impact on many other Asian countries as well as many developing countries around the world.

Europe. I think it is still too early to get excited about Europe although I do believe policy makers are going about things in the right way. They had to take a different route to the US because of The Zones complex structures. The strong set of PMI numbers we have just seen will do even more for confidence. Although just a start, if the numbers over the next few months show some progress we could be in for some growth next year. That would be great news for the global economy who have been expecting very little from Europe.

As for the US, well they are still trudging on with the slow recovery as we saw with the jobs number on Friday. I have absolutely nothing against a slow recovery. When you consider the damage after the sub-prime mortgage crisis, this seems like the most sustainable route. People need to calm down and be patient.

A better looking developed market is very good for the global economy because they control the majority of assets. This will in turn have a positive effect on developing markets which may be decelerating for the time being but certainly not for the long term. There are still hundreds of millions of people out there who need to be liberalised.

Home again, home again, jiggety-jog. Mr. Market is higher here. We are close to the all time highs, the Rand is catching a bid, the commodity prices on balance are trending higher on decent enough Chinese data. And as Byron said above, green shoots in Europe. My Celtis is full of green shoots! And we seem to have escaped the worst of winter here on the Highveld! Winning!!

Sasha Naryshkine and Byron Lotter

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Friday 2 August 2013

Sasol sizzling!

"The company released a trading statement at 16:30 exactly, HEPS for the full year to end June are expected to be higher, in the 20-30 percent range. EPS for the same time period are expected to be higher by 7 to 17 percent. So what does that translate to? EPS was 3910 cents this time last year, and HEPS was 4228 cents. Translate forward to the middle of the range and you get 5285 cents for HEPS (25 percent) and 4379 for EPS."

To market, to market to buy a fat pig. Woo-hoo! Just as the market opened in New York the S&P 500 crested 1700 points for the very first time! I saw that some folks are talking about 2000 points on the S&P 500, of course it will get there, it is just a matter of time. Personally and also in this office we are not too keen on putting a specific target on an index, inside of a specific time horizon. That tells you what your time frames are. And to be honest, even the best guess does not know the unknown-unknown, the political or economic event that can scupper a rally in the short term. Think Greece, rising bond yields in Spain, Ireland, Portugal, Iceland and whatever other long list that you have there.

For the time being all of the economic news, and earnings (more importantly) have been good. And remain good, albeit it "only" ahead of expectations. The market price today (this is in general) represents the price that the collective are willing to pay for future earnings. And last evening, that closing price was nearly 1707 on the S&P. But is that expensive? We all know that future earnings today are not what they turn out, this time next year that number could differ by as much as ten percent. Either better, or worse. Currently, for the 2014 FY, the collective S&P 500 earnings are 123 Dollars (more or less). So quite simply, at current levels, the S&P 500 trades on a 13.9 times forward multiple, admittedly 2014 earnings. What? Where I am getting all this garbage from?

Well, there are people who are much cleverer than I am (who don't use the word cleverer) who have loads of time, or who are better at managing their time. It is strange how wonderfully successful people tend to have more time to fit more in, inside of 24 hours. But I want you to look at this .pdf, titled: Earnings, Revenues, & Valuation: S&P 500/400/600.

Dr. Edward Yardeni and Joe Abbott (from Yardeni research) update this piece week to week, and normally on a Thursday, so right there you have your freshest piece to date. The rolling 12 months earnings, the next two quarters this year and then the first two quarters next year have the S&P 500 on collective earnings of 118.26 Dollars. That puts the valuation of the biggest and most solid benchmark index globally, the S&P 500, on a 14.43 times earnings. That is hardly expensive by historical standards. Still at this point! A simple rerating of 15 times, closer to the historical average, implies a 1773 level for the S&P. Around 65 points more than current levels.

Be cautious when making these assumptions however, of where index levels should, or could be. Again, the levels are not blindly set, the overall market consists of real companies with divergent fortunes and earnings. For instance, if Apple inc., one of the bigger constituents of the S&P 500 traded at the same multiple as the market (14.43 times), the stock would be at 578 Dollars and not the current 456 Dollars a share. But that is what makes a market, different valuations for different companies, reflective of the future. Google trades on a 27 multiple, indicating that the collective is willing to pay a lot more for their earnings than for Apple's earnings.

I can't disseminate the graph that I would really like to, I read the disclaimers at the bottom of the .pdf, so you're are going to have to read it for yourself. But the graph I refer to is the S&P 500 blue angels graph. That tells a whole story by itself.

Crazy, but in 2000, at the height of that market, the S&P 500 was trading at 33 times earnings, thanks to the flying tech stock weightings in the broader market. For the whole period from 1991-2000 the average multiple was 20 times earnings. This table is fantastic, from this article: Lessons from the Intelligent Investor Part 3: State of the Market in 2013.

On a 33 multiple the S&P 500 index would currently trade around 4000 points. On a through the nineties average of 20 times, we would be closer to 2400 points. So my conclusion is, even though we are record highs, stocks are not that expensive. What is also interesting to note is that companies have perhaps returned a whole lot less to their shareholders than they could have, through the last decade, by way of dividends. Perhaps that is a function of lower rates globally. But, just as importantly, why it is always better to be in the market, than trying to time it, is that multiple expansion comes quicker than you think.

There was a trading update from one of the firm favourites here at Vestact, a stock that has been mostly in our client portfolios for the better half of ten years, Sasol. Higher volumes at the end of the day is what you want to see, that is good for the company, their shareholders and the country. The more fuel that Sasol produces here, the better for all South Africans, that means that we have to import less oil. As it stands, oil makes about 22-23 percent of all imports, imagine if Sasol did not produce fuels for the local market!

The company released a trading statement at 16:30 exactly, HEPS for the full year to end June are expected to be higher, in the 20-30 percent range. EPS for the same time period are expected to be higher by 7 to 17 percent. So what does that translate to? EPS was 3910 cents this time last year, and HEPS was 4228 cents. Translate forward to the middle of the range and you get 5285 cents for HEPS (25 percent) and 4379 for EPS. Why the massive divergence?

Simple really, there are two impairments, one in their wax expansion project here and the other in their Iranian chemicals business, Arya. The difference is 9.06 ZAR a share, or multiplying by the number of shares in issue (644.8 million) you get 5.841 billion Rand, most of that being Arya, by as much as 3.6 billion over the last year. Paul winced when I told him. That is a BIG number. Plus, 1.6 billion ZAR in operating profits that might not be recovered in the disposal process of the Iranian asset (currently valued at 2.3 billion Rand, or 230 million Dollars). As much as another 100 million Dollars, or 1 billion Rand may be written off when Sasol eventually sells the asset, as a result of the weakening Iranian Rial. 2 billion Dollars worth of losses have been recognized in these full year results.

In order to be taken more than seriously in North America and in order to get the re-rating, Sasol have to get rid of this asset. And if that means short term (medium term) pain for all of their shareholders, then so be it. Full year results are expected on the 9th of September, which is a Monday. Nearly five weeks time. The all time high for Sasol is 518 ZAR, reached in May 2008, remember those days my friends....... the stock has reached a high of 479.98 ZAR this morning, there has been a big move upwards since yesterday. Nearly 4 percent yesterday and another percent this morning.

Byron beats the streets

Yesterday, just after the close we received a very good looking trading update from another one of our recommended stocks, City Lodge.

".... headline earnings for the year ended 30 June 2013, which include the costs and effects of the BEE deal, are anticipated to be between 42% and 47% higher than the previous year, whilst diluted headline and basic earnings per share are anticipated to be between 40% and 45% higher than the previous year.

Normalised headline earnings, which excludes the costs and effects of the BEE deal, are however anticipated to be between 28% and 33% higher than the previous year, whilst normalised diluted headline earnings per share are anticipated to be between 27% and 32% higher than the previous year."

Let's look at these numbers in more detail. For the first half of the year the company managed to grow normalised headline earnings per share by 31% to 295c. For comparative reasons it is best to look at the number which excludes the BEE deal. So a range of 28% to 33% looks to be in line with the first half. Last year the company made normalised diluted headline earnings per share of 442.8c. Add the middle of the range 31% and we should expect around R5.80 for the year.

The stock is trading at R128 which puts it on a multiple of 22. That may seem expensive but there are a lot of factors here. Firstly there is that generous dividend they usually pay. Last year the company had a dividend cover of 1.7 times. If they keep it that way we should expect R3.40. That is a yield of 2.7%. Not as good as it used to be but that is because the share price has run. The other prevailing factor is the property underpin.

According to my latest calculations, using the listed property index as a benchmark, their directors estimated replacement value of the hotels they own should be around R4.56bn. The current market cap is R5.4bn.

That calculation of mine was done in January. When the full year results come out later this month we should get an updated version of the estimation which will give us some clarity. Occupancies were at 63% for the half year, I expect this to have grown. All in all a good update, we will do a full analysis when the results come out on the 14 of August.

Home again, home again, jiggety-jog. Jobs day today! All the data so far has been good, expectations are for 183 thousand new jobs that have been created for the month of July. Watch out for the revisions too, plus hours worked, average hourly wages AND the unemployment rate. So much to get through, it is possibly for Mr. Market, a good outcome if the number is "just right". Like Goldilocks and her porridge, let us all eat the baby bear porridge. If you are not too distracted, tune in to the action at 14:25 on your favourite business channel for all the action! And all the shouting guests that you could ever dream of.

Sasha Naryshkine and Byron Lotter

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Thursday 1 August 2013

MTN motoring ahead

"If you annualise this number which is a fair to conservative assumption for MTN, the stock trades on 14 times this year's earnings. To put things into perspective, telecommunication companies in developed markets are trading on much higher valuations, probably because of their impressive dividend yields. These companies are spewing cash."

To market, to market to buy a fat pig. Seven down and five to go. That is for months of the year that is. I asked Byron this morning when he walked in, why do we define ourselves like this, month to month and then year to year? Particularly when investing. Why set yourself a finite amount of investing time, trying to jump trains and catch the fastest one? Perhaps the train analogy in light of the horrific Spanish crash (that driver was apparently late and going around the bend at twice the normal speed) is not the right one and insensitive.

But I think you understand what I am trying to say. Investing can change, the platforms and the data dissemination evolve, but ironically the companies evolve a little each and every day along with the rest of the world. Those companies that find themselves unable to evolve in a changing world, either because their product is not needed anymore, or something better came along. As investments, these are businesses that you have to avoid at all costs. I can imagine that businesses like E. Remington & Sons and the Volta Graphophone Company which were once at the top of their respective worlds would have thought that "things" would change a little slower than perhaps they anticipated towards the end. Avoid these ones.

But that doesn't quite answer why we set finite investment times. It should in theory be forever. That phrase is sometimes attributed to Warren Buffett, who in the 1988 Berkshire Hathaway Chairman's letter said: "In fact, when we own portions of outstanding businesses with outstanding managements, our favorite holding period is forever." But sometimes that is taken out of context, because he says in the next line, directly after that: "We are just the opposite of those who hurry to sell and book profits when companies perform well but who tenaciously hang on to businesses that disappoint. Peter Lynch aptly likens such behavior to cutting the flowers and watering the weeds." Getting anxious about stocks having done "too well" and the price having gone up a lot is perhaps the same behaviour as getting worried about a company that is currently in a funk, and the share price is down too!

So trying to identify businesses which have the long term enduring qualities that you look for in a solid investment is the job half done. Thinking without blinkers and sticking to your strengths, avoiding your weaknesses. Investing is however not like trying to cut hooking out of your batting range of stocks, but rather than the urge to go for that specific shot, being able to duck regularly. When markets are flying there is a temptation to go outside of your comfort zone. The basics have always applied, and will continue to apply. There is a lot to be said for keeping the investment philosophy simple!

Mr. Market yesterday had loads of different data points to look out for yesterday. First off, around 14:15 local time here in Jozi there was the release of the ADP employment data. That number was a modest beat, 20 thousand more than anticipated, it seemingly does not make the market budge too much nowadays. But a solid enough beat, I was in the middle of a whole lot of "things" going on, and was looking at the screens from a distance. My desk is a distance. I guess the most pleasing thing was that there were jobs across all sectors of the US economy, small, medium and large businesses adding jobs. This is much better than the July read this time last year. August was a shocker. Remember that the sequester was supposed to put a lid on job creation, as a result of Washington D.C. uncertainty? Remember?

And the sequester and automatic cuts were also supposed to put a lid on the second look at US second quarter GDP growth too, but that comfortably trumped expectations. Gross Domestic Product, second quarter 2013 (advance estimate). James Pethokoukis had a middling view, remember that he is not exactly a fan of the current dispensation: America's "not-horrible" economy. He has an interesting take, more or less. A better take is from my old favourite, Cullen Roche: A Closer Look at the GDP Report. Private investment is leading the charge. I wish the same could be said for here.

And then perhaps the one that everyone was waiting for, the FOMC statement which is always available on their website, just after eight local time, here goes: Federal Open Market Committee. The long and the short of it is that the Fed are going to continue buying 85 billion Dollars worth of bonds and they will continue to monitor the economy for signs of strengthening, or weakness. Interpret the Fed Speak in any way that you want, there are way too many people anxious about it.

Oh dear, I can see it already. Chinese PMI, at least the official release this morning clocked a positive number, over fifty, indicating that overall manufacturing activity is expanding, but is at a 11 month low. On the official data at least. Over in Europe, where the more "believable" data is, French PMI missed slightly this morning, and more importantly it is trending towards 50. Just a fraction below that!! We keep saying green shoots are appearing in Europe, but get nothing but a blank stare and a snigger in return. Well...... the overall PMI Europe figure clocked a number above 50 for the first time in over 24 months! I am always amazed that facts and figures from one part of the world is believable and others seemingly not. That smacks of some sort of ..... racism?

What happened to Visa last night? The stock was seven and a half percent lower on the session, giving back most of the positive action over the last 10 weeks. It has all to do with the capping of swipe fees of specifically debit cards, of which Visa has nearly a one third share in the US. Cast your mind back, the original fee was set at 12 US cents, but the payment processing companies managed to hike that to 21 cents. Yesterday a court, a District Court, overruled the US Fed's authority to raise the fee, at the time. It seems like a knee jerk reaction to me, nothing is final. Nothing is ever final in terms of rules and regulations set in stone by politicians. It changes and evolves. We will see what transpires, but I doubt that it is a huge deal for now, but would have a fair impact if reversed.

Byron beats the streets

This morning we received a nice looking trading update from MTN for the 6 month period ending June 2013.

"Shareholders are advised that MTN expects an increase of between 20% and 25% in headline earnings per share ("HEPS") for the six months ended 30 June 2013 when compared against the previously reported corresponding period."

The HEPS for the six month period are positively affected by foreign exchange gains of approximately R1.0 billion compared to foreign exchange losses of approximately R1.5 billion in the prior year related to some of the group's subsidiaries resulting in markedly lower net finance costs.

As you can see from the update, there were big currency swings, let's look at the past numbers in detail and see what we can decipher. Last year headline earnings for the 6 month period came in at R9.911bn. If you add the middle of the range 23% we should expect R12.19bn for the period. That gives us an increase of R2.28bn, R1bn of that as a result of the currency swing. If it weren't for the currency swing we would have seen earnings growth of 13% which is still very acceptable for a company of this size, especially when everyone was calling them ex-growth a few years ago. Maybe they are now ex ex-growth.

On a per share basis we saw 537c this time last year. With this release we should expect around 660c. The stock is trading at R187 as I write. If you annualise this number which is a fair to conservative assumption for MTN, the stock trades on 14 times this year's earnings. To put things into perspective, telecommunication companies in developed markets are trading on much higher valuations, probably because of their impressive dividend yields. These companies are spewing cash. What I am trying to say is that MTN is cheap in my opinion, especially when you look at the potential growth in the regions that they operate in. I guess that is why the stock would also afford a bit of a discount, those regions can be very risky.

And how do you analyze currency swings? Well these things happen, sometimes in your favour, sometimes not. Enjoy the benefits when they come around and hold tight when things go against you. It is the average growth over a long period of time, say 5 years, which is important. We will look at the stock in more detail when the results come out, probably later this month.

Home again, home again, jiggety-jog. Markets are higher again, perhaps a combination of Fed purchases and European green shoots and a Chinese relief. There is of course an ECB meeting today, although it eats into valuable watching time for the US session. And the ashes crucial (no it isn't, it is over already, not so?) test starts today. I got the Mooi River Plaza whisper number from a little birdie and it is a record high. So perhaps "things" are not as bad as they seem.

Sasha Naryshkine and Byron Lotter

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